Manufacturing
Our client, a manufacturing company and a Global MNC, initially operated as traders in India before establishing a local manufacturing unit. During the first year of operations, they imported raw materials from their Holding and Fellow subsidiaries in the Asia-Pacific and European regions, assembled these materials, and exported the final products to other entities within the Group. Due to these activities, their net margins for the year were negative. Our assistance was sought to develop a comprehensive Transfer Pricing Strategy document that could effectively defend any potentially unfavorable positions taken by the Revenue authorities during their Revenue Audit.
Approach
To address the client’s transfer pricing challenges, we developed a robust and multi-faceted defensive document employing the following strategies:
Product Pricing Evaluation: We conducted a detailed assessment of the product pricing structure to ensure it aligns with market conditions and is consistent with arm’s length pricing principles.
Resale Price Benchmarking: Through a thorough analysis of comparable transactions in the market, we established a reliable resale price benchmark to demonstrate the fairness and reasonableness of the prices charged between the related parties.
Net Margin with Economic Adjustments: To accurately represent the true profitability of the client’s operations, we made appropriate economic adjustments to the net margins, considering any unique circumstances or non-recurring factors that may have affected the results in the first year.
Gross Margin Defense: By examining the gross margin, we provided additional support for the inter-company pricing model, showcasing the value added during the manufacturing process and justifying the related-party pricing.
Our comprehensive Transfer Pricing Strategy document aimed to present a strong defense to the Revenue authorities, ensuring transparency, compliance, and adherence to the arm’s length principle. By adopting this multi-pronged approach, we sought to protect our client’s interests and mitigate any potential adverse outcomes during the Revenue Audit.
IT/ITeS
Our client, engaged in the Cloud migration business, operates an offshore development center (ODC) in India. The client’s objective is to have the ODC function as an independent entity on a standalone basis. Despite market benchmarked hourly rates, the ODC’s net margins fall below the industry average. Our expertise was sought to identify the risks associated with this situation and provide a commercially acceptable solution that also complies with tax regulations in India.
Approach
To address the challenges, we adopted a systematic approach comprising the following key steps:
Identification of Inefficiencies: We requested the client to provide us with employee grade-wise productivity levels and benchmarked them against industry averages. This analysis revealed that the productivity levels at the ODC were significantly lower. Additionally, we discovered that only billed headcounts received remuneration, while unbilled headcounts were compensated on a cost-to-cost basis. This root cause analysis helped the client gain a detailed understanding of the issues affecting their net margins.
Development of a Pricing Model: To rectify the inefficiencies, we conducted a thorough analysis of the ODC’s business operations and interviewed key team members. Based on our findings, we designed a new pricing model that not only met the commercial needs of the headquarters but also complied with the Arm’s Length Principle, a crucial requirement in transfer pricing regulations.
Exploration of Alternative Pricing Strategies: Instead of relying solely on the conventional Cost-plus method, which might be commercially undesirable and lead to potential tax leakage, we explored multiple pricing model strategies. These alternative approaches considered factors such as bench strength, research and development activities, and the ODC’s dependency, ensuring a comprehensive and tailored solution.
By adopting this approach, we aimed to optimize the ODC’s performance and profitability while ensuring compliance with tax regulations in India. The new pricing model addressed inefficiencies, improved productivity, and aligned with the Arm’s Length Principle, thus enabling our client’s ODC to function as an independent and thriving entity in the Cloud migration business.
Private Equity Investment Manager’s Indian Establishment
Our client, a major Global Private Equity investment manager with its headquarters in the USA, runs an Indian establishment providing investment advisory services. These services involve identifying and assessing potential investment opportunities in India, offering economic and market intelligence, and advising on liquidity event strategies for its parent entity and other group entities. To address their Transfer Pricing needs, we were approached for guidance and implementation.
Approach
Identifying Comparable Companies: Given the specialized nature of the business, we adopted a comprehensive search approach, utilizing various relevant keywords. This effort enabled us to identify over 1,500 potential companies.
Qualitative Filtration: A meticulous thought process was applied to filter out irrelevant comparable companies, leaving us with a refined selection.
Determining Arm’s Length Range: Using the selected comparables, we provided guidance on the acceptable Arm’s Length range based on Indian tax regulations.
Results
Our expert guidance empowered the client to navigate the potential litigation risk in India, ensuring a seamless and compliant transfer pricing strategy for their Indian establishment.
Our unparalleled expertise in designing Transfer Pricing strategies and successfully handling litigations has benefited over 100+ clients across 20+ diverse sectors. We take pride in our track record of delivering effective solutions that drive success for businesses like yours. Our portfolio includes range of interesting projects in various domains, such as:
- Media industry.
- Trading of medical equipment in India.
- Trading and assembling of Electric vehicle in India.
- Corporate guarantee.
- Management services/Royalty cross charges.
- Royalty cross charge.
- Intellectual Property Transfer – DCF method could be used to determine Arm’s length price?
- Share transfer – Indian entity was thinly capitalised and was operating at a Debt equity ratio of 40:1. The group was undergoing massive restructuring and from India perspective, share transfer was decided to be the mode of restructuring and hence, the complication of determining the Arm’s length price with a highly skewed Debt equity ratio.
