Location Savings: India's position different from GAP India ruling?

A few days ago, Taxsutra had published a story on UN manual on transfer pricing for developing countries. UN Manual also includes a separate chapter on country practices for India, China, South Africa and Brazil. India’s comments include an elaborate discussion on transfer pricing issues related to location savings. India observes that location savings is one of the major aspects to be considered for comparability analysis. 


Some of India's observations are contrary to the recent ruling of Delhi ITAT in GAP International Sourcing India P. Ltd [TS-667-ITAT-2012(DEL)-TP]. ITAT has observed that no separate allocation is necessary, when benchmarking is done using the comparables in the tested party’s jurisdiction. In such a case, the location savings would automatically be reflected in the profitability of comparables and hence, would be taken care of in arriving at the arm's length price (so based on the profitability of comparables).


But, India in its comments, takes a view that “Comparability analysis and benchmarking by taking local comparables will determine the price of a transaction with a related party in a low cost jurisdiction. However, it will not take into account the benefit of location savings which can be computed by taking into account cost difference between cost of low cost country and high cost country from where the business activity was relocated.  In view of this, theprice determined on the basis of local comparables is not consistent with arm’s length price because any arm’s length transaction between two unrelated parties would not be possible without benefiting both parties to the transaction.”


India proposes that the ‘profit split method’ should be used for making arm’s length allocation for location savings. In the case of Li & Fung [TS-583-ITAT-2011(DEL)-TP], Delhi ITAT had held that arm’s length remuneration to the Indian entity should have been determined having regard to the critical functions performed by it, location savings and unique intangibles developed by it. ITAT held that remuneration received from the third party was to be split in 80:20 ratio between Indian entity and foreign AE.