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India perspective
Transfer Pricing aspects of marketing and buy-sell arrangements has been the focus of the tax authorities and the key dispute between the taxpayers and the tax authorities has generally been whether the India operations qualify as “baseline” or not. The allegation of the Indian tax authorities is that the Indian distributors make more than baseline contributions such that the activities benefit the owner of the trademark. The tax authorities have generally been carving out these activities and benchmarking them separately. The position of the taxpayers has been that the Indian operations are routine and therefore “baseline” and the return on sales earned by the Indian entity subsumes the remuneration, if any required for the additional activities. This matter is currently pending review by the Supreme Court of India.
Also, India operations of several MNE Groups are organized as “sales and marketing service support” entities which appear to be out of scope of Amount B whereas arrangements which are much wider in scope such as “sales agents” find a place. However, it is not clear as to how “sales agents” would be distinguished from marketing service providers from an India standpoint.
Implications
It is presently unclear as to how Amount B will be implemented (eg: as a safe harbor, prescriptive etc). If implemented well, most countries and taxpayers will benefit from reduction in disputes and streamlining the transfer pricing for selling arrangements given that this will represent a consensus measure. Irrespective of the implementation mechanism, Amount B is expected to result in reduction of compliance burden as well as provide tax certainty in a manner which may not be as cumbersome as other processes like APA and MAP. Therefore, businesses also should evaluate the potential impact of these changes on their business models and consider adoption.
Given the lack of consensus in the scoping criteria and the two alternatives proposed (A & B), it is unclear whether the Indian tax authorities would accept the inclusion of Indian buy-sell structures within the scope of Amount B until there is clarity on the issue by the Supreme Court. Until then it appears that APAs and MAPs may provide a better alternative to seek upfront certainty on transfer pricing aspects relating to India buy-sell structures.