The tribunal held that the taxpayer’s delivery of products via electronic media cannot determine the nature of the taxpayer’s functions. GE India Technology Centre Pvt. Ltd. v. DDIT (ITA No. 789/Band/2011; ITA Nos. 487 and 925/Bang/2011)
The taxpayer was engaged in providing R&D and engineering services to its foreign affiliates. To support the arm’s length pricing, the taxpayer selected comparables in the field of software development for its transfer pricing documentation.
The Transfer Pricing Officer, however, rejected:
- The documentation on the the basis that the taxpayer was providing R&D in technical and engineering services with the aid of sophisticated labs and software in various fields of engineering—and not software development services
- The taxpayer’s comparables
Accordingly, the Transfer Pricing Officer determined the arm’s length price by conducting a search for “fresh” comparables that were engaged in technical consultancy, engineering services, and R&D, with the result of a proposed adjustment to the arm’s length price on account of interest on external commercial borrowings based on prevailing interest rates.
The tribunal found that the taxpayer was conducting R&D and engineering analysis, and not software development services. The case, however, was remanded to the tax authorities for resolution of certain issues related to a claim of risk adjustment.
The case highlights the importance of taxpayers reviewing and documenting their functional profile in relation to international transactions.
Read a January 2013 report [PDF 913 KB] prepared by the KPMG member firm in India: Bangalore Tribunal concludes on functionality of taxpayer based on the nature of operations carried on by taxpayer and rejects its transfer pricing documentation. Further the case is remanded to the Transfer Pricing Officer to verify the claim of risk adjustment.
Contact a tax professional with KPMG's Global Transfer Pricing Services.