- The taxpayer is merely a low-risk bearing sourcing support services provider
- No additional allocation for location savings is required
- The profit level indicator adopted would not yield absurd results
GAP International Sourcing (India) Pvt. Ltd, New Delhi [ITA Nos. 5147/Del/2012 and 228 Del/2012] (AYs 2006-07 and 2007-08)
The taxpayer—a wholly owned subsidiary of a U.S. entity—was engaged in the business of sourcing apparel merchandise from India for the taxpayer group during the years at issue.
The taxpayer used the Transactional Net Margin Method (TNMM) for substantiating costs plus 15% remuneration as the arm’s length price.
The Transfer Pricing Officer conducted an analysis of function, assets, and risks (FAR); rejected the taxpayer’s approach; and, instead, determined that a commission at a rate of 5% of the FOB value of the goods sourced by the foreign enterprise through Indian vendors was the most appropriate arm’s length price.
The Dispute Resolution Panel agreed with the Transfer Pricing Officer, and the taxpayer initiated this judicial action.
The tribunal accepted the taxpayer’s proposal for the cost-plus 32% mark-up and concluded that for non-risk bearing procurement facilitating functions, the appropriate profit level indicator would be net profit / total costs—and not the percentage of FOB value of goods sourced by the associated enterprise.
The tribunal held that the the transfer pricing adjustments were to be made by adopting a 32% cost-plus mark up.
The judgment is viewed as providing relief to procurement support service providers conducting only low value-added activities. The decision also shows the importance of maintaining robust documentation to substantiate the FAR profile and to support the remuneration model that is most appropriate fro the level of activities conducted by the taxpayer.
Also, it is observed that the tribunal’s acceptance of the taxpayer’s proposal for cost-plus 32% mark-up may be randomly applied by the tax authorities to seek higher mark-ups for low value-added procurement support services.
Read an October 2012 report [PDF 205 KB] prepared by the KPMG member firm in India: Cost plus remuneration model is more appropriate in case the taxpayer is merely a low risk bearing sourcing support service provider, no additional allocation for location savings required; and Profit level Indicator adopted should not yield absurd results
Contact a tax professional with KPMG's Global Transfer Pricing Services.