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India: Arm’s length price of related party not controlling

India: Arm’s length price of related party

The Bangalore Bench of Income-tax Appellate Tribunal held that the tax authority is free to examine the arm’s length price for the taxpayer, regardless of the fact that the arm’s length price as declared by a party to the transaction was accepted. In other words, this does not preclude the tax authority from examining what would be the arm’s length price in the hands of the other party—the taxpayer—to the same transaction.


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The taxpayer entered into international transactions that involved payments of royalties and payments for administrative, financial, and marketing services with related parties. The tax authorities eventually accepted income tax returns filed by the related parties, and thus accepted the income declared in these tax returns to be at an arm's length price. In its own proceedings, the taxpayer asserted that because the returns of its related parties had been accepted (and the arm's length price also accepted), the tax authority would have to consider the price to be at arm's length in the hands of the taxpayer.

The tribunal found that income of a related party is not required to be recomputed by reason of determination of the arm’s length price of the other party to the transaction. Also, the tribunal held that in instances when there is an adjustment to the payment amount, the tax authority cannot make a corresponding adjustment that results in a reduction to income. 


The case is: Filtrex Technologies Pvt. Ltd. Read an April 2018 report [PDF 808 KB] prepared by the KPMG member firm in India

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