Mitsubishi wins big for Japanese trading companies in Indian Berry ratio transfer pricing case

Meredith McBride in Hong Kong

Mitsubishi Corporation India’s victory over the Indian tax authorities in the New Delhi Tax Tribunal on the use of the Berry ratio (gross margin divided by operating expenses) sets important precedents for transfer pricing litigation in India, advisers believe, because it legitimises the use of this method for determining profit levels and recognises the importance of business models in transfer pricing decisions.

The tribunal determined that the Berry ratio can be used as a profit level indicator (PLI) in transfer pricing documentation for trading companies with low inventory risk. The ruling also determined that activities paying commission do not qualify as trading activities for tax purposes.

Though officially recognised by the OECD as an acceptable PLI in transfer pricing documentation, the use of the Berry ratio has been met with some hesitation due to its limited applicability.

Japanese trading companies called sogo shoshas, including Mitsubishi, operate on narrow margins facilitating trade between buyers and sellers. Because the corporations used fixed prices on both the buy- and sell- side and have negligible inventory risk, the OECD included the Berry ratio in its Transfer Pricing Guidelines for Multinational Enterprises in 2010 as an indicator of profit levels. To align its policies with OECD…