1      Introduction

We often come across instances wherein a tested party and comparables may follow dissimilar depreciation policies. As a result, the tested party might have charged depreciation in its financial statements at significantly higher rates vis-à-vis the comparables. In such a case, could a taxpayer insist before the transfer pricing officer that depreciation should be disregarded while applying the transactional net margin method (TNMM) for determination of the arm’s-length price (ALP)?

This issue has come up in a number of transfer pricing cases before the Indian income tax appellate Tribunal (ITAT). To do justice to its complex nature, it would be helpful to discuss this issue over two blog posts.

In the present blog post, we may examine a few important aspects concerning depreciation allowance, and key Indian transfer pricing decisions wherein the Income Tax Appellate Tribunal (ITAT) recognized the necessity of either making appropriate adjustments or altogether disregarding depreciation allowance in case of significant differences between a tested party and comparables.