India: APA for earlier year may apply, determining “tested party”

India: APA for earlier year may apply

The Delhi Bench of the Income-tax Appellate Tribunal held that foreign related parties, that are the “least complex” entities in the transaction, must be selected as tested parties for the purpose of determining arm’s length nature of international transactions. While doing so, the tribunal gave due consideration to a prior advance pricing agreement (APA) reached between the taxpayer and the Central Board of Direct Taxes under which the facts were similar to the year under consideration.

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The case is: Ranbaxy Laboratories Ltd. v. ACIT (ITA No. 196/Del/2013)


The taxpayer manufactures and sells active pharmaceutical ingredients such as bulk drugs and formulations. The overseas related parties (associated enterprises) act as distributors and secondary manufacturers for the taxpayer’s products. 

During the Assessment Year 2008-09, the taxpayer entered into transactions with the related parties—i.e., sales of active pharmaceutical ingredients and drug formulations. The taxpayer benchmarked these international transactions by considering the foreign related parties as “tested parties” using the transactional net margin method (TNMM) as the most appropriate method. The taxpayer selected regional comparables for benchmarking the margins earned by the foreign related parties.

The Transfer Pricing Officer rejected the taxpayer’s selection of the foreign related parties as the tested parties, and instead tested the company-wide margins of the taxpayer to determine the arm’s length price of the international transactions. This was upheld by the Dispute Resolution Panel. 

Tribunal’s findings

The tribunal found that an earlier APA concluded for an earlier year, while not binding for the year under consideration, nevertheless had “persuasive value” because there had been no change to the taxpayer’s function, asset, and risk analysis. 

Next, the tribunal noted that Indian transfer pricing regulations do not provide guidance on the concept of “tested party.” After considering various findings, the tribunal concluded that the foreign related parties are to be considered as “tested parties” and that due weight is to be given to the APA.


Read an April 2016 report [PDF 333 KB] prepared by the KPMG member firm in India: Overseas AEs selected as tested parties in light of the APA concluded for later year

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