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India: Profits attributed to permanent establishment; transfer pricing study rejected

India: Profits attributed to permanent establishment

The Delhi Bench of the Income-tax Appellate Tribunal held that the Assessing Officer correctly sought to apply Rule 10 of the Income-tax Rules, 1962 for purposes of determining the profits attributable to a branch in respect of the marketing activities related to direct sales made by the head office, absent a "correct" transfer pricing study report. The tribunal found 30% of the profits were attributable to the branch for its marketing activities in India.


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The case is: DDIT v. Nipro Asia Pte Ltd. 


The taxpayer (a Singapore-based company with a branch in India) engaged in trading medical equipment to and from locations in India. The Indian branch conducted marketing, sales warehousing, and after-sales services for the head office. The branch also marketed the taxpayer's brands in India. 

The Indian branch recorded only the value of goods sold by it, and did not account for sales made directly by the head office in India or made through distributors. All of the marketing, after-sales services, and other actions for sales made by the head office—whether directly or made through distributors—were undertaken by the Indian branch. 

The Assessing Officer determined that the branch office constituted a permanent establishment (PE) of the taxpayer in India, and in computing the profit attributable to the PE, observed that:

  • The Indian branch did not receive income in lieu of services rendered in selling products directly by the head office
  • The taxpayer's transfer pricing study report was not reliable because of various deficiencies. 

The Assessing Officer invoked Rule 10 and computed the gross profit margin (28.6%) of the ultimate parent company (and its consolidated subsidiaries) from its website and applied this percentage to sales made by the taxpayer in India, and determined 40% of this profit was attributable to sales activity in India through the PE and, thus, arrived at a profit rate from activities in India of 11.44% (i.e., 40% of 28.6%).

Following an administrative appeal, the Commissioner of Income-tax (Appeals) applied the profit rate from the transfer pricing report, of 15% on costs—thus providing some relief to the taxpayer.

In the action before the tribunal, the parties did not dispute the rejection of the transfer pricing report. The dispute concerned the quantification of income attributable to the PE. The tribunal upheld application of Rule 10. However, the profit rate was computed as 10% of sales and profits attributable or 3% (i.e., 30% of 10%) on the total amount of sales made by the taxpayer whether made directly or through a branch in India.

KPMG observation

The issue of attribution of profits to a PE has been the subject of litigation and specifically questions concerning whether any profits need to be attributed to the PE and, if so, how much to attribute have resulted in a fact-based exercise. If all transactions between the parties are remunerated at arm's length, it begs the question whether anything further remains to be attributed to the PE. There is no hard and fast rule for attributing profits, but a detailed a robust transfer pricing study would appear to be essential to support a taxpayer's transfer prices.


Read a February 2017 report [PDF 347 KB] prepared by the KPMG member firm in India

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