CONTENTS. Introduction to Transfer Pricing. Transfer Pricing Litigation Statistics. Introduction to Domestic Transfer Pricing

Transcription

1 DOMESTIC TRANSFER PRICING

2 CONTENTS Introduction to Transfer Pricing Transfer Pricing Litigation Statistics Introduction to Domestic Transfer Pricing Section 40A(2)(b), 80IA(8) & 80IA(10) Relationships, Issues & Challenges Case laws on DTP prior to introduction of detailed DTP Regulations Domestic Transfer Pricing - Compliances Information and Documentation Requirements Transfer Pricing Compliances and Penalties on Default Applicability of TP Regulations to Domestic TP transactions Domestic Transfer Pricing Case Studies Page 2

3 INTRODUCTION TO TRANSFER PRICING

4 INTRODUCTION TO TRANSFER PRICING What is Transfer Pricing? OECD Guidelines defines Transfer Prices as the prices at which an enterprise transfers physical goods and intangibles or provide services to associated enterprises Thus, Transfer Pricing is a term used to refer to all inter company pricing arrangements between related enterprises Transfer Pricing provisions were introduced to prevent shifting of profits by MNCs from high tax rate jurisdiction to low tax rate jurisdictions to minimize tax cost at group level Page 4

5 EVOLUTION OF TRANSFER PRICING Year Events Occurred 1991 Integration of Indian economy with Global economy leading to increased cross border transactions March 1999 The Standing committee on Finance realized that existing tax provisions (Section 92) may not be effective to curb Transfer Pricing abuse in India November 1999 CBDT constitutes an Expert Group on Transfer Pricing for suggesting necessary amendments in the Act and regulatory framework January 2001 Expert Group submitted its report to CBDT February 2001 Finance Ministry introduces Chapter X to deal with transfer pricing issue with effect from AY (ie FY ) Page 5

6 TRANSFER PRICING REGULATIONS IN INDIA Any international transaction undertaken between associated enterprises would be subject to transfer pricing regulations and the transfer price charged/paid should be at arm s length The term international transaction is widely defined to cover almost all kinds of transactions Associated Enterprise is also defined to cover direct or indirect shareholding of more than 26% or various other criterions by way of participation in the management or control Indian Transfer Pricing regulations are based on OECD Guidelines but with some modifications Page 6

7 APPLICABILITY OF TRANSFER PRICING International Transaction purchase, sale, transfer, lease or use of tangible as well as Intangible property capital financing, including borrowings, lending, guarantees, deferred payments, etc arising during the course of business provision of services transaction of business restructuring or reorganization, irrespective of whether it has bearing on the profit, income, losses or assets of such enterprises at the time of the transaction or at any future date Page 7

8 APPLICABILITY OF TRANSFER PRICING Associated Enterprise which participated directly or indirectly, or through one or more intermediaries in Management or Control or Capital of the Other Enterprise in respect of which one or more persons participate directly or indirectly or through one or more intermediaries in Management or Control or Capital of two enterprises Associated Enterprise also include Deemed Associated Enterprises like: - one enterprise has direct or indirect shareholding carrying not less than 26% voting power in the other enterprise - one person holds 26% or more of the voting power in two enterprises - Others Page 8

9 APPLICABILITY OF TRANSFER PRICING Arm s Length Price Arm s length price means a price applied or proposed to be applied in a transaction between non Associated Enterprises in uncontrolled conditions Arm s length price can be determined by any of the following methods: Comparable Uncontrolled Price Method Resale Price Method Cost Plus Method Profit Split Method Transactional Net Margin Method Other Method as prescribed under Rule 10AB Where arm s length price is within 5% range of the transaction price, no adjustment is warranted but if it is beyond 5% range, adjustment is required to be made to the transfer price and benefit of 5% is not available (5% range is applicable for A.Y ). For A.Y onwards, tolerance range would be notified by the central government subject to maximum 3% Page 9

10 TRANSFER PRICING LITIGATION STATISTICS

11 TRANSFER PRICING LITIGATION STATISTICS For Assessment Year Number of Transfer Pricing audits completed Number of cases adjusted Percentage of adjustment cases Adjustment Amount (INR Crores) , % 1, , % 2, , % 3, , % 4, ,717 1,019 59% 9, ,102 1,089 52% 24, ,589 1,338 52% 44,500 Page 11

12 INTRODUCTION TO DOMESTIC TRANSFER PRICING

13 GLAXO SMITHKLINE CASE Decision of the H ble Supreme Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: i. where one of the related entities is loss making or ii. where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity The question of extending Transfer Pricing regulations to domestic transactions require expeditious consideration by the tax authorities Page 13

14 GLAXO SMITHKLINE CASE The CBDT should examine whether Transfer Pricing Regulations be extended to domestic transactions by making amendments to the Act Law can be amended to mandate the taxpayer to comply with Rule 10D Assessing Officer can be empowered to make adjustments to value of the transactions between the related parties based on methods of determination of arm s length price Based on the above observations of the H ble Supreme Court, the Finance Act, 2012 has extended the applicability of the transfer pricing provisions for specified domestic related party transactions Page 14

15 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 H ble Supreme Court, the Finance Act, 2012 has extended the applicability of the transfer pricing provisions for specified domestic related party transactions Page 15

16 SPECIFIED DOMESTIC TRANSACTIONS Section 40A Expenditure paid or to be paid to related party as defined under section 40A(2)(b) Section 80IA Inter unit transfer of goods and services as referred to in section 80IA(8) Section 80IA Transaction between the tax payer and any other person owing to close connection as referred to in section 80IA(10) where more than ordinary profits are earned by business unit claiming tax holiday/deduction Section 10AA Some examples of Specified Domestic Transactions Any transaction under Chapter VIA or Section 10AA to which the provisions of 80IA apply, ie: inter-unit transfers more than ordinary profits earned by tax holiday/ exemption unit Page 16

17 SPECIFIED DOMESTIC TRANSACTIONS COMMON TRANSACTIONS Payment for purchase of semi-finished goods Transfer of machinery, technology, etc Sharing of common costs Job work charges Payment of interest /royalty charges Transfer of goods from one unit to another (in specific cases) Some examples of Specified Domestic Transactions Payment made to key personnel/relatives Rent charged Page 17

18 THRESHOLD LIMIT & COVERAGE Domestic Transfer Pricing is applicable only where value of Specified Domestic Transactions crosses 5 Crs While computing the aggregate value of transactions: Value of the International transactions to be excluded Value of transactions between 2 units of the same company to be covered (when undertaken with a tax holiday unit) Inter-company transactions to be covered (when undertaken with a company having a tax holiday unit) Transactions with a person having a close connection as mentioned in section 80IA(10) to be covered Payment of expenses to related person defined under section 40A(2)(b) to be covered Aggregate Value of transaction below INR 5 Cr Aggregate Value of SDT above INR 5 Cr Page 18 Subject to existing tax laws Subject to Domestic Transfer Pricing regulations

19 DOMESTIC TRANSFER PRICING SECTION 40A(2)(b), 80IA(8) & 80IA(10) RELATIONSHIPS, ISSUES & CHALLENGES

20 TRANSACTIONS COVERED UNDER SECTION 40A(2)(b) Case-I: Director or any relative of Director Section 40A(2)(b)(ii) Relative: in relation to an individual, means the husband, wife, brother or sister or any lineal ascendant or descendant of that individual Mr. A Mr. B Mr. C Directors/ Partner/ Member Relative XYZ Covered Transactions under Domestic Transfer Pricing Cont Page 20

21 TRANSACTIONS COVERED UNDER SECTION 40A(2)(b) Case-II: To an individual who has substantial interest in the business of XYZ Ltd or relative of such individual Section 40A(2)(b)(iii) Relative Relative Mr. A Mr. B Mr. C Substantial interest > 20% XYZ Substantial Interest: The Beneficial owner of shares carrying not less than 20% of the voting power in the company Covered Transactions under Domestic Transfer Pricing Cont Page 21

22 TRANSACTIONS COVERED UNDER SECTION 40A(2)(b) Case-III: To a Company having substantial interest in the business of XYZ Ltd or Director of such company or any relative of Director Section 40A(2)(b)(iv) Relative Mr. B Mr. C Director A Ltd Substantial interest > 20% XYZ Covered Transactions under Domestic Transfer Pricing Cont Page 22

23 TRANSACTIONS COVERED UNDER SECTION 40A(2)(b) Case-IV: Any other Company carrying on business in which the first mentioned company has substantial interest Section 40A(2)(b)(iv) A Ltd Substantial interest > 20% B Ltd Substantial interest > 20% C Ltd Substantial interest > 20% XYZ Covered Transactions under Domestic Transfer Pricing Cont Page 23

24 TRANSACTIONS COVERED UNDER SECTION 40A(2)(b) Case V - To a Company of which a director has substantial interest in the business of XYZ Ltd or any other director of such company or relative of director - Section 40A(2)(b)(v) Relative Mr. B Mr. C Mr. D Director Director Substantial interest > 20% A Ltd XYZ Covered Transactions under Domestic Transfer Pricing Cont Page 24

25 TRANSACTIONS COVERED UNDER SECTION 40A(2)(b) Case-VI: To a Company in which XYZ Ltd has substantial interest in the business of the company - Section 40A(2)(b)(vi) XYZ Ltd Substantial interest > 20% B Ltd Covered Transactions under Domestic Transfer Pricing Cont Page 25

26 TRANSACTIONS COVERED UNDER SECTION 40A(2)(b) Case-VII: Any director or relative of a director of XYZ Ltd having substantial interest in that person - Section 40A(2)(b)(vi) Substantial interest > 20% Mr. C Relative Mr. B Substantial interest > 20% A Ltd D Ltd Director XYZ Covered Transactions under Domestic Transfer Pricing Back Page 26

27 TRANSACTIONS COVERED UNDER SECTION 40A(2)(b) b(iv) b(iii) Relative of Individual Individual (A) holding > 20% b(iii) b(v) b(v) b(v) b(v) Firm holding >20% AOP holding >20% HUF holding >20% Company in which A is Director AOP in which A is Member Firm in which A is Partner HUF in which A is member Partner Member Member Other Other Other Other Directors Members Partners Members Relative of Relative of Relative of Partner Partner Partner Relative of other Directors Relative of other Members b(ii) Relative of other Partner Relative of Directors b(vi) Relative of Other Members Director b(vi) b(ii) Taxpayer Company b(iv) b(iv) b(iv) Company holding >20% (HCo) Director Relative of Director Page 27 Any entity in which relative holds > 20% Any entity in which Director holds > 20% b(vi) Any entity in which Taxpayer holds > 20% Company in which HCo holds >20% b(iv)

28 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? Director s remuneration Benchmarking Issues Corresponding credit for tax neutral entities Page 28

29 TRANSACTIONS COVERED UNDER SECTION 80IA(8) A Ltd Unit A Telecom Business 80IA - Eligible Unit Goods and Services Unit B Manufacturing Business Taxable Unit Transfer at Rs 120 Market Value of above goods/ services is Rs 100 Thus, the ALP of the above transaction would be Rs 100 Page 29

30 TRANSACTIONS COVERED UNDER SECTION 80IA(10) A Ltd Infrastructure Business 80IA - Eligible Unit Goods and Services Close Connection B Ltd Trading Business Taxable Unit Operating Margin: 40% (Extraordinary Profits) Industry Average: 10% Thus, Arm s length profit margin would be taken as 10% Page 30

31 80IA(8) & (10) ISSUES AND CHALLENGES Issues in claiming corresponding credit when both units are eligible for tax holiday 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? Page 31

32 DOMESTIC TRANSFER PRICING CASE LAWS ON DTP PRIOR TO INTRODUCTION OF DETAILED DTP REGULATIONS

33 IN THE CONTEXT OF SECTION 40A(2) KR Motilal v. CIT (1999) (240 ITR 810) (Mad) The assessee engaged in the business of manufacture of three wheel cycles Payment of remuneration and commission to brothers of the assessee for providing technical and supervisory services The AO disallowed the same u/s 40A(2) ITAT held that: Part of the remuneration / commission paid to brothers is excessive and unreasonable and thus to be disallowed u/s 40A(2) since: The assessee was unable to justify possession of technical qualifications / technical skill by the brothers required to handle the job Unable to produce supporting to substantiate the technical experience of brothers Page 33

34 IN THE CONTEXT OF SECTION 40A(2) Mangal Chand Tubes Pvt. Ltd. v. CIT (1994) 208 ITR 729 (Raj) Payments to two directors for managing the operations for the same area The AO disallowed part of the payments made to one of the director u/s 40A(2) Rajasthan High Court upheld the AO s order and held that: The disallowance made by the AO is justified since one of the directors who was permanently stationed in the same region (Delhi) was looking after the day to day functions of the company and business needs of the company did not warrant payments to another director The assessee was unable to justify commercial rationale of making payments to both directors and how it benefited its operations Legitimate business needs of the company did not warrant incurrence of such expenditure Page 34

35 IN THE CONTEXT OF SECTION 80IA(8) Whether HO expenses are required to be allocated among units? ACIT v. Asea Brown Boveri Ltd. (2007) 110 TTJ 502 (Mum) It was held that HO expenses are required to be allocated since HO is a cost centre which is common to all the units. It does not exist for its own sake but its existence is relevant for all the activities undertaken by various divisions, units and profit centre Similarly, in the following cases, it was held that HO expenses are required to be allocated based on rationale allocation keys: CIT v. S T Micro Electronics Pvt. Ltd. (2011-TIOL-499-HC-DEL-IT) Wipro GE Medical Systems Ltd v. DCIT (2003) 81 TTJ 455 (Bang) Page 35

36 IN THE CONTEXT OF SECTION 80IA(10) M/s Tweezerman India Pvt Ltd Vs. Addl. CIT (2010-TII-45-ITAT-MAD-TP) The assessee (Indian Company) engaged in manufacturing of tweezers and eligible for 10B deduction exported 100% to its US AE TPO accepted the value of ITs at ALP and passed remark that Arm's length profit would be Rs lacs as against Rs. 1,251 lacs reported by the assessee AO invoked Section 10B(7) r.w.s.80ia(10) and reduced 10B deduction ITAT deleted the addition and held that: Section 80IA(10) does not give an arbitrary power to the AO and the AO has to specify as to why he feels that the profits of the assessee is shown at a higher figure Further, AO has to show as to how he has computed the ordinary profits which the assessee might be expected to generate AO has blindly taken a calculation for determining the ordinary profits which the assessee had given before the TPO and admitted it to be erroneous Page 36

37 IN THE CONTEXT OF SECTION 80IA(10) M/s Visual Graphics Computing Services (India) Pvt. Ltd Vs. ACIT (2012-TII-55-ITAT-MAD-TP) The assessee (Indian company), a subsidiary of US Company was engaged in preparing PowerPoint presentations and related software The assessee provided finance and accounting services to its AEs and adopted TNMM as the most appropriate method TPO held that the international transactions of the assessee are above ALP and no adjustment is called for. However, the AO reduced the quantum of eligible deduction u/s 10A to the extent of excess of price realised by the assessee over the ALP determined by the TPO as per section 10A(7) read with section 80IA(10) ITAT deleted the adjustment and held that: TP regime is different from regular computation of income Section 10A belongs to that part of regular computation of income and it should be computed independent of TP regulations and TP orders It is not permissible for the AO to work out section 10A deduction on the basis of ALP profit generated out of the order of the TPO Page 37

38 DOMESTIC TRANSFER PRICING COMPLIANCES

39 COMPLIANCE REQUIREMENTS FOR DOMESTIC TRANSFER PRICING Current Compliance Requirements Section 40A: Transactions to be reported in Tax Audit Report in Form 3CD Section 80IA: Declaration of profit to be made in CA Certificate in Form 10CCB Section 10AA: For claiming tax deduction, CA Certificate in Form 56F needs to be filed Additional Compliance Requirements Maintaining Contemporaneous Documentation as prescribed in Rule 10D and prove that transactions are at ALP by selecting the most appropriate method Filing audit report in Form 3CEB / any other Form may be prescribed Page 39

40 DOMESTIC TRANSFER PRICING PROCESS FLOW Identification of Specified Domestic Transactions Determination of ALP Voluntary Adjustments in Return (if any) FAR Analysis Selection of Most Appropriate Method Documentation, Return Filing and Form 3CEB Filing Identification of comparable transactions Establishing Comparability, adjustment for differences Assessment and Appellate Proceedings Page 40

41 VARIOUS METHODS FOR DOMESTIC TRANSFER PRICING Method Applicability PLI to be compared CUP RPM CUP method can be applied where reliable data of similar uncontrolled transaction between two unrelated parties or between related party and third party is available Where an enterprise purchases goods or services from a related party and sells them to unrelated parties without adding any substantial Prices Gross Profit Margins value to the product or services CPM Where there is transfer of semi finished goods between related parties Gross Profit Margins/ PSM TNMM Other Method as per Rule 10AB or in case of services In case of transfer of unique intangibles or in multiple inter-related transactions which cannot be evaluated separately for determining the arm s length price When all other methods for determining ALP fails and reliable comparable data with broad functional similarity is available Where the price which would be charged for similar transaction between unrelated parties is available (based on the valuation reports, genuine quotes available from independent parties, etc) Direct & Indirect Cost of Production / service Generally, operating Profit Margins Generally, operating Profit Margins Such would be Price Page 41

42 INFORMATION & DOCUMENTATION REQUIREMENTS

43 INFORMATION & DOCUMENTATION REQUIREMENTS Entity Related Group Profile (incl. organization structure) Indian Entity Profile (incl. description of transactions) Related Party Profile (incl. description of transactions) Industry Profile Price Related Transaction Terms Functional, Asset and Risk ( FAR ) Analysis Economic Analysis (selection of the most appropriate method, benchmarking and determining ALP) Transac ction Related Agreements Invoices Pricing related correspondence (letters, s, etc) Internal presentation & business plan Brochures & Catalogues Management s accounts & reports Page 43

44 COMMON TRANSACTIONS DOCUMENTATION Transaction entered Purchase/ sale of raw material Remuneration to Directors - Invoices - Purchase/ Sale order - Product details - Sale details if sold to 3rd Party - Qualification - Work Experience & Profile - Minutes of Meeting authorizing the director s remuneration Corporate cost sharing - Nature of expenses - Auditor s certificate allocating the expenses Documents to be maintained - Pricing strategy - Proof of price negotiation - Quotes from competitors - Terms of payment - Data from HR firms for Directors in the same line of business - Basis of allocation between the companies - Proof of usage (rendering) of services - Cost benefit analysis Page 44

45 COMMON TRANSACTIONS DOCUMENTATION Transaction entered Rent paid toward use of premises Reimbursement of expenses Interest on loan (nonfinancial services company) - Rent receipts - Documents suggesting the rent of the surrounding area Documents to be maintained - Rental agreement - Fair market value of the property (municipal valuation, only if higher than the actual rent paid) - Nature of expenses with detailed - Employee details break-up - Actual invoices of the expense - Reason of expense incurred for - Basis of determination of - Loan agreement interest rate - Basis on which the interest rate - Interest Rate Card for the period is pegged above standard rate of loan Page 45

46 TRANSFER PRICING COMPLIANCES & PENALTIES ON DEFAULT

47 TRANSFER PRICING COMPLIANCES & PENALTIES ON DEFAULT Particulars Compliances to be followed Penalties, if not complied with Filing of the Audit Report in From 3CEB Reporting of each SDT and international transaction entered into with related party in Form 3CEB Maintenance of Transfer Pricing Documentation Maintenance and furnishing of correct information / documents before AO and CIT(A) Concealment of particulars of income and furnishing inaccurate particulars thereof. Failure to furnish information or documents as required under section 92D(3) Mandatory to file Form 3CEB before the due date of filing return of income if the value of SDT exceeds INR 5 crs or even if there is international transaction with Associated Enterprise of even a single Rupee Mandatory to report every transaction in Form 3CEB Mandatory to maintain robust documentation where transactions subject to Transfer Pricing exceed 1 cr. in a financial year for international transaction & INR 5 cr for SDT Mandatory to maintain and furnish correct information / documents before AO and CIT(A) Mandatory to furnish correct particulars of transactions before the Revenue authorities Mandatory to furnish information or documentation required by the Revenue authorities within timelines as per section 92D(3) Rs 1,00,000 [Section 271BA] 2% of the value of each transaction not reported [Section 271AA] 2% of the value of each transaction [Section 271AA] 2% of the value of each transaction for false reporting [Section 271AA] Penalty ranging from 100% to 300% of the amount of tax sought to be evaded if adjustment is made by the Revenue authorities [Explanation 7 to Section 271(1)(c)] 2% of the value of the transaction for each such failure [Section 271G] Page 47

48 APPLICABILITY OF TRANSFER PRICING REGULATIONS TO DOMESTIC TRANSFER PRICING TRANSACTIONS

49 APPLICABILITY OF TRANSFER PRICING REGULATIONS TO DOMESTIC TRANSFER PRICING TRANSACTIONS Section Provisions Applicability of Specified Domestic Transactions 92 Computation of Income having regard to Arm s Length Price Yes 92A Meaning of Associated Enterprise No 92B Meaning of International Transaction No 92C Methods of Computation of Arm s Length Price Yes 92CA Reference to Transfer Pricing Officer Yes 92CB Safe Harbor Rules Yes 92CC Advance Pricing Agreement No 92CD Effect of Advance Pricing Agreement No 92D Maintenance of Information and Documents Yes 92E Accountant s Report Yes 144C Dispute Resolution Panel No clarity Page 49

50 DOMESTIC TRANSFER PRICING CASE STUDIES

51 CASE STUDY - 1 SCOPE & COVERAGE OF DOMESTIC TRANSFER PRICING

52 CASE STUDY 1 INDIA OUTSIDE INDIA B LTD. 100% IT Enabled Services -ITES Royalty Payment C LTD. 25% A LTD. -Distribution of Pharma products D LTD. 25% -Brand owner Manufacturer of Pharma Products Page 52 -Mfg of Raw material -10AA Eligible Company Supply of raw material

53 CASE STUDY 1 Facts A Ltd. is an foreign company owning a reputed brand and is engaged in manufacturing of pharma products B Ltd. is an Indian company, 100% subsidiary of A Ltd and is engaged in providing IT Enabled services to A Ltd C Ltd. is an Indian company, engaged in distribution of pharma products in India and 25% shareholding is held by A Ltd. C Ltd makes royalty payment to A Ltd for the use of brand name and trademark owned by A Ltd D Ltd. is an Indian company, engaged in manufacturing of raw material and 25% Issue shareholding is held by A Ltd. It is eligible for tax holiday u/s 10AA. D Ltd supplies raw materials to A Ltd Explain the applicability of Domestic Transfer Pricing in the hands of B Ltd, C Ltd and D Ltd? Page 53

54 CASE STUDY - 2 DOMESTIC TP FOR FINANCIAL TRANSACTIONS

55 CASE STUDY 2 A Ltd. - Indian Company - Non Eligible Company Interest Free Loan Interest Free Loan B Ltd. - Foreign Company C Ltd. - Indian Company - Non Eligible Company OUTSIDE INDIA INDIA Interest Free Loan D Ltd. - Indian Company - 10AA Eligible Company Page % Interest - ALP 11% E Ltd. - Indian Company - 10AA Eligible Company

56 CASE STUDY 2 Facts A Ltd. is an Indian company and not eligible for any tax-holiday B Ltd. is a foreign company located in U.S.A and 100% subsidiary of A Ltd C Ltd. is an Indian company, 100% subsidiary of A Ltd., and not eligible for taxholiday D Ltd. and E Ltd. are Indian companies, 100% subsidiaries of A Ltd and eligible for deduction u/s 10AA A Ltd granted interest free loans to B Ltd, C Ltd and D Ltd A Ltd granted loan to E Ltd at interest rate of 18% p.a. Issue What is the effect of Domestic TP in the hands of A Ltd, B Ltd, C Ltd, D Ltd and E Ltd? Page 56

57 CASE STUDY - 3 SECTION 40A(2)

58 CASE STUDY 3 Directors of A Ltd. X Y 10% 10% 10% D LTD. -Indian co -Manufacturing Business Z Purchase of raw material Purchase of finished goods A LTD. 100% 75% B LTD. C LTD. - Indian co. - Manufacturing FMCG products Purchase of fixed assets -Indian co. - Trading of fixed assets - Indian co. - Diversified business Page 58

59 CASE STUDY 3 Facts A Ltd. is an Indian company, engaged in the manufacturing FMCG products B Ltd. is an Indian company, engaged in trading of fixed assets C Ltd. is an Indian company, having diversified business D Ltd is and Indian company, engaged in trading of raw materials C Ltd. holds 75% shares of B Ltd and B Ltd holds 100% shares of A Ltd X, Y and Z are directors of A Ltd and each holds 10% shares of D Ltd A Ltd has purchased fixed assets from B Ltd, finished goods from C Ltd and raw materials from D Ltd Issue Identify the SDT which are subject to Domestic TP Page 59

60 CASE STUDY - 4 ALLOCATION OF HEAD OFFICE EXPENSES 80-IA(8)

61 CASE STUDY 4 A Ltd. Head Office - Performs general management functions Rs. 1200/- per hour Unit -1 Unit -2 Unit -3 Unit -4 - SEZ -Back office support / ITES - 10AA eligible Third Party -Insurance business Rs. 1000/-per hour - Insurance business Rs. 800/-per - Telecom business - Infrastructure hour business Rs. 900/-per hour Page 61

62 CASE STUDY 4 Facts A Ltd. is an Indian company engaged in diversified business. Its head office performs general management functions like accounting, HR, payroll, etc. A Ltd has 4 business units Unit -1 of A Ltd. is full fledged engaged in providing back office / IT enabled services to other units and independent third parties Unit -2 is engaged in insurance business. Unit -3 is engaged in telecom business Unit -4 is engaged in infrastructure business Unit-1 has provided ITES services to unit-2, unit-3 and unit-4 and charged at Rs.1,200 per hour, 800 per hour and 900 per hour respectively Unit-1 has also provided similar services to third party at Rs. 1,000 per hour Page 62

63 CASE STUDY 4 Issues Whether Head Office expenses are required to be allocated between various units? If yes in which ratio? Whether Domestic TP will be applicable for allocation of Head Office expenses and whether Head Office expenses are required to be allocated to various units by charging arm s length mark up as per Transfer Pricing provisions? Whether IT Enabled Services provided by Unit -1 to all other units will be covered under Domestic TP requiring arm s length mark-up? Whether deduction u/s 10AA of Unit -1 can be reduced by applying Domestic TP provisions? Page 63

64 CASE STUDY - 5 INTERPLAY BETWEEN DOMESTIC TP & INTERNATIONAL TP

65 CASE STUDY 5 For the period of to R& D Services A LTD. -Indian co. -Software development -SEZ 10AA benefit -OP/OC 40% (TNMM) 100% Payment based on Cost +20% to B Ltd. B LTD. -Foreign co. Change in shareholding to (Close connection established) Page 65 A LTD. -Indian co. -Software development -SEZ 10AA benefit -OP/OC 40% -ALP 17% 25% Payment based on Cost +20% to B Ltd. B LTD. -Foreign co.

66 CASE STUDY 5 Facts A Ltd. is an Indian company engaged in software development and eligible for section 10AA benefit B Ltd. is a wholly owned subsidiary of A Ltd situated in China and provides R & D services to A Ltd. B Ltd charges cost plus 20% mark-up for providing R & D services to A Ltd With effect from , shareholding of A Ltd in B Ltd was reduced to 25% A Ltd has earned OP/OC of 40% from to as well as from to Arm s length OP/OC is 17% Issues During F.Y , whether A Ltd. will be subject to International TP or Domestic TP or both? In Domestic TP, whether transactions will be covered u/s 40A(2) or 80-IA(10) or both? Whether any upward adjustment can be made for A Ltd. by the AO under Domestic TP Provisions even though there is mere change in the shareholding without any change in the pricing mechanism of transactions with related party? Page 66

67 WAY FORWARD

68 NEED OF THE HOUR Impact Analysis Scrutinising which transactions are impacted by the amendment Current valuation method Review the Existing Structure Current documentation maintained Verify if they are Compliant with New Provisions Benchmark the transaction Determine if within arm s length Maintain Contemporaneous Documentation Entity Related Price Related Transaction Related Strong Documentation and Rigorous Benchmarking Strengthens Defense during Tax Audit Page 68

69 SEEK NAVIGATION ASSISSTANCE Assistance in Designing Documentation Maintaining Robust Documentation Quarterly review and update of positions Navigating through Tax Audit Partnering Approach by Assisting in Preparing Documents and Giving In-house Training to Maintain Contemporaneous Data Page 69

70 THANK YOU