Global

Details

  • Service: Tax, Global Transfer Pricing Services, Global Compliance Management Services, International Tax
  • Type: Regulatory update
  • Date: 8/12/2014

India - Comparables rejected in information technology-enable service cases 

August 12: The Hyderabad Bench of the Income-tax Appellate Tribunal rejected comparables selected by the Transfer Pricing Officer in three cases concerning the profit level indicator of taxpayers involved in providing information technology enabled services to related entities.

Summary

The taxpayers provided the following services to related parties (the net cost plus margin of each taxpayer is listed below in parenthesis):


  • Processing of financials of companies to extract data (15.46%)
  • Back-office data creation, content development, and support services for analysis, content search, and projects for business information (12.41%)
  • Support services relating to computer-aided engineering and design (6.44%)

The Transfer Pricing Officer rejected each taxpayer’s documentation because of: (1) the use of multiple year data; (2) improper allocation of export filters; and / or (3) selection of functionally dissimilar companies.


The Transfer Pricing Officer selected a set of 12 comparable companies with an average profit level indicator of 27.42%, before working capital adjustments.


The taxpayers eventually filed for review by the tribunal, which rejected the comparables selected by the Transfer Pricing Officer, and reduced the average profit level indicate to as low as 10.78% in two of the taxpayer cases.


Among the reasons for rejecting the comparables selected by the Transfer Pricing Officer, the tribunal found these comparables were functionally dissimilarity and that there were extraordinary events during the comparable’s year.


Read an August 2014 report [PDF 462 KB] prepared by the KPMG member firm in India: Hyderabad Tribunal adjudicates on rejection of certain comparables from the standard ITES set selected by the TPO in three different rulings, consequentially dropping the average PLI as low as 10.78%



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




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