DDIT v. Nipro Asia Pte Ltd. |Profits attributed to permanent establishment| transfer pricing study rejected

28 February 2017

The Delhi Bench of the Income-tax Appellate Tribunal held that the Assessing Officer correctly sought to apply Rule 10 of the Income-tax Rules, 1962 for purposes of determining the profits attributable to a branch in respect of the marketing activities related to direct sales made by the head office, absent a “correct” transfer pricing study report. The tribunal found 30% of the profits were attributable to the branch for its marketing activities in India.

The taxpayer (a Singapore-based company with a branch in India) engaged in trading medical equipment to and from locations in India. The Indian branch conducted marketing, sales warehousing, and after-sales services for the head office. The branch also marketed the taxpayer’s brands in India.

The Indian branch recorded only the value of goods sold by it, and did not account for sales made directly by the head office in India or made through distributors. All of the marketing, after-sales services, and other actions for sales made by the head office—whether directly or made through distributors—were undertaken by the Indian branch.

The Assessing Officer determined that the branch office constituted a permanent establishment (PE) of the taxpayer in India, and in computing the profit attributable to the PE, observed that:

  • The Indian branch did not receive income in lieu of services rendered in selling products directly by the head office
  • The taxpayer’s transfer pricing study report was not reliable because of various deficiencies.The Assessing Officer invoked Rule 10 and computed the gross profit margin (28.6%) of the ultimate parent company (and its consolidated subsidiaries) from its website and applied this percentage to sales made by the taxpayer in India, and determined 40% of this profit was attributable to sales activity in India through the PE and, thus, arrived at a profit rate from activities in India of 11.44% (i.e., 40% of 28.6%).

    Following an administrative appeal, the Commissioner of Income-tax (Appeals) applied the profit rate from the transfer pricing report, of 15% on costs—thus providing some relief to the taxpayer.

    In the action before the tribunal, the parties did not dispute the rejection of the transfer pricing report. The dispute concerned the quantification of income attributable to the PE. The tribunal upheld application of Rule 10. However, the profit rate was computed as 10% of sales and profits attributable or 3% (i.e., 30% of 10%) on the total amount of sales made by the taxpayer whether made directly or through a branch in India.


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