The Delhi High Court has held that the Transfer Pricing Officer’s determination of an arm’s length price based on a 5% markup of the “free on board” (FOB) value of goods sourced for a related party’s contract with third parties was contrary to the transfer pricing rules under India’s income tax law and regulations.
The taxpayer during the financial year 2005-06 provided sourcing support services to its Hong Kong-based related party. In return, the taxpayer received remuneration of its costs plus 5%. The taxpayer applied the Transactional Net Margin Method (TNMM) to determine an arm’s length price for the remuneration, and used the “operating profit / total cost” as the profit-level indicator.
The Dispute Resolution Panel agreed with this determination, but reduced the markup to 3% of FOB value of exports.
