Indian advance pricing agreement uses customs value as arm’s length price

By Ajit Jain, Mumbai

India’s Central Board of Direct Taxes (CBDT) has recently entered into an advance pricing agreement (APA) where the price determined by the Indian Customs authorities was accepted as arm’s length price for import transactions for transfer pricing purposes.

Generally, the Indian tax authorities and customs authorities have different purposes for valuing an import transaction. The customs authorities have a motive to increase the price so that they can charge higher import duty on the purchase price. The tax authorities, on the other hand, have a motive to slash the purchase price so that they can lower the expenditure of the taxpayer and charge tax accordingly. 

The use of customs data to establish arm’s length pricing for transfer pricing purposes has been the subject matter of litigation in India.

Customs data is prepared and maintained by the Indian customs authorities in relation to any items, goods, products. etc. imported into India. For transfer pricing purposes, Indian taxpayers who have undertaken import transactions have been benchmarking the said transactions using customs data to arrive at the arm’s length price.

However, such an approach has not received judicial approval. In Serdia Pharmaceuticals (India) Private Limited the Mumbai Income Tax Appellate Tribunal (ITAT) rejected the assessee’s reliance on customs data.

The ITAT held that merely because the customs authorities consider the price at arm’s length does not relieve the taxpayer’s burden of establishing that the price is at arm’s length for purposes of transfer pricing requirements under the Income Tax Act.

Further, the Delhi ITAT, in the case of Panasonic India (P.) Ltd, held that “purposes of customs valuations and Transfer Pricing provisions were different and where specific rules of law existed in the statute on a particular subject, then they would hold the field.”  

However, there are few ITAT rulings wherein the customs data have been accepted by the ITAT to benchmark import transactions. In Coastal Energy Pvt Ltd the assessee had imports from associated enterprises. The transfer pricing officer applied comparable uncontrolled price data obtained from customs authorities to arrive at the arm’s length price.

The ITAT, while accepting the custom data, held that “the valuation made by the Customs authorities was not arbitrary, as it was based on large volumes of international data, classified according to internationally accepted protocol.”

Therefore, we observe that there are mixed views of the Indian judiciary on accepting customs data as ALP. However, the recently concluded APA by India’s Central Board of Direct Taxes, by accepting custom’s data for the purpose of determining arm’s length price, evidences the willingness of the APA authorities to accept valuation done by another division of the Indian government.

Siddhesh Chaugule, Assistant Manager, also contributed to this article.