Pass through cost – whether mark up to be added? Perspective of tax authorities in India

June 7, 2021

Pass through cost – whether mark up to be added? Perspective of tax authorities in India

By Amit Ajmera, Kreston SGCO, India

In the recent round of a Transfer Pricing Assessment (“TPA”) of an Indian entity, a Wholly-Owned Subsidiary (“WOS”) of a foreign entity, the transfer pricing authorities in India have taken a view that the pass-through cost billed by the WOS to its parent entity and reimbursed by the parent entity to the WOS, should be done with a mark-up and not on the cost to cost basis. The said cost needs to be included in the marked-up cost base for determining the arms-length arrangement between the WOS and its group entity.


The taxpayer is part of a multinational group that is in the business of undertaking clinical trial activities globally.  To undertake the said business activities, typically one of the entities in the group (i.e., the service provider) would enter into a service agreement (i.e., a Master Service Agreement or “MSA”) with a pharmaceutical company (i.e., the service recipient or client) to undertake clinical trials in identified geographies. The agreement, among other things, categorically states that the pass-through cost incurred by the service provider while providing the services will be reimbursed by the service recipient on a cost-to-cost basis. Which expense would qualify as the pass-through cost is also defined in the said agreements. Further, the agreements clarify that the pass-through cost that would be incurred in any part of the identified geographies will have to be recovered only by the entity entering into the MSA with the service recipient and not by another group entity, which may be undertaking clinical trials in its respective geography.  Pass through cost are cost which are required to be incurred during undertaking clinical trials that are required to be paid by the pharmaceutical company to the sites (hospitals), investigators (doctors) and patients.  But because it is administratively not possible, the pass-through cost is normally paid by the service provider and recovered from the service recipient.

Facts of our client

In the case of the Indian WOS, on the basis the MSA entered into by its group entity with its client, the group entity had entered into a service agreement with the WOS in India. In addition, there was also a tripartite agreement that was entered into among the WOS, the site, and the investigators in India for undertaking clinical trial activities in India. The service recipient, in this case, had also signed the agreement as a confirming party to the agreement entered among the Indian Parties. The medicines / drugs that were required for undertaking the clinical trials in India were supplied directly by the service recipient to the site. To undertake the clinical trials, the Indian entity had to make payments to the sites and the investigators which were like pass-through cost. The same was invoiced by the WOS to the group entity on the cost to cost basis. This was in addition to the invoice raised by the WOS on the group entity for the services of clinical trials rendered by it. The invoice for intercompany services was raised on a cost-plus basis.

View of the transfer pricing authorities at a lower level

The transfer pricing officer has taken a position that the pass-through cost should be added to the marked-up cost base for determining whether the transaction between the WOS and the group entity is on an arm’s length basis.

Way forward

We have filed an appeal with the higher authority challenging the view of the lower level.