India: Most appropriate method, under cost contribution agreement

India: Method under cost contribution agreement

The Bangalore Bench of Income-tax Appellate Tribunal held that concerning payments for intragroup services related to technical and management costs, as expense transactions having no mark-up, the profit method may not be the most appropriate method. The tribunal remanded the case for an evaluation of a combined transaction approach vis-à-vis the Comparable Uncontrolled Price (CUP) method.


Related content

The case is: Fosroc Chemicals India Pvt. Ltd. v. DCIT.


The taxpayer, a member of a multinational group and a subsidiary of a UK entity, was a manufacturer and distributor of specialty construction chemicals.

Technical know-how was provided to the taxpayer by the UK entity, and the taxpayer paid for the technical and management services provided by the UK entity under the cost contribution agreement. The taxpayer also purchased raw materials and entered into other transactions with its international related parties. The taxpayer selected the Transactional Net Margin Method (TNMM) at the enterprise level, on considering that the technical and management services were integral to the primary business segment of the taxpayer.

The Transfer Pricing Officer rejected the methodology adopted by the taxpayer for the technical and management costs; asserted that these costs were independent transactions that had to be considered under the CUP method; and eventually determined the arm’s length price was “nil” by applying the CUP method, and adjusted the full amount of the payment made for technical and management services.

On administrative appeal, the Dispute Resolution Panel took the position that the separate transactions were to be benchmarked on a stand-alone basis, unless they were closely interlinked and that this position justified application of the CUP method.

The issues before the tribunal were: (1) whether the Transfer Pricing Officer was justified in finding a nil arm’s length price, by consider CUP as the most appropriate method; and (2) absent data for applying the CUP method, whether application of the TNMM at the entity level was the proper approach.

The tribunal stated that when expenses are actually reimbursed with no mark-up, it is appropriate to determine whether costs claimed to have been apportioned among various group entities have not been inflated and are properly allocated.

The tribunal agreed with an approach of aggregating all international transactions, provided that the taxpayer was able to establish that different segments benefited from the services received from the related parties. The tribunal returned the case to the Transfer Pricing Officer for a determination on the approach to be adopted after evaluating the evidence and explanation provided by the taxpayer.


Read a May 2015 report [PDF 371 KB] prepared by the KPMG member firm in India: Profit methods may not be the Most Appropriate Method for intra-group services which are in the nature of expense transactions; Filing of voluminous correspondence, reports insufficient to discharge 'benefit' test

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



KPMG's new digital platform

KPMG International has created a state of the art digital platform that enhances your experience, optimized to discover new and related content.