India: No aggregation of transactions for benchmarking | KPMG Global
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India: No aggregation of transactions for benchmarking in “unusual” circumstances

India: No aggregation of transactions for benchmarking

The Delhi High Court rejected the taxpayer’s aggregation or bundling of imports of component parts under the transactional net margin method (TNMM) because the facts in this case demonstrated that the import arrangements, when viewed in their totality, differed from those that would have been made by independent enterprises acting in a commercially rational manner. The High Court upheld the approach of the Transfer Pricing Officer to benchmark the transactions pertaining to imports of the component parts separately.


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The case is: Denso India Ltd. v. ACIT (ITA No. 443/2013 and ITA No. 451 /2013)


The taxpayer, a manufacturer of auto electrical products, was owned in part by two Japanese companies—one Japanese company’s interest in the taxpayer was approximately 48% and the other’s interest was approximately 10%. 

The taxpayer engaged in various international transactions and made payments for royalties, technical know-how, testing fees, and other items to related parties. The taxpayer benchmarked these as international transactions (along with imports of component parts) on an aggregated basis using the transactional net margin method (TNMM) as the “most appropriate method.”

The taxpayer also reported that it had imported raw material components from the Japanese company holding the 10% ownership interest. These imports were about 86% of the taxpayer’s total imports and 38% of total raw materials consumed. The taxpayer took the position that since the Japanese company’s shareholder interest was less than 25%, it was not a related party. Accordingly, the taxpayer contended it did not need to report these transactions as an international transaction.

Transfer pricing adjustment

During assessment proceedings, the Transfer Pricing Officer accepted all transactions as being at arm’s length based on the benchmarking conducted by the taxpayer using TNMM as the most appropriate method. However, the Transfer Pricing Officer found that the imported component parts were in fact made by the Japanese company that owned the 48% interest in the taxpayer (and not the company that was a 10% shareholder) and that these imports had been routed through an intermediary to disguise that the actual purchase was made from a related party. The Transfer Pricing Officer then rejected the taxpayer’s application of the TNMM for benchmarking, and applied instead the comparable uncontrolled price (CUP) method by comparing the price of the imported components with the price of domestically produced components purchased from Indian suppliers. A transfer pricing adjustment resulted from this treatment.

The taxpayer filed for administrative review by the Commissioner of Income Tax (Appeals) who removed the transfer pricing adjustment. The tax authorities then appealed to a tribunal which restored the transfer pricing adjustment. 

The High Court affirmed the tribunal’s decision to restore the transfer pricing adjustment. Concerning the taxpayer’s approach to bundle or aggregate a series or chain of transactions to benchmark the international transactions, the High Court found the fact that the component parts were purchased through an intermediary in an effort to disguise the arrangement raised concerns and influenced the tax authorities to benchmark the transactions separately.

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