India: Effects of arm’s length price adjustment on taxable income

India: Effects of arm’s length price adjustment

The Delhi Bench of the Income-tax Appellate Tribunal found that application of an arm’s length price adjustment to the taxpayer’s intra-group services would lead to the corresponding reduction in the revenue from rendition of services, and thus deleted a transfer pricing adjustment in respect of the intra-group services.

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The case is: Mercer Consulting India Pvt Ltd. v. DCIT (ITA No. 1085/Del/2016)


The taxpayer, a “captive” information technology enabled services provider, followed a transfer pricing policy of marking up its operating expenses by a margin of 20% for invoiced services provided its foreign related parties. 

The tax authorities asserted that a 20% mark-up was less than the arm’s length standard. Instead, the Transfer Pricing Office found that a mark-up of 29.53% was determined to be at arm’s length. Also, a second adjustment was made concerning the cost of the intra-group services that the taxpayer received from its foreign related parties. This cost was found to be “nil.” 

The Dispute Resolution Panel restored the 20% mark-up as being at arm’s length, but did not reverse the adjustment relating to the cost of intra-group services.

The taxpayer sought judicial review by the tribunal, which issued a taxpayer-favorable decision rejecting the position of the tax authorities with respect to the cost of intra-group services.


Read a September 2016 report [PDF 335 KB] prepared by the KPMG member firm in India: Arm’s length principle cannot be invoked when replacement of self-declared prices of international transactions by arm’s length price results in lowering of taxpayer’s income chargeable to tax

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