The tribunal found that the allocation of residual profits may be done based on contributions from each entity. In other words, when uncontrolled transactions are not available, the residual profits can be allocated based on how much each of the independent enterprises of the group might have contributed, and that relative contributions can be determined on the basis of key value drivers.
The taxpayer—a company incorporated in India and a subsidiary of a Dutch firm—provided internet and related network services to the consolidated group’s customers in India.
The group operated in a globally organized manner, with critical customer-facing and revenue-generating activities undertaken by the group’s various operating entities across the globe.
The Transfer Pricing Officer rejected the PSM adopted by the taxpayer as the most appropriate method and, instead, determined the TNMM applied which gave rise to an upward adjustment to the arm’s length price for the years at issue. This was upheld by the Dispute Resolution Panel.
The tribunal, however, agreed with the taxpayer that the TNMM cannot be used for benchmarking returns earned by the number of complex entities when each makes valuable, unique contributions. As further noted, the TNMM does not contemplate benchmarking at the entity level, but at a transactional level.
The tribunal’s decision provides guidance on the use of the PSM—a method typically applied in complex, related-party transactions.
Read an April 2014 report [PDF 470 KB] prepared by the KPMG member firm in India: Delhi Tribunal upheld taxpayer's residual PSM over TPO’s TNMM and held that allocation of residual profits to be done based on contribution from each entity
Contact a tax professional with KPMG's Global Transfer Pricing Services.