The Indian taxpayer provided investment advisory-related support services to its Hong Kong parent company. The activities undertaken by the Indian taxpayer included analysis of investment opportunities; general advice in relation to merits, timing, structure, terms of acquisition or disposal of investments; monitoring investments; and providing economic and political information.
For the investment advisory services provided to the Hong Kong parent company, the taxpayer was paid at 115% of its total operating expenses.
The taxpayer had no decision-making authority, did not invest its own capital, did not guarantee performance, and was not at risk for non-payment. There was no privy of contract between the taxpayer and clients of the Hong Kong parent company.
The taxpayer’s transfer pricing study adopted TNMM (transactional net margin method) as the most appropriate method and identified two companies with a net cost-plus margin of 14.80%.
During assessment proceedings, the taxpayer conducted a fresh search of five comparable companies, having a net cost-plus margin of 10.45%. The taxpayer also filed an updated net cost-plus margin of the two original comparables, of 18.97%. In total, the taxpayer’s net cost-plus margin was 15.2%—which was within the arm’s length range.
The Transfer Pricing Officer, however, disregarded the taxpayer’s comparability submissions, and selected a new list of eight comparables, with a net cost-plus mark-up of 81%, to benchmark the international transactions of the taxpayer with its Hong Kong related party.
The Mumbai tribunal found that none of the comparable companies selected by the Transfer Pricing Officer was functionally comparable to the taxpayer, noting a distinction between investment banking / merchant banking activities and investment advisory activities. In determining the comparability of the selected companies, the tribunal examined the business activities, income streams, and ratio of the relevant income stream to total income of the companies.
Read TaxNewsFlash-Transfer Pricing (April 2012).
The issues before the Bombay High Court:
- Was the tribunal correct in holding that the comparables selected by the Transfer Pricing Officer were not functionally comparable for determining the arm’s length price?
- Was the tribunal correct in allowing the taxpayer a safe harbor margin of +/- 5% variation?
The High Court answered both questions favorably for the taxpayer, and affirmed the decision of the tribunal.
Read a March 2013 report [PDF 190 KB] prepared by the KPMG member firm in India: The Bombay High Court dismisses appeal of the tax department against the decision of the tribunal in the case of Carlyle India Advisors Pvt. Ltd.
Contact a tax professional with KPMG's Global Transfer Pricing Services.