Transfer Pricing. Recent Trends & Key Developments. PHD Chamber International Tax Conference September 04, 2014 New Delhi. Statement of Credentials 1

Transcription

1 Transfer Pricing Recent Trends & Key Developments PHD Chamber International Tax Conference September 04, 2014 New Delhi Statement of Credentials 1

2 SESSION DETAILS Topic: Transfer Pricing Recent Trends and Key Developments Moderator Mr. Mukesh Butani, Chairman, BMR Legal Panelists Mr. Vijay Iyer, Partner and National Leader, EY Mr. Tarun Arora, Partner, Deloitte Mr. Amit Agarwal, Partner, Nangia & Co. Mr. Sanjiv Malhotra, Partner, BMR & Associates LLP 2

3 CONTENTS DISPUTES LANDSCAPE SAFE HARBOUR APA RECENT AMENDMENTS FINANCE ACT, 2014 CBDT GUIDANCE ON R&D 3

4 % of adjustment cases Amount of adjustment (USD Million) DISPUTES LANDSCAPE , ,470 9, ,940 2,320 1, Assessment Year Adjustment Amount (USD Million) % of adjustment cases Source: Annual Report of Ministry of Finance (Budget Division) 4

5 SAFE HARBOUR RULES What has been the experience so far? Is it inconsistent with arm s length standard? Implicit premium over arm s length price? Dis-entitlement under MAP for avoidance of double taxation Subjectivity around characterization What about Domestic Transactions? Should safe harbour rules be extended to transactions such as support services, management fee transactions? Global policies of MNEs vs safe harbour margins? Requirement to maintain documentation How do we see safe harbour rules evolving in India? 5

6 APA REGIME SOME THOUGHTS What has been the experience so far 378 APA applications filed as on 31 March enthusiastic response in second cycle Issues covered: Marketing intangibles, management cross charges, corporate guarantee, share issuance, IT / ITeS, royalty, contract research and development, contract manufacturing, TNMM margins and cost allocations 5 Unilateral APAs signed on March 31, 2014 Industry - Pharmaceuticals; Telecom and Financial services Transactions - Corporate guarantees; Non-binding investment advisory services and Contract manufacturing Who should opt for APA? Companies facing litigation on similar issues Where new transactions are proposed to be introduced Losses Routine transactions or complex ones? Roll back provisions introduced under the APA scheme (subject to inflation adjustment) - Amendment to the APA Rules awaited What more needs to be done? 6

7 KEY AMENDMENTS: FINANCE ACT, 2014 Inter-quartile range Positive move Better late than never How does it work globally? What does the law say now? How the adjustment would be made if the price is outside the range where in the range the transfer price should be set? Multiple year data Why was the amendment required? What has been the Courts view on multiple year data? Global best practices What is the law as of today? Deemed transactions Historical points / controversies Key rulings Kodak India, Swarnandhara IJMII Integrated Township Development Co. Pvt. Ltd. New law as of today Penalty Section 271G Need for this amendment especially when penalty provision under section 271AA (penalty on failure to maintain the mandatory transfer pricing documentation) has not been amended? 7

8 CBDT GUIDANCE ON R&D SERVICES Circular No. 2 rescinded by issuing new Circular No. 5 Circular No. 3 amended and reissued as Circular No. 6 Controversy explained General operating models Positive Changes by CBDT Restoration to selection of most appropriate method instead of profit split method Elimination of cumulatively complied with in respect of conditions in circular no. 3 Deletion of the requirement that R&D centre does not use economically significant assets including intangibles Acknowledgment of existence of three categories Grey Areas Clarity needed with regard to categorization Economically significant assets and Economically significant realized risks possibility of varied interpretation Challenges Onus on taxpayer to correctly determine characterization and support through documentation UN TP Manual and Discussion Draft on Intangibles Key observations 8

9 SOME HOT TOPICS INTERPLAY BETWEEN ALP & TAX HOLIDAY PROVISIONS A.T. Kearney India Pvt. Ltd. Vs Additional Commissioner of Income Tax, Range 1, New Delhi Income Tax Appellate Tribunal, Delhi Benches ITA No. 348/Del/2013 Bench Members: Sh. R.S. Sayal (AM) and Sh. George George K. (JM) Main issue Claim of deduction under section 10A in respect of revenue from international transactions Contentions discussed Whether section 80-IA(10) applies when the second party to the transaction is a non-resident It should be an arranged course of business between the related persons to produce more than ordinary profits Effect of insertion of proviso to sub-section (10) w.e.f. 1 st April

10 SOME HOT TOPICS INTERPLAY BETWEEN ALP & TAX HOLIDAY PROVISIONS Expression any other person not qualified by phrase resident in India Related person can be resident of India or of any country Provision is simply concerned with the increase in profits of the assessee having eligible business Cumulative conditions to be satisfied Close connection and arrangement Utmost importance on the part of the Assessing Officer to demonstrate that the transactions were arranged to produce more profit - position has to be necessarily proved Mere higher profits of an eligible business is no criteria to invoke section 80-IA(10) Proviso to sub-section (10) of section 80-IA applicable in case of Specified Domestic Transactions and is effective 1st April 2013 does not include international transactions Effect of proviso in case of arranged SDT reasonable profit shall be profit determined having regard to ALP - AO still to establish that such arrangement; is not correct 10

11 SOME HOT TOPICS MOST APPROPRIATE METHOD Mattel Toys (I) Pvt. Ltd. Vs Deputy Commissioner of Income Tax, Circle 6(3), Mumbai Income Tax Appellate Tribunal, Mumbai Benches ITA No. 2476/Mum/2008 Bench Members: Sh. Rajendra Singh (AM) and Sh. Amit Shukla (JM) Main issue Change in the most appropriate method ( MAM ) so as to produce better or more appropriate ALP Brief Facts Assessment year Mattel Toys (I) Pvt. Ltd. ( assessee ) Disputed transaction Method selected as per TP Study Net margin of assessee Adjusted margin of comparables Contention of assessee Most Appropriate Method Adjustment made by the TPO Subsidiary of Mattel Inc, USA Import of finished goods for resale in India Transactional Net Margin Method ( TNMM ) (-) percent (-) percent Resale Price Method ( RPM ) is the MAM INR 1.32 crore 11

12 SOME HOT TOPICS MOST APPROPRIATE METHOD Assessee entitled to raise plea for change of method in assessment/ appeal proceedings Appellate Court must consider such plea if change in method produces better or more appropriate ALP on facts of the case Upholds assessee's claim for use of Resale Price Method (RPM) for benchmarking distribution activity Product similarity not vital aspect for RPM, but operational comparability to be seen Reliance placed on OECD TP Guidelines & ICAI Guidelines ITAT ruling in Textronix and L'oreal relied upon 12

13 DISCLAIMER This presentation provides general information existing as at the time of preparation and reflects personal views of the Panel. The presentation is only meant for the panel discussion on International Tax Conference on Recent Trends & Key Developments organized by PHD Chamber. No responsibility for loss arising to any person acting or refraining from acting as a result of any material contained in this presentation will be accepted by the Panel. It is recommended that professional advice be taken based on the specific facts and circumstances. This presentation does not substitute the need to refer to the original pronouncements. 13

14 GLOSSARY APA CBDT ICAI IT ITeS ITAT MAP MNE OECD R&D RPM SDT TNMM TP Advance Pricing Agreements Central Board of Direct Taxes The Institute of Chartered Accountants of India Information Technology Information Technology Enabled Services Income Tax Appellate Tribunal Mutual Agreement Procedure Multinational Enterprises Organisation for Economic Co-operation and Development Research & Development Resale Price Method Specified Domestic Transactions Transactional Net Margin Method Transfer Pricing 13