A taxpayer has won the latest round in what has been described as landmark litigation against the Indian tax authorities that centred on the methodology used to choose comparables to benchmark the profits of an Indian taxpayer.
The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) ruled on November 2 that a transfer pricing officer was not correct to reject the comparables used by Mentor Graphics, a captive service provider, to price the software development services it provided IKOS Systems, its US parent company, in 2001 and 2002.
The Commissioner of Income Tax (Appeal) had sided with the transfer pricing officer, so Mentor appealed to the ITAT.
Mentor had chosen the transactional net margin method to benchmark their transactions and the Tribunal judged that it had gone about the choice in the correct way.
The Tribunal said a taxpayer didn't have to satisfy all points in a range of prices to establish that the arm's length price they came to was valid. It said adjustments were necessary if a taxpayer's characteristics, such as its functions, risks and assets, and that of the comparables it had chosen were different.
"The observation of the Tribunal on the selection of comparables and the due emphasis on function, asset and risk analysis will assist in resolving TP
disputes specially in the cases of outsourcing units," said Samir Gandhi of Deloitte, Haskins & Sells.
