IT Services Subsidiary of Dutch MNC — ₹3.1 Crore TP Addition Reduced to Nil at DRP
A Netherlands-backed Indian captive development centre faced a ₹3.1 crore transfer pricing addition after the TPO rejected TNMM and applied CPM with inappropriate comparables. We overturned it entirely at the DRP — no appeal required.
A methodological dispute with ₹3.1 crore at stake.
The Indian subsidiary — a 180-engineer software development and QA centre billing exclusively to its Dutch parent — had used TNMM with OP/TC as the margin measure for several years. For AY 2022–23, the Transfer Pricing Officer rejected this approach, characterising the Indian entity as if it were a standalone IT services company bearing entrepreneurial risk. The TPO proposed the Cost Plus Method (CPM) using a comparable set that included IT consulting, system integration, and staffing businesses, applied a 25% markup on direct costs, and raised a proposed income addition of ₹3.1 crore. The dispute was entirely methodological: whoever made the stronger legal and economic argument before the Dispute Resolution Panel would determine the outcome.
How we executed the engagement.
FAR Analysis
Built a detailed Function-Asset-Risk analysis demonstrating the Indian entity’s limited-risk captive character: zero ownership of intangibles, zero client-facing commercial risk, no discretion over project scope or pricing. All entrepreneurial risk, market development, and IP ownership sat with the Dutch parent.
TPO Comparable Set Challenge
Deconstructed the TPO’s CPM comparable set company by company. Demonstrated that consulting, system integration, and staffing businesses have fundamentally different economic profiles from a pure software development captive. Exclusion of these comparables removed the statistical foundation for the 25% markup.
TNMM Re-benchmarking
Rebuilt the TNMM comparable set with robust filters: operating revenue thresholds, employee strength, export orientation, and related-party transaction caps at 25% of revenues. Fourteen Indian IT software development companies passed all filters. IQR: 12.1%–19.4% OP/TC; client’s actual margin: 16.2% — inside the range.
DRP Objections Filing
Filed a comprehensive DRP objection within the 30-day window structured around three arguments: functional characterisation, comparable set invalidity, and TNMM re-benchmarking. Master File and Local File documentation aligned with BEPS Action 13 submitted as part of the DRP record.
Cross-Border Coordination
Aligned the Indian TP position with the parent group’s Dutch tax advisors throughout the process. Confirmed consistency between positions filed in India and the Netherlands; ensured no double-taxation exposure arose from conflicting documentation.
The capabilities we brought to bear.
FAR Analysis & Entity Characterisation
Limited-risk captive determination with supporting evidence from intercompany agreements, headcount allocation, and commercial risk mapping.
TNMM Benchmarking
Comparable set construction, multi-factor filtering, IQR computation, and arm’s length range confirmation.
DRP Representation
Objection filing and advocacy before the Dispute Resolution Panel on combined legal, functional, and statistical grounds.
BEPS Documentation
Master File, Local File, and CbCR-awareness documentation aligned with OECD BEPS Action 13.
Cross-Border TP Alignment
Coordination with overseas advisors to maintain consistent positions across jurisdictions and avoid double-taxation exposure.
The numbers that matter.
The results we delivered.
The TPO’s comparable set was the weakness — once we demonstrated that consulting and staffing businesses are economically incompatible with a captive development centre, the 25% markup had no foundation. The DRP agreed.
