Transfer Pricing News

published on 30 July 2025 I reading time approx. 3 minutes

Important Transfer Pricing Updates and Judicial Rulings

1.Profit attribution to a Permanent Establishment (‘PE’) shall be based on Transfer Pricing (‘TP’) analysis:

In a recent judgement by the Hon’ble Mumbai Income Tax Appellate Tribunal (‘ITAT’) in the case of Fincantieri SPA [ITA 3313/MUM/2023], the Hon’ble ITAT held that profit attribution to a PE shall depend on a Functions, Assets and Risk (‘FAR’) analysis, which is the cornerstone of Transfer pricing rules for arm’s length price determination.

In the captioned case, the non-resident taxpayer was providing technical services from its head office (‘HO’) located in Italy, which essentially included providing designs and drawings to an Indian customer for shipbuilding activity. Further, as part of the execution of the contract, it had also set up a project office (‘PO’) in India which had a limited role for acting as interface between HO and the customer, including overseeing and explaining the designs and drawings provided by the HO in Italy.

Subsequently, during the assessment proceedings the tax officer attributed an ad hoc 50 per cent of the contractual revenue to the PO which eventually led to constitution of a PE in India, disregarding the TP analysis that was conducted by the taxpayer.

As the matter reached before the ITAT and while passing its judgment, the Hon’ble Tribunal accepted the taxpayer’s plea to adopt FAR analysis for profit attribution to a PE, which was in line with Article 7 of the tax treaty. In addition, the ITAT rejected the ad hoc attribution of profit to a PE without pointing out any defects in the FAR analysis which was documented in the transfer pricing study report.

This ruling reiterates the importance of maintaining a transfer pricing study report which therein shall document the FAR analysis between Associated Enterprises (‘AEs’), HO and the PE, and depending on the same the profit shall be attributed to the PE in India.

(For more details refer to our recent Article on this topic)

2. Resale Price Method (‘RPM’) is the Most Appropriate Method (‘MAM’) in case of buying and selling of Products by a Distributor without any further value addition:

On a recurring issue of application of MAM in case of distributor entities, the Hon’ble Ahmedabad ITAT in the case of Bock Compressors India Pvt. Ltd [ITA 1484/AHD/2024] has held that RPM is the MAM for benchmarking of international transactions for purchase/sale of traded goods over Transactional Net Margin Method (‘TNMM’).

In the said case, the taxpayer was engaged in wholesale and retail trade of compressors and other products without any further value addition, which it benchmarked by applying RPM.

During the assessment proceedings, the Tax Authorities contended that a significant advertising, marketing and promotion (‘AMP’) expenses were incurred by the taxpayer which in turn added value addition to the overall sales, and thus a gross margin analysis under RPM would not be correct and instead TNMM is the MAM for the said transactions.

However, as the case went before the Hon’ble ITAT, it held that RPM is the most appropriate method for the distribution activity, contending that gross profit margins are sufficient to determine arm’s length price in case of distributors, when the core transaction is buying and selling of goods without any value addition. Hon’ble ITAT further commented that claim of Tax Authorities that the taxpayer incurred high AMP expenses was general in nature and didn’t counter how RPM is not the MAM in the given case as per the Regulations.

3. Cost of ‘amortization of goodwill’ to be treated as non-operating in nature for operating margin computation:

An important judgement pronounced by Hon’ble Chennai ITAT in case of Hitachi Solutions India Private Limited [ITA No’s 17 & 1715/CHNY/2024] has held that amortization of goodwill is an extraordinary item which arises out of business acquisition and cannot be treated as a part of operating expenditure of the taxpayer and shall be excluded for the operating margin computation purposes.

The above ruling provides much required clarity on treatment of amortization of goodwill as either operating or non-operating while computing operating margins for transfer pricing analysis purposes.

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