• Service: Tax, Global Transfer Pricing Services, Global Compliance Management Services, International Tax
  • Type: Regulatory update
  • Date: 8/19/2014

India - Arm’s length price based on exports’ FOB value 

August 19: The Supreme Court of India has granted the tax authorities’ special leave petition against an order of the Delhi High Court, that had rejected an arm’s length price determination based on the FOB value of goods exported from India by third-party vendors to customers.

The case identifying information is: CIT v. Li & Fung India Pvt. Ltd. SLP No(s) 11346/2014.


The taxpayer in India provided sourcing support services to its Hong Kong-based related entity, for which the taxpayer was paid remuneration of its costs plus a 5% mark-up.

The taxpayer applied the Transactional Net Margin Method (TNMM) to determine the arm’s length price of the remuneration, and determined that the profit level indicator was the operating profit / total cost.

The Transfer Pricing Officer accepted the TNMM as the most appropriate method of determining the arm’s length price and also accepted the comparables selected by the taxpayer, but determined that the cost for purposes of the 5% mark-up must include the “free on board” (FOB) value of the exports that were facilitated by the taxpayer.

The Dispute Resolution Panel basically agreed, but reduced the mark-up to 3% of the FOB value of exports.

A tribunal agreed with the Transfer Pricing Officer’s findings that the cost-plus mark-up methodology adopted by the taxpayer was not at arm’s length, but held that the amount of the transfer pricing adjustment cannot exceed the amount that had been retained by the related entity from the total remuneration received from third-party customers. The tribunal concluded that the distribution of the total compensation received by the related entity from its customers (5% of FOB value of exports) between the taxpayer and the related entity would be in a ratio of 80:20.

High Court’s finding

On appeal, the High Court of Delhi rejected the arm’s length price determination based on the FOB value of exports, finding that it was the related entity—and not the taxpayer—that undertook substantial functions and assumed enterprise risks and operational risks. The High Court’s decision, therefore, affirmed some basic principles relating to the application of the TNMM for purposes of determining the arm’s length price of sourcing support services transactions.

The decision of the High Court was viewed as providing guidance for taxpayers in low-risk and captive sourcing support services when the tax authorities might attempt to impute a commission on FOB value of the goods sourced from India.

Supreme Court to decide

The tax authorities appealed to the Supreme Court which has granted the tax authorities’ special leave petition against the High Court’s order.

With this action, prudent taxpayers would consider whether they have robust documentation in place—documentation supporting the low-risk nature of their transactions—if they had previously relied on the High Court’s judgment in this case, pending final resolution of the case by the Supreme Court.

Read an August 2014 report [PDF 456 KB] prepared by the KPMG member firm in India: The Supreme Court admitted Revenue’s Special Leave Petition against Delhi High Court’s order rejecting Arm’s Length Price determination based on Free On Board value of goods in the case of Li & Fung India Private Limited

Contact a tax professional with KPMG's Global Transfer Pricing Services.

©2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

The KPMG logo and name are trademarks of KPMG International.

KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever.

The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

Direct comments, including requests for subscriptions, to
For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at:

+ 1 202 533 4366

1801 K Street NW
Washington, DC 20006.


Share this

Share this


Subscribe to receive the latest TaxNewsFlash email alerts (you must select the option for TaxNewsFlash)

Already a Subscriber? Login

Not a member? Subscribe now