India: Income Tax Appellate Tribunal rejects internal comparable

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The Ahmedabad Bench of Income-tax Appellate Tribunal on 24 may 2017, in the case of Inductotherm (India) Pvt. Ltd. v. DCIT held that “internal costs plus method” do not apply to benchmark exports of finished goods to a related party when there are differences in the geographic location of the market and in the value chain and usefulness of the product. The Tribunal also noted that the benchmark of the royalties paid to nearby persons could not be accepted as a comparable, uncontrolled price increase.

With regard to the payment of a royalty fee to related parties, the tribunal noted that it was the benchmark of licensing fees paid to related parties (in this case the parent company), intra-related parties (ie rates paid by other group companies As a license fee to the parent company) could not be accepted as a valid comparable uncontrolled price. The difference in the royalties applicable to domestic sales of Indian companies was properly recognised by the Court and accepted by the regulatory framework in India.

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