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Recent transfer pricing rulings

India

The Indian Government have recently brought into law several orders and decisions concerning transfer pricing (TP) tax issues. Taxand India takes a look at the recent rulings and their affects on taxpayers.

IJM Infrastructure Ltd
The taxpayer was a subsidiary of a Malaysian entity but had a project office in India. This subsidiary had entered into an Indian joint venture with the Parent Entity and with a third party. All tax decisions were made in India. A TP audit was made and it was decided that this did not fall under the purview of TP as both parties were Indian residents. This case reiterates an important principle that pricing provisions would apply only when one of the parties is a non-resident under Indian tax laws. However it could have been argued that the PE as a non-resident was entitled to the benefits of the Indian Malaysia Treaty.

Cordys Software Private Ltd
The taxpayer was engaged in rendering software development services to its associated enterprises. During the course of the TP audit the comparables selected by the taxpayer were rejected and a new adjustment was proposed. This was appealed as considering the companies functional and risk profile it was entitled to take benefit of working capital and risk adjustment. This ruling highlights the importance of an in-depth functional analysis to determine the comparability with other companies. It laid emphasis on the rejection of the approach of artificially bifurcating ITES companies into business process outsourcing and knowledge process outsourcing.

Subitomo Coporation India Private Ltd
This case looked at expense incurred by the taxpayer towards earning non-operating income deducted from cost base while computing its net margin for benchmarking purposes. The company was a subsidiary of the Japanese company and acted as a facilitator between them and customers of the JC in India. The Tribunal sought to adopt a 2 tier test. Firstly the income/expenditure should have an impact on the international transaction undertaken by the taxpayer and secondly that this should qualify as operating in nature. The approach taken by the Appellate Tribunal was reasonable. Classifying an expense/income item as operating or non-operating would only assume significance if such expense has any relation to the international transaction being benchmarked. The taxpayer should undertake an independent and robust analysis to identify such expenses and as a matter of good practive have them audited by the statutory auditors.

Discover more: Summary of transfer pricing rules


Your Taxand contact for further queries is:
Mukesh Butani
T. +91 124 339 5010
E. mukesh.butani@bmrlegal.in

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Also published in Thomson Reuters' Taxnet Pro, 31 July 2014

Taxand's Take

Multinationals and individuals should further investigate all recent transfer pricing tax developments in India to ensure they remain compliant with the local tax laws and keep afresh of the current tax environment.

Taxand's Take Author

Mukesh Butani
Taxand Board member
India

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