A loss-making subsidiary needed more than a transfer pricing report. It needed a defensible story.

Situation

The Indian subsidiary of a foreign multinational was in its establishment phase, relying heavily on its holding company — purchasing machinery, raw materials, construction services and operational support from the parent while building operations. The result: losses and negative gross margins in the initial years.

What was at stake

Pricing had been set from the holding company’s perspective. The Indian tax authorities were likely to ask a different question: why was the Indian entity making losses while significant payments flowed to the parent? The risk was a challenge to the pricing arrangements and an allegation of profit-shifting out of India. The task wasn’t just benchmarking transactions — it was demonstrating that the losses were commercially justified and consistent with the company’s stage of development.

What we did

We approached the assignment from both a technical and a commercial perspective.

• Analysed the operational and commercial reasons behind the losses
• Evaluated how the start-up phase affected profitability and gross margins
• Conducted a detailed need-and-benefit analysis of services received from the holding company
• Performed transfer-pricing benchmarking and economic analysis
• Developed a representation strategy for potential questions from the authorities
• Identified the documentation and evidence needed to support the commercial rationale
• Prepared a framework for defending the position in future assessments

Outcome

Management gained a clear view of the transfer-pricing risks in the group’s operating model and implemented a documentation framework capable of supporting the business position — contemporaneous evidence explaining both the commercial necessity of the related-party transactions and the reasons for the set-up-phase losses. A more robust, defensible position, aligned with the economic reality of the business.

Why it matters

Transfer-pricing disputes are rarely about numbers alone. When a business is investing for growth, losses can be commercially justified — the challenge is making sure the tax authorities can clearly see the difference between a genuine investment phase and a profit-shifting concern.