The Chamber of Tax Consultants

Transcription

1 The Chamber of Tax Consultants 3 rd Domestic Transfer Pricing Conference Tax incentives and domestic transfer pricing Sanjay Kapadia Assisted by Nisha Shah 19 October 2013

2 Meaning of Specified Domestic Transaction (SDT) Section 92BA of the Income-tax Act, 1961 ( Act ) defines Specified Domestic Transaction" as any transaction, not being an international transaction, namely: i. any expenditure for which payment is to a person referred to in Section 40A(2)(b); ii. any transaction referred to in Section 80A; iii. iv. any transfer of goods or services referred to in Section 80-IA(8); any business transacted between the assessee and other person under Section 80-IA(10); v. any transaction, under Chapter VI-A or Section 10AA, if Section 80-IA(8) or Section 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 Rs 5 Crores Page 2 19 October 2013

3 Examples of tax incentive provisions covered Section 80-IA Description Infrastructure development Production / Distribution of power Telecom services 80-IAB 80-IB(11C) 80-IC 80-IE 10AA Industrial park development Development of SEZ Operating and maintaining a hospital located anywhere in India Industrial undertakings or enterprises in special category states Undertakings in North-Eastern states Newly established units in SEZ Page 3 19 October 2013

4 Overview of Section 80A(6), 80-IA(8) and 80-IA(10) Page 4 19 October 2013

5 Section 80A(6)/80-IA(8) coverage Intends to cover inter unit transfers Covers cases where taxpayer is entitled to deduction under Chapter VI-A, Section10AA in respect of undertaking or unit or Enterprise, where: Goods or services held for the purpose of eligible business are transferred to any other business, Goods or services held for the purpose of any other business transferred to eligible business, Key elements : Goods or Services Held for the purpose of business of the unit and other business Transfer of goods or services Page 5 19 October 2013

6 Section 80A(6)/80-IA(8) coverage Activities which are not carried on as business HO expenses including IT support, accounts, law compliance etc Use of corporate resources HO finance out of capital or accumulated profits Temporary use of funds Temporary use of capital assets Restricted to core activity Supply of power by captive power unit to the manufacturing unit Supply of intermediate goods to the unit manufacturing final goods Allocation of actual expenses and challenges around allocation keys HO overheads, sales promotion, finance cost etc If SDT applicable, adjustment at ALP; if not SDT, adjustment at FMV Page 6 19 October 2013

7 Summary : 80A(6)/80IA(8) Head Office (HO) Audit Fees Directors fees Payroll processing HO rent, etc. Eligible Unit 1 Eligible Unit 2 Non eligible unit Typical HO expenses relatable to the unit need fair and commercial allocation Normal GAAP If not a super specialty / commercial function no mark up needed Services / core functions rendered in the business will need to be at ALP Page 7 19 October 2013

8 Case study - inter-unit transfer of funds Case 1 Case 2 Company I Company I HO Non eligible Interest free loan given Unit Z Eligible unit HO Non eligible Surplus funds transferred for the use of non eligible unit Unit Z Eligible unit Case Study : Applicability of Section 80-IA(8) Page 8 19 October 2013

9 Inter unit transfers - Interplay of eligible and non-eligible unit A Co Implications of ALP adjustment between eligible and non eligible units Eligible Unit (Tax Holiday 100%) Non eligible Unit Applicability of Section 92C(4) Particulars Income GTI Deduction Total Income El Unit N EL Unit El Unit N EL Unit As returned by the taxpayer If AO enhances income of Unit P If AO reduces income of Unit P Nil Nil Nil 120 Page 9 19 October 2013

10 Voluntary TP adjustment in ROI Particulars Taxpayer (Eligible Unit) Taxpayer Post Voluntary TP adjustment AO Voluntary TP adjustment under Section 40A(2), profits eligible for tax holiday Purchase from related party GTI 200 (200+20) = 220 (200+20) = 220 Less : Deduction u/s10aa Taxable income Nil Nil 20 Page October 2013

11 Transaction covered under Section 80-IA(10) Needs to be a transaction with other person Ingredients which trigger invocation of Section 80-IA(10): Assessee carrying on eligible (tax holiday) business If it appears to AO Owing to close connection or otherwise Course of business arranged Transaction produces more than ordinary profit in tax holiday unit Key Points : Scope not restricted to goods or services Scope not restricted to Section 40A(2) persons Revenue > ALP does implies existence of more than ordinary profits. Page October 2013

12 Coverage of Section 80-IA(10) For A Co A Co Related Parties B Co (WOS) Domestic TP not applicable transaction is of income receipt, 40A(2) not triggered Sale of goods at cost < FMV Corporate Guarantee : NIL cost Free use of Trademark and Know-how or HO resources Tax Holiday Unit For B Co Covered by Section 40A(2)(b) and hence SDT. But, payment is at < FMV, no TP adjustments required. Section 80-IA(10) may still be invoked on the ground that arrangement leads to more than ordinary profits? Page October 2013

13 Section 80-IA(10) Close connection : meaning? More than ordinary profits : Applicability to loss? Concept of ordinary profits : wider concept than ALP Applicability to capital expenditure? Interplay between Section 40A(2) and Section 80IA(10) Page October 2013

14 Inter-corporate interest free loan Company I WOS 1 Interest free loan given for set up WOS 2 Eligible unit under section 80-IA Case Study : Applicability of Section 80-IA(10) Page October 2013

15 Case study Case study : Interplay between Section 40A(2) and Section 80-IA(10) Sr No Actual payment to related party under Section 40A(2)(b) ALP Inter-quartile range Disallowance under Section 40A(2)(a) Adjustment under Section 80-IA(10) ?? ?? ?? ?? Page October 2013

16 Determination of years of applicability of SDT Applicability of Domestic TP vis-à-vis commencement of initial assessment year Provisions apply from year of effective claim No choice available to Taxpayer (eg. 80-IC, 80-IE etc.) Choice available to Taxpayer (eg. 80-IA, 80-IAB ) SDT provisions to apply in year of tax holiday though, in loss Page October 2013

17 Case study Year Result of the Eligible undertaking Claim u/s 80-IA lodged in the ROI SDT applicable? 1-5 Losses No? 6-7 Losses No? 8-9 Profit Yes? Losses No? Profit Yes? Case study : In the context of Section 80IA Page October 2013

18 Losses after tax holiday eligibility Implications of TP applicability to losses Particulars Losses of eligible unit in Year 1 Profit of eligible unit in Year 2 Losses setoff in Year 2 Claim of deduction under Section 80-IA in Year 2 Scenario 1 : (100) 1000 (100) 900 Understated losses Scenario 2 : (500) 1000 (500) 500 Actual losses / ALP Incremental tax holiday 400 Page October 2013

19 Benchmarking basis TNMM Where TNMM being adopted, challenges on comparables Entity level or undertaking wise data availability in similar business as the undertaking Examples on benchmarking: Supply of non-marketable intermediate products by a non-eligible unit to SEZ eligible for deduction under Section 10AA Supply of components by a non-eligible unit to an eligible undertaking (engaged in assembly functions) claiming deduction under Section 80IC Where losses are being benchmarked, whether profit making companies will be considered comparable? Page October 2013

20 Whether other incentive sections covered Examples : Section 35AD(7), Section 10A(1A) Specific reference to Section 80A(6) and Section 80-IA(10) in the above sections Reference not made in Section 92BA of the Act Page October 2013

21 Other case studies Presentation title Page October 2013

22 Transfer of employees for Nil consideration Company Z Company I Transfer of few key employees of Company I at Nil Unit C SEZ These employees to form core team of the SEZ Transfer of few key employees at Nil value by Company I to Company Z which shall form core employee team of the SEZ Case Study : Applicability of Section 80-IA(10) Page October 2013

23 Slump sale Company I Company Z Unit A Non eligible Unit B Not eligible Slump Sale Unit C SEZ Post slump sale assets will be part a part of the eligible undertaking Case Study : Applicability of Section 80-IA(10) Page October 2013

24 Contact Details Sanjay L. Kapadia Partner, Transfer Pricing, Ernst & Young LLP, Mumbai Ph No: sanjay1.kapadia@in.ey.com Nisha Shah Associate Director, Transfer Pricing, Ernst & Young LLP, Mumbai Ph No: nisha.shah@in.ey.com All the views expressed during the presentation are personal opinions of the presenter and the presenter is not liable for any consequences arising out of reliance on the same Page October 2013

25 Thank You Page October 2013