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India: No transfer pricing adjustment, profit margin greater than comparables

India: No transfer pricing adjustment, profit margin

The Mumbai Bench of the Income-tax Appellate Tribunal issued a decision concerning the taxability of agency commission relating to the services rendered outside India.


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The case is: Fox International Channel Asia Pacific Ltd. v. DCIT


The taxpayer was a foreign company engaged in the distribution of satellite television channels and sale of advertisement air time for the channel companies at a global level. The taxpayer was not a channel owner, but was a service provider to group companies owning various television channels. The channel companies appointed the taxpayer as an agent to sell advertising air time on the channels, to distribute the channels in the territories where the channels were being broadcast, and to procure syndication revenues for the contents of the channels. The taxpayer did not maintain an India-specific financial statement or India-specific account.

The taxpayer originally filed its tax return based on unaudited global financial statements, which return was subsequently revised based on its audited global financial statements and those of its channel companies.

The Transfer Pricing Officer determined that the taxpayer and the channel companies had bench-marked the international transaction by adopting the profit split method as most appropriate. The Transfer Pricing Officer observed that the taxpayer determined the arm’s length price profit of INR 2525 million under the profit split method. However, in the computation of income, it offered to tax in India an amount of INR 2278 million. The difference of INR 247 million would be treated as an adjustment to the arm’s length process. The Assessing Officer made an addition to the income of the taxpayer.

The Dispute Resolution Panel rejected the taxpayer’s contention that part of the commission income does not fall within the purview of section 9 of the Income Tax Act, 1961 (taxing income that does not accrue or arise in India but accrues or arises outside India).

Tribunal decision

The tribunal rejected the findings of the Dispute Resolution Panel—holding that the actual profit attributable to India is a purely factual issue that has to be demonstrated by the taxpayer through proper documentary evidence and books of account. The tribunal restored the issue to the Assessing Officer to examine the taxpayer’s claim. Because the claim of the taxpayer that actual profit attributable to India of INR 2278 million was found to be correct, no further adjustment could be made to the arm’s length price since the Transfer Pricing Officer concluded that the profit margin of the international transaction shown by the taxpayer was higher than the average margin of the comparable.

Read a March 2019 report [PDF 614 KB] prepared by the KPMG member firm in India

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