BY CA MAYUR B NAYAK 1

Transcription

1 BY CA MAYUR B NAYAK 1

2 Govt. should collect taxes from citizens the way a Bee collects Honey from the flowers - quietly without inflicting pain". -Chanakya BY CA MAYUR B NAYAK 2

3 Financial Year Transfer pricing adjustments done in India No. of TP audits completed No of Adjustment cases % of Adjustment cases Amount of Adjustment (Rs. In Crore)

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6 Introduction with effect from 1 st April 2012 Specified Domestic Transactions (SDT) between related parties exceeding Rs. 20 crore SDTs subject to Transfer Pricing Regulations as applicable to International Transactions Bench mark transactions using methods prescribed for Arm s Length Price (ALP) BY CA MAYUR B NAYAK 6

7 The genesis of DTP can be traced to the Supreme Court s decision in case of CIT v. Glaxo Smithkline Asia Pvt. Ltd. [26 th Oct. 2010] Existing provisions to curb the misuse of tax holiday provisions were arbitrary and insufficient. New provisions are expected to provide certainty and methods for determining ALP. Protecting the revenue of the Indian Government. BY CA MAYUR B NAYAK 7

8 CIT v. Glaxo Smithkline Asia Pvt. Ltd Facts Glaxo SmithKline (Asia) Reimbursement of cost* plus 5% Provides Finance, Marketing, Hr related Services Glaxo Smith Kline Consumer Healthcare Ltd ( GSKCH ) NOT Covered u/s 40A(2) *Cost towards services suggested by Firm of CAs BY CA MAYUR B NAYAK 8

9 Assessing Officer s Contention The reimbursement of cost by assessee is excessive or unreasonable and not for business purpose. Thus, he was of the opinion that part of the charges reimbursed is to be disallowed Held That No interference is called for as this exercise is revenue neutral Tribunal deleted the disallowance on the ground that there was no provision to disallow expenditure on the ground that it was excessive or unreasonable unless the case of the assessee falls within the scope of section 40A(2) BY CA MAYUR B NAYAK 9

10 COMPANY A - DISTRIBUTOR OF ROUGH DIAMONDS Goods/ Services TRANSFER SHOULD BE DONE AT ALP AE OF A COMPANY B MANUFACTURER OF POLISHED DIAMONDS USA INDIA AE Associated Enterprise ALP Arm s length price BY CA MAYUR B NAYAK 10

11 INDIA INDIA Shifting of Expenses/ Losses Company A Enjoying tax holiday - SEEPZ Related enterprise- Company B in Domestic tariff Area Shifting of Income/ Profits Tax Saving to the Group - Loss to Indian Revenue BY CA MAYUR B NAYAK 11

12 Particulars Co. A (Tax holiday) Income Income from related party Expenses Expense to related party CASE 1 : ALP - Co. B (Normal rates of tax) 200 Profit/ Loss Tax rate applicable 0% 32.45% Tax (200*32.45%) Tax to the group Particulars CASE 2 : Non ALP Co. A (Tax holiday) Income Income from related party Expenses Expense to related party Profit/ Loss Co. B (Normal rates of tax) 400 Tax rate applicable 0% 32.45% Tax - - Tax to the group NIL Tax saving to group- Loss to Indian Revenue BY CA MAYUR B NAYAK 12

13 Intent of TP Regulations INDIA INDIA Shifting of Expenses/ Losses Company A Loss Making Related enterprise- Company B in Domestic tariff Area Shifting of Income/ Profits Tax Saving to the Group - Loss to Indian Revenue BY CA MAYUR B NAYAK 13

14 CASE 1: ALP NORMAL RATE OF TAX APPLICABLE TO BOTH THE COMPANIES (Both Cos. are in DTA) CASE 2 : Non ALP Particulars Co. A Co. B Particulars Co. A Co. B Income Income from related party Expenses Expense to related party Profit/ Loss (200) 200 Tax rate applicable 32.45% 32.45% Tax (200*32.45%) Tax to the group Income Income from related party Expenses Expense to related party Profit/ Loss (100) 100 Tax rate applicable 32.45% 32.45% Tax (100*32.45%) Tax to the group BY CA MAYUR B NAYAK

15 any expenditure in respect of which payment has been made or is to be made to a person referred to in 40A(2)(b) any of these transactions, not being an international transaction any transaction referred to in section 80A any transfer of goods or services referred to in section 80-IA(8) any business transacted between the assessee and other person as referred to in 80-IA(10) any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which provisions of section 80-IA(8) or 80 IA(10) are applicable any other transaction as may be prescribed Y CA MAYUR B NAYAK aggregate of such transactions in the previous year exceeds a sum of twenty crore rupees 15

16 Section 40A(2)(b)(i): any relative ASSESSEE (INDIVIDUAL) RELATIVE Section 40A(2)(b)(ii): any director of the co. or any relative of such director COMPANY DIRECTOR MR. A RELATIVE MRS. A Covered transaction BY CA MAYUR B NAYAK 16

17 ASSESSEE 20% or more voting power or profits INDIVIDUAL HAVING SUBSTANTIAL INTEREST MR. A RELATIVE OF MR. A Covered transaction Section 40A(2)(b)(iii): Any individual or relative of the individual having substantial interest in the business or profession of the assessee BY CA MAYUR B NAYAK 17

18 ASSESSEE 20% or more voting power or profits COMPANY A HAVING SUBSTANTIAL INTEREST Covered transaction DIRECTOR MR. B RELATIVE OF MR. B COMPANY C COMPANY A HAVING SUBSTANTIAL INTEREST 20% or more voting power or profits Section 40A(2)(b)(iv): any company having substantial interest in business or profession of the assessee or director of such company or any relative of such director or any other Co. in which first mentioned Co. has substantial interest BY CA MAYUR B NAYAK 18

19 ASSESSEE 20% or more voting power or profits MR. A HAVING SUBSTANTIAL INTEREST- DIRECTOR OF COMPANY A RELATIVE OF MR. A Covered transactions ANY OTHER DIRECTOR OF COMPANY A - MR. B RELATIVE OF MR. B Section 40A(2)(b)(v): A company of which a director has a substantial interest in business or profession of the assessee or any director of such company or any relative of such director BY CA MAYUR B NAYAK 19

20 ANY PERSON HAVING BUSINESS OR PROFESSION 20% or more voting power or profits ASSESSEE MR A HAVING SUBSTANTIAL INTEREST OR RELATIVE OF MR A HAVING SUBSTANTIAL INTEREST Section 40A(2)(b)(vi): (A) any person who carries on a business or profession where the assessee (individual) or any relative of such individual has substantial interest BY CA MAYUR B NAYAK 20

21 ANY PERSON HAVING BUSINESS OR PROFESSION 20% or more voting power or profits 20% or more voting power or profits 20% or more voting power or profits ASSESSEE COMPANY A HAVING SUBSTANTIAL INTEREST OR DIRECTOR OF COMPANY A -MR B HAVING SUBSTANTIAL INTEREST OR RELATIVE OF MR. B - HAVING SUBSTANTIAL INTEREST Section 40A(2)(b)(vi): (B) any person who carries on a business or profession where the assessee (company) or any director or any relative of such director has substantial interest BY CA MAYUR B NAYAK 21

22 Co. A Co. B Co. C Co. D Co. E BY CA MAYUR B NAYAK 22

23 Co. A & Co. B =? Co. A & Co. C =? Co. B & Co. C =? Co. B & Co. D =? Co. C & Co. E =? Co. A & Co. D =? Co. A & Co. E =? Co. D & Co. E =? Co. C & Co. D =? Co. B & Co. E =? BY CA MAYUR B NAYAK 23

24 Anti-avoidance provision Transactions of goods or services by the assessee between its two businesses one of which is eligible for a tax holiday and the other not so eligible must be at market value Rationale - To prevent assessee from inflating profits in a tax holiday unit, undertaking or a company and showing losses in non-tax holiday enterprises. BY CA MAYUR B NAYAK 24

25 Where any goods or services held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or 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, in either case, the consideration, if any, for such transfer as recorded in the accounts of Where it appears to the assessing officer that, owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the the eligible business does not ordinary profits which might be correspond to the market value of such goods or services as on the date transfer, then, for the purpose of the expected to arise in such eligible business, the Assessing Officer shall, in computing the profits and gains of deduction under this section, the such eligible business for the profits and gains of such eligible business shall be computed as if the transfer, in either, had been made at the market value of such goods or services as on that date. purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom. 25 BY CA MAYUR B NAYAK

26 Applicability: Goods or services held by the eligible business are transferred to any other business carried on by the assessee or goods or services held by any other business of the assessee are transferred to the eligible business. The consideration for such transfer as recorded in the accounts of the eligible business must correspond to the market value of such goods or services. BY CA MAYUR B NAYAK 26

27 In relation to any goods or services sold or supplied (Table A) The price that such goods or services would fetch if these were sold by the undertaking or unit or enterprise or eligible business in the open market, subject to statutory or regulatory restrictions, if any. In relation to any goods or services acquired (Table B) The price that such goods or services would cost if these were acquired by the undertaking or unit or enterprise or eligible business from the open market, subject to statutory or regulatory restrictions, if any. For value > Rs. 20 Crore (Table C) In relation to any goods or services sold, supplied or acquired means the arm's length price as defined in clause (ii) of section 92F of such goods or services, if it is a specified domestic transaction referred to in section 92BA. Provisions of Table A and B would continue to apply to all transactions below Rs. 20 Cr. as provisions of DTP would apply to transactions exceeding Rs. 20 Cr. w.e.f. A.Y BY CA MAYUR B NAYAK BACK 27

28 FMV ALP No method Documentation is not required Tax Audit report Assessing Officer Six methods Documentation is required Report of an accountant to be furnished u/s 92E BY CA MAYUR B NAYAK 28

29 Eligible business : Eligible Business means business by an undertaking, unit or an enterprise which is eligible for the deduction under this section. This section provides 100% tax break for ten consecutive assessment years out of fifteen years beginning from the year in which the undertaking or the enterprise develops or operates and maintains or develops, operates and maintains any infrastructure facility or telecommunication services Industrial park or special economic zone generates power or commences transmission or distribution of power or undertakes substantial renovation and modernization of the existing transmission and distribution lines. BY CA MAYUR B NAYAK BACK 29

30 If the consideration is not at market value : For the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods or services as on that date. BY CA MAYUR B NAYAK 30

31 Section 80 IA(8) : Section 80-IA (10): Transactions between eligible and non- eligible businesses of the same assessee Business transacted with any person by an assessee carrying on eligible business generates more than ordinary profits owing to the close connection between them SDT amounting to more than Rs. 20 crore: The discretionary powers of AO are replaced and provided that ALP as defined in section 92F(ii) would be applicable SDT amounting to less than Rs. 20 crore: Discretionary powers of the AO would continue to apply. BY CA MAYUR B NAYAK 31

32 Sr. No. Section Particulars (i) 10A Special Provisions in respect of newly established undertakings in Free Trade Zone, etc. (ii) 10AA Special Provisions in respect of newly established undertakings in Special Economic Zones. (iii) 10B Special Provisions in respect of newly established hundred per cent export oriented undertakings. BY CA MAYUR B NAYAK 32

33 Sr. No. Section Particulars (iv) 80-IA Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development etc. Nature of Tax Payer covered: Infrastructure developers. Developers of Industrial park. Telecommunication service providers. Producers or distributors of power. BY CA MAYUR B NAYAK 33

34 Sr. No. Section Particulars (v) 80-IB Deductions in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings. Nature of Tax payer covered: Small scale industry engaged in operating Cold storage plant Company carrying on scientific research and development Multiplex theaters and convention centre Industrial undertaking in Industrially backward state as mentioned in VIII Schedule (ex: Jammu and Kashmir ) Eligible housing projects. Eligible hospitals. Eligible Hotels Commercial production of mineral oil and Natural Gas 34 BY CA MAYUR B NAYAK

35 Sr. No. Section Particulars (vi) 80-IAB Deductions in respect of profits and gains by an undertaking or enterprise engaged in development of Special Economic Zone. (Nature of Tax payer - Developers of SEZ) (vii) 80-ID Deductions in respect of profits and gains from business of hotels and convention centres in specified area. (viii) 80-IE Special Provisions in respect of certain undertakings in North- Eastern States. (ix) 80JJA Deductions in respect of profits and gains from business of (x) collecting and processing of bio-degradable waste. 80JJAA Deductions in respect of employment of new workmen. BY CA MAYUR B NAYAK 35

36 Summary of Coverage of Domestic Transfer Pricing Section Coverage Transactions with 40A(2) Expenditure Related Parties as defined 80A and 80IA(8) Income and Expenditure Between Different Business units of same tax payer 80IA (10) Profits Close Connection BY CA MAYUR B NAYAK 36

37 Safe Harbour Rules BY CA MAYUR B NAYAK 37

38 Overview The Central Board of Direct Taxes (CBDT) has released a new set of simplified Transfer Pricing (TP) documentation Rules for domestic transactions Safe harbour means circumstances in which the income tax authorities shall accept the transfer price as declared by the assessee. BY CA MAYUR B NAYAK 38

39 Overview 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 3CEFAB on before due date for filing return of income. The safe harbour rules are valid for each assessment year in which the eligible assessee has entered into eligible SDT and it is treated as validly exercised. BY CA MAYUR B NAYAK 39

40 Rules for Safe Harbour Rules 10 TH- Definitions 10 THA- Eligible Assessee 10 THB- Eligible Specified Domestic Transactions 10 THC- Safe Harbour 10 THD- Procedure BY CA MAYUR B NAYAK 40

41 Which are the Eligible Domestic Transactions? Rule 10THB : Eligible Specified Domestic Transaction means a specified domestic transaction undertaken by an eligible assessee and which comprises of i. Supply of Electricity ii. iii. iv. Transmission of Electricity Wheeling of electricity Purchase of milk or milk products by a co-operative society from its members. BY CA MAYUR B NAYAK 41

42 Who are the Eligible Assessee? Rule 10THA: The eligible assessee means a person who has exercised a valid option for application of safe harbour rules in accordance with the provisions of rule 10THC and i. Is a government company engaged in the business of generation, supply, transmission or distribution of electricity ii. Is a co-operative society engaged in procuring and marketing milk and milk products BY CA MAYUR B NAYAK 42

43 Evaluation of Transactions Sr. No. Eligible specified Transactions 1 Supply of Electricity, transmission of electricity, wheeling of electricity referred in clauses (i), (ii) or (iii) of rule 10THB, as the case may be Safe Harbour Ratios The tariff in respect of supply of electricity, transmission of electricity, wheeling of electricity, as the case may be, is determined [or the methodology for determination of the tariff is approved] by the Appropriate Commission in accordance with the provisions of the Electricity Act, 2003 (36 of 2003). BY CA MAYUR B NAYAK 43

44 Evaluation of Transactions Sr. No. Eligible specified Transactions 2 Purchase of milk or milk products as referred to in clause (iv) of Rule 10THB Safe Harbour Ratios The price of milk or milk products is determined at a rate which is fixed on the basis of the quality of milk, namely, fat content and Solid Not FAT (SNF) content of milk ; and (a) The said rate is irrespective of the,- (i) the quantity of milk procured; (ii) the percentage of shares held by the members in the cooperative society; (iii) the voting power held by the members in the society; and (b) Such prices are routinely declared by the cooperative society in a transparent manner and are available in public domain BY CA MAYUR B NAYAK 44

45 Some Important Points 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). The provisions of section 92D and 92E apply irrespective of the fact that the assessee has opted for safe harbour rules. BY CA MAYUR B NAYAK 45

46 Procedure : Filing of Form 3CEFB AO verifies whether Eligible Assessee Eligible Specified Transaction DOUBTFUL Yes Safe Harbour option available AO will provide notice for submission of required documents inadequate Adequate Safe Harbour option available Option to file objection to Principal Commissioner within 15 Days Principal Commissioner passes appropriate orders within 2 months BY CA MAYUR B NAYAK 46

47 Section 92CA(1): Assessing Officer (AO) may refer the computation of ALP to the TPO with the previous approval of the Commissioner. Section 92CA(2): TPO shall issue a notice to the assessee requiring him to produce any evidence in support of the computation of ALP. Section 92CA(3): TPO shall by order in writing, determine the ALP and send a copy to the AO and to the assessee. BY CA MAYUR B NAYAK 47

48 Section 92CA(3A): An order under sub-section (3) may be made by TPO at any time before 60 days prior to the date on which the limitation under section 153 or 153B expires. Provided that if the period of limitation available to TPO is less than 60 days then such remaining period shall be extended to 60 days. Section 92CA(4): The AO shall proceed to compute the total income of the assessee in conformity with the ALP as so determined by the TPO. BY CA MAYUR B NAYAK 48

49 Section 92CA(7): The following powers of a TPO are also applicable to domestic transactions: Section 131(1):Powers regarding discovery and inspection, summons, production of evidence, issuing commission. Section 133A: Power of survey. Section 133(6): Power to call information. BY CA MAYUR B NAYAK 49

50 Section 144C(15)(b): Reference to Dispute Resolution Panel(DRP) AO shall forward a draft of the proposed order of assessment to the eligible assessee if he proposes to make any variation in the income or loss returned which is prejudicial to his interest. Here eligible assessee means any person in whose case order u/s 92CA is passed BY CA MAYUR B NAYAK 50

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52 Relating to the assessee enterprise Description of the ownership structure Profile of the multinational group of which the assessee is a part Broad description of the business and the industry Nature and Terms (including prices) of SDT entered into with each associate Enterprise Description of the Functions preformed, Assets employed, and Risks assumed i.e. (FAR Analysis) Record of the economic and market analyses, forecasts, budgets or any other financial estimates Record of uncontrolled transactions for analyzing comparability BY CA MAYUR B NAYAK 52

53 Relating to the Associated enterprise (AE) Broad description of the business and the industry Description of the functions preformed, risks assumed and assets employed Relating to ALP Description of methods considered for determining the ALP Record of the actual working carried out for determining the ALP Assumptions, policies and price negotiations, if any Details of adjustments BY CA MAYUR B NAYAK 53

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55 Identification of SDTs Analyzing the legal structure of the Group Obtaining a list of related parties Verifying the list of transactions with related parties maintained by the assessee Verifying Board minutes for increase in investment in group companies/ other companies that could lead to substantial interest. Verifying the transactions with the related parties in accordance with the provisions of Specified Domestic Transactions under Section 92BA. Verifying sample copy of invoices, debit notes, ledger accounts of related parties and other back up documents. BY CA MAYUR B NAYAK 55

56 Implications of SDTs Review the agreements/ documents in support of the current inter company pricing/ allocations Analyze whether the current pricing policy of the group are in line with the Arm s Length principle Technical assessment of the arrangements to evaluate applicability of SDT provisions and possible approach for establishing ALP for the arrangements where SDT applies BY CA MAYUR B NAYAK 56

57 Further steps: Classification of SDT Conducting FAR Analysis Selection of appropriate method Benchmarking BY CA MAYUR B NAYAK 57

58 BY CA MAYUR B NAYAK 58

59 Section Impact Quantum of Penalty 271AA Failure to maintain any information or documents as required u/s 92D(1) or 92D(2) Failure of reporting a transaction Maintaining or furnishing an incorrect information or document 2% of the value of transaction 271G Failure to furnish information or document u/s 92D(3). 271BA Failure to furnish a report of an accountant as required by 92E 271(1)(c) Adjustment to tax payer s income during assessment 2% of the value of transaction Rs. 1,00, % to 300% of tax on adjusted amount BY CA MAYUR B NAYAK 59

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61 Resale Price Method (RPM) Cost Plus Method (CPM) Profit Split Method (PSM) Transactional net margin method (TNMM) Comparable Uncontrolled Price Method (CUP) Determination of ALP such other method as may be prescribed BY CA MAYUR B NAYAK 61

62 Comparable - Price Most direct method for determination of ALP Classified into Internal CUP and External CUP Method will be applicable in case of Similar Products, Similar conditions Most appropriate method in case of the following: Interest charged on loan Sale and Purchase of goods and services Royalty payment Commission BY CA MAYUR B NAYAK 62

63 Direct method Comparable - Gross Income Method will be applicable in case of Similar functions, Similar product group Most appropriate method in case where the controlled party is a Distributor BY CA MAYUR B NAYAK 63

64 Comparable Gross Income Method will be applicable in case of Most appropriate method in case of the following: Similar functions Similar product group Sale of finished / semifinished goods or services BY CA MAYUR B NAYAK 64

65 Comparable Profit Most appropriate method in case of the following: Joint Research and Development Development of joint Intellectual Property Rights Certain Financial Transactions BY CA MAYUR B NAYAK 65

66 Comparable Operating Income Most appropriate method in case of the following: Manufacture / distribution of finished goods Provision of services BY CA MAYUR B NAYAK 66

67 BY CA MAYUR B NAYAK 67

68 Transactions Appropriate method Documentation required Issues 1) Purchase of Goods Comparable uncontrolled price (CUP) method CUP analysis along with supporting documentation Agreement/ invoices between the parties _ 2) Salary and Bonuses paid to the partners 3) Interest payment Whether the limit as per Section 40(b) will be appropriate for determination of ALP? Comparable uncontrolled price (CUP) method Benchmarking study of Interest rates Agreement between the parties Source of funds BY CA MAYUR B NAYAK 68 _

69 Various Transactions and their appropriate method for determining ALP and issues Transactions Appropriate method Documentation required Issues 4) Remuneration and Sitting fees paid to the Directors _ Approvals from remuneration committee and general meeting for managerial remuneration Whether the limit as per Chapter XIII of Companies Act will be appropriate or determination of ALP? 5) Reimbursement of expenses _ Copy of invoices raised on third parties for which costs are reimbursed 6) Rent payment _ Agreement between the parties BY CA MAYUR B NAYAK 69

70 As per the definition of related parties of Section 40A(2)(b) Direct relations OR Indirect relations? In case of transfer of land whether rates mentioned in ready reckoner considered as ALP? Apprehensions are expressed about nonavailability of comparative data for determination of ALP Will DTP reduce or increase litigation? BY CA MAYUR B NAYAK 70

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72 Maintaining and keeping information and documents Arm s Length Price Filing of Form 3CEB Losing excessive income tax benefits Possibility of double taxation Assessment by Transfer pricing officer (TPO) Penalty BY CA MAYUR B NAYAK 72

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74 An Indian company having substantial interest of more than 20% in a Company outside India but less than 26%. Provisions of International Transfer Pricing will not be applicable on transactions between the two companies, but will provisions of Domestic Transfer Pricing applicable? BY CA MAYUR B NAYAK 74

75 Company XYZ has entered into the following transactions : Rent given to Company A ( substantial interest of Company XYZ) Rs. 5 crore Remuneration paid to Director and Managing Director Rs. 6 crore Sold goods to Company B (substantial interest of Company A) Rs. 10 crore Will DTP provisions be applicable? BY CA MAYUR B NAYAK 75

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