Transfer Pricing Case Studies – Detailed Analysis of 5 Case Studies

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Transfer Pricing Case Studies


  • XYZ Inc., a fortune 500 Company is in the business of manufacturing of automobiles
  • XYZ India is a 100 % subsidiary and provides CAD designing services.
  • XYZ India is a captive service provider and is compensated on a C + 10 % mark up.
  • XYZ India has applied the TNNM as the Most Appropriate Method using comparables operating in ITeS industry. –
  • PLI applied – Operating Margin / Operating Cost


Position of the TPO

  • Rejection of Loss Making Companies
  • Rejection of Companies having only domestic transactions
  • Rejection of Multiple year data
  • Own set of Comparables provided without any search process (cherry picking)
  • Proposed mark up of 30% -40%

Position of the Tax Payer

  • Loss cannot be the sole criteria for rejection (entrepreneurial risk)
  • TNNM requires functional comparability
  • Financial results of comparables exhibit high degree of variation
  • Integrated Service Provider to be excluded
  • Companies having intangibles to be excluded ( unique software, brand name etc)
  • Adjustment for :
  • Working Capital
  • Intangibles
  • Risk ( captive service provider Vs. entrepreneur)

Audit Outcome

  • Captive Service Provider (BPO/ITeS)

–Losses not acceptable

–Proposed cost plus markups range from 25% to 40%

–“One size fits all” approach

–Comparables proposed inappropriate (no consideration for intangibles, differences in business models, etc.)

–Justifies markup saying “even after paying high markups, cost savings will be substantial”

  • Adjustment of risk vis-à-vis third party comparables disallowed
  • Working capital adjustments of 2% allowed in some cases

Case Study 1 on Transfer Pricing :-

Applicability of SDT to transactions between non‐residents

Transfer Pricing Case Studies


  • Mr. X is director of FCO which has a PE in India
  • Mr. X was deputed to work for PE in India from 1 November 2012 during FY 2012‐13.
  • For services rendered upto October 2012, Mr. X was paid salary outside India. For services rendered post 1 November 2012, he is paid salary in India.
  • PE is liable to tax on net basis in India. Mr. X’s status is non‐resident for FY 2012‐13.
  • PE claims salary paid to Mr. post 1 November 2012 as deductible expenditure from its income.


  • Whether salary paid to Mr. X is subject to Domestic TP considering that both FCO (and hence its
    PE) as also Mr. X are non‐residents?

Case Study 2 – Applicability of TP for royalty paid by Indian and foreign subsidiaries to Indian parent

Transfer Pricing Case Studies


  • Hold Co is an Indian company.
  • Sub 1 is a foreign subsidiary. Sub 2 and Sub 3 are Indian subsidiaries.
  • Hold Co. owns valuable brand ‘XYZ’ which is self generated for Hold Co.
  • Hold Co is not eligible for any profit linked tax holiday
  • The subsidiaries are engaged in manufacturing and distribution of diverse products.
  • The subsidiaries sell their products under brand name of ‘XYZ’.
  • The subsidiaries pay royalty to Hold Co. for use of brand name.
  • Sub 1 has no presence in India and is not liable to tax in India.
  • Sub 2 pays royalty of Rs.4 Cr to Hold Co. Sub 3 pays royalty of Rs.7 Cr to Hold Co. Both Sub 2 and
    Sub 3 are not entitled to any profit linked tax holiday.


  • Whether Hold Co. is liable for Domestic TP for royalty received from subsidiaries?
  • Whether subsidiaries are liable to Domestic TP?
Transfer Pricing Case Studies3

CASE STUDY 2 on Transfer Pricing


  • A Ltd. is an Indian company and not eligible for any tax‐holiday
  • B Ltd. is a foreign company located in U.S.A. and 100% subsidiary of A Ltd.
  • C Ltd. is an Indian company, 100% subsidiary of A Ltd., and not eligible for tax‐holiday
  • D Ltd. and E Ltd. are Indian companies, 100% subsidiaries of A Ltd. and eligible for deduction u/s.10AA
  • A Ltd. granted interest free loans to B Ltd., C Ltd. and D Ltd.
  • A Ltd. granted loan to E Ltd. at interest rate of 18% p.a.


What is the effect of Domestic TP in the hands of A Ltd., B Ltd., C Ltd., D Ltd., and E Ltd.? B Ltd. A Ltd. C Ltd. D Ltd. E Ltd.

CASE STUDY 4 on Transfer Pricing

Transfer Pricing Case Studies

CASE STUDY 5 on Transfer Pricing


  • A Ltd. is an Indian company engaged in software development and eligible for section 10AA benefit
  • B Ltd. is a wholly owned subsidiary of A Ltd. situated in China and provides R & D services to A Ltd.
  • B Ltd. charges cost plus 20% mark‐up for providing R & D services to A Ltd.
  • With effect from 01.10.2012, shareholding of A Ltd. in B Ltd. was reduced to 25%
  • A Ltd. has earned OP/OC of 40% from 01.04.2012 to 30.09.2012 as well as from 01.10.2012 to 31.03.2013. Arm’s length OP/OC is 17%


  • During F.Y. 2012‐13, whether A Ltd. will be subject to International TP or Domestic TP or both?
  • In Domestic TP, whether transactions will be covered u/s. 40A(2) or 80‐IA(10) or both?
  • Whether any upward adjustment can be made for A Ltd. by the AO under Domestic TP
  • Provisions even though there is mere change in the shareholding without any change in the pricing mechanism of transactions with related party?

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