The taxpayer—a subsidiary of a Dutch holding entity and ultimately held by a Japanese company—was engaged in the import of consumer electronic products from foreign related parties for sale in India. The taxpayer also provided market support services for these related entities.
For Assessment Year 2008-09, the taxpayer purchased goods from related parties for re-sale in India, adopted the Resale Price Method (RPM) to determine the arm’s length price, and used the gross profit margin as the profit level indicator. The taxpayer’s margin was 14.69% regarding its international transactions (compared to 16.47% for comparable companies), and thus was within the +/- 5% limit as allowed under Indian tax law.
For transactions relating to the market support services provided by the taxpayer, the Transactional Net Margin Method (TNMM) was adopted to determine the arm’s length price.
There was no dispute concerning the value of the international transactions or the method adopted by the taxpayer. Rather, the dispute concerned how to determine the selling price and whether the taxpayer’s calculation of the gross profit margin for itself and the comparable companies was appropriate.
The Transfer Pricing Officer determined the gross profit margin by reducing the selling price by cash discounts offered by the taxpayer, and added freight and storage expenses as a direct expense in relation to the purchase of goods. An upward adjustment was also made for development and business promotion expenses.
The Chennai tribunal concluded that the cash discounts, outward freight, and storage charges were selling and distribution expenses—and did not reduce the selling price. Thus, the decision provides clarity in the determination of selling price for the application of the RPM.
Read a July 2014 report(PDF 437KB) prepared by the KPMG member firm in India: The Chennai Tribunal rejects the TPO’s approach of reducing cash discount, outward freight, and storage charges from selling price, with regard to computation of Gross Profit Margin
Contact a tax professional with KPMG's Global Transfer Pricing Services.