Transfer Pricing in the HO-PO Model: Key Considerations for Multinationals in India

 As India continues to attract foreign investment, multinational enterprises (MNEs) often choose to operate through a Project Office (PO) model to execute short- to medium-term projects. Under this setup, the Head Office (HO), based abroad, establishes a PO in India to locally manage and deliver projects. Though the HO and PO form part of a single legal entity, Indian tax laws treat them as distinct enterprises for transfer pricing (TP) purposes.

 

Transfer Pricing Applicability

 

Transfer pricing rules are triggered when:

1. Multiple enterprises exist,
2. They qualify as Associated Enterprises (AEs),
3. There’s an international transaction between them.

 

The PO, while not legally separate from the HO, qualifies as a Permanent Establishment (PE) under Indian tax law and DTAAs (Double Taxation Avoidance Agreements). Thus, transactions between HO and PO must comply with arm’s length pricing under TP regulations.

 

Identifying AEs and Transactions

The HO and PO are deemed AEs under Section 92A of the Income Tax Act when the PO depends heavily on the HO for raw materials, intellectual property, or sales. Section 92B extends the definition of international transactions even to dealings involving unrelated third parties if the AE influences the transaction.

 

Benchmarking Methods

To ensure fairness and compliance, transactions between HO and PO must be benchmarked using appropriate methods such as:

• Comparable Uncontrolled Price (CUP)
• Cost-Plus Method
• Transactional Net Margin Method (TNMM)

 

DTAA and Legal Precedents

DTAAs reinforce the principle that POs are separate taxable entities for TP. In a landmark case (TBEA Shenyang Transformer Group Co.), the Tribunal ruled that even if a PO isn’t a separate legal entity, it must be treated independently for TP to avoid tax base erosion in India.

 

Conclusion

The HO-PO model, while operationally convenient, brings complex TP obligations. MNEs must ensure that their intercompany arrangements, contracts, and pricing mechanisms are structured and documented in line with the arm’s length principle to maintain compliance and minimize tax risks in India.