Transfer Pricing PPT 190714 Final

TRANSFER PRICING
19th July, 2014
By : CA Mitil Chokshi
19-July-14 1
TRANSFER PRICING AND ITS FUTURE PROSPECTS
Due to the increasing trend in globalization of Indian business,

transfer pricing will remain foremost on the agenda of Indian
income-tax authorities into the foreseeable future.
19-July-14 2
Top 10 Toughest Tax Authorities For Transfer Pricing Risk *
1. Japan 6. France
2. India 7. Germany
3. China 8. Australia
4. Canada 9. Korea
5. United States
10. United Kingdom
* FICCI presentation on transfer pricing, October, 2012
19-July-14 3
TAX TREATY/ DOUBLE TAX RESOLUTION
What is the extent of the double tax treaty network?
 India has an extensive tax treaty network and has entered into
comprehensive tax treaties with 85 countries.
 India is also party to a series
of treaties under negotiation.
 Other agreements
The basic objective of DTAA :
• Avoid double taxation of income in both the countries.

• Promote and foster economic trade and investment between
the two countries.
19-July-14 4
Agreements DTAA *
India has the following agreements except the

comprehensive agreements with 85 countries :
 DTAA Limited agreements – With respect to income of airlines/ merchant

shipping – with 8 countries.
 Limited Multilateral Agreement – with 8 countries.
 DTAA Other Agreements/Double Taxation Relief Rules – 3.
 Specified Associations Agreement with Taipei.
 Tax Information Exchange Agreement – with 10 countries.

*as per income tax authority, India
19-July-14 5
CONTENTS
 Transfer Pricing – Outline
 International Transactions
 Associated Enterprises
 Domestic Transfer Pricing
 Related Parties
 Debatable Issues
 International TP vs Domestic TP
 FAR Analysis
 Methods of Computation
 Documentation
 Dispute Resolution Panel
 Assessment Procedure
 Transfer of Intangibles
 Safe Harbour
 Advance Pricing Agreement
 Mutual Agreement Procedure
 Budget 2014
 OECD & India
 Transfer Pricing vs Other Statutes
 Recent Rulings
 Bibliography
19-July-14 6
Transfer Pricing:
Outline
19-July-14 7
WHAT IS TRANSFER PRICING?
DEFINITION
 Transfer Pricing is a term used to

refer to all intercompany pricing.
“The prices at which an enterprise

transfers physical goods and
intangibles or provide services to
associated enterprises.”
 Transfer Pricing provisions were

introduced in India in 2001 to
prevent shifting of profits by Large
Corporates from high tax rate
jurisdiction to low tax rate
jurisdictions to minimize tax cost at
group level.
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19-July-14 9
Tax authority name
Central Board of Direct Taxes
(CBDT).
Effective date of transfer pricing

rules
Revenue Transactions :1 April 2001
Capital Transactions : 1 April 2011
Domestic Transactions : 1 April
2012
19-July-14 10
RELEVENT SETIONS OF THE INCOME TAX
ACT1961
92 Computation of income from international transaction having regard to arm’s

length price
92A Meaning of associated enterprise
92B Meaning of international transaction
92BA Meaning of domestic transaction
92C Computation of arm’s length price
19-July-14 11
92CA Reference to Transfer Pricing Officer
92CB Power of Board to make Safe Harbour Rules
92CC Advance Pricing Agreement
92CD Effect to Advance Pricing Agreement
92D Maintenance and keeping of information and document by persons

entering into an international transaction
92E Report from an accountant to be furnished by persons entering into

international transaction
92F Definitions of certain terms relevant to computation of arm’s length price,

etc
19-July-14 12
INCOME TAX RULES
 Rule 10A : Definitions.

 Rule 10B : Determination of Arm’s Length Price.
 Rule 10C : Most Appropriate method.
 Rule 10D : Documents to be kept and maintained.
 Rule10E : Furnishing report from Chartered Accountant in Form
3CEB.
19-July-14 13
SECTION 92
“Where a business is carried on between a resident and a non-

resident and it appears to the Assessing Officer that, owing to the
close connection between them, the course of business is so
arranged that the business transacted between them produces to
the resident either no profits or less than the ordinary profits
which might be expected to arise in that business, the Assessing
Officer shall determine the amount of profits which may
reasonably be deemed to have been derived there from and
include such amount in the total income of the resident”.
19-July-14 14
TRANSFER PRICING PROCESS
19-July-14 15
International Transfer Pricing
19-July-14 16
INTERNATIONAL TRANSACTIONS: SECTION 92B
The definition also

covers a transaction
An international between two non-
transaction is At least one of the residents.
essentially a cross parties to the
border transaction transaction must be a E.g. One of them has a
between associated non-resident. permanent
enterprises. establishment whose
income is taxable in
India.
Thus in conclusion, it is a transaction between two or more associated enterprises, either

or both of who are non-residents.
19-July-14 17
NATURE OF TRANSACTIONS COVERED UNDER SECTION 92B
Capital Transactions of
Purchase, sale, financing(short business
transfer, use, lease and long term), restructuring or
Provision of marketable reorganization
of tangible or services.
intangible security exchange irrespective of the
property. or debts arising in bearing on profits,
course of business. incomes, losses or
assets.
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ASSOCIATED ENTERPRISES
The basic criterion to determine associated

enterprises
is the participation in management,
control or capital (ownership)
of one enterprise by another enterprise.
The participation may be direct or indirect

or through one or more intermediaries.
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Direct Control
Enterprise X Enterprise Y
If Enterprise Y is managed, controlled or owned by

Enterprise X directly as above then, Enterprise Y is said
to be an Associated Enterprise of Enterprise X.
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Indirect Control through Intermediary
Enterprise X Intermediary Enterprise Y
If Enterprise Y is managed, controlled or owned by

Enterprise X through a intermediary as above then,
Enterprise Y is said to be an Associated Enterprise of
Enterprise X.
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Participation/ Control/ Management
Enterprise X
Mr. X & Mr. Y
Enterprise Y
Mr. X & Mr. Y control Enterprise X & Enterprise Y.

Therefore, Enterprise X & Enterprise Y are AEs.
19-July-14 23
ASSOCIATED ENTERPRISES… DEEMING SITUATIONS…
Control Of Voting Power
Enterprise X Enterprise Y
Enterprise X controls 26 % OR MORE of shares

carrying voting rights of Enterprise Y whether directly
or indirectly. Enterprise X and Enterprise Y are AE’s.
19-July-14 24
Control Of Voting Power
Mr. X/ Enterprise X
Controls
26% of voting power
directly or indirectly
Enterprise Y Enterprise Z
Enterprise Y and Enterprise Z are AE’s.
19-July-14 25
Enterprise X has given a Enterprise X

loan Enterprise Y.
Loan by X to Y is not less

than 51 % of the book value
of Assets of Y. Enterprise Y
Therefore, X & Y are AE’s.
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Guarantee of Debts not Less

than 10%. Enterprise X
Total Borrowing of Enterprise
Y is Rs. 10000/-.
Guaranteed by Enterprise X
is Rs. 1000/-. Enterprise Y
Therefore, Enterprise X and
Enterprise Y are AE’s.
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Control over Board of

Directors Enterprise X
(MORE THAN 50%).
Total number of Board of
Directors of Y is 10.
Enterprise X appoints 6 of Enterprise Y
them.
Therefore, X & Y are AE’s.
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Control over Board of Directors/

Governing Board Members
(MORE THAN 50%) or Executive
Directors or both. Mr. X/ Enterprise X
Enterprise X or Mr. X appoints
more than 50 % of
directors/governing board
members or one or more Enterprise Enterprise
Executive Director or governing Y Z
Board Members of both of two
enterprises.
Therefore, Y and Z are AEs.
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Dependence on Enterprise
for use of brand, know-how, Enterprise X
patents, etc.
Enterprise Y manufactures Only technology
product ‘A’ under a brand transfer from X to
owned by Enterprise X Y. No financial
Therefore, Enterprise X & Y participation.
are AEs.
Enterprise Y
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for raw materials.
Enterprise X procures
90% OR MORE of its raw Enterprise Y Enterprise X
materials from Enterprise Y.
Enterprise Y are AEs.
19-July-14 31
for raw materials. Enterprise X
Enterprise X procures
90% OR MORE of its raw
materials from Enterprise Y Enterprise Z
who in turn supplies it at
such price as influenced by
Enterprise Z.
Enterprise Y
Enterprise Z are AEs.
19-July-14 32
Control over Sale Price.

If price is influenced by Enterprise X
Enterprise Y, then X & Y are
AEs.
If instead of Enterprise Y,
Enterprise X sells to
Enterprise Z at a price
Enterprise Y
influenced by Y, then still X &
Y are related AEs.
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19-July-14 35
DOMESTIC TRANSFER PRICING
 Effective from 1st April, 2012
 Domestic Transfer Pricing is applicable only where value of Specified Domestic

Transactions in aggregate crosses 5 Crores.
 The threshold for substantial interest to qualify as ‘specified persons” is 20% or

more, as compared to the threshold limit of 26% or more for international
transfer pricing.
 Sec 92BA of The Income tax Act, 1961 covers provisions for Domestic Transfer
Pricing.
19-July-14 36
India
now
part
of
DTP
19-July-14 37
PURPOSE OF INTRODUCING DOMESTIC
TRANSFER PRICING
It was realized by the government that:
• Presently, there is no method prescribed to determine reasonableness of
expenditure to re-compute the income in related party transactions.
• There is need to provide objectivity in determination of income and determination

of reasonableness of expenditure in domestic related party transactions.
• There is need to create legally enforceable obligation on assessee to maintain

proper documentation
Based on the above observations of the Honorable Supreme Court, the Finance
Act, 2012 has extended the applicability of the transfer pricing provisions for
specified domestic related party transactions
19-July-14 38
MEANING OF SPECIFIED DOMESTIC
TRANSACTION – SECTION 92BA
Specified Domestic Transaction" means any transaction, not being an
international transaction, namely:—
i. any expenditure for which payment is to a person referred to in sec
40A(2)(b);
ii. any transaction referred to in sec 80A;
iii. any transfer of goods or services referred to in sec 80-IA(8);
iv. any business transacted between the assessee and other person sec
80-IA(10);
v. any transaction, under Chapter VI-A or s.10AA, if sec 80-IA(8) or sec 80-
IA(10) is applicable; or
vi. any other transaction as may be prescribed,
and the aggregate of such transactions entered into in the previous year
exceeds INR 5 Crores
19-July-14 39
OVERVIEW OF PROVISIONS OF SECTION 92BA
Inter unit transfer of goods & services by
undertakings to which profit-linked
deductions apply
Expenditure
incurred
between Any other
related SDT transaction
parties that may be
defined specified
under
section 40A
Transactions between undertakings, to which

profit-linked deductions apply, having close
connection
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19-July-14 41
DOMESTIC TRANSFER PRICING
Shifting of expenses
India India
Indian Co. Related Enterprise in

Tax Holiday Domestic Tariff Area
undertaking (DTA)
Tax Exemption Tax @ 32.45%
Shifting of income
Tax Saving for the Group – Loss to Indian revenue
19-July-14 42
 SECTION 40A(2)(b)
The persons referred to in clause (a) are the following, namely :—
• where the assessee is a relative;
• where the assessee is a member of HUF / director of the company /

partner of the firm;
• any individual who has a substantial interest;
• a company, firm, AOP or HUF having a substantial interest or whose

director, partner or member has substantial interest in the business of
the assessee;
• any person who carries on a business or profession—

where the assessee being an individual, director of company, partner of a
firm or member of an HUF which has a substantial interest in the business
or profession of that person;
19-July-14 43
SEC 40A(2)(B)-PAYMENT TO RELATED PARTIES
Any payment towards expenditure by :
 A Co to its own directors as remuneration, X Co (Indian
salary, bonus etc Company)
 A Co to X Co
 A Co to directors of X Co Beneficial ownership >20%
 A Co to Relatives of directors of
A Co and X Co
 A Co to B Co
A co(Indian B co(Indian
Any payment towards expenditure by: Company) Company)
 X Co to A Co/B Co
19-July-14 44
TYPE OF TRANSACTIONS COVERED (ILLUSTRATIONS FOR
PAYMENTS MADE BY A COMPANY)
Case 1 - Director or any relative of the Director of the taxpayer – Section
40A(2)(b)(ii)
Assessee
(Taxpayer)
Director
Relative
Mr. A Mr. D Mr. C
Covered transactions
Holding Structure
19-July-14 45
Case 2 - To an individual who has substantial interest in the business or
profession of the taxpayer or relative of such individual – Section 40A(2)(b)(iii)
Assessee
(Taxpayer)
Substantial interest >20%
Mr. A Mr. D Mr. C

Relative Relative
Holding Structure
19-July-14 46
Case 3 – To a Company having substantial interest in the business of the taxpayer
or any director of such company or relative of the director – Section 40A(2)(b)(iv)
Mr. D
Director
Substantial
interest >20%
Assessee
Relative
A Ltd (Taxpayer)
Mr. C
Holding Structure
19-July-14
47
Case 4 – Any other company carrying on business in which the first mentioned
company has substantial interest – Section 40A(2)(b)(iv)
Assessee
(Taxpayer)

A Ltd B Ltd
Holding Structure
19-July-14
48
Case 5 – To a Company of which a director has a substantial interest in the

business of the taxpayer or any director of such company or relative of the
director – Section 40A(2)(b)(v)
B Ltd
Director
Substantial
interest >20%
Mr. A Assessee
(Taxpayer)
Mr. C
Relative
Relative
Mr. D
Holding Structure
19-July-14
49
Case 6 – To a person in which the taxpayer(individual) has
substantial interest– Section 40A(2)(b)(vi)(A)
Assessee
(Individual) Relative
B Ltd
Holding Structure
19-July-14
50
Case 7 – To a Company in which the taxpayer has
substantial interest in the business of the company –
Section 40A(2)(b)(vi)(B)
Assessee
(Company) Director Relative
Substantial
interest
>20%
B Ltd
Holding Structure
19-July-14
51
40A(2) ISSUES AND CHALLENGES
 Whether indirect shareholding is covered?
 Whether Capital Expenditure or corresponding depreciation is covered?
 Whether shareholding of individual Directors can be

aggregated for determining substantial interest?
 Directors Remuneration- Benchmarking Issues
 Interest free Loans to Group Companies
 Granting of Corporate Guarantees/Performance

Guarantees by Parent Company to its subsidiaries
19-July-14 52
ANY TRANSACTION REFERRED IN SECTION 80A
 Section 80A applies to profit linked deductions to be made in computing

total income under Chapter VI-A.
 Though the reference in section 92BA is to section 80A in general, on a

closer examination, it becomes clear that the reference is merely to sub-
section (6) of section 80A and not to any other sub-section since other sub-
section of section 80A merely regulates the quantum of deduction and
does not involve fair pricing of any transaction.
 This is also supported by corresponding amendment made to section

80A(6) by Finance Act 2012 to amend the meaning of expression ‘market
value’ referred to in that sub-section and to provide that in case of
specified domestic transactions, the market value shall be computed at
arm’s length price.
19-July-14 53
19-July-14 54
ANY TRANSACTION REFERRED IN SECTION 80A
 Explanation of Section 80A(6):
• Internal transactions between various units / undertakings of the assessee in

respect of goods or services.
• This clause covers any transactions of goods or services.
• And hence covers income as well as expenditure.
19-July-14 55
APPLICABILITY OF DOMESTIC TP- INTER UNIT TRANSFER
A Co
FACTS:
 Both units of A co are tax holiday
Power Manufacturing
Unit(Tax Unit (Tax
qualifying units @ 100%.
Holiday 100%) Holiday 100%)  Power unit transfers power to the
Particulars Income GTI Deduction Total
Manufacturing unit.
Income
Unit Unit Unit Unit
P M P M
ISSUE:
AS returned 100 100 200 100 100 Nil
by the  Whether application of Domestic
taxpayer TP can result in adverse impact for
If AO 120 80 200 120 80 Nil (20?) taxpayers despite there being no
enhances (100?)
income of potential for tax arbitrage between
Unit P two units?
If AO 80 120 200 80 120 (20?)
reduces (100?)
income of
Unit P
19-July-14
10-Jan-14 56
19-July-14 57
ISSUES/CHALLENGES RELATING TO 80A(6) TRANSACTIONS
 If both tax holiday units of the same assessee enter into

transaction inter unit transfer will that be part of specified
domestic transfer pricing?
 Will the purchase of goods from a related party be covered

under Section 40A(2)(b) or Section 80A(6) relating to transfer
of goods between two units of the same assessee?
19-July-14 58
PURPOSE OF INTRODUCING 80-IA(8)
Sale of
Goods
A Ltd.-Unit 2
A Ltd. – Unit 1
(Ineligible
(Eligible Unit)
Unit)
Scenario 1 Scenario 2
Particulars Unit 1 Unit 2 Particulars Unit 1 Unit 2
Tax Rate 0% 30% Tax Rate 0% 30%
Sales to Ineligible Unit 1000 - Sales to Ineligible Unit 2500 -
Sales to third parties 2000 4000
Sales to third parties 2000 4000
Purchase from Eligible - 2500
Purchase from Eligible - 1000 Unit
Unit
Other Expenses 4000 2000
Other expenses 4000 2000
Profit/Loss 500 -500
Profit/Loss -1000 1000
Tax Nil 300 Tax Nil Nil
Total Tax for the Group 300 Total Tax for the Nil
19-July-14 group 59
ANY TRANSFER OF GOODS OR SERVICES REFERRED TO IN
SUB-SECTION (8) OF SECTION 80-IA;
 Where any goods [or services] held for the purposes of any other business
carried on by the assessee are transferred to the eligible business and, the
consideration does not correspond to the market value of such goods [or
services].
 When the computation of the profits and gains of the eligible business in
the manner hereinbefore specified presents exceptional difficulties, the
Assessing Officer may compute such profits and gains on such reasonable
basis as he may deem fit.
 Explanation of Section 80-IA(8):
• Deals with the internal transactions with more than one undertaking /
units of the assessee, out of which one or more undertaking is enjoying
the tax holiday.
• Onus is on the taxpayer to prove that the internal transfer is at Arms

Length Price.
19-July-14 60
TRANSACTIONS COVERED UNDER SECTION 80IA (8)
A Ltd
Unit A Unit B
Telecom Business Manufacturing
Goods & Services
80IA- Eligible Unit Business
Taxable Unit
Transfer at Rs. 120

Market value of above goods and services is Rs. 100
So, ALP of above transaction is Rs. 100
19-July-14 61
SECTION 80-IA(8) COVERAGE
Contextually covers intra division transfers not being a transaction.
Inter unit transfer between two non-eligible units has no TP implications.
Section requires ―any other business‖carried on by assessee and dealings

between businesses.
Restricted to goods and services of marketable nature.
19-July-14 62
ANY BUSINESS TRANSACTED BETWEEN THE ASSESSEE
AND OTHER PERSON AS REFERRED TO IN SUB-SECTION
(10) OF SECTION 80-IA;
• As per this clause, when due to close connection between assessee and
‘any other person’
• the eligible business of the assessee produces ‘more than the ordinary
profit’,
• then for the purpose of deduction under this section, profit of the eligible
business shall be determined by taking ALP of the transaction.
19-July-14 63
TRANSACTIONS COVERED UNDER SECTION 80IA(10)
A Ltd Goods and Services B Ltd

Infrastructure
Trading Business
Business Close connection
80IA- Eligible Unit Taxable Unit
Operating Profit: 40% (Extraordinary profits)
Industry Average: 10%
Hence, Arm’s length profit margin would be taken as 10%
19-July-14 64
COVERAGE OF SEC 80IA (10)
► For A Co
Related B Co ► Domestic TP not applicable –
A Co Parties
(WOS)
transaction is of income receipt,
40A(2) not triggered
• Sale of goods at
cost < FMV
• Corporate ► For B Co
Guarantee : NIL cost
Tax Holiday ► Covered by s. 40A(2)(b) and
• Free use of TM and
KHW or HO
Unit
resources
hence SDT. But, payment is at
< FMV, no TP adjustments
required.
► S. 80-IA(10) may still be invoked
on the ground that arrangement
leads to more than ordinary
profits?
19-July-14 65
80IA(10)– ISSUES AND CHALLENGES
 The term “Close Connection” not defined and subject to litigation.
 Whether the term “more than ordinary profit” can be equated with ALP.
 Whether Capital account transactions are covered?
19-July-14 66
The term close connection has not been expressly defined in
the Act. Accordingly, reference could be drawn from conjoint
reading of the other provisions of the Act as well as the
Accounting Standards to define close connection as under.
Particulars Substantial interest- Associated Related party as per

Section 40A(2)(b) enterprise- Section AS-18 as issued by
92A(2) ICAI
Voting power >=20% >=26% >=50%
Direct or indirect Only Direct Holding Both Both

holding covered
Director’s covered Covered Covered Key managerial
personnel covered
Key suppliers covered Not covered Supplying more than Specifically excluded
90%
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 Will Domestic TP be applicable
Head Office to such a transaction structure?
•Close Connection under
Section 80-IA(10)
 What if the intermediary does

Unit 1 Unit 2 not have a close connection with
Eligible Unit Non Eligible Unit the taxpayer?
•“any other reason” –
section 80-IA(10)
•Is the business transacted
Sale of Sale of
so arranged…?
goods goods
•Which transaction to report
Party with Close in Form 3CEB / justify arm’s
Connection length pricing?
19-July-14 69
 Will Domestic TP be applicable for the
transaction involving transfer of funds?
Head Office
 Does Unit 1 need to pay Unit 2 an arm’s
length interest on the funds transferred?
What will be the scenario if the funds

were transferred to bank account of Unit 1
from the bank account of a party having
close connection with the taxpayer?
Transfer
Unit 1 Unit 2
of Funds
What will be the scenario if the funds
were transferred to bank account of Unit 1
from the bank account of a third party?
Eligible Unit u/s
80-IA
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COST ALLOCATIONS
Allocation of common expenditures to tax holiday undertakings has been a highly
litigated issue. Under the Act, tax holiday undertakings are required to maintain
separate accounts. The costs directly relatable to the undertakings are charged to
such undertakings. However, common expenses benefit all the undertakings of the
taxpayer. These expenses could be in the nature of general administrative expenses
or research, marketing and finance expenses.
In this regard following approach may be considered:
Issue Approach
Whether allocation Relying on judicial precedent taxpayers may argue that pure cost
of costs is a SDT allocations to determine appropriate profits of the undertaking do
not entail a service and accordingly, are not covered under DTP
provisions.
Determination of An ideal costs allocation policy would entail allocation of ‘all’
allocable costs common costs based on rational allocation keys.
Determining Expenses ought to be allocated on a reasonable and scientific basis
reasonable (say, on the basis of ratio of turnover, head-count, cost of sales, etc)
allocation keys
Allocation of costs- Where the services are of a marketable nature, the relevant costs
whether at actual or could be charged at the mark-up and reported in Form 3CEB.
at mark-up
19-July-14 72
ORDINARY PROFITS VS ARM’S LENGTH
Under section 80IA(10), ordinary profits for tax holiday undertakings
will need to be determined by using prescribed transfer pricing
methods. The challenges likely to be faced by taxpayers in this
regard have been illustrated below:
Transactions with closely connected person Comparables

Particulars OP/TC
Particulars Profit level Indicator
Company A 35%
Total income 130
Company B 10%
Cost(TC) 100 Company C 25%
Profits(OP) 30 Company D 14%
Company E -8%
OP/TC 30%
Arithmetic mean 15%
19-July-14 73
Sec 92BA(iv): any transaction, referred to in any other section under
Chapter VI-A or section 10AA, to which provisions of sub-section (8) or
sub-section (10) of section 80-IA are applicable; or
The following profit linked incentive provisions under Chapter VI-A are also
governed by provisions of section 80-IA(8) and section 80-IA(10) and hence will be
subject to Domestic TP:-
 80-IAB- Deductions in respect of profits and gains by an undertaking or enterprise
engaged in development of Special Economic Zone.
 80-IB- Deduction in respect of profits and gains from certain industrial

undertakings other than infrastructure development undertakings.
 80-IC- Special provisions in respect of certain undertakings or enterprises in certain

special category States.
 80-ID- Deduction in respect of profits and gains from business of hotels and
convention centres in specified area.
 80-IE- Special provisions in respect of certain undertakings in Northeastern States.
19-July-14 74
CIT VS. GLAXO SMITH KLINE ASIA (P) LTD.
Facts:
 The assessee-company was engaged in the business of manufacture and

sale of fast moving consumer products.
 Administrative services relating to marketing, finance, human resources,

secretarial services, etc., were provided by Glaxo Smith Kline Consumer
Healthcare Ltd. (“GSKCH”).
 The assessee had entered into agreement with GSKCH for reimbursement
of the costs incurred for various services plus 5% by GSKCH.
19-July-14 75
Facts:
 The costs towards services provided

to the assessee were allocated on the
basis suggested by a firm of CAs.
 The administrative expenses/

cross charges were worked out
on the basis of the report of the
CA and same was claimed by the
assessee.
 The Assessing Officer disallowed the

same and raised a demand.
19-July-14 76
Decision:
 As far as this SLP is concerned no interference is called for as the

entire exercise is a revenue neutral exercise.
 The Tribunal observed that "there is no provision to disallow any

expenditure on the ground that such expenditure is excessive or
unreasonable unless the case of the assessee falls within the scope of
section 40A(2).
 It was held that as it was not the case of the Department that s.
40A(2) was attracted, the disallowance could not be made.
19-July-14 77
CIT VS. GLAXO SMITH KLINE ASIA (P) LTD.
Issues:
 Whether TP Regulations should be limited to cross-border transactions

or be extended to domestic transactions.
 The CBDT should examine whether TP Regulations can be applied to

domestic transactions between related parties u/s 40A(2) by making
amendments to the Act.
 The CBDT should examine whether Transfer Pricing Regulations can be

applied to domestic transactions between related parties u/s 40A(2) by
making amendments to the Act.
19-July-14 78
19-July-14 79
GENERAL CHALLENGES IN DTP
19-July-14 80
Arm’s Length Principle
 Arm’s length principle may be difficult to apply to associated enterprises
engage in transactions that independent enterprises would not undertake.
 Arm’s length principle, in some cases, may result in an administrative

burden for taxpayers./tax admin. of evaluating significant number / type of
cross border transactions
 There are difficulties in finding and interpreting evidence from which arm's
length prices can be deduced. There may be no, or very little, evidence on
which to base a determination of an arm's length price, and what evidence
there is may be difficult to interpret or may indicate only that the arm's
length price is within a certain range of prices. A flexible approach is, thus
the requirement.
 Notwithstanding the above, this is superior to any other approach because

it is essentially simple, aligns the comparatively exceptional kind of
transaction with the normal kind, is equitable between taxpayers of
different kinds, and, unlike other approaches, is widely accepted.
19-July-14 81
CHALLENGES…
Type of payments/ transactions Challenges
• Salary and Bonuses paid to the partners • Benchmarking?

• Whether the limit as mentioned in section 40
(b) would be the ALP?
• Remuneration paid to the Directors
• Benchmarking?
• Whether the limit as mentioned in Schedule
XIII would be the ALP?
• Transfer of land
• Whether the rates mentioned in the ready
reckoner be considered as ALP?
• Joint Development agreements • Benchmarking?
• Project management fees • Benchmarking?
• Allocation of expenses between the same • Whether these allocation would be SDT – Sec
taxpayer having an eligible unit and non- 80-IA(10)?
eligible unit
• Definition of Related Party • Directly v/s Indirectly
19-July-14 82
19-July-14 83
Something to consider…
a) Transfer pricing provisions are not applicable in case where income is not
chargeable to tax at all.
[Amiantit International Holding Ltd., (2010) 322 ITR 678 (AAR)]
b) Provisions of section 40A(2) are not applicable to a co-operative society.

[CIT vs. Manjara Shetkari Sahakari Sakhar Karkhana Ltd.(2008) 301 ITR 191 (Bom.)]
c) Correlative adjustments - if excessive or unreasonable expenses are disallowed in

the hands of tax payer at time of the assessment then corresponding adjustment
to the income of the recipient will not be allowed in the hands of recipient of
income. Hence, it would lead to double taxation in India.
19-July-14 84
Outsourcing by a Special Economic Zone (SEZ) unit to a
non-SEZ unit of the taxpayer
In this case, the rates charged by the non-SEZ unit to the SEZ unit can be
compared with the rates charged to third-party customers;
or the profit earned by the non-SEZ unit can be compared with the profit
earned by the non-SEZ unit from services rendered to third-party
customers;
or the profit earned by the non-SEZ unit can be compared with the profit
earned by third-party companies in rendering similar services using
external databases.
The development of intellectual property by the units may add to the
complexity.
19-July-14 85
Some other provisions…
The provisions currently in force which grant profit linked tax holiday
deductions and which are regulated by section 80A(6) and, consequently,
subject to Domestic transfer pricing are as follows:-
80-IA – Infrastructure development, etc

80-IAB – SEZ development
80-IB – Industrial undertakings
80-IC – Industrial undertakings or enterprises in special category states
80-ID – Hotels and convention centres in specified area
80-IE – Undertakings in North-Eastern states
80JJA – Collection and processing of bio-degradable waste
80JJAA – Employment of new workmen
80LA – Offshore Banking units and International Financial Services Centre
80P – Co-operative societies
19-July-14 86
Debatable issues…
 Income part of transactions are
not touched in DTP provisions?
 Intra group loans?
 Interest free loans?
 Whether a taxpayer entitled to

investment linked tax holiday
(section 35AD) is covered by DTP?
19-July-14 87
Debatable issues…
Company
XYZ
Mr. A Mr. B Mr. C Mr. D Mr. E

10% 10% 10% 10% 10%
Shares Shares Shares Shares Shares
For Substantial Interest,

Shareholding to be considered
individually or aggregate??
19-July-14 88
Debatable issues…
AB Company
A Ltd B Ltd
Transfer of goods Non
Eligible
Unit Eligible
Unit
Transfer Unit B –
Unit A-
of goods Non
Eligible
eligible
Unit
Unit
Transfer of goods and services must be of same ASSESSEE and inter-unit

transfer for the purpose Section 80A(6) or Section 80-IA(8)
19-July-14 89
Debatable issues…
Transactions not
covered
Assessee
(Taxpayer) C Ltd

A Ltd B Ltd
19-July-14
Transactions covered 90
Debatable issues…
less than 20%

Shareholding Mr. A
A LTD (Director of A Ltd-
Payment of Director’s Non Resident)
Remuneration
Will this transaction come under the ambit of International

transfer pricing or Domestic transfer pricing???
19-July-14 91
Debatable issues…
 Corporate Guarantee?
 Purchase or sale of marketable

securities?
 Business restructuring
transactions?
 Repayment of loan taken?
19-July-14 92
Debatable issues…
 If deduction on account of payment
to a related party, is reduced by
application of Domestic TP
provisions, whether the related
party’s income will automatically
stand reduced to that extent?
 What is the impact on profit linked

tax holiday claimed under Chapter
VI-A or s. 10AA on the amount of
addition due to Domestic TP
adjustment (other than on account
of payment to related party under s.
40A(2)(b)? Will higher deduction be
permissible including on such
adjustments made?
19-July-14 93
Debatable issues…
 Transactions entered into with
related parties without
consideration?
 For determining substantial

interest of a related party, indirect
holding is not covered?
 Will presumptive taxation rule out

transfer pricing rules?
 Why threshold limit of 5 crores?

19-July-14 94
19-July-14 95
INTERNATIONAL vs DOMESTIC TP…
Particulars International TP Domestic TP
Threshold No limit Above Rs. 5 Crore
Applicability Associated Related Parties

Enterprises
Ownership threshold 26% 20%
Transactions covered All transactions Limited transactions
APA Available Not available
19-July-14 96
INTERNATIONAL vs DOMESTIC TP…
Particulars International TP Domestic TP
Safe Harbour Applicable Not Applicable
Tested Party Preferably Taxpayer Taxpayer or other

party
ALP options for LIBOR / EURIBOR / Only Domestic Rates
interest RUPEE
19-July-14 97
19-July-14 98
TRANSFER PRICING ANALYSIS
 In dealing between two independent enterprises, the price charged,
usually reflects the functions that each enterprise performs ( taking into
account assets used and risks assumed).
 Therefore, in determining whether controlled and uncontrolled
transactions are comparable, comparison of the functions performed,
assets used and risks assumed by the parties is necessary.
 This comparison is based on a FAR Study. Functional study thus forms the
basis, and provides a framework for comparability study and subsequent
determination of the most appropriate method. It assists in proper
assessment of comparability for the purpose of arm’s length study.
19-July-14 99
Funtions
Assets
Risks
FAR Analysis
19-July-14 100
PURPOSE OF FAR
Gathering and organizing facts needed to analyze intercompany prices
 To identify an appropriate level of profit that related parties should earn

with respect to intercompany transactions under review.
 To identify effects of functions, risks and assets on its profitability.
 To determine the economic characterization of the entities in the

transaction.
 To determine the most appropriate method for benchmarking the

transaction.
 To identify any uncontrolled transaction involving one of the controlled

parties.
19-July-14 101
Forecasts /
Business Business Plans
Process
Organisation /
Staff
Markets /
Competition Financial Result
Products FAR Agreements

ANALYSIS / Terms
Entities Assets
Transactions Risks
Functions
19-July-14 102
WHAT GOES INTO FAR ANALYSIS
Functions
Transactions Risks
Entities Assets
Products
Markets/ FAR ANALYSIS Agreements

Competition
Business Financial
Processes Results
Forecasts/ Organisation/
Business Plans Staff
19-July-14 103
WHAT COMES OUT FUNCTIONAL ANALYSIS
Internal Comparables
Understanding of the Basis to
Business search for external
comparable
FAR ANALYSIS
Documentation Risk and
opportunity
Characterization assessment
of entities Determination of the MAP
19-July-14 104
19-July-14 105
COMPONENT OF FAR ANALYSIS
Functions performed
 Activities carried out by each of the
parties to the Transaction.
 Focus should be on identification of

critical functions which add value to the
transactions.
 Principal functions performed by the

entities in a controlled transaction are
compared with the functions performed
in uncontrolled transactions.
19-July-14 106
COMPONENT OF FAR ANALYSIS….
Assets employed
 The type of assets and their nature
needs to be understood.
 Helps in determination of their
contribution to the business process
/ economic activity.
 Facilitates understanding of
respective roles played by the
entities participating in the
transaction.
 Knowledge of assets owned and
employed by the entities facilitates
determination of the profit margin
to be earned by them.
19-July-14 107
COMPONENT OF FAR ANALYSIS….
Risks Assumed
 Probable variability of future outcomes or returns.
 As the risk increases, the expected return should increase
as well.
 The potential risks are company and industry specific.
 Only important risks should be described and quantified.
 Important to distinguish between which entity bears risks
as per legal terms and which one bears as per the
economic substance of the transaction.
19-July-14 108
FUNCTIONS ASSETS RISKS
• Manufacturing/Processing • Risks Analysis

• R&D Tangible Assets • Product Liability Risk
• Quality Control e.g. Building, Plant & • Inventory Risk
• Advertising/Marketing Machinery etc. • Technology Risk
• Sales • R&D Risk
• Ordering and Distribution • Credit Risk
Intangible Assets • Manpower Risk
• Invoicing and collection
e.g. Patents, Copyrights and
• Warranty Trade Marks etc.
• Service, warranty and
spare parts
• Administrative, Financial
and Legal Matter
19-July-14 109
COMPARABILITY PRINCIPLES
Rule 10B (2), lays down the criteria for comparability between international
or domestic transactions and uncontrolled transactions. This process is not
quantitative but qualitative and involves exercise of judgment. The criteria
listed in Rule 10B(2) are:
 Distinctive nature of property transferred or services provided.
 Functions performed taking into account assets employed and to be

employed.
 Risk assumed by respective parties.
 Contractual terms of the transaction.
19-July-14 110
19-July-14 111
SEARCH OF UNCONTROLLED TRANSACTIONS
• Transactions between
Internal
assessee and third party
uncontrolled
transactions
• Transactions by and
External
between third parties
uncontrolled
transactions
19-July-14 112
POINTS TO BE CONSIDERED IN SEARCH.
Internal uncontrolled External uncontrolled

transactions transactions
• Same transaction with third party • Search from external databases of

must be considered. comparables must be undertaken.
• Accurate and reliable data must be • Same Industry and enterprises
available for benchmarking. having same business.
• Year of data must be of current year
in which such transaction has taken
place or 2 years preceding such
financial year.
19-July-14 113
19-July-14 114
19-July-14 115
 The selection of the tested party influences the selection of the most appropriate
method to benchmark the international or domestic transaction and consequently
on the comparables selected.
 The comparables performing similar functions as the AE in the territory in which

the AE operates will have to be selected as comparables.
 The term ‘tested party’ has not been defined in the Indian transfer pricing
regulations.
 Entity performing simpler functions and not owning any valuable intangibles
is normally selected as the tested party
 Availability of the reliable financial information of the comparable companies
 Normally least complex entity is selected as tested party as testing the margins of
such entity would involve least adjustments.
19-July-14 116
•Owner of IP
ABC Inc • Contract Risk
•R&D
• Marketing & Sales
USA
INDIA Payment of
Services
Provision of
Services
ABC India Back Office, •Least Complex Entity. Tested

Subsidiary Accounting • No ownership of IP Party
19-July-14 117
KEY TAKEAWAYS
Robust FAR analysis is the foundation of a sound Transfer
Pricing Analysis.
Choice of the tested party should be consistent with the

functional analysis of the controlled transaction.
Selection of Tested Party, plays a central role in the overall

application of the arm's- length principle.
Enough documentation to substantiate.
19-July-14 118
19-July-14 119
19-July-14 120
1. Comparable Uncontrolled Price Method ( CUP Method)
• The CUP Method compares the price charged for property or

services transferred in a controlled transaction with the same
with unrelated party.
• Such price is adjusted to account for differences in nature of

functions , characteristics of property or contractual terms or
geographical indices, etc.
Such adjusted price is considered to be an arm’s length price in respect of the property
transferred or services provided.
19-July-14 121
Strengths & Weaknesses of CUP
STRENGTHS
• Two sided Analysis.
WEAKNESSES
• Finding comparables
is a difficult task as it
is specific in nature.
• Avoids tested party
selection.
• Comparables
availability is less
• Involves a direct common as specific
transactional comparison. transactions are not
available on public
domain.
• Less susceptible to
differences in non
transfer pricing factors
19-July-14 122
2. Resale price method (RPM)
• RPM is a method based on the price at which a product that has

been purchased from a related party is resold to an unrelated
enterprise.
• The resale price is reduced by the resale price margin/ gross

profit margin.
• This is further reduced by the expenses incurred in connection

with the purchase of product or obtaining of services.
The price so arrived is adjusted price, considered as the Arm’s length price.
19-July-14 123
Strengths & Weaknesses of RPM
WEAKNESSES
STRENGTHS
• Accounting inconsistencies.
• Demand driven method.
• One sided analysis.
• Reliable when demand is
• Can lead to extreme
inelastic.
results.
19-July-14 124
3. Cost Plus Method (CPM)
• CPM uses the costs incurred by the supplier of the property (or
services) in a controlled transaction.
• Direct and indirect costs of production incurred by the enterprise in

respect of the property or service to a related party are determined.
• A gross profit mark up in the same or similar comparable uncontrolled

transaction by the enterprise or an unrelated enterprise is added.
Used where raw materials or semi-finished goods are sold; where joint facility
agreements or long term buy-and-supply arrangements, or the provision or services are
involved.
19-July-14 125
STRENGTHS Strengths & Weaknesses of CPM
WEAKNESSES
• Data on mark-up may be
difficult to find.
• Based on internal costs. • Weak link between level

of costs and market price.
• Information is usually • Consistency required

readily available. between controlled and
uncontrolled transaction.
• Focus only on related

party manufacturer.
19-July-14 126
19-July-14 127
4. Profit Split Method
• PSM first identifies the combined profit of the related parties

arising from the domestic transaction in which they are engaged.
• The relative contribution made by each related party is then

evaluated on the basis of the FAR Analysis.
• The combined profit is then split amongst the parties in

proportion to their respective contributions.
The profit thus apportioned is taken into account to arrive at arm’s length price in
relation to the domestic transaction.
19-July-14 128
Strengths & Weaknesses of PSM
STRENGTHS
• Suitable for highly
WEAKNESSES
integrated operations. • Dependence on data
from foreign
affiliates.
• Suitable when
comparables not readily • Certain
available. measurement
problems due to
difference in
• Two-sided approach hence accounting practices.
no extreme result to the
parties.
• Allocation of costs
may be difficult.
19-July-14 129
5. Transactional Net Margin Method(TNMM)
• Comparison of the net profit margin computed on an

appropriate base (for e.g. costs, sales, assets, etc.);
Used in majority of the cases including transfer of semi-finished goods, distribution of
finished products where applicability of resale price method appears to be
inappropriate.
And transaction involving provision of services.
6. Other Method
Used for which accurate comparable data in respect of similar transactions is easily
available.
19-July-14 130
STRENGTHS Strengths & Weaknesses of TNMM
WEAKNESSES
• Less affected by • Can be influenced by
transactional differences. some factors that do not
have an effect, or have a
less substantial effect.
• More tolerant to some
functional differences. • It leads to difficulty in
determination of arm's
length net margins
• Advantageous when it is difficult.
difficult to obtain reliable
information about one of • TNMM method is
the parties. applied only to one of
the controlled taxpayer.
19-July-14 131
TRANSACTION NET MARGIN METHOD (TNMM)
Identify the Identify net

net profit profit margin
margin from a
realized Adjust for
comparable
by the differences
uncontrolled
enterprise that could
transaction
from a affect net
or a number profit in the
transaction of such
with open market.
transactions
regard to an having regard
appropriate to the same
base. base.
19-July-14 132
TNMM Adjustment
PBT xx
+ Depreciation xx
+ Interest xx
+ Any one-time expense paid xx
+ Any abnormal expenditure xx
- Any one-time income received (xx)
- Any abnormal income (xx)
- XX
19-July-14 133
Choice of Profit Level Indicator (PLI)
 Each method, with the exception

of the CUP method, examines a
profit level indicator (PLI)
relevant to the method of
analysis.
 Specified financial ratio of the

tested party is compared to the
results of independent,
functionally comparable
companies.
19-July-14 134
Profit Level Indicators (PLI) and Methods
CUP Prices
PSM Generally, operating profit margins
Gross Margin on Operating

RPM Revenue
CPM Gross Margin (mark-up) on

Operating Cost
TNMM In case transaction of a tested

party pertain to receipt of income
– Operating Margin on Operating
Cost. In case transaction of a
tested party pertain to payment of
expenses – Operating Margin on
Operating Revenue
Other Method “ Would be price”
19-July-14 135
19-July-14 136
Selection Of Most Appropriate Method [Rule 10C(2)]
Factors Determining Most Appropriate Method
 Nature & class of transaction.
 Class of associated enterprise and functions performed.
 Availability and reliability of data.
 Degree of comparability.
 Extent and reliability of adjustments.
 Nature, extent and reliability of assumptions.

19-July-14 137
Selection Of Most Appropriate Method [Rule 10C(2)]
CUP
PSM
RPM
CPM
TNMM
Other
19-July-14 138
TRANSFER PRICING METHODS
Any Other Method

7% CPM/TNMM
79%
PSM
9%
CUP Method
9%
19-July-14 139
19-July-14 140
19-July-14 141
ACCOUNTANTS ‘ REPORT
Section 92:
 Requires every person entering into an international

transaction to obtain an accountants’ report.
 To be Submitted on or before the due date for filing the tax

return.
19-July-14 142
SECTION 139: DUE DATE FOR FILING RETURN IN
FORM 3CEB
30th November for ALL

Assessees.
Corporate : 30th November.
Other than Corporate

assesses: 30th November.
19-July-14 143
FILING OF TRANSFER PRICING REPORT
Manual (A.Y. 12-13)
TP Report is required to be
Transfer Pricing filed (uploaded) before the
Report filing of the Income Tax
Return
E-Filing (A.Y. 13-14)

3CEB Template
19-July-14 144
Preparation of Form 3CEB
The Central Board of Direct Taxes (‘CBDT’) issued a notification on 10 June 2013, amending
the Accountant’s Report (also referred to as ‘Form No. 3CEB’ of the Income-tax Rules, 1962)
with effect from 1 April 2013 to ensure that the same corresponds to the amended Indian
TPR.
Overview of the amendments
The amended Form No. 3CEB contains 25 clauses requiring disclosure of the details
of the various international transactions and SDT. It is divided into the following three
parts:
Part A: Requires the taxpayer to provide general information about itself along with
the aggregate value of international transactions and SDT
Part B: Requires the taxpayer to provide the details of the international transactions
entered into during the FY
Part C: Requires the taxpayer to provide the details of SDT entered into during the FY
Part C requiring disclosure of SDT is an addition to the earlier Form No. 3CEB;
whereas, Part A and Part B have been amended, primarily to incorporate the changes
made in the definition of the term international transactions.
19-July-14 145
MANAGEMENT REPRESENTATION
An Example of Certificate
to Form 3CEB
19-July-14 146
19-July-14 “ Can I write off last year’s taxes as bad investments” 147
HOW TO PREPARE TP STUDY/DOCUMENTATION??
Brief business profile of the tested party and the AEs
Identification and analysis of transactions
Planning & Budgeting
Industry & Market Analysis
FAR Analysis
Selection & Characterization of entities
Economic Analysis
Selection & Application of MAM
19-July-14 148
DOCUMENTATION
 Under Section ?
Section 92D of Income-tax Act, 1961- Maintenance and keeping of
information and document by persons entering into international
transaction or specified domestic transaction.
 Who has to Maintain?

Every person who has entered into an international transaction or
specified domestic transaction.
19-July-14 149
DOCUMENTATION
NEED For Proper documentation
For Assessee:
For the department:
 Because of
 Selection for cases
legislation.
for scrutiny.
 To be prepared for TP
 Arriving at the
Audit.
correct result.
 To show that ALP has
been followed.
Thus, it is an important tool for enforcing TP Regulations.
19-July-14 150
DOCUMENTATION
Statutory Obligations:
 Section 92D lays down statutory requirement for maintenance and

keeping of information and document by persons entering into
International Transaction or Specified Domestic Transaction.
 Sub section (1) says that the required I&D would be prescribed by
the CBDT.
 Sub section (2) requires the board to prescribe the period for which
such I&D are to be kept and maintained.
19-July-14 151
DOCUMENTATION
 Sub section (3) prescribes that the requisitioned I&D should be produced
before tax authorities.
 Section 92E requires submission of report from accountant by persons

entering into International Transaction or specified domestic Transactions.
DETAILS OF I&D
Basically of 2 Types:
 Those to be furnished along with the return :

FORM 3CEB
 Those to be maintained and kept for production before tax

authorities :
Report/Documents under Income Tax Rules (10D Documentation)
19-July-14 152
DOCUMENTATION
General Requirements:
 Documentation should be contemporaneous.
 Should be in place as on the due date for filing

of return of income.
 Should be kept for 8 years.
. Threshold limits Before After

Documentation 1 Crore 1 Crore
Scrutiny 5 Crore 15 Crore
19-July-14 153
COMMON TRANSACTIONS DOCUMENTATION
Transaction entered Documents to be maintained

Purchase/ Sale of raw -Invoices -Pricing strategy
material - purchase/ Sale order - proof of price negotiation
- product details - Quotes from competitors
- Sale Details if sold to 3rd Party - Terms of payment
Remuneration to -Qualification - Data from HR firms for

Directors - Work experience & profile Directors in the same line of
- Minutes of Meeting Business
authorizing
- the Director’s remuneration
Corporate Cost -Nature of expenses -Basis of allocation between

sharing - Auditor’s certificate allocating the companies
the expenses - proof of usage (rendering)
of services
- Cost Benefit analysis
19-July-14 154
COMMON TRANSACTIONS DOCUMENTATION
Transaction entered Documents to be maintained

Rent paid toward use - Rent receipts -Rental agreement
of premises - Documents suggesting the rent - Fair market Value of the
of the surrounding area property (municipal
Valuation, only if higher than
actual rent paid)
Reimbursement of -Nature of expenses with -Employee Details
expenses detailed break up -Actual invoice of the
- reason of expense incurred for expense
Interest on loan (non - Basis of determination of -Loan agreement

financial service Interest rate - Basis on which the interest
company) - Interest rate card for the period rate is pegged above
of loan standard rate
19-July-14 155
19-July-14 156
TPO
TRANSFER PRICING ADJUSTMENTS

19-July-14 157
 An adjustment in Tax when it is determined that the
pricing scheme of an enterprise falls outside the range of what
is considered to be an arm's length transaction between
associated enterprises.
 Taxpayer disputes over the adjustment may be argued before
a court but the burden of proof lies with the taxpayer to prove
the authorities acted incorrectly.
19-July-14 158
TREND OF ADJUSTMENTS OVER THE YEARS
 TP Audit trends indicate greater scrutinity, leading to increased adjustments and

resultant litigation.
No. of TP Number of % of
Financial Amount of Adjustment
Audits Adjustment Adjustment
Year Completed Cases Cases (Rs. in Crore)
2004-05 1,061 239 23 1,220

2005-06 1501 337 22 2,287
2006-07 1,768 471 27 3,432
2007-08 219 84 39 1,614

2008-09 1,726 670 39 6,140
2009-10 1,830 813 44 10,908
2010-11 2,301 1,138 49 23,237
2011-12 2,638 1,343 52 44,531
Source: White Paper May 2012, Ministry Of Finance, Department Of Revenue
19-July-14 159
19-July-14 160
AVAILABLE DATABASES
 Indian Databases:
 Prowess
 Capitaline
 Ace Technology
 Foreign Databases:
 Compustat
 OneSource Database
 Moody’s Electronic Data Gathering, Analysis, and Retrieval System

(EDGAR)
19-July-14 161
19-July-14 162
19-July-14 163
TRANSFER PRICING AUDIT
CONSIDERATIONS IN AUDIT
Agreements
Ledgers
AS 18
Tax Audit Report
Supporting Documents
19-July-14 164
TRANSFER PRICING AUDIT ISSUES
 Data for comparability analysis: Current year’s data i.e., the year in which the
transaction has taken place needs to compared with that of comparables. Data of
comparables can be of previous two years.
 Royalties/ management charges: These are of significant focus of the revenue

authorities. In many cases, the authorities have rejected the taxpayer’s analysis and
disallowed payments. Hence, extensive documentation is required, failing which they
could face significant adjustments on account of intellectual property or services fee
payments made to group concerns.
Use of ‘nonpublic’ comparables: In some cases, TPOs seek pricing information from
competitors of the taxpayers. The use of competitor data not in the public domain is not
only unjust from the taxpayer’s point of view, but may also harm the business interests of
the competitor once such strategic pricing information is shared with the taxpayer. Such
information is also not enough to undertake a detailed comparability or functional analysis
of the enterprises/transactions, thus leading to an inappropriate TP analysis.
19-July-14 165
19-July-14 166
DISPUTE RESOLUTION PANEL
(DRP)
19-July-14 167
Introduced with the policy objective of expediting
dispute resolution.
Expectation from panel of 3 Commissioners – more

judicious orders.
Higher comfort level to taxpayers.
Complex TP case would be resolved confidently by a team of 3

Commissioners as opposed to a single person.
Result expected – fewer cases being filed in the ITAT.
19-July-14 168
Set up for Speedy resolutions.
Investor-friendly mechanism & expected to reduce taxpayer

grievance and litigation.
Choice of the assessee to file an objection before the DRP or file

an appeal before CIT (Appeals) against order passed by AO.
19-July-14 169
Powers & Duties

 Conform, reduce or
enhance the variations as
proposed by TA.
 Cannot set aside the

variation to TA.
 Cannot leave
adjudication of issue of TA
by directing the TA to pass
order of assessment by
conducting further
inquiry.
19-July-14 170
Powers & Duties

 Decision to be based on
opinion of the majority of
members.
 No direction can be issued by

DRP after 9 months from the
end of the month in which draft
order is forwarded to the
assessee.
 Has powers as vested in a

court under the Code of Civil
Procedure, 1908.
19-July-14 171
PENALTIES
Nature of Default Penalty Prescribed

Failure to maintain prescribed 2 % of value of Transactions.
information or documents.
Failure to furnish 2 % of value Transactions.

information/documents
during audit.
Concealment of income 100 to 300 % on tax evaded.
Failure to furnish accountants INR 100,000.

report.
19-July-14 172
19-July-14 173
DTP ASSESSMENTS
 The Indian revenue authorities have not issued any
clarification on the selection of cases for DTP assessments.
 Assessment of DTP compliances would fall within the

jurisdiction of the same TPOs who presently review ITP
compliances.
19-July-14 174
FIRST DTP AUDIT CYCLE (Estimated)
File Tax Return and
TP Order Draft AO Order
accountant’s report
(31 Jan 2017) (31 March 2017)
(30 Nov 2013)
AO passes final
DRP Order
order
(31 Dec 2017)
(31 Jan 2018)
ITAT – final fact finding

authority
High Court – on questions

of law
Supreme Court
19-July-14 175
Examination of International Transactions not reported by
the Assessee
 Section 92CA has been amended retrospectively from
1st June, 2002.
 It empowers TPO to determine ALP of an international

transaction noticed by him in the course of proceedings before
him, even if the said transaction was not referred to him by
the AO.
 But no reopening of any proceeding would be undertaken only

on account of such an amendment.
19-July-14 176
ASSESSMENT PROCEDURE
Audit teams- cities: Team: Director of Aggregate value

1. – Delhi International Tax The TPO receives of international
and Joint /
2. Mumbai reference from transactions
Additional
3. Bangalore Commissioners as
Assessing > Rs 15 crores:
4. Chennai Transfer Pricing Officer. compulsory TP
5. Kolkata Officers (TPO). audit.
AO proceeds to
TPO notify TPO will
AO refer Determination calculate IT on
taxpayer to determine ALP
to TPO with approval of basis of ALP
produce by passing an
commissioner. determined by
evidence. order.
TPO.
19-July-14 177
19-July-14 178
19-July-14 179
TRANSFER OF INTANGIBLES
19-July-14 180
Intangibles related to marketing and technology have become
crucial sources of value and of competitive distinctiveness and
now play a greater role in a company’s profitability.
19-July-14 181
TRANSFER OF INTANGIBLES
As per Erstwhile RBI circular on Miscellaneous Remittances

from India:
• Any payment under a technical collaboration agreement

where amount of royalty exceeds 5% on local sales and 8%
on exports.
• Lump-sum payment exceeds USD $ 2 million.
Then one needs to approach Ministry of Industry and

Commerce for Approval.
19-July-14 182
Comparative Chart on the Remittance of Technology Fees
and the Royalty Payments.
Before issue of Press After issue of Press Note

Note 8 (2009 8 (2009 series)
Details series) Prior to with effect from
16-12-2009 16-12-2009
Lump sum payments Not exceeding US$ 2 No limit now.
million.
Royalty payable 5% on domestic sales and No restrictions - subject to

8 % on export. FEMA (Current Account
Transactions) Rules, 2000.
Duration of royalty No restrictions. No restrictions.
payments
Royalty limits are Net of taxes and are Net of taxes and are
calculated according to calculated according to
standard conditions. standard conditions.
19-July-14 183
ISSUES RELATING TO TRANSFER OF INTANGIBLES
 Lack of external comparables.
 Comparability analysis may reveal that transactions in addition to, or

different from, the transactions described in the registrations and
contracts actually occurred.
 Incase when transfer of Intangible provides the enterprise with a

unique competitive advantage in the market, purportedly
comparable intangibles or transactions should be carefully
scrutinized. It is critical to assess whether potential comparables in
fact exhibit similar profit potential.
19-July-14 184
Safe Harbour Rules in India
19-July-14 185
OVERVIEW
A ‘Safe Harbour’ can be any statutory provision or regulatory
approach directed at simplifying transfer pricing compliance.
The Central Board of Direct Taxes notified the Safe Harbour
Rules by Press Release on 18th September, 2013 vide
Notification No. 73/2013.
•Safe Harbour is a Transfer Pricing provision applying to a

specific category of tax payers/transactions.
•These rules are optional in nature and can be opted for by filling
Form 3CEFA.
•The assessee can opt for the safe harbor regime for a period of his choice
but not exceeding 5 AYs beginning from AY 13-14 by filing Form 3CEFA.
Once the option exercise by the assessee has been held valid it shall
remain so for the period opted unless the assessee voluntarily opts out of
safe harbor regime by furnishing a statement to this effect.
19-July-14 186
•Once Safe Harbour rules are chosen, the assessee is not eligible for
comparability adjustment or for a +/-3% benefit while adjusting the ALP
(Arm’s Length Price).
•Safe Harbour rules are not applicable for Specific Domestic Transactions.
•The Safe Harbour rates or margins specified therein cannot be considered

as a benchmark by the TPO in cases not covered by Safe Harbour Rules and
also where the assessee has not opted for Safe Harbour Rules.
19-July-14 187
RULES FOR SAFE HARBOUR RULES
Rule 10TA – Definitions

Rule 10TB – Eligible Assessee
Rule 10TC – Eligible International Transaction
Rule 10TD – Safe Harbour Benchmarks
Rule 10TE – Procedure
Rule 10TF – Non-Applicability
19-July-14 188
Sr. Eligible International Circumstances
No. Transaction
1. Provision of software Transactions upto Rs. 500 crore: The operating profit margin
development services declared by the eligible assessee from the eligible
referred to in clause (i) international transaction in relation to operating expense is
of rule 10TC. 20 per cent or more.
Transactions above Rs. 500 crore: The operating profit margin

declared by the eligible assessee from the eligible
international transaction in relation to operating expense is
22 per cent or more
2. Provision of Transactions upto Rs. 500 crore: The operating profit margin
information technology declared by the eligible assessee from the eligible
enabled services international transaction in relation to operating expense is
referred to in clause 20 per cent or more.
(ii) of rule
10TC. Transactions above Rs. 500 crore: The operating profit margin
declared by the eligible assessee from the eligible
international transaction in relation to operating expense is
22 per cent or more.
19-July-14 189
No. Transaction
3. Provision of knowledge The operating profit margin declared by the eligible assessee
process outsourcing from the eligible international transaction in relation to
services referred to in operating expense is 25 per cent or more.
clause (iii) of rule 10TC.
4. Advancing of intra- The Interest rate declared in relation to the eligible

group loans referred to international transaction is equal to or greater than the
in clause (iv) of rule base rate of State Bank of India (SBI) as on 30th June of the
10TC to wholly owned relevant previous year plus 150 basis points.
subsidiaries where the
amount of loan
does not exceed fifty
crore rupees.
5. Advancing of intra- The Interest rate declared in relation to the eligible
group loans referred to international transaction is equal to or greater than the
in clause (iv) of rule base rate of SBI as on
10TC to wholly owned 30th June of the relevant previous year plus
subsidiaries where the 300 basis points.
amount of loan exceeds
fifty crore rupees.
19-July-14 190
No. Transaction
6. Providing corporate The commission or fee declared in relation to the eligible
guarantee referred to in international transaction is at the rate of 2 per cent or
clause (v) of rule more per annum on the amount guaranteed.
10TC to wholly owned
amount guaranteed does
not exceed Rs. 100 crore.
7. Providing corporate The commission or fee declared in relation to the eligible
guarantee referred to in international transaction is at the rate of 1.75 per cent
clause (v) of rule or more per annum on the amount guaranteed.
10TC to wholly owned
amount guaranteed exceeds
Rs. 100 crore.
8. Provision of contract The operating profit margin declared by the eligible
research and development assessee from the eligible international transaction in
services wholly or partly relation to operating expense incurred is 30 per cent or
relating to software more.
development referred to in
clause (vi) of rule 10TC.
19-July-14 191
No. Transaction
9. Provision of contract The operating profit margin declared by the eligible

research and development assessee from the eligible international transaction in
services wholly or partly relation to operating expense incurred is 29 per cent or
relating to generic more.
pharmaceutical drugs
referred to clause (vii) of
rule
10TC.
10. Manufacture and export of The operating profit margin declared by the eligible
core auto components. assessee from the eligible international transaction in
relation to operating expense is 12 per cent or more.
11. Manufacture and export of The operating profit margin declared by the eligible
non- core auto components. assessee from the eligible international transaction in
relation to operating expense is 8.5 per cent or more.
19-July-14 192
Advance Pricing Agreement
19-July-14 193
Advance Pricing Agreement (APA)
APA is an agreement between a taxpayer and a taxing authority on an

appropriate transfer pricing methodology for a set of transactions
over a fixed period of time in future.
The APAs offer better assurance on transfer pricing methods and are
conducive in providing certainty and unanimity of approach.
New sections 92CC and 92CD in the Act have been inserted to provide
a framework for APA.
19-July-14 194
1. Such APAs shall include determination of the ALP or specify the manner
in which ALP shall be determined.
2. The manner of determination of ALP shall be any method including

those provided in sub- section (1) of section 92C, with necessary
adjustments or variations.
3. The ALP of any international transaction, which is covered under such

APA, which normally apply for determination of arm’s length price
would be modified to this extent and arm’s length price shall be
determined in accordance with APA.
4. APA would be valid for a period of time not exceeding five consecutive
years.
19-July-14 195
5. The CBDT is empowered to rescind the APA if it is found to

be obtained by fraud or misrepresentation of fact.
6. The Board is empowered to prescribe a Scheme providing

for the manner, form, procedure and any other matter
generally in respect of the APA.
19-July-14 196
Timeline for making the application of the APA

• For an International Transaction of a Continuous Nature-
Before the first day of the previous year relevant to the first assessment year for
which the application is made.
• In any other case-

Before undertaking the international transaction under consideration.
Contents of an APA
 Terms of the Agreement
 Details of the Transaction intended to be covered
 Details of the other International Transactions
 Agreed TP Methodology
 Determination of the Arm’s Length Price (ALP)
 Critical Assumptions
 Case Specific details, if any.
19-July-14 197
Benefits:
1. APAs are seen as dispute resolution vehicles that helps in
attaining certainty on transfer pricing.
2. Agreement on the TP method and the price for various

transactions for a fixed period of time prospectively is expected
to reduce the burden associated with annual audit examinations
and litigation.
3. The tax administration can channelize its resources more

constructively and focus on better enforcement.
4. A well designed program can also provide a collaborative and

cooperative setting to find mutually beneficial solutions to
contentious transfer pricing issues.
19-July-14 198
5. This endows a strong foundation for evolving unambiguous laws

which feeds into a virtuous circle of clarity, minimized
interpretational differences, and greater acceptance by the tax
authority and lowered need to litigate on the part of both the
taxpayer and the tax administration.
19-July-14 199
Bilateral
APA's
Unilateral Multilateral
APA's APA's
Types of
APA's
Unilateral
APA entered into between a taxpayer and the tax administration of the country where it is
subject to taxation.
Suitability
A unilateral APA may be best suited in the following cases:
• Where it is either unnecessary to involve a foreign tax authority in the APA process - where
the counter-party to an Indian resident’s international related party transaction is a taxpayer
in a country which does not have a tax treaty with India.
• A unilateral APA would also be appropriate where a foreign tax authority declines to
participate in case of a bilateral APA.
19-July-14 200
Bilateral
APA entered into between the taxpayers, the tax administration of the host country and the
foreign tax administration.
Multilateral
APA entered between the taxpayers, the tax administration of the host country and more than
one foreign tax administrations.
Bilateral and multilateral APAs are often referred to as Mutual Agreement Procedures (MAP
APA).
Suitability
A MAP APA is best suited where the Indian resident’s international related party transaction(s)
occurs with a related party that is a taxpayer in a tax treaty partner country.
The agreement with the foreign tax authority ensures there is no economic double taxation in
respect of the transaction(s) covered by the APA by ensuring that the benefits of the DTAA
provisions are thoroughly taken into consideration.
19-July-14 201
Process of filing an APA:
Stage I : Pre-filing consultation (Form 3CEC)
Stage II : Filing of an application for an APA (Form 3CED)
Stage III : Preliminary Processing of Application
Stage IV : Processing of the Application
Discussions / negotiations for bilateral / multilateral APAs and their outcome
Drafting of an APA
19-July-14 202
Stage V : Post APA Compliances
Revision of tax return
Filing of an Annual Compliance Report (Form 3CEF)
Audit of the Compliance Report
Withdrawal of the application seeking an APA (Form 3CEE)
Revision of an APA
Cancellation of the APA
Renewal of the APA
19-July-14 203
FEES PAYABLE IN APA
Amount of International Transactions Fee

entered or to proposed to be entered
Amount not exceeding Rs. 100 crores 10 lakhs
Amount not exceeding Rs. 200 crores 15 lakhs
Amount exceeding Rs. 200 crores 20 lakhs
19-July-14 204
Mutual Agreement Procedure
19-July-14 205
Mutual Agreement Procedure (MAP)
What is Mutual Agreement Procedure (MAP) ?
• MAP is an alternative available to taxpayers for resolving

disputes giving rise to double taxation.
• The agreement for avoidance of double taxation between the

countries would give authorization for assistance of Competent
Authorities in the respective jurisdiction under MAP.
• In the context of OECD Model Convention for the Avoidance of

Double Taxation, Article 25 provide for assistance of Competent
Authorities under MAP.
19-July-14 206
What are the Key Benefits of Pursuing MAP?
• Elimination of double taxation (either juridical or economic). It is very

rare that a case under MAP is not resolved.
• Also, cases involving certain jurisdictions (US, UK and Denmark), the

Indian authorities have entered into an agreement under which the
taxpayer can choose to provide a bank guarantee for the outstanding
tax demand. In such cases, the tax demand would not be pursued by
the tax authorities until disposal of the MAP application.
• The MAP resolution, once accepted, eliminates the need for

protracted litigation..
19-July-14 207
What kind of issues can be

taken for resolution under
MAP?
Generally, the issues giving rise to

double taxation are submitted by
the taxpayers for resolution under
MAP:
• Adjustment arising from Transfer

Pricing assessment.
• Issues relating to existence of
Permanent Establishment.
• Characterization of income.
• Attribution of profits to
Permanent Establishment.
19-July-14 208
What is the time limit for filing of MAP?
• Generally, the time limit ranges between two to three years from the
date of the notice giving rise to double taxation.
• In cases where the Convention for Avoidance of Double Taxation does

not provide for time limit the domestic tax provision on time limit has
to be looked into for filing an application for assistance of Competent
Authorities under MAP.
• E.g., the Convention for Avoidance of Double Taxation between India

and UK does not provide time limit for filing for assistance under
MAP. However, the UK domestic regulation provides a time limit of
six years from the end of the relevant financial year to which
adjustment relates.
19-July-14 209
Can an application for assistance of Competent Authorities

under MAP be made?
• The tax Conventions allow the taxpayers to apply for MAP even in
anticipation of a dispute giving rise to double taxation.
• Technically, one can file a MAP application upon receipt of the draft
Assessment Order.
• However, from a practical perspective, the Competent Authority might not

begin the negotiation process until the final Assessment Order has been
issued as the tax demand would only crystallize upon issuance of the final
Assessment Order.
19-July-14 210
Does the taxpayer have to exhaust the appeal options

available under the domestic litigation route to apply for
assistance under MAP?
Option of resolution under MAP is an additional dispute resolution

option available to the taxpayer. It can be pursued simultaneously
with the dispute resolution options available under domestic
regulation.
19-July-14 211
Can a taxpayer participate in the negotiation process

between the Competent Authorities?
• The negotiation process between the Competent Authorities of

countries under MAP, are generally a ‘closed door’ event. Thus, the
taxpayer would not have access to and cannot participate in the
negotiation process between the Competent Authorities.
• Taxpayers can work with the Competent Authorities to explain

their own case and positions prior to the negotiation meetings
between the Competent Authorities.
19-July-14 212
How soon the taxpayer can expect the outcome under
MAP?
• Under the Indian tax Conventions (entered into with other countries)
there is no timeline for disposal of application for assistance of
Competent Authorities under MAP.
• Based on experience, the resolution under MAP can be expected within

a period of two years from the filing of an application.
19-July-14 213
Is the outcome under MAP binding on the taxpayer and

the Revenue?
• While the taxpayers have the option of either accepting or rejecting

the resolution arrived under MAP, should the taxpayer opt to accept
the MAP resolution, it will be binding on the Revenue for that
international transaction and for that Assessment Year.
• Rule 44H (4) of the Indian Income Tax Rules, 1962 provided that the
Assessing Officer shall, within 90 days of receipt of the resolution by
the Chief Commissioner or Director General of Income Tax, give effect
to the resolution provided:
• The taxpayer gives his acceptance to the resolution arrived at under

MAP; and withdraw the appeal filed under the domestic litigation
provisions
19-July-14
. 214
Can outcome under MAP for a year be applied even for

subsequent years?
• The resolutions under MAP are for the particular issues and the
Assessment Years covered in the application for assistance of Competent
Authorities under MAP. Thus, strictly speaking, the resolution under
MAP for one year cannot be applied for the subsequent year.
• That said, the principle agreed upon for one year is likely to be followed
in MAP proceedings for the subsequent years should the taxpayer choose
to apply for MAP for the those years.
• However, since the MAP resolution is in the nature of settlement between

two Competent authorities, it cannot be used as a basis for supporting
arm’s length nature under the domestic litigation process.
19-July-14 215
Can a resolution under MAP be treated as an Arm’s

Length Price?
• The resolution arrived at by the Competent Authorities under MAP are

based on the negotiation with the objective of settlement of issues.
• The negotiated settlement cannot be considered as an Arm’s Length

Price which needs to be based on principles of Transfer.
19-July-14 216
What is the procedure for withdrawal of domestic

appeal in case the settlement under MAP is
accepted?
• If the taxpayer accepts the resolution arrived at under MAP, a

letter indicating the acceptance of resolution under MAP, and
withdrawal of appeal (to the extent of the issues covered under
the MAP resolution) need to be made to the Assessing Officer
and the Appellate Authorities before whom an appeal is filed
under domestic litigation provisions.
19-July-14 217
2014
19-July-14 218
Roll Back of APAs
 Likely to settle and resolve pending disputes/ litigation.
 The roll back provisions would apply to APAs signed after
1st October, 2014.
 Rules still to be framed by government.
 If an APA application was filed on 31stMarch, 2013 and is
signed after 1st October, 2014, it may still provide for its “roll-
back” applicability for the four fiscal years prior to fiscal year
2013-14.
 Gives total cover of nine years.[four years in the past and five
years in the future]
19-July-14 219
Deeming TP Provisions
 Deeming TP provisions are proposed to be applied to
transactions between an enterprise and an independent
person irrespective of whether such persons are non-resident
or not.
 The proposed amendment now effectively includes domestic

transactions with third parties in India as ‘international
transactions’.
 This amendment shall take effect from 1st April, 2015.
19-July-14 220
Documentation Penalty
 The authority can levy penalty at the rate of two percent of
the value of international transactions or specified domestic
transactions for failure to furnish information, or
documentation under Section 92D(3) of the Income Tax Act,
1961.
 The proposed amendment will come into effect from 1st

October, 2014.
19-July-14 221
Usage of Multiple Years data, instead
of Single Year Data
 As on the due date of filing of tax return, only about 35% of

the total universe of companies available in public databases
(i.e. Prowess and Capitaline) report current year’s data.
 The TPOs carry on transfer pricing audits 3 years later when

data is available and adjust the transfer price based on single
year data, as per existing regulations.
 It is now proposed multiple year data will be allowed to be

used for comparability analysis.
19-July-14 222
Inter-Quartile Range, instead of
Arithmetic Mean (AM)
 Inter-quartile range provides a more accurate result for ALP.
 17 countries, both developed & developing economies, use

this concept .
 If the taxpayer’s result falls outside the “inter-quartile range”,

then the TP adjustment is made with reference to the median.
19-July-14 223
19-July-14 224
OECD AND INDIA
 India is one of the many non-member economies with which the OECD has working
relationships in addition to its member countries.
 The OECD has been co-operating with India since 1995.
 The OECD Council at Ministerial level adopted a resolution on 16 May 2007 to

strengthen the co-operation with India, as well as with Brazil, China,
Indonesia and South Africa, through a programme of enhanced engagement.
 It also called for the expansion of the OECD's relations with Southeast Asia.
 While enhanced engagement is distinct from

accession to the OECD, it has the potential
in the future to lead to membership.
19-July-14 225
Mutual benefits
India values the opportunity to discuss major policy issues and challenges and
to learn from the experiences of OECD countries facing similar challenges.
The relationship also benefits OECD Members and non-OECD economies, who
are increasingly engaged with India through trade and investment, and who
have gained a better understanding of India as it has become a major actor in
the globalised economy.
How is the co-operation co-ordinated?

The OECD’s Centre for Co-operation with Non-Members develops and
oversees the strategic orientation of this relationship and ensures that the
dialogue remains focused, forward-looking and mutually beneficial.
Areas of work
The OECD’s first Economic Survey of India was released in 2007. India also
participates in various policy areas including trade, investment, policies for
small and medium-sized enterprises, development and steel.
19-July-14 226
India’s participation in OECD general activities
India is on the Governing Board of the OECD’s Development Centre and
it also participates as an observer in some OECD Committees and various
working groups . Indian ministers have also attended a number of
Ministerial Council Meeting dialogue sessions with non-OECD countries
since 2002.
19-July-14 227
INDIAN TP v/s OECD GUIDELINES: SNAPSHOT
Concepts Indian Regulation OECD Guidelines
Associated Enterprise Very wide definition Restricted to controlled
entities
Comparable range (FY 2012-13) allows 3% Allows for range of
range band on average comparable data
results of comparable.
Multiple year data Only allows data for Permitted
current year (and earlier
two years under limited
circumstances)
Foreign Comparables Not permitted in practice Permitted
Priority of methods Most appropriate method (Originally) preference for
rule traditional methods
Use of unspecified method Not specified Permitted
Documentation Stringent Prudent business principles
Intangibles Absence of definition and Defined and described
Guidelines
19-July-14 228
19-July-14 229
CUSTOMS
 ‘Assessable value’ is the ‘Assessable Value’ for custom duty.
 The IT Department may contend that Customs authorities merely ensure that the
import price is atleast equal to the ‘Assessable Value’ and in particular, Customs
authorities may not investigate whether the goods are overpriced.
 However, it appears that the Customs authorities ’ acceptance of a ‘Transaction

Value’ could serve as documentation support for proving that it is an ‘Arm’s
Length Price’. Especially because new provison (a) to Rule 4(2) specifically
stipulated that the sale is in the ordinary course of trade under fully competitive
conditions which implies that it is at ‘ Arm’s Length price’
19-July-14 230
FEMA
 Under Foreign Exchange Management Act (FEMA), an issue could arise in case of
imports , wherein the IT Department determines an ‘Arm’s Length Price’, which is
lower than actual import price. In such a case, it will be interesting to see whether
RBI would take a stand that the Indian entity has overpaid and hence the excess
amount paid by Indian entity should be brought back into India.
 As per Section 8 of FEMA, an Indian resident has to bring into India all foreign
exchange amounts , which are due or accrued to him. The issue is whether an
Indian resident has to bring into India, additional foreign exchange on account of an
adjustment made by the IT authorities under the TP Regulations ?
19-July-14 231
 Example
Indian company receives a royalty of Rs .100 from its foreign subsidiary. Under
TP Regulations , the IT authorities determine that arm’s length royalty should
be Rs.500 instead of Rs .100. Is the Indian company liable to bring into India,
the additional royalty of Rs .400? Broadly, the literal interpretation of the word
‘due’ would mean the amount ‘due’ as per contractual agreement and not the
amount assessed by IT authorities which is determined long after the
transaction is completed. However, whether Reserve Bank of India (RBI) shall
insist on bringing such additional amounts into India remains to be seen.
19-July-14 232
TRANSFER OF SHARES
 In order to transfer the shares of an Indian company from a resident to a non-
resident, FIPB approval and RBI permissions obtained. The issue is whether IT
authorities can adjust the selling price of shares which is approved by FIPB and RBI?
 In this context, it is important to note that FIPB does not comment on price, it
merely confirms that the purchase of shares by the non-resident is in line with the
foreign investment policy. RBI too, does not scrutinize the selling price of shares .
RBI only ensures that the selling price of shares is above the basic floor price (CCI
valuation norms ) to avoid undue foreign exchange loss to the country. Thus , the
assessee would need to prove before the IT authorities that selling price of shares
is at arm’s length even if it is approved by FIPB and RBI.
TP Regulations is a new legislation. In view of the aforesaid issues , it will be

interesting to see how TP Regulations are implemented vis -à-vis other Statues at
the ground level.
19-July-14 233
RECENT INDIAN JURISDICTION IN TRANSFER PRICING
19-July-14 234
Assessee/ Taxpayer Judicial Forum Short point of ruling
Keihin Panalfa Ltd. ITAT Delhi Tribunal strikes down arbitrary lifting of
corporate veil by TPO
Cushman and Delhi High Pure cost reimbursements require arm’s length
Wakefield India Pvt. Court price determination.
Ltd. Assessing Officer can reopen or re examine
transactions referred to Transfer Pricing Officer
Air Liquid Engineering ITAT Hyderabad Royalty on Sales to associated enterprises
India (P) Ltd. allowed.
RBI’s approval implies that the royalty payment
is at arm’s length.
Once taxpayers transaction have been
aggregated under TNMM, separate analysis of
royalty is erroneous.
Danisco India Pvt. Ltd. ITAT Delhi Appropriate economic adjustments on
account of the difference in administrative
expenses incurred by taxpayer as compared to
comparables, can be made.
19-July-14 235
Bharti Airtel Ltd. ITAT Delhi -Corporate guarantees with no impact on
profit, income, losses or assets of a guarantor
not considered international transaction.
-Share application cannot be recharacterised
as interest free loan.
Net Freight India (P) ITAT Delhi -Profit Split Method is the most appropriate
Ltd. method for freight forwarding services.
Dania Oro Jewellery ITAT Mumbai -Notional Interest is to be charged on delayed
Pvt. Ltd. payments from associated enterprises if the
credit period exceeded the maximum credit
period granted to non AEs.
IJM (India) ITAT Hyderabad Transfer pricing would not apply to
Infrastructure Ltd. transactions undertaken between the
permanent establishment (‘PE’) / joint venture
(‘JV’) of a foreign company and its Indian
subsidiary.
Cordys Software India ITAT Hyderabad It is important for an in-depth functional
Pvt. Ltd. analysis to determine the comparability with
the companies identified on the database.
19-July-14 236
19-July-14 237
RULINGS
Maruti Suzuki India vs. ACIT (Delhi High Court)
Facts:
 Assessee manufactured cars under the brand name “Maruti”.
 Assessee entered an agreement with Suzuki, Japan pursuant to which it began

manufacturing cars using the brand name “Suzuki”.
 TPO issues show - cause notice alleging that substitution of brand name
“Maruti” with “Suzuki” meant that assessee sold the “Maruti” brand to Suzuki.
 On above basis, TPO determined “arm’s length” sale proceeds at Rs. 4,420
Crores being total advertisement expenditure incurred by MSIL till the year
under audit plus a mark-up thereon of 8%.
 Assessee filed a writ petition.
19-July-14 238
RULINGS
Facts:
 In the order, TPO held that assessee was using the trademark “Maruti Suzuki”,
the “Suzuki” trademark had “piggybacked” on the “Maruti” trademark without
payment of any compensation by “Suzuki” to the assessee.
 TPO also concluded that the co-branded trademark ‘Maruti Suzuki’ led to
impairment in value of MSIL’s trademark and reinforcement of SMC’s trademark
in India.
 TPO held that SMC did not compensate MSIL for developing the marketing
intangibles with large advertisement expenses, which benefited SMC.
 TPO observed that MSIL had higher advertisement expenditure compared to

other comparable companies and hence carried out adjustments to MSIL’s total
income by disallowing 50 percent of royalty and excess advertisement
expenditure.
19-July-14 239
RULINGS
Decision:
 HC held that the approach adopted by the TPO was erroneous and
unsustainable.
 HC directed the TPO to consider the argument’s put forth by the taxpayer
appropriately and determine the ALP in light of the following observations:
 AO/TPO can reject the ALP computed by the tax payer only when he finds
that taxpayer has not complied with Transfer Pricing provisions.
 AO / TPO needs to give appropriate notice to the taxpayer, giving him an

opportunity to produce evidence in support of the ALP computed.
19-July-14 240
RULINGS
Decision:
 There would be no obligation on SMC to pay if the use of logo is at the

discretion of the MSIL.
 If SMC is required to pay towards the marketing intangibles, the ALP of the
international transaction has to be determined taking into consideration all the
rights and obligations of the parties under the international transaction,
including the benefit from the mandatory use of foreign trademark / logo.
 In case SMC is liable to compensate MSIL, the ALP of the international

transactions between the entities has to be determined taking into
consideration all the rights obtained and obligations incurred by the two
entities, including the advantage obtained by SMC.
19-July-14 241
19-July-14 242
Demag Cranes & DCIT Pune Working capital is a factor which influences
Components (India) (P.) price in open market and requisite adjustment
Ltd on account of it has to be consider for ALP.
Huntsman Advanced ITAT Mumbai Adjustment for ALP is to be made only in
Materials (India) (P.) respect of assessee's transactions with AE.
Ltd. Entire turnover of trading segment cannot be
considered.
Thyssenkrupp ACIT -ALP can only be determined on value of
Industries India (P.) Ltd. international transactions alone and not on
entire turnover of assessee at entity level.
-So long as expenditure or payment has been
demonstrated to have incurred or laid out for
purpose of business, it is no concern of TPO to
disallow same on any extraneous reasoning.
-TPO cannot determine ALP at nil as
jurisdiction provided to him is to determine
ALP of transactions under methods provided
under the Act.
19-July-14 243
19-July-14 244
Diageo India Pvt Ltd DCIT AMP expenses incurred, resulting in brand
promotion of foreign AE is an international
transaction, triggering transfer pricing
mechanism.
Ford India Pvt Ltd DCIT -Carrying logo of its AE resulting brand building
for its AE in India is an international
transaction.
-Excess AMP expenditure incurred in
comparison to its comparables only could be
treated as expenditure towards brand
development.
-Half of product development expenditure
which benefited its AE is not allowable.
Hinduja Global ACIT Where it could not be proved that assessee
Solutions Ltd had incurred interest on funds advanced to AE,
it could not be held that borrowed funds were
source of loans, merely because some interest
had been paid by assessee in immediately
preceding year.
19-July-14 245
19-July-14 246
Nestle India Ltd. ITAT Delhi Disallowance of royalty payment to parent
company is not justified on the ground that it
was not incurred wholly and exclusively for
business.
Stratex Net Works CIT Installing and commissioning services could
(India) (P.) Ltd. not be deemed to be international
transactions. Thus, operating cost of these
services could not be considered for TP
adjustment.
Vijai Electricals Ltd ACIT Transfer pricing provisions do not apply to
following:
(i) to an investment in share capital of
overseas companies and
(ii) to transactions where no “income” has
arisen under the provisions of Income Tax
Act, 1961
19-July-14 247
19-July-14 248
Chrys Capital ITAT Delhi Non-operating income to be excluded in
Investment Advisors determining the profit margin under TNMM.
(India) Pvt. Ltd.
Four Soft Ltd. ITAT Hyderabad For computing net margin, only cost related to
transactions with AE to be considered.
Exchange fluctuations also to be considered.
Redington (India) Ltd. ACIT Under CUP method, what is required is a
comparison with actual sale and purchase with
unassociated enterprise or transaction
between unassociated enterprises.
CLSA India Ltd DCIT Payment of royalty to its foreign AE at certain
percentage of net profit for using its
tradename, TNM method should have been
adopted
Denso India Ltd ACIT Purchases of RM from its AE and from
uncontrolled enterprises operating in domestic
market and there is product comparability,
CUP method is most appropriate method
Il Jin Electronics (India) ITAT Delhi Proportionate adjustment under TNMM on the
Pvt. Ltd ratio of international transaction with AE’s to
19-July-14
transaction with non-AE’s. 249
Assessee / Judicial Short point of ruling
Taxpayer forum
Schefenacker ITAT Delhi Depreciation cost may be adjusted to eliminate material
Motherson Ltd differences in ‘asset’ profile
ACIT vs. Wockhardt ITAT Mumbai TNMM refers only to net margin realized by from
Ltd. international transactions but not operational margins of
enterprise as a whole.
ACIT vs. Frost & ITAT Mumbai No basis for excluding only loss making comparables and
Sullivan Pvt. Ltd not excluding high profit margin comparables or
companies which are not at all comparables based on
size, turnover and other factors.
Ranbaxy Labs & ITAT Delhi Selection of overseas comparable may be allowed
Development provided such data is available in public domain.
Consultants
Aztec Software & ITAT SB All characteristics of controlled transaction which are
Technology likely to affect its open market value must be taken into
account
19-July-14 250
Hyundai Motor India ACIT Where products of comparable companies did
Ltd not have even a distant relation to products
sold out, those companies could not be
accepted as comparables
Mattel Toys (I) (P.) Ltd. DCIT Resale price method is most appropriate
method where resale takes place without any
value addition to product
Hellosoft India Pvt Ltd DCIT TPO can select any other method as more
appropriate for determining true income, even
if assessee has chosen one of methods
Reebok India Co. ACIT If the difference is less then 5% between net
profit margin as per assessee and determined
by TPO, no addition in ALP
SAP Labs India (P.) Ltd. ACIT Bangalore If two prices are determined by most
appropriate method (MAM) then:
1st Step: Take arithmetical mean of such prices
as arm's length range.
2nd Step: Only after arriving at arithmetical
mean, adjustment of ± 5 per cent (3% w.e.f.
01/04/2013) can be done.
19-July-14 251
PROBLEMS WITH INDIAN TP
 No proper Documentation.
 Grossly improper comparables being used.
 No clear method or quantification for adjustments.
 Disparate Data sources are a bone of contention.
 Documentation requirement overload.
 Lack of knowledge and skill-set.
 Growth of “intangible” economy ignored completely..
 Overburdening of taxpayer.
19-July-14 252
SOLUTIONS
 Use inter-quartile range instead of arithmetic mean.
 Allow multiple year period data across the board.
 Allow foreign comparables, allow foreign AE as tested parties.
 Provide clear guidance on adjustments specifically risks, idle capacity and

depreciation and working capital.
 Prescribe clear turnover range filters for comparables.
 Do not reject loss-making comparables outright.
19-July-14 253
 Allow technical expert reference for selecting functionally similar
comparables.
 Ameliorate the data gathering system by the TPO and mandatorily involve
the assessee at every step.
 Use Advance Pricing Agreements (APA’s)

 APA’s were recently introduced and are a welcome addition.
 MAP process should be pursued more and made time-bound and

effective.
19-July-14 254
BIBLIOGRAPHY
 www.transferpricing.com
 Transfer Pricing Manual, BCA
 www.incometaxindia.gov.in
 Guidance Note on TP
 www.taxmann.com
 www.oecd.org
19-July-14 255
19-July-14 256
19-July-14 257
PROWESS
19-July-14 258
PROWESS
19-July-14 259
PROWESS
19-July-14 260
PROWESS
19-July-14 261
PROWESS
19-July-14 BACK262
CAPITALINE
19-July-14 263
CAPITALINE
19-July-14 264
CAPITALINE
19-July-14 265
CAPITALINE
19-July-14 266
CAPITALINE
19-July-14 267
CAPITALINE
19-July-14 BACK268

Transfer Pricing PPT 190714 Final

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Transfer Pricing PPT 190714 Final

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TRANSFER PRICING

19th July, 2014

Due to the increasing trend in globalization of Indian business,

* FICCI presentation on transfer pricing, October, 2012

What is the extent of the double tax treaty network?

The basic objective of DTAA :

• Avoid double taxation of income in both the countries.

India has the following agreements except the

 DTAA Limited agreements – With respect to income of airlines/ merchant

 Limited Multilateral Agreement – with 8 countries.

 DTAA Other Agreements/Double Taxation Relief Rules – 3.

 Specified Associations Agreement with Taipei.

 Tax Information Exchange Agreement – with 10 countries.

 Transfer Pricing is a term used to

“The prices at which an enterprise

 Transfer Pricing provisions were

Effective date of transfer pricing

92 Computation of income from international transaction having regard to arm’s

92A Meaning of associated enterprise

92B Meaning of international transaction

92BA Meaning of domestic transaction

92C Computation of arm’s length price

92CB Power of Board to make Safe Harbour Rules

92CC Advance Pricing Agreement

92CD Effect to Advance Pricing Agreement

92D Maintenance and keeping of information and document by persons

92E Report from an accountant to be furnished by persons entering into

92F Definitions of certain terms relevant to computation of arm’s length price,

 Rule 10A : Definitions.

“Where a business is carried on between a resident and a non-

The definition also

Thus in conclusion, it is a transaction between two or more associated enterprises, either

The basic criterion to determine associated

The participation may be direct or indirect

If Enterprise Y is managed, controlled or owned by

Indirect Control through Intermediary

Enterprise X Intermediary Enterprise Y

If Enterprise Y is managed, controlled or owned by

Participation/ Control/ Management

Mr. X & Mr. Y

Mr. X & Mr. Y control Enterprise X & Enterprise Y.

Control Of Voting Power

Enterprise X controls 26 % OR MORE of shares

Control Of Voting Power

Enterprise Y and Enterprise Z are AE’s.

Enterprise X has given a Enterprise X

Loan by X to Y is not less

Therefore, X & Y are AE’s.

Guarantee of Debts not Less

Control over Board of

Control over Board of Directors/

Control over Sale Price.

 Domestic Transfer Pricing is applicable only where value of Specified Domestic

 The threshold for substantial interest to qualify as ‘specified persons” is 20% or

• There is need to provide objectivity in determination of income and determination

• There is need to create legally enforceable obligation on assessee to maintain

iii. any transfer of goods or services referred to in sec 80-IA(8);

vi. any other transaction as may be prescribed,

Transactions between undertakings, to which

Indian Co. Related Enterprise in

Tax Exemption Tax @ 32.45%

Tax Saving for the Group – Loss to Indian revenue

• where the assessee is a member of HUF / director of the company /