India: Payment of 2% on sales considered arm’s length | KPMG | GLOBAL

India: Payment of 2% on sales considered at arm’s length

India: Payment of 2% on sales considered arm’s length

The Kolkata Bench of the Income Tax Appellate Tribunal rejected a transfer pricing adjustment with respect to the taxpayer’s payment equal to 2% on sales for intra-group services and made to a Singapore related party.


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The tribunal rejected the Transfer Pricing Officer’s determination that there was a zero (nil) arm’s length price on the sales. The tribunal also rejected a transfer pricing adjustment concerning exports of chemicals to related parties, by applying the comparable uncontrolled price (CUP) method, observing that the taxpayer was bound to sell the chemicals at a low price to the related parties because the stock was obsolete. The case identifying information is: NLC Nalco India Ltd. v. DCIT (ITA No. 529/Kol/2008) and NLC Nalco India Ltd. v. ACIT (ITA No. 1256/Kol/2009)


The taxpayer was engaged in the manufacture and other transactions concerning water treatment chemicals, industrial additives, and oilfield chemicals. For the tax year under investigation, the taxpayer paid an intra-group service change to a Singapore related entity, equal to 2% of net sales. The taxpayer asserted that the arm’s length price of this charge was justified on the basis of the Transactional Net Margin Method (TNMM).

The Transfer Pricing Officer, however, found that the services rendered by the Singapore related party were more in the nature of directions / management decisions / routine advice, and because these services were provide more in the interest of the Singapore entity (rather than to meet the needs of the taxpayer), determined that the arm’s length price of this transaction was “nil.” A transfer pricing adjustment was made, and then accepted by the Assessment Officer and by the Commissioner of Income Tax (Appeals).

The tribunal, however, found that the Transfer Pricing Officer’s determination of a “nil” value was determined without applying any transfer pricing methodology and thus was without any basis. The tribunal found that the services rendered by the Singapore entity to the taxpayer were intra-group services for which independent enterprises would have been willing to pay for or to perform in-house, themselves.

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