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India: “Location savings” not sole basis for arm’s length price

India: Location savings not sole basis, arm’s length

The Bangalore Bench of Income-tax Appellate Tribunal held that savings from locating clinical trials in India may be relevant for purposes of making a business decision about the transaction, but “location savings” itself is not relevant for the limited purpose of examining and investigating the transaction for its arm’s length price.


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The case is: Parexel International Clinical Research Pvt. Ltd. v. DCIT


The taxpayer is a wholly owned subsidiary of a company in the Netherlands, and is engaged in providing clinical research services in India. The taxpayer was compensated at cost plus a 15% mark-up for the services provided to the related party, and the taxpayer used the transactional net margin method (TNMM) as the most appropriate method to benchmark the international transaction with its related parties.

The Transfer Pricing Officer observed that a clinical trial conducted in India by the taxpayer had resulted in location savings to the related parties, given that the regulatory, compliance, and investigatory costs were significantly lower in India compared to other developed countries. The Transfer Pricing Officer determined that the benchmarking study conducted by the taxpayer using local comparables did not take into account the benefit of location savings. The Transfer Pricing Officer made a determination of what was the amount of the location savings, and by applying profit split method, allocated this amount by dividing the location savings equally between the taxpayer and its related parties. 

The conclusions of the Transfer Pricing Officer were upheld by the Dispute Resolution Panel. The taxpayer appealed to the tribunal. 

Tribunal’s decision

The tribunal held that:

  • When the comparable uncontrolled price (CUP) is available, then the location saving or condition cannot itself be the basis for determination of arm’s length price, and consequentially, adjustments are not warranted.
  • The basis of the Transfer Pricing Officer, in arriving at the location savings, was based on an assumption and was not in accordance with the provisions of the Income Tax Act, 1961.

Considering the fact that the Transfer Pricing Officer / Assessing Officer had not examined the functional comparability of the companies selected by the taxpayer and the fact that no steps were taken to identify comparables, the tribunal set aside the matter to the Transfer Pricing Officer / Assessing Officer for fresh adjudication.


Read a July 2017 report [PDF 313 KB] prepared by the KPMG member firm in India

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