India: Location savings not sole basis, arm’s length | KPMG | US

India: “Location savings” not sole basis for arm’s length price

India: Location savings not sole basis, arm’s length

The Bangalore Bench of Income-tax Appellate Tribunal held that savings from locating clinical trials in India may be relevant for purposes of making a business decision about the transaction, but “location savings” itself is not relevant for the limited purpose of examining and investigating the transaction for its arm’s length price.

1000

Related content

The case is: Parexel International Clinical Research Pvt. Ltd. v. DCIT

Background

The taxpayer is a wholly owned subsidiary of a company in the Netherlands, and is engaged in providing clinical research services in India. The taxpayer was compensated at cost plus a 15% mark-up for the services provided to the related party, and the taxpayer used the transactional net margin method (TNMM) as the most appropriate method to benchmark the international transaction with its related parties.

The Transfer Pricing Officer observed that a clinical trial conducted in India by the taxpayer had resulted in location savings to the related parties, given that the regulatory, compliance, and investigatory costs were significantly lower in India compared to other developed countries. The Transfer Pricing Officer determined that the benchmarking study conducted by the taxpayer using local comparables did not take into account the benefit of location savings. The Transfer Pricing Officer made a determination of what was the amount of the location savings, and by applying profit split method, allocated this amount by dividing the location savings equally between the taxpayer and its related parties. 

The conclusions of the Transfer Pricing Officer were upheld by the Dispute Resolution Panel. The taxpayer appealed to the tribunal. 

Tribunal’s decision

The tribunal held that:

  • When the comparable uncontrolled price (CUP) is available, then the location saving or condition cannot itself be the basis for determination of arm’s length price, and consequentially, adjustments are not warranted.
  • The basis of the Transfer Pricing Officer, in arriving at the location savings, was based on an assumption and was not in accordance with the provisions of the Income Tax Act, 1961.

Considering the fact that the Transfer Pricing Officer / Assessing Officer had not examined the functional comparability of the companies selected by the taxpayer and the fact that no steps were taken to identify comparables, the tribunal set aside the matter to the Transfer Pricing Officer / Assessing Officer for fresh adjudication.

 

Read a July 2017 report [PDF 313 KB] prepared by the KPMG member firm in India

© 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.

Connect with us

 

Request for proposal

 

Submit