India vs. Gap International Sourcing Pvt. Ltd., May 2016, ITA No.1077/Del./2016

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Gap International Sourcing was engaged in sourcing products from India to other group companies. The activity comprised of assistance in identification of vendors, provision of assistance to vendors in procurement of apparel, inspection and quality control and coordination with vendors to ensure delivery of goods to group companies. The necessary technical and intellectual basis for provision of these services were provided by the group companies.

The Indian company used TNMM to benchmark the service fee at full cost plus 15%.

The tax administration disregarded the functional profile and characterisation of Gap International Sourcing by assuming that the functional profile was substantially higher than those of limited risk support service providers.

The tax administration found that a cost plus form of remuneration did not take into account substantial intangible assets owned by the taxpayer. Intangibles were identified to be human asset intangibles, supply chain intangibles and location savings.

Based on above, the tax administration set the arm’s length remuneration at a commission of 5% on the value of the products sourced.

The Tribunal held, that for determining the arm’s length price of international transaction, it is importent to take the characterisation of the taxpayer and the relatet party into consideration through a functional analysis.

The Tribunal observed the following specifically for Gap International Sourcing:

• No significant business risks were assumed.
• No capacity to assume business risks.
• No human resource intangibles were developed.
• No supply chain intangibles were developed.
• Location savings could not be attributed to the taxpayer.

The Tribunal held that the arm’s-length cost plus mark-up for the taxpayer should be 32% (- as opposed to the cost plus 830% and 660% for the two years under consideration, derived by resorting to a commission based model of 5%).

The Tribunal also stated that the arm’s length principle as determined by either the taxpayer or Revenue cannot lead to manifestly absurd or abnormal financial results.


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