India: Profit split method upheld, activities were “inextricably linked”

India: Profit split method upheld, activities "linked"

The Delhi Bench of the Income-tax Appellate Tribunal upheld application of the profit split method (PSM) when different activities performed by the taxpayer and its related parties were inextricably linked, and the entities contributed significantly to the value chain of provision of software services to the end-user customer.

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The tribunal rejected the Transfer Pricing Officer’s conclusion that PSM was adopted only to camouflage loss at net level, but instead the tribunal found that “…the decision as what is the most appropriate method does not depend on the fact as to whether an assessee is having loss or has a profit.” In reaching its conclusion, the tribunal noted that for the preceding and successive years, the tax department had accepted the taxpayer’s use of PSM as well as the taxpayer’s allocation of profit split between the taxpayer and its related party at 40:60. 

The case is: DCIT v. Infogain India Pvt. Ltd. (ITA No. 6134/Del/2012)

Summary

The taxpayer was the “back-end” software service provider for its U.S. parent company. The taxpayer provided the back-end software services to its related parties, with the taxpayer selecting PSM as the most appropriate method to benchmark its related-party transactions in its transfer pricing report. The taxpayer applied a profit split of 60:40.

The Transfer Pricing Officer rejected the taxpayer’s approach, and applying the Transactional Net Margin Method (TNMM) proposed a transfer pricing adjustment. The Dispute Resolution Panel upheld this finding.

The taxpayer filed for review by the tribunal, which found that the PSM was the most appropriate method when, as in this situation, the activities of the taxpayer and its related parties were inextricably linked and that both parties contributed to the value chain.

 

Read a September 2015 report [PDF 440 KB] prepared by the KPMG member firm in India: Profit Split Method considered as the most appropriate method if activities performed by taxpayer and its associated enterprises are inextricably linked, and both the entities contribute to the value chain

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