India’s Central Board of Direct Taxes entered into a unilateral advance pricing agreement (APA) with a taxpayer in the information technology-enabled services sector. The APA specifically addressed certain issues about severance compensation paid to employees, following the reduction and shutdown of captive activities in India.
Captive service providers, at times, have had to rationalize the size of their operations in India, or in some instances, have had to end their Indian captive activities completely—thus, resulting in shutdown costs, employee severance compensation, and other costs. How taxpayers are to treat the mark-up on such severance costs has been often debated, given that the arm’s length treatment of such expenses may not follow a “straight-jacket” approach. Rather, the treatment may need to be resolved mutually on the basis of a fact-based review.
In the present case, the APA authorities conducted an in-depth analysis of the taxpayer’s facts, and during several rounds of discussions, the authorities focused on the function, assets, and risk (FAR) analysis undertaken by the taxpayer in the overall supply chain.
Tax professionals have observed that in light of the effort of the APA authorities in this case, and of their willingness to discuss upfront and address contentious issues proactively, other taxpayers in the industry may want to consider an APA as a tool for resolving their transfer pricing disputes.
Read a June 2017 report [PDF 304 KB] prepared by the KPMG member firm in India