Plan & Executive Summary
The essay is quadripartite and it seeks to present a comprehensive discourse on the issue of transfer pricing in intra-firm trade, which has gained currency in today’s global age.
The narrative in the initial section provides an in-depth analysis of the concept of Transfer Pricing against the backdrop of global economics. Firstly, the key terms associated with trans-border intra-firm trade are discussed. This is tied up with a delineation of the relevant OECD guidelines. Thirdly, the information sources for discovering the intra-firm trading activities are briefly dealt with, before ending this section with a short note on the motivations for transfer pricing.
The second part of this essay dwells upon the relevant Transfer pricing regulations. The internationally accepted twofold test- provision of service and whether it should have been at ALP- is critically examined herein. The benefit rule is also discussed in detail. This is followed by an analysis of the five non-beneficial services listed by the OECD. They are:
- Shareholder/custodial activities
- Duplicative/stewardship services
- Passive association benefits
- Services that provide incidental benefits
- On-call services
Finally, a brief note on the methods in computing the ALP is submitted.The third part of this essay analyses the judicial precedents on the issue to study the general trends in judicial reasoning. Cases along the lines of ‘respecting the commercial wisdom of the business man as far as the necessity of the said service is concerned’ and also those regarding ‘the allocation of common expenses’.
The third part of this essay analyses the judicial precedents on the issue to study the general trends in judicial reasoning. Cases along the lines of ‘respecting the commercial wisdom of the business man as far as the necessity of the said service is concerned’ and also those regarding ‘the allocation of common expenses’.
The conclusion briefly discusses the general trend seen in the precedents and sums up the essay by noting that ‘despite the clutching laws, the judiciary has been consistent in protecting the legitimate business interests of the concerned parties’.
Part I: Introduction to Trans Border Intra Firm Trade
Traditional international economic theory overemphasises the importance of the ‘nation’ in Global Trade and it presupposes the existence, either implicitly or explicitly, of an arm’s lengthcharacterisation in every international transaction.  As problematic as these premises are, they have been dislodged further by the alarming rise of non-state actors like Transnational Corporations (TNCs) or Multinational Companies (MNCs) in International Commerce and the trade relations contracted within them.
“A multinational group is a conglomerate of multiple entities working in various geographic regions at different sizes and scale of operations. The group is regarded as a collective unit that functions by mutual cooperation and assistance, focusing on increasing its efficiency and wealth.” 
It is common for the ultimate parent company to render centralised services to all of the group entities and a separate agency could be established for this purposed. This is done,
- To capitalise on the cheaper labour and capital available in certain jurisdictions and
- To improve the efficiency or productivity of a group as whole by avoiding the duplication of resources for each entity on a standalone basis.
These services are commonly referred to as intra-group services. Such transfer of services within a firm and across national boundaries is asymmetrically located in the international sphere and its distribution is skewed. Hence, in the free market economy that pervades capitalist countries, the open market transactions can be contrasted with these intra-group ‘hierarchical’ transactions.  Here, there is a centrality in deciding the contractual terms and thereby they are distinct and different from market transactions and inter-firm trade in the global fiat economy.
One major advantage of such trade, from the business perspective, is the avoidance of transaction costs in terms of the expenses incurred in:
- Search & information
- Bargaining & decision and
- Policing & enforcement activities.
These overheads could be attributed the externalities, like Government intervention, and the market forces which dictate trade relations in the open market.  But when the international exchange is within the firm, it can be customised to suit the institutional preference, to minimise the overall tax incurred and to prioritise the organizational profits. Hence, the transfer pricing between related parties- like parent company & subsidiary or divisions, internal sales within associated enterprises (AEs) – aren’t, in the general course of events, at arm’s length. These controlled transactions could cover anything from traditional operations proper, to management contracts, technical assistance agreements, licensing arrangements, transfer of technology, dividend remittances, royalties and technical fees payments.
Operationally, the financial manipulations for transfer pricing take place through false invoicing: under invoicing or over invoicing of imports and exports, and both of these methods are ruinous to national economies. This practice is defined by the OECD Committee on Fiscal Affairs (1976), as:
“A transaction intended to evade tax by putting taxable objects outside the reach of national tax authorities by means of an invoice that does not accord with economic facts.”
When the transfer of goods or services occurs across a technologically and territorially separable interface at a price lower than the market price, the Customs Department is deprived of adequate import duty. Also, as far as the operating country of the exporter is concerned, profit shifting has taken place: since a lower price is listed, lower profits are computed and thus a lower tax amount is collected in the host country of the exporting business. Under invoicing could be resorted to for products with high import duties and sales tax. Whereas,
“Over invoicing of imports occurs in those commodities with low or zero import tariffs, mostly forillegal repatriation of capital to head offices; and also in sectors with internal price control to increase the cost of production so that higher official prices/ subsidies can be obtained.”
As far as over invoicing is concerned, though the Customs Department shouldn’t fret, it would be a clear case of profit shifting and tax avoidance causing loss of due income tax to one the operating jurisdiction of the importing company. The objective could also be to capitalise on the Government Export Incentive schemes.
Joint ventures (financial & technical) and trans-border licensing agreements often provide ample scope for transfer pricing, not only to circumvent adverse government policies, but also as a part of the corporate strategy and organisational structure of transnational entities. Such activities could also be indulged in by adding a tie-in clause in the contract wherein the licensee in the technical/ financial collaboration would be made to purchase supplies from the licensors or a designated third party. In these internal or monitored sales, there is great scope for false invoicing to suit business interests.
Methods have been devised to check such anti-competitive activities in the open market. The Customs Departments have valuation systems with the comparable prices and when the transactions don’t correlate, they could penalise both of the parties and they might even blacklist serial offenders. But when it happens intra-firm, it is hard to detect and harder to question.
This is the reason why Foreign Direct Investments (FDIs) should be taken with the pinch of salt since they could be ways for MNCs to dictate the terms of their own trade across nations, divorced from the international market. They could create Global value chains (GVCs) through the international restructuring of operations:
- By establishing Business Process Outsourcing (BPO) ventures and
- Offshoring of business activities.
Such structural adjustments are made keeping in mind the production process optimisation and other factors to improve the business. Hence, value chain activities like design, production, marketing and distribution could be dispersed across the world and located in different sites depending on the suitability of the local conditions vis-à-vis business interests.
A country’s participation in GVCs could also speak volumes of its Global Economic integration. This could be learnt by analysing the upstream links by computing the amount of foreign inputs in a country’s exports or by studying downstream links through the finding of the amount of a certain country’s domestic inputs in a foreign country’s exports. In a simplistic sense, it can be stated that the percentage of a country’s domestic inputs in any export is directly proportional to its economic position in the Global Market. But joining the GVCs has its own pros and cons, and it’s beyond the scope of this essay to analyse them.
But it can be stated that, if unrestricted, GVCs could allow for an international coordination of production and distribution within the firm, defying all state laws; hierarchy being its own court of ultimate appeal.
The information Sources for Intra Firm Trade aren’t wide. Two alternative methods could be employed to obtain the details of Intra Group transactions:
- The Customs Declarations regarding the specificities of ownership ties between the domestic and the foreign AE.
- Through a survey of the MNC wherein the particularities of international transfer of goods & services, like the values of specified trade flows, could be brought into question.
But only the United States mechanically collects and analyses comprehensive data and the available data, on a general note, is much more restricted when vertical integration in service industry is concerned. Despite being less documented, vertical trade in banking industry could be taken as an example to illustrate the slicing up of value chains in the service sector.
Since Banking activities are largely digitised and require minimal physical resources, they could be expanded across the world to offer global financial services. The output could also be computed as a linear sequential value chain thanks to the digital component which allows for offshoring work which requires processing capabilities and skilled labour, and localising the core banking competences in financial service hubs.
Motivations for Transfer Pricing
Apart from the obvious tax considerations induced by unfavourable Government policies, TP could also be motivated by structural and strategic reasons:
- An MNC might want to maintain a certain level of secrecy about its R&D vis-à-vis its competitors. Hence it could be motivated to carry out its business activities in private, by way of vertical integration of its supply chain.
- If a certain subsidiary isn’t making profits, the parent company could be persuaded to transfer price to compensate the loss of that group company.
- Considerations of security with respect to both prices and access to supplies, especially in cases of long gestation period investments could also factor in motivating a group company to false invoice its services.
- In brief, their multinational character itself is an attempt to `internalise’ market imperfections so as to maximise current global profits or minimise future risks and uncertainties in order to ensure long-term gains for the entire corporation.
The manipulations could be general or specific.  The existence of ‘shell companies’ or any unexplained affiliations in tax havens which don’t perform any function as such are clear indicators of evading tax through transfer pricing. The same suspicion arise in the case of companies which are under common control but belong to different corporate groups and those which are permanently loss making units.
Specific manipulations would comprise tampering with the balance sheet and the Profit & Loss account.
PART II: Intra Firm TPR for Service Sector
Though the OECD Guideline provide the overarching structure within which the TPR of all the countries can be subsumed, it is important to consider the Regulations in certain important jurisdictions. In India, the Transfer Pricing rules were introduced by Finance Act, 2001 with effect from 1st April 2002 under Chapter X comprising of s.92 to s.92F. The U.S. Regulations in 1.482-9(I) (1), include the following deﬁnition of an intra-group service:
“A controlled services transaction includes any activity by one member of a group of controlled taxpayers (the renderer) that results in a beneﬁt to one or more other members of the controlled group (the recipient(s)).”
Arm’s length pricing for intra-group services continues to remain one of the major global transfer pricing challenges for multinational taxpayers and national tax authorities alike. There are two issues in the analysis of TP in intra-group services:
- Whether the service was actually provided/rendered.
- Whether intra group charge should be in accordance with ALP costs. 
Determining whether intra-group service was rendered
The OECD Guidelines uphold the Benefit Rule and broadly state that,
“When one group member performs an activity for one or more group members, it will be regarded as a service rendered if and only if the activity provides the respective group member with economic or commercial value that might conceivably enhance the recipient’s commercial position.” 
The legitimacy of the service being provided could also be ensured by considering,
- Whether an independent enterprise would be willing to pay for that service if it’s procured under similar circumstances from an independent third party,
- Or whether an independent party would be willing to make the service available by performing it in-house.
If both of these conditions aren’t satisfied, that particular activity shouldn’t be considered a chargeable intra group service under arm’s length principle.
The US regulations u/s.482 of the Internal Revenue Code propounds a similar principle. Even theAustralian Tax Office (ATO) upholds a similar idea when it essentialises the accrual of some form of benefit to the recipient in its definition of ‘service’ and goes on to further add that if there is a ‘real connection’ between the service provider and the recipient, then there should be recompense.
The Benefit Rule, apart from quantifying the benefit, to identify if the enhancement was real or illusory, also discovers the proximity of the same to legitimate it. The benefit should be direct or perceived and it should not be something so incidental or remote that unrelated parties wouldn’t have charged the service.
The Management fee should be consistent and commensurate with the benefit received and the transaction shouldn’t be subject to benefits that might be realised in the future; hence, the usage ofhindsight is avoided.
For instance, Central Human Resource Department might train all of the employees in a particular group entity and then post them across group companies. Such, services accrue benefit to the recipient company in terms of human skills. Also, the benefit isn’t incidental; the service was done for the purpose of each of these business entities. Therefore, a service fee can be collected.
But, as afar as managerial services like marketing is concerned, unless that particular branch office was specially promoted, there can be no need to independently compensate the Head Office since ultimately it is the brand image of the whole company which will benefit.
To facilitate the identification of beneficial services, the OECD guidelines have listed out certain non-beneficial services which cannot be charged. They are,
- Shareholder/custodial activities;
- Stewardship/duplicative services;
- Services that provide incidental benefits;
- Passive association benefits; and
- On-call services.
Shareholder/ custodial activities
These are practices undertaken in view of the ownership interests. The European Union’s Joint Transfer Pricing Forum (EU JTPF), February, 2010, classiﬁed costs of central coordination and managerial activities generally to be in the nature of shareholder costs. However, it also stated that such activities should be related to the management and protection of the investments in participants and no independent party should be willing to pay or perform for itself. 
As per the OECD Transfer Pricing Guidelines for Multinational Enterprises & Tax Administrations, 2010 (amended since 1995), the Canadian Regulations, and the US Regulations services/costs that are regarded as shareholder activities are mentioned below:
- Costs of activities relating to the legal structure of the parent company and include expenses associated with the issuance of stock and maintenance of shareholder relations.
E.g., costs of issuing shares, share transfer expenses, meetings of shareholders and costs of the supervisory board;
- Costs relating to the reporting and legal requirements of the parent company.
E.g., consolidation of financial reports, maintenance of shareholder records, filings of prospectuses and income tax returns;
- Costs incurred by a parent company to raise funds for acquisition of a new company in its own right;
- Costs of, secretarial, managerial and control (monitoring) activities related to the management and protection of the investment as such in participations;
- Costs of visits and reviewing subsidiary performance on a regular basis; and
- Costs of financing or refinancing the parent’s ownership participation in the subsidiary. 
The reasoning behind this is that beneﬁts from shareholding activities ought to be received by the provider of the services rather than the recipient.
But every activity performed which might bring a benefit to the owner, isn’t barred from being made chargeable. Hence, the particularities and the surrounding circumstances should be analysed before deciding whether a certain activity which conforms to one or more of abovementioned categories warrants allocation.
Duplicative/ Stewardship activities
These are services rendered by a group member when there is no apparent need for them on account of the recipient or an unrelated third party already performing these activities adequately. The US Regulations illustrate the point with the example of intra group accounting & financial analysis service. When a group entity has sufficient financially knowledgeable personnel who are qualified to conduct these analytical operations by themselves, then it would be redundant if the parent company or another group entity provides the same service. Hence, it shouldn’t be chargeable.
If legal and secretarial compliance services can adequately be attended to by employing own personnel then service fee shouldn’t be collected if another group member offers the same service.
But this is subject to certain exceptions like a temporary circumstance or an opportunity to eliminate critical business risks. The instances of elimination of critical business risk could come into play while taking a second legal opinion or performing an external audit to avoid a risky or wrong business decision. Hence, a valid reason which is warranted by an important business concern can dislodge this prohibited head.
Technical Services procured from the parent company or another group member, (other than technical know-how) will fall under this category if they are easily available locally, unless a valid business reason is established.
Services that provide incidental benefits
The OECD guidelines state that activities that only indirectly enhance a group entity cannot be made a chargeable intra group service. Hence, when the coordinating centre has worked policies targeting a particular group entity and this policy tends to remotely benefit another group member, it cannot compensate them for this illusory gain. So, a situation of reorganisation decision or acquisition/disinvestment deal being carried out by a parent or a sister company might result ineconomies of scale or some other benefit for some other group member not directly involved in the process/deal. In this case, though there is a service element, the same cannot be charged for, since it only provides an indirect benefit.
Passive association benefits
A mere ‘status as a member of a controlled group’ in the case of a taxpayer, generally, won’t be considered as adequate to justify the provision of a benefit to the taxpayer for which an arm’s-length charge or allocation will be required. But intra group guarantor fee payments are justified. Also, when a group entity receives higher credit firm ratings on account of its association with the parent company, then management fee can’t be legitimated; but if such a rating was on account of the guarantee provided by the parent company, then an allocation could be warranted on account of the benefit accrued.
There could be a support group established by the group entities, through a common understanding and for common benefit, which might always be ready and prepared to provide any, legal technical, financial or tax related service, on an on-call basis and whenever it’s required. The relevant aspect in this issue is the chargeability of the round-the clock availability of the services itself; like, stand-by charges. It is important to note herein that there is no regular necessity for these services but when they are sought, an advisor shall be appointed on retainer basis. But these availability charges become redundant and unjustified if the same service could easily be procured from another source. Also, it is necessary to consider the benefit that the ‘on-call’ arrangement offers to the group over a period of several years, since the occurrence of those service needs are sporadic.
Documentation to justify the provision of service and the accrual of benefit
The Indian TPR do not specially discuss the documentation requirements with regard to intra firm service transactions. But elaborate filing and recordings are necessitated, generally, in TP cases. Further, since the transfer of services are harder to detect on account of them being intangibles, robust documents become all the more important. In the absence of such evidence, if the TPO isn’t satisfied with the responses to his enquiry, he could disallow the entire management fees and impose a heavy income tax burden in the domestic jurisdiction. Also, without comprehensive and thorough identification, evaluation, and documentation processes, the MNC’s chance of proving the ‘service transferred’ in the case of a litigation, are weakened.
Though the primary onus is on the taxpayer, the TPO can make adjustments upon the figures submitted, on the ground that the burden has not been adequately discharged by the taxpayer.
Also, it should be noted here that mere documental proof won’t suffice; it should be substantiated with a detailed analysis of functions performed, assets employed and risk assumed, etc. which are mentioned in S. 92D read with Rule 10D and the same should be established beyond reasonable doubt.
For this purpose, the legal contracts between the MNE group entities should be put in place along the functions, assets and risks (FAR) analysis. During the course of TP audit, the evidence required will be:
- Emails, Reports, Invoices;
- Presentations, detailed worksheets;
- Memos, circulars;
- Exhaustive evidence as to Description of services;
- Explanation in brief on the type of services received;
- Substantial elucidation of how these services have been received by the taxpayer company; and
- In what manner and to what extent benefits have been derived by the taxpayer. 
But even the meticulous following of this requirement may not suffice to ward off potential adjustments or disallowance of deductions in the recipient jurisdiction. 
Methods to compute ALP
In relation to this, the OECD Guidelines also prescribe two charging systems i.e. direct and indirect charging. Direct charging is resorted to when a service is directly provided by one member of the group to another member. Here, the third party quote for the same or a ‘comparable service’ are found, to analyse the ALP for that particular transaction.
The indirect charging methods are based on costs allocation or apportionment and usually involve some estimation or approximation to arrive at a practical method to determine the ALP for complex transactions. The Comparable Uncontrolled Price (CUP) Method and the Cost Plus method fall under this category.
The CUP method can be used in two situations:
- When the service provider provides the same service to independent enterprises under similar circumstances.
- Or when the recipient could procure/ procures a comparable service from an independent enterprise.
If the CUP method is found to be inapplicable, the Cost Plus method can be made use of. This method only requires a simple analysis of the costs incurred in the process.
PART III: Precedential Analysis
In the recent years, the TP in intra group services has become the soft target of Indian tax authorities for the purpose of adjustments. But the judiciary has been the saviour in these situations, as it is evidenced by the slew of cases in this regard.
The Indian jurisprudence in this context has focussed on the commercial expediency of the ‘services’ received by the Indian entity from its MNE group members and it has evolved the standard of a ‘prudent businessman’ as an analytical construct.
The Delhi High Court, in Hive Communications Pvt. Ltd.  held that the legitimate business needs of the tax payer and the benefits obtained from satisfying them, must be judged from the point of view of the tax payer complemented by the viewpoint of a constructed ‘prudent businessman.’ Also, it has been repeatedly affirmed by the Courts that the word ‘benefit’ should be subject to a wide interpretation which cannot be restricted to ‘shillings, pounds or pence.’  Hence, it has be reiterated frequently that the word ‘benefit’ has a broad connotation which cannot be monetised. 
Recently, the Delhi High Court in M/s Cushman & Wakefield India Private Limited (the Taxpayer), ruled on the TP aspects with respect to intra firm service trade. The Taxpayer is an Indian company engaged in the business of rendering services connected to acquisition, sales and lease of real estate and provision of advice and research on such matters, project management etc. within and outside India. It procured some services from the Singapore and Hong Kong branches of the group entity, (CWHK) and (CWS). The said services obtained are:
- Coordination and liaison services
- Referral of clients to AEs
As per the documentation, on reasonable allocation methodology, actual costs were charged for the liaison services and referral fees were paid according to International fee sharing rules and referral fees on Tenant Representation Transactions.
But both of these expenses were disallowed by the Tax authorities on the ground that no real benefit was derived by the assessee from the liaison services and in the case of referral fees, it was unwarranted since, if at all any benefit could be construed to have resulted, it wasn’t directed at the taxpayer i.e. it was incidental and indirect.
By challenging the TPO and the AO’s decision, the Taxpayer pleaded that only the actual costs incurred by the service provider was reimbursed without a mark-up, and if the transaction was computed on arm’s length pricing, the tax incidence in India would have been reduced. The same was contended to be against the statutory provision u/s. 92 (3) which provides that TP provisions won’t apply if the result of the ALP determination is a reduction of the overall tax incidence in India.
The High Court opined that:
“Whether a third party in an uncontrolled transaction would have charged amounts lower, equal to or greater than the amounts claimed by the AEs, has to be tested under the methods prescribed under the Indian TP provisions. The concept of base erosion is not a logical inference from the fact that the AEs have only asked for reimbursement of cost. This being a transaction between related parties, whether that cost itself is inflated or not only is a matter to be tested. The basis, the activities for which they were incurred, and the benefit accruing must all be proved to determine whether such expenditure was for the purpose of benefit of the Taxpayer, and whether that amount meets ALP criterion.”
The Delhi High Court relied on the Tribunal ruling in Dresser-Rand India Pvt. Ltd.  and observed that the authority of the TPO is to conduct a transfer pricing analysis to determine the ALP and not to determine whether there is a service or not from which the Taxpayer benefits. The HC held that the TPO cannot question the commercial wisdom or reasoning for providing the services and should restrict itself to determining the ALP; a businessman being the best judge of his own commercial interests. Thus, it is entirely the Taxpayer’s prerogative to decide how to conduct its business:
“The taxpayer may have any number of qualified accountants and management experts on his rolls, and yet he may decide to engage services of outside experts for auditing and management consultancy. This decision can’t be questioned by the Tax authorities since it would amount to unjustified interference in business practices”
Mumbai ITAT also reversed the disallowances made by the Assessing Officer (AO) under Sections 37(1), 40A (2) and 40(a) (i) of the Income-tax Act, 1961. The Tribunal’s observations inter-alia lay down considerations that are relevant for determining the ALP of intra-group services / headquarter cost allocations. Further the Tribunal ruling also provides useful guidance on the taxpayer’s burden of proof.
The Benefit Rule was disregarded by the ITAT when it opined that it shouldn’t be the consideration of the TPO whether the service availed actually benefitted the assessee. In the view of the Tribunal, ‘the real question which is to be determined in such cases is whether the price of a service is what an independent enterprise would have paid for the same service.’ But the relevance of the Benefit Rule was re-established by the Delhi High Court in Cushman & Wakefield.
On the issue that the Indian AE had earlier procured these services free of cost, it was held that ‘for the sole reason that a particular service was once provided on a gratuitous basis, it may not be assumed that the particular service doesn’t warrant charges at all.’ Therefore, the irrelevance of gratuitous services received in the past for determining ALP in the current year has been recognised in this landmark ruling.
The Tribunal went on to set aside the Dispute Resolution Panel’s (DRP’s) ruling on the basis of the observations made by the Supreme Court in the case of ML Kapoor: 
“Quasi-judicial authorities should provide adequate reasoning for the positions adopted by them.”
The Tribunal also highlighted the provisions of S.144 (6) and stated that ‘it is not open to the DRP to reject the objections of the taxpayer in a summary manner without properly analysing the objections of the taxpayer and dealing with evidences filed by relying on the Delhi High Court decision in the case of Vodafone Essar Limited. 
By relying on the Apex Court decision in GE India Technology Centre Pvt. Ltd,  the Tribunal observed that the vicarious tax withholding liability cannot be invoked unless the primary tax liability of the recipient is established. The Tribunal noted that the AE did not have a Permanent Establishment (PE) in India and further, the services availed cannot be taxed as ‘Fees for Included Services’ underArticle 12(4) of India-USA tax treaty since the services prima facie do not satisfy the ‘make available’ criterion mentioned therein.
This landmark judgment also highlights the need to maintain robust contemporaneous documentary evidences in support of intercompany services availed from AEs and uphold the right of the taxpayer to determine the need for service. Moreover, the judgment also reiterated certain well established principles of law such as limit on powers available to the AO or TPO to determine commercial expediency for the taxpayer and duty of the DRP while adjudicating on objections filed before them. This pronouncement came as relief which cleared the air with regard to these important legal principles after the unfavourable decision in Gemplus India Pvt. Ltd. 
Taxation of common expenses: cost sharing and cost allocation
Intra group services can either be directly provided by one member to another, or they may be generated at a centre and distributed to all of the members. In such a situation, the issue of cost sharing to establish that centre and subsequent cost allocation to bear the common expenses which were incurred to create common benefit. For instance, development of new products / new raw materials by one group entity might substantially benefit another member. But this should be subject to the test of directness.
According to Art.7 of OECD model and UN Model Convention,
“A foreign enterprise is liable to be taxed in source country on its business profits which are attributable to the Permanent Establishment (PE) in that source country. A PE is to be treated as if it is an independent enterprise different from its head office and which deals with the head office at Arm’s Length.”
But this taxation requirement could be circumvented by shifting the profits to another group entity through ‘legitimate means’ like paying for intra-group services rendered, cost allocation and cost sharing. The legitimacy of the international transaction should be established by the assessee through documentary evidence and FAR analysis. If the results of such analysis done by the assessee showed that the international transactions entered by the assessee with the AEs were at arm’s length, no adjustments or disallowance is permissible. 
But the issue is debatable and the judicial stand is not settled either. For instance, in CIT Vs. Dunlop Rubber Co. Ltd  the assessee company paid its share of costs and expenses in relation to the sharing the fruits of R&D. The Hon’ble Calcutta High Court held that amount received by the foreign company from the Indian company did not constitute income assessable under the Act.
However, a slightly contrary view has been taken by Authority for Advance Ruing (AAR) in Danfoss Industries Pvt. Ltd.  it was held that ‘the tax is deductible on the re-imbursement of cost allocated to the group company on some reasonable basis but the same is not possible in a case of pure re-imbursement as the re-imbursement amount may have some income element embedded in it.’
Thus, this is a grey area in legal reasoning which can be manipulated to mean for the business interests or greater income incidence in the domestic jurisdiction.
PART IV: Conclusion
Transfer pricing Regulations for intra-firm trade is a wide area which provides as many opportunities as the challenges that it presents to every stakeholder. Especially, the intra firm transfer of services, is a weak point which can be capitalised on by either side. But the judicial pronouncements in this regard have given some hope to the MNCs by protecting their legitimate business interests through legal measures that grant them the leeway to decide for themselves, what their ‘commercial needs’ will be. The commercial wisdom of the business ventures has been given precedence over the biased interests of the Tax authorities, whose power has been restricted to determination of the ALP of any particular transaction, neither questioning its necessity nor its outcome. But, the business climate is fast changing and new, more inventive methods are being devised by the MNCs to avoid tax ‘legitimately’. The legal framework has indeed tried to play catch-up, but the law isn’t up to the mark yet.
 Helleiner GK & Lavergne R, Intra Firm Trade and Industrial Imports to the United States, 41 Oxford Bulletin of Economics and Statistics 297–311 (1979).
 Rahul K Mitra, Aditya Hans & Ashish Jain, Intra group services for shareholder activities, 15 Transfer Pricing International Journal (8th ed., Aug. 2014).
 Oliver E. Williamson, Markets & Hierarchies: analysis and antitrust implications (1975).
 R.H Coase, The Problem of Social Cost, 3 J. Law & Econ. 1-44 (Oct., 1960).
 US Internal Revenue Service, Multinational Companies, Tax avoidance and/or evasion and Available Methods to Curb Abuse, in R. Murray (ed.) (1981).
 Paragraph 7.5 of OECD Guidelines.
 Paragraph 7.6 of OECD Guidelines.
 Annex II; point 12 of EU JTPF Report: Guidelines on low value adding intra-group services, 2010.
 Paragraph 7.10 of the OECD Guidelines.
 TNS India v. Assessee ITA No. 1875/Hyd./2012 for Assessment Year: 2008-09.
 Knorr Brense India ITA. No. 5097/ Del./ 2011.
 Hive Communication Pvt. Ltd v. CIT  201 TAXMAN 99 (Del).
 CIT v. EKL Appliances (ITA No’s 1068/2011 & 1070/2011); Indigene Pharma v. ACIT [TS-46-ITAT-2014(HYD)-TP]; AWB India Private Limited v. ACIT (ITA No 4454 of 2011) (Delhi ITAT).
 McCann Erickson India Pvt. Ltd. v. ACIT (ITA No. 5871/Del/2011).
 Dresser-Rand India Private Limited v. ACIT (ITA no. 8753 / Mum /10) dated 7 September 2011.
 Union of India v. ML Kapoor AIR  (SC) 87.
 Vodafone Essar Limited v. DRP  240 CTR 263 (Del.).
 GE India Technology Centre Pvt. Ltd v. CIT  327 ITR 456 (SC).
 Gemplus India Private Limited v. ACIT [ITA No.352 /Bang/2009, dated 21 October 2010 (AY 2004-04)].
 Development Consultants vs. DCIT (ITAT Kolkata)(2008).
 (10 Taxmann 179)(Cal.).
 (2004) (138 Taxmann 280).
Lakshana Radhakrishnan is presently an undergraduate student at National Academy of Legal Studies and Research (NALSAR) University of Law, Hyderabad. She will be graduating in 2019. She can be contacted at firstname.lastname@example.org.