INDIA Law and Practice Contributed by: Deepak Chopra, Harpreet Singh Ajmani, Rohan Khare, Pulkit Pandey and Priyam Bhatnagar, AZB & Partners
transactions based on the detailed review of the functions performed, assets deployed and risks assumed by the AEs involved. 10. Relevance of the United Nations Practical Manual on Transfer Pricing 10.1 Impact of UN Practical Manual on Transfer Pricing Similar to the impact of OECD Transfer Pricing Regulations on Indian Transfer Pricing Regula - tions as discussed in 9.1 Alignment and Differ - ences , the United Nations Practical Manual is often used as a reference point by taxpayers and the department for interpretation in certain circumstances. 11. Safe Harbours or Other Unique Rules 11.1 Transfer Pricing Safe Harbours The Indian safe harbour rules are an optional dis - pute avoidance mechanism that prescribes the minimum cost-plus mark-up/transfer price that an eligible taxpayer has to maintain in relation to eligible categories of international transac - tions for one or more specified FYs, and they are updated from time to time. 11.2 Rules on Savings Arising From Operating in the Jurisdiction Location savings refer to the net cost savings an MNE achieves by relocating its core operations from a high-cost jurisdiction to a lower-cost one, such as India. The primary goal is to generate additional profits by leveraging benefits such as reduced labour and material costs, more afford - able or subsidised capital, and access to better production, distribution, technology, and logis -
tics support. Additionally, a broader customer base and increased spending capacity can fur - ther enhance the MNE’s competitive advantage. As a result, the MNE can see significant profit gains from relocating its operations to India. These savings and profits must be carefully managed from a transfer pricing standpoint to ensure that profits are properly allocated across the group according to the arm’s length princi - ple. 11.3 Unique Transfer Pricing Rules or Practices In India, there are several notable transfer pric - ing rules and practices that are unique and must be considered while dealing with transactions between AEs. Taxpayers have been subjected to a lot of transfer pricing litigation on the issues of selection of comparables, most appropriate method, allowability of adjustments and even on the existence of an international transaction. Here are a few illustrations relevant to transfer pricing practices in India. • Marketing and promotion expenses: (a) Benchmarking of excessive advertise - ment, marketing and promotion expenses – in India, the Tax Authorities have often been taking a position that incurring of excessive advertising, marketing and promotion expenses by the Indian tax - payer results in brand building and brand promotion of the foreign AE, which is the legal owner of the brand. Accordingly, the TPO has been proceeding to separately determine ALP of excessive advertising, marketing and promotion expenses as a separate international transaction whilst applying the bright line test. (b) Having said so, the higher judiciary (Tribunal and High Court) has been coming forward to the rescue of taxpay -
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