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05 April 2019
In a recent case before the tax tribunal,(1) the tribunal ruled that the lower tax authority had erred in making a transfer pricing adjustment at the entity level, rather than the transactional level.
Further, the lower tax authority had failed to understand that third-party transactions are in fact at arm's length and cannot be considered when calculating a transfer pricing adjustment.
In coming to its decision, the tax tribunal relied on the high court rulings in Tara Jewels and Hindustan Unilver and held that:
the objective of computing the [arm's-length principle] is to determine the income arising from an international transaction and accordingly the adjustment that is required to be made is to be limited to the international transactions with the [associated enterprises] only and not the entity segmental level.
The tax tribunal further stated that making an entity-level adjustment is illogical, as the value of international transactions may be less than the total amount of the adjustment. Therefore, the tax tribunal directed the lower tax authority to recalculate the arm's-length principle by considering the transactions with the associated enterprises only.
For further information on this topic please contact Pranay Bhatia at BDO in India by telephone (+91 22 3332 1600) or email (firstname.lastname@example.org). The BDO in India website can be accessed at www.bdo.in.
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