Transfer Pricing

Section 92 of Income Tax Act,1961

CA Final Course Paper 7 Direct Tax Laws , Chapter 16

CA. Vijay Iyer
CA. Nitin Narang
Background

Multinational Enterprises (MNE) carry out business in

multiple countries

Tax rates vary from country to country

MNE may be able to reduce tax cost by moving profits from

high tax to low tax jurisdictions

Tax authorities want to prevent the illegitimate shifting of

profits and want to protect their tax base

Legislative framework necessary to define appropriate tax

base
Intent behind introduction of Transfer
Pricing (TP) provisions in India

Growth of investments by multinationals in India

Increase in cross border transactions of multinational

enterprises in India

Potential risk of erosion of India’s tax base

Need for a statutory framework to examine intra-group cross-

border transactions
Concepts in Transfer Pricing

• The price charged in a transaction

Arm’s Length Price
between unrelated parties

• The price charged in a transaction

Transfer Price
between two associated enterprise

Uncontrolled • Transaction between two unrelated

Transaction parties

• Transaction between two associated

Controlled Transaction
enterprises or related parties
Concept of TP

Associated Independent
enterprise entity

Transactions

Independent
Taxpayer
entity

Transfer Arm’s length

price price
Applicability

 TP Provisions contained in Section 92 to 92F of the Act

 TP Provisions apply to Transactions (defined in Sec 92F);
 Transactions between two or more Enterprises (defined in Sec 92F);
 The enterprises are Associated Enterprises (AEs) (defined in Sec
92A);
 The transaction is an International Transaction (defined in Sec 92B).

 Effective 1 April 2012, TP provisions shall also apply to

specified domestic transactions (SDT) (defined in Sec
92BA)
Compliance Requirements

 Computation of income/ allowance of expenses having

regard to the Arm’s length price [Section 92]
 Maintenance of prescribed Documentation (Section 92D &
Rule 10D)
 Obtaining of Accountant’s report (under Form 3CEB) (Section
92E)
 To ensure compliance with the arm’s length principle, stiff
Penalties have been prescribed (Sections 271AA, 271BA,
271G, 271(1)(c))
Legislative Provisions

 Section 92(1) –
Any income arising from an international transaction shall be computed
having regard to the arm’s length price

Explanation - the allowance for any expense or interest arising from an

international transaction shall also be determined having regard to the
arm’s length price

 Section 92(3) –
The provisions are not intended to be applied in case determination of
arm’s length price reduces the income chargeable to tax or increases the
loss as the case may be
International Transaction (Section 92B)

 Transactions between two or more AEs, either or both of whom are

non-residents
 Transaction relates to:
 Purchase, sale or lease of tangible or intangible property; or
 Provision of services; or
 Lending or borrowing money; or
 Any other transaction having a bearing on the profits, income, losses or assets
of the enterprises; or
 Mutual agreements or arrangements for allocation or apportionment of, or any
contribution to, any cost or expense incurred
International Transaction (Section 92B)

Intangible Capital Provision of Business

Tangible Property
Property Financing Services Restructuring

► Purchase, Sale, ► Purchase, Sale, ► Long/short term ► Market ► Transaction of

Transfer, Lease Transfer, Lease borrowing/ Research/ Business
/Use of /Use of IP lending Development restructuring/reorg
property/article/ ► Includes Transfer ► Guarantee ► Technical anization with AE
product/ thing of ownership/use ► Purchase/Sale Service irrespective of
► Includes Building, of rights/other Securities ► Scientific bearing
Vehicle, commercial right ► Advances/recei Research profit/income/loss
machinery etc. vables, or assets – at the
► Legal/
Payments/any time of
Accounting
transaction/future
debt etc Service etc.
date
Definition of Intangible Clarified
Marketing Trademarks, Trade Names, Brand Names , Logos

Process Patents , Patent Applications, Technical

Technology
Documentation, Technical know-how

Copyrights, Literary work, Musical Compositions, Maps,

Artistic
Engravings

Software Copyrights, Proprietary software, Automated

Data Processing
databases, Integrated circuit Masks & Masters

Industrial Design ,Product Patent ,Trade Secrets , Engineering

Engineering
Drawings , Blueprints , Proprietary Documentation

Customer Customer Lists , Customer Contracts, Customer

Relationship, Open Purchase Orders
Definition of Intangible Clarified
Contract Favourable Supplier Contracts, License agreements , Franchise
agreements , non-compete agreements

Human Capital Trained, Organised workforce, Employment agreements, Union

Contracts

Location` Leasehold interest, Mineral exploitation rights, Easements, Air rights,

Water rights

Goodwill Institutional / Professional Practice / Celebrity goodwill, Personal

goodwill of professional, General business going concern value

Similar Similar item deriving its value from its intellectual content

Others Methods, Programmes, Systems, Procedures, Campaigns,

Surveys, Studies, Forecasts, Estimates etc.
Do the following transactions need to be
benchmarked?

Purchase of fixed assets

Transfer of shares in an Indian company to a non resident

External Commercial borrowing

Free-of cost services availed by Indian company

Payment for use of intangibles such as royalty

Reimbursement of expenses
Associated Enterprise
Meaning of Associated enterprises (Section 92A)

B Both A and B
are associated Direct or indirect participation
enterprises of C (through one or more
C
intermediaries) in management,
control or capital

A D
D and E are also
associated
B E enterprises of C
since they have a
common ultimate
C parent (A)
Meaning of Associated Enterprises (Section 92A(2)

Capital Management Activities Control

26% direct or Appointment of Supply of >90% Common
indirect holding more than half of the raw control
by the of the directors materials
enterprise
By the same One or more Wholly dependent Control by
person in both executive on the intangibles relative of
enterprises directors provided jointly
Loan >= 51% of Appointed by Sales under Control by HUF
total assets the same influenced prices and other
person in both and conditions member of HUF
enterprises / relative
Guarantee >=
10% of
borrowings
Deemed Associated Enterprises - Sec 92B(2)

Prior
Prior agreement
agreement
A transaction with an unrelated
A’s
A’s Parent
Parent 3rd party company (3rd party) is deemed to
be a transaction with an associated
enterprise and subject to transfer
pricing regulations if -
a prior agreement exists between
A A’s AE and 3rd party in relation to
services rendered by A to the 3rd
party; or
Determination of terms
terms of transaction are determined
in substance by A’s AE and 3rd party
A’s Parent 3rd party

A
Determination of arm’s length price
 Arm’s length price
Price applied or proposed to be applied in a transaction between persons
other than AEs, in uncontrolled conditions

Determination of arm’s length prices using one of the Prescribed methods

Yes Whether No
you arrive
at a single
price ?
The arithmetic mean of such
The price thus determined is prices, read with sec 92C(2)
the arm’s length price
(i.e. not exceeding the
tolerance range (which has an
upper ceiling of 3%) of the
transfer price)
 Prescribed Transfer Pricing Methods
OECD Transfer Pricing Methods

Traditional Transaction Methods Transactional Profit Methods Other Methods

Comparable Resale Transactional

Cost Plus Profit Split
Uncontrolled Price Net Margin New Method
Method Method
Price Method Method

 New method has been prescribed by the Central Board of Direct Taxes - Any method that takes
into account the price that has been charged or paid, or would have been charged or paid, for the
same or similar uncontrolled transaction, with or between non-associated enterprises, under
similar circumstances considering all the facts, shall be regarded as one of the recognized
methods for determining the Arm’s Length Price
Comparable Uncontrolled Price Method
(“CUP Method”)
Controlled Uncontrolled
transaction transaction
CUP entials comparison of PRICE of
comparable uncontrolled transaction
with the controlled transaction A Inc. B Inc.
• Identify comparable transactions (USA) (USA)
• Adjust the price of such
transactions to account for
differences between the controlled
transaction and the uncontrolled $10 $11
transaction
• The adjusted uncontrolled price is
the arm’s length price A Ltd. C Ltd.
(India) (India)
 Resale Price Method (“RPM”)
RPM entails comparison of Gross Margin on Controlled Uncontrolled
resale of goods purchased from an associated
enterprise transaction transaction
• Identify comparable transactions /
companies A Inc. B Inc.
• Determine gross margin (Gross Profit / (USA) (USA)
Sales) of the uncontrolled transactions /
companies
• Adjust the gross margin for differences in
functions, assets and risks between the $10
comparable transactions and the controlled
transaction A Ltd. C Ltd.
• Determine the arm’s length price of the (India) (India)
controlled transaction based on the adjusted
gross margin on comparable transactions $12 GM 25%

Customers Customers
Resale Price Method (“RPM”)
 Gross Margin of Comparable transaction is 25%
 Applying Resale Price Method
 Sale Price of A Ltd. (A) - $ 12
 Applying the arm’s length
gross margin of 25% (B) -$3
 Arm’s length price of the related
party purchase transaction (A-B) -$9
 Related Party Transaction Price - $ 10
 Cost Plus Method
Cost Plus Method entails comparison of Gross Controlled Uncontrolled
Margin on supply of goods or services to an
associated enterprise transaction transaction
• Identify comparable transactions /
companies Third Suppliers
• Determine gross margin (Gross Profit / Cost Party
of Goods/Services Sold) of the uncontrolled Supplier
transactions / companies
• Adjust the gross margin for differences in
functions, assets and risks between the $10
comparable transactions and the controlled
transaction A Ltd. C Ltd.
• Determine the arm’s length price of the (India) (India)
controlled transaction based on the adjusted
gross margin on comparable transactions $12 GM 25%

A Inc. (USA) Customers

Cost Plus Method
 Gross Margin of Comparable transaction is 25%
 Applying Cost Plus Method
 Cost of Goods Sold of A Ltd. (A) - $ 10
 Applying the arm’s length
gross margin of 25% (B) - $ 2.5
 Arm’s length price of the related
party purchase transaction (A+B) - $ 12.5
 Related Party Transaction Price - $ 12
 Transactional Net Margin Method
(“TNMM Method”)
Comparison of Net Profit comparable Controlled Uncontrolled
uncontrolled transaction / companies with the transaction transaction
net margin of the controlled transaction
Net margin may be computed with reference to
A Inc. B Inc.
cost, sales or any other relevant profit level (USA) (USA)
indicator
• Identify comparable transactions / companies
$60
• Adjust the price of such transactions to
account for differences between the
controlled transaction and the uncontrolled A Ltd. C Ltd.
transaction
(India) (India)
• Determine the arm’s length price for the
related party transaction on the basis of the
adjusted net margin of the uncontrolled $100
transactions
Customers Customers

Net Profit / Net Profit /

Sales = Sales =
4% 5%
Transactional Net Margin Method
 Net Margin of Comparable transaction is 5%
 Applying TNMM Method
 Sales of A Ltd. (A) - $ 100
 Applying the arm’s length
net margin of 5% (B) -$5
 Net Margin of A Ltd.
 Total Costs of A Ltd.
 Related party transaction cost (C) - $ 60
 Unrelated party costs (D) - $ 36
 Arm’s length price of the related
party purchase transaction (A-D-B) - $59
 Related Party Transaction Price - $ 60
 Profit Split Method
Controlled
transaction
Splitting the profit from the whole
transactions between various related
parties based on their relative A Inc.
contribution. (USA)
A BV
• Identify comparable transactions for (Netherlands)
every related party involved in the know-how
transaction (i.e. transactions
comparable to A Inc., A BV and know-how
A Ltd. )
A Ltd.
• Determine net profit earned by (India)
comparable companies (developed
know-how)

Customers
 Profit Split Method
Controlled
transaction
• Attribute profits to each related party
involved i.e. A Inc, A BV and A Ltd.
A Inc.
• Allocate the super normal-profit / loss (USA)
to each related party involved (i.e. A A BV
Inc., A BV and A Ltd.) on the basis of (Netherlands)
their relative contribution know-how

• Relative value of the know-how know-how

developed by A Inc., A BV and A
Ltd. A Ltd.
(India)
(developed
know-how)

Customers
 Sixth Method-Rule 10AB
• Where the application of the five specific methods is not possible due
to difficulties in obtaining comparable data or due to uniqueness of
transactions
• Intangibles or business transfers, transfer of unlisted shares, sale
of fixed assets, revenue allocation/splitting, guarantees provided
and received, etc.
• Examples of application:

• Third party quotations

• Valuation reports

• Commercial & economic models

 Most appropriate method
► Rule 10C (1) – Method which provides the most reliable measure of an
arm’s length price in relation to an international transaction or a Specified
Domestic Transaction
► Most reliable measure would depend on availability of comparable data
► Comparable data is more likely to be available for benchmarking an entity that is
relatively less complex
► For a complex entity that has intangibles and multiple operations, it is very difficult to
find a true comparable.
► Gross margin of manufacturing comparable companies may not be possible to
decipher from Schedule VI Profit and Loss Account and hence Cost Plus is usually
very difficult to apply in practice
Comparables

► All methods require comparables

► Transfer price is set/ defended using data from comparable

transactions

► Comparable transaction should be independent and similar to tested

transactions

► Factors for judging comparability (Rule 10C(2)):

 nature of transactions undertaken (i.e. type of goods, services etc.)

 company functions
 risks assumed
 contractual terms (i.e. similar credit terms)
 economic and market conditions
Case Studies
Case Study 1
A Inc. USA
(owns intangibles
and is complex)

Sale of tablets
100kgs
at Rs
90/kg
10kgs at Rs
100/kg
A India Third parties in India

Which method applies to this transaction and why?

Case Study 1 (Answers)

 Most Appropriate Method would depend on the

availability of comparable data
 If comparable prices for ‘identical’ tablets is available
then CUP may be applied (with minor adjustments)
 If gross margin of comparable distribution companies is
available, RPM may be used
 Cost Plus may not be appropriate method for
benchmarking an intangible-owning complex entity
 If gross margin of comparable distribution companies is
not available, TNMM may be the only method that could
be applied since PSM applies only where intangibles are
owned by the Indian entity and the foreign AE
Case Study 2

XYZ UK Royalty - 3% of gross sales

XYZ Netherlands
(Licensor of
technology)

XYZ India Royalty - 8% of net sales

XYZ UK, XYZ Netherlands and XYZ India are associated

enterprises
Which method can be applied to this transaction? Can CUP
be applied?
Case Study 2 (Answers)
 Transaction between XYZ US and XYZ Netherlands
is a controlled transaction and therefore is not an
arm’s length price
 Comparison of transaction between XYZ US and
XYZ Netherlands with the controlled transaction
between XYZ India and XYZ Netherlands is not
appropriate
 If XYZ US was an unrelated party to XYZ
Netherlands, comparison of the royalty rates may
have been possible after adjusting for the
difference in the base (CUP method)
 If CUP is not possible to apply, then TNMM may be
applied as the most appropriate method
Case Study 3
1000 kgs at
Rs 80/kg
X Inc USA Third parties in USA

XYZ Inc, USA (Group

100 kgs at
100 kgs at Company)
Rs 90/kg
Rs 90/kg

90 kgs at
Rs 100/kg
X Ltd India
Third parties in India

Which method can be applied to this transaction? How would

you defend TP for X Ltd India
Case Study 3 (Answers)
 X Inc. has supplied to third parties in the US at
$80/kg while it has supplied to X India at $90/kg
 Quantity supplied to third parties is 10 times more
than the quantity supplied to X India and hence a
direct comparison of the prices may not
appropriate
 Appropriate adjustment for volume discount to be
offered to a substantial customer may be required
before comparison with the controlled transaction
 Where such comparison is not possible, RPM or
TNMM may be applied depending upon the
available comparable data (Refer Case Study 1)
Case Study 4

ABC Inc., USA

Royalty
Import of master payments for
copy of software distribution
for duplication based on net
Outside India sales
and resale
---------------------------------------------------------------------
India
ABC India Customers
(duplication and in India
distribution)

Which method can be applied to the transactions?

Can royalty be disallowed to the extent of bad debts as it is
based on net sales?
Case Study 4 (Answers)

 Selection of the most appropriate method would depend

on available comparables
 If comparable software duplicators and distributors are
identified and their Royalty rates are available in the
public domain, CUP may be an appropriate method
 In the absence of CUP data, RPM and TNMM may be
explored
 Since the functions of ABC are not merely distribution,
RPM may be applied only if a perfect comparable is
identified
 In the absence of comparable data for RPM, TNMM may
be applied as the most appropriate method
Case Study 5
► XYZ India sells wipers to
XYZ USA XYZ USA. Similar wipers are
purchased by XYZ USA from
third parties in China
► CUP method applied by XYZ
India
► Transfer Pricing Officer
disregarded CUP on the
Third parties
XYZ India basis that conditions
in China
prevailing in the market are
not similar
► How would you defend the
case?
Case Study 5 (Answers)
 If the wipers purchased from China and India are
identical, CUP may be the most appropriate
method
 Chinese and Indian economies may be similar and
therefore, the Chinese suppliers price may be a
suitable benchmark
 For the purchaser (XYZ US) it does not matter
where is purchases from (related or unrelated
party) so long as the same wiper is supplied by
both
 Therefore, the uncontrolled transaction would
serve as a basis for determining the price of the
transaction between XYZ US and XYZ India
Case Study 6

ABC USA
Sale of
registered
patents
Sold for Rs. 50 crores
based on valuation report
from independent valuer

ABC India
(entrepreneur and
developer of patents)

Which method applies to this transaction and why?

Case Study 6 (Answers)

 A valuer’s report based on generally accepted

valuation methodology is a reasonable estimate of
how third parties may value intangibles when such
intangibles are sold to unrelated parties
 Therefore the valuer’s report provides a
computation of arm’s length price
 Since the arm’s length price determination is based
on methods that may be applied by third parties to
determine their transaction prices in uncontrolled
transactions, such determination would fall under
the Sixth Method under the Indian TP Rules
Domestic TP
Introduction – Pre Finance Act, 2012
Tax Authority empowered to disallow payments to “related parties”
which are “excessive” or “unreasonable”

In case of inter-unit transfer of goods/services, tax holiday profits to

be determined based on Fair Market Value (FMV) of goods/ services

Tax Authority empowered to re-compute tax holiday eligible profit if

undertaking makes more than ordinary profits as a result of
arrangements with closely connected persons or otherwise

No specific methodology prescribed for disallowance/ tax holiday

profit adjustment
Introduction – Finance Act, 2012

TP provisions extended to certain Specified Domestic Transactions(SDTs) with

effect from Financial Year 2012-13

Seeks to create legally enforceable obligation on taxpayers to maintain

proper documentation

Is intended to provide objectivity in determining reasonableness of

expenditure and income eligible for tax holiday

Monetary threshold of INR 50 Million (approx. USD 900,000) provided for

applicability of the provisions

Allowance for expenditure or allocation of cost or expense or any income in

relation to SDT to be computed having regard to Arm’s Length Price (ALP)
Definition of SDT

Payments to related parties as defined under section

40A(2)(b)
Tax holiday related transactions (eligible business)
Any transaction referred to in section 80A
Any transfer of goods/services referred to in section 80IA(8)
Any business transaction referred to in section 80IA(10)
Any transaction under Chapter VI-A or u/s 10AA – to which
provisions of section 80IA (8) or section 80IA (10) apply
Any other transaction as may be prescribed
Domestic TP – Applicability

Taxpayer cannot apply TP to SDT so as to reduce total income

that is subject to tax

Monetary threshold of INR 50M to be computed based on

aggregate of payments and receipts to which the provisions
apply during a FY

Definition of the term “related parties” for the purposes of

expense disallowance expanded to cover entities which have
common beneficial ownership

TP provisions applicable to international transactions are largely

applicable to SDT as well, with the exception of Advance Pricing
Agreement (APA) provisions
Eligible business covered
Section Tax payers covered Deduction

10AA Persons with income from Special 100% for the first 5 years
Economic Zone (SEZ) units 50% for the next 5 years
50% of the profits or amount credited to SEZ re -investment
reserve, whichever is less for next 5 years
80 -IA Infrastructure developers 100% for a period of 10/15 years out of 15/20 years, as the
case may be, from the date of commencement of operation
80 -IA Telecommunication service 100% for a period of 5 years
providers 30% for the next 5 years
out of 15 years from the date of commencement of operations
80 -IA Developers of Industrial park 100% for a period of 10 years out of 15 years from the date of
commencement of operations
80 -IA Producers or distributors of 100% for a period of 10 years out of 15 years from the date of
power commencement of operations
80 -IAB Developers of SEZ 100% for a period of 10 years out of 15 years from the date of
commencement of operations
80 -IB Small scale industry engaged in 30% of profits for the first 10 years
operating Cold storage plant
80 -IB Industrial undertaking in 100% of profits for 5 years and
Industrially backward state as 30% for the next 5 years
mentioned in VIII Schedule (ex:
Jammu and Kashmir )
80 -IB Multiplex theaters and convention 50% for the first 5 years
centre
Eligible business covered (contd…)

Secti Tax payers covered Deduction

on
80 -IB Company carrying on scientific research 100% of profits for first 10 years
and development

80 -IB Eligible housing projects 100% of profits from such business

80 -IB Eligible hospitals 100% of profits for first 5 years

80 -IC/ Persons with units in North-eastern states 100% for a period of first 10 years
80 -IE claiming deduction
80 -ID Hotels located in districts having World 100% of profits for first 5 years of commencement of
Heritage site business
Section 40A(2) – Payments to related
parties

Payments by taxpayers to certain specified persons covered within the

ambit of section 40A(2)

Where the taxpayer/assessee is a company, following persons regarded

as ‘specified persons’
• Directors of the taxpayer company or any relative of such directors
• Individuals having Substantial Interest (SI) in the business of taxpayer company or
any relative of such individual
• Persons having a SI in the business of the taxpayer company
• Directors of the entities having SI in the business of the taxpayer company or any
relatives of such directors
• Any company having the same holding company (which holds a SI) as that of the
taxpayer company
• A company of which a director has a SI in the business of the taxpayer company, any
director of such company or any relative of such director
• Persons/entities in which taxpayer company/its directors/ their relatives have a SI

Payments by an individual, firm, AOP and HUF to certain specified

persons are also covered within the ambit of section 40A(2)
 Section 40A(2) – Payments to
related parties
A person shall be regarded as having a SI in a
business if at any time during the previous year
• Such person is the beneficial owner of shares carrying not less
than 20% of the voting power (in case of a company)
• Such person is beneficially entitled to not less than 20% of the
profits of such business (in any other case)

Beneficial ownership

• Term not defined but can be understood as a person who

ultimately enjoys the income/asset and also controls it
• Need not be in existence for the entire year but is sufficient if it is
in existence for only part of the year
Section 40A(2) – Payments to related
parties

General scope of Section 40A(2)

• Applicable to taxpayers making the payment/incurring expenditure and
not to recipients of such income
•Can ALP testing of recipient be relied upon to support arm’s length
nature of expense?
•No correlative relief for recipient if payer subject to a TP adjustment
• If no payment is made or payment is less than ALP, cannot be considered
as “excessive/ unreasonable”
• Expenditure should be towards ‘goods’, ‘services’ or ‘facilities’
• Capital expenditure, depreciation outside the purview of section 40A(2)
• Generally, following payments may be covered:
•Payment towards purchase of raw materials, services, use of asset
•Payment towards sharing of common premises/facilities
•Payment of interest on loan
•Payment of managerial remuneration, salary, bonus etc to directors
 Payments to related parties – Illustration
 Any payment towards
expenditure by
 ACo to its own directors
X Co (Indian as remuneration, salary,
company)
bonus etc
Beneficial Beneficial
Share holding Share holding  ACo to XCo
>20% >20%
 ACo to directors of XCo
A Co (Indian B Co (Indian
company) company)  ACo to Relatives of
directors of A Co and X Co
 ACo to BCo

 Any payment towards

expenditure by
 XCo to ACo/BCo
Tax holiday eligible business

SDT provisions apply to business transactions/transfers referred to

in section 80A, 80IA(8), 80IA(10), 10AA, Chapter VI-A provisions

Section 80A(6) and Section 80IA(8) require adjustment to tax

holiday profits where
• Goods and services of eligible business are transferred to any other business carried
on by the same taxpayer and vice versa
• Consideration for such transfer as recorded in the accounts of eligible business
does not correspond to market value of such goods/services
• In such cases, tax authorities/ taxpayer required to recompute tax holiday claim by
reference to ALP of such goods/services

Overlap between 80A(6) and 80IA(8) not of much consequence

Applies to all tax holiday claims under Chapter VI-A/ Section 10AA
Tax holiday eligible business

 General scope of Section 80A(6)/ 80IA(8)

 Covers transfer of goods/ services held by “eligible business” to
another business or vice versa
 Existence of two or more separate businesses of the same
taxpayer
 Transfer of goods/ services between the businesses
 Does not contemplate an artificial or hypothetical segregation of
profits between tax holiday unit and the rest of the enterprise
 Once threshold is satisfied, inter-unit transfer price may be need
to be determined by hypothesizing the businesses as separate &
distinct enterprises for determining ALP
 Provides for a “two-way” adjustment (both favorable as well as
adverse) and is a mandatory provision
 Is in the nature of notional adjustments for determining profits
eligible for tax holiday
Tax holiday eligible business

 General scope of Section 80IA(10)

 Tax officer empowered to re-compute tax holiday profits if:
 more than “ordinary profits” have arisen in the eligible business
due to transactions between closely connected persons or for
other reasons

 Provides for only “one way” adjustment i.e. only adverse

adjustment at the discretion of the tax officer
 Is in the nature of notional adjustment for determining
profits eligible for tax holiday
 Tax officer may invoke the provision in case of SDT on the
basis of ALP determination
 Onus still on tax officer to establish that the course of business
was arranged to produce more than ordinary profits?
TP compliance requirements
 Transfer Pricing Documentation
► Ownership Structure

► Profile of multinational group Entity Related

► Business description/ Profile of industry
► Nature and terms (including price) of international transactions
► Description of functions performed, risk assumed and assets
employed (functional analysis)
► Records of economic and market analysis (economic analysis)
► Record of budgets, forecasts, financial estimates Price Related
► Any other record of analysis (if, any) to evaluate comparability
of international transaction with uncontrolled transaction(s)
► Description of method considered with reasons of rejection of
other methods
► Details of transfer pricing adjustment(s) made (if, any)
► Any other information e.g. data, documents like invoices, Transaction Related
agreements, price related correspondence etc.
Transfer Pricing Documentation

Detailed documentation not required in case aggregate value of all international

transactions does not exceed one crore rupees (five crores in case of specified
domestic transactions)

List of supporting documents are also provided in the law

Contemporaneous data requirements

Documents to be retained for a fixed period from end of the assessment year

Need to obtain Accountant’s report (under Form 3CEB) to be filed along with the return
of income
Accountant’s report (Form 3CEB)
- Rule 10E
Obtained by every tax payer filing a return in India and having international
transaction or SDT

To be filed by due date for filing return of income

Essentially comments on the following:

whether the tax payer has maintained the transfer pricing
documentation as required by the legislation,
whether as per the transfer pricing documentation the prices of
international transactions are at arm’s length, and
certifies the value of the international transactions as per the books of
account and as per the transfer pricing documentation are “true and
correct”
 TP Penalties - Section 271
Default Penalty

Post - inquiry adjustment (deemed 100 - 300% of tax on the adjusted

concealment of income)  amount
Section 271(1)(c)
Failure to maintain documents 2% of the transaction value
Fails to report transactions /
Maintains or furnishes incorrect
documents  Section 271AA
Failure to furnish documents  2% of the transaction value
Section 271G
Failure to furnish accountants Rs 100,000
report  Section 271BA
Transfer Pricing Audit Process
Transfer Pricing Calendar

Indian Financial Year (‘FY’) – 1 April to 31 March

• Due date of completion of Transfer Pricing Documentation

and filing of Form 3CEB (Accountant Report)
• 30 November following the FY
• Time limit for completion of assessment
• 46 months from the end of the FY (i.e. 31 January 2013
for the FY 2008-09)
• Retain Documentation for 8 years
Routine Audit Process

Taxpayer to file
AO to determine
objections with
DRP to pass
ALP u/s 92C(3)
DRP* directions*

AO also may
refer AO to pass Draft AO to pass final
determination of order order
ALP to the TPO

Taxpayer to
substantiate AO to compute Appeal/
transfer price as taxable income Rectification
ALP to TPO

TPO to determine * If the tax payer files chooses to file

ALP by passing an Intimation to
objections with the Dispute Resolution Panel
order taxpayer & AO (DRP). The taxpayer also has an option to file
an appeal with the Commissioner of Income
Tax (Appeals) against the final assessment
order of the AO
Timelines for DRP route – A Snapshot

AO to pass DRP to pass

• 34 months draft order • Within 30 directions • Within 1
from end of • 36 months Days of • Within 9 month
AY from end of receipt of months of
AY Draft Order Draft Order
TPO to pass Objections Final AO
order before DRP Order passed
Timelines for CIT (A) route – A Snapshot

AO to pass Appeal to
• 34 months draft order • Within 60 CIT(A) • No time limit
from end • 36 months days of the • Within 30
from AY from end of draft order days from
AY receipt of AO
TPO to pass AO passes Order CIT(A)
order final Order Order
Domestic Law Dispute Resolution Process

TPO’s AO’s draft DRP

Order order objections

AO’s Final
Tribunal DRP order
Order

High Supreme
Court Court
Advance Pricing Agreements
What is an APA?
Finance Act, 2012 – Salient features
 An agreement between the Central Board of Direct
Taxes (CBDT) and any person
 determining the arm’s length price (ALP) or
 specifying the manner in which the ALP is to be
determined in relation to an international transaction
 Flexibility to determine arm’s length price using
unspecified method/ adjustments/variations, as
necessary
 Valid for the periods specified in the APA and for a
maximum period of 5 consecutive years
 Binding on taxpayer and tax authority, unless there is
a change in law/ facts
 No provision for “roll back”
Indian APA rules- Overview

 New rules introduced in Income-tax Rules, 1962 – Rules 10F-10T and Rule
44GA
 Rules 10F-10T contain procedures for APA applications in general; Rule
44GA contains the procedure to deal with requests for Bilateral APAs/
Multilateral APAs
 Overview of the process

Evaluation and
Execution and
Pre-filing APA request negotiation –
monitoring
Agreement

► Unilateral vs bilateral ► Industry overview ► Field work (functional ► Annual report,

vs multilateral interviews, review record-keeping
► Supply chain
financial statements)
► Pre-filing meeting overview ► Audit
(anonymous also ► Government-to-
► FAR analysis ► Revocation,
permitted) government process
cancellation or
► Proposed
► Pricing study and ► Position papers – face revision
economic
strategy to face meetings
analysis ► Renewal
► Critical assumptions
► Proposed term
► Drafting and concluding
APAs
Administrative structure in India for APAs

UNILATERAL BILATERAL /
MULTILATERAL

Chairperson CBDT
 All APAs to be approved Chairperson CBDT
by the Central Government

 Common team at the back

Director General of
end for unilateral and bilateral Competent
Income Tax / multilateral APAs Authority

Director APA Director APA

Team of Officers, Team of Officers,

economists and economists and
statisticians statisticians
Key Features & Implications
Feature Description Implication

Taxpayer can pursue an

Eligibility Any person who has undertaken or is APA for its existing inter-
proposing to undertake an international company transactions
transaction with India

Types of APAs Framework allows unilateral, bilateral and Flexibility to choose the
type of solution
Multilateral APAs depending on
requirements.

Pre-filing Prescribed format provided for pre-filing. This is a mandatory step

application and Application will be followed by a meeting in the process and will
consultation with the APA authority. Pre-filing on a no- offer an opportunity to
name or anonymous basis is also permitted determine the scope and
broad terms of the APA
and identify potential
issues for consideration.
No timeframe proposed
as of now
Key Features & Implications
Feature Description Implication

Prescribed fee in the range of USD 18,000 Filing fee kept steep to
Filing Fee for to USD 37,000 depending on the value of deter non serious
APA transactions sought to be covered in the applications
APA

The application can be filed anytime (i) APAs will apply

Filing timeline before the first day of the financial year for prospectively for the
which the application is made in respect of period sought to be
existing or continuing transactions; or (ii) covered (upto five
before undertaking a proposed transaction consecutive years). No
past year can be covered
and hence, no roll-back
mechanism.

APA application Prescribed format provided requesting Taxpayer should be

extensive details of the taxpayer’s prepared to submit
business, transactions and industry. detailed information
voluntarily. In the absence
of any firewall provisions,
sharing of this information
by the APA authority with
other departments within
the tax administration
cannot be ruled out
Key Features & Implications
Feature Description Implication

Evaluation and APA authority is empowered to hold The process is

negotiation meetings with the applicant, request for consultative. The APA
additional information, and visit the Authority and taxpayer
applicant’s business premises to arrive at shall prepare a proposed
its final decision mutually agreed draft
agreement in the end.
However taxpayer would
not be party to the
discussions between the
CAs in the bilateral
process

Agreement The APA authority needs to seek approval Taxpayer may need to
from the Central Government to enter into wait for some time for the
the APA final approval

Bilateral & The CAs would negotiate the terms of the Taxpayer would need to
Multilateral agreement. The APA process will not be file an application with CA
APAs initiated unless the foreign taxpayer has to kick off the bilateral /
filed a request with the CA of his country multilateral APA process
Key Features & Implications
Feature Description Implication

Post APA An Annual Compliance Report (ACR) needs Taxpayer would need to
compliance to be filed for each year covered by the substantiate continued
APA and a compliance audit would be satisfaction of the critical
undertaken to monitor adherence to the assumptions, correctness
terms of the APA of the supporting data or
information and
consistency of the
application of the transfer
pricing method

Revision, APAs can be revised in the event of The program is forward

cancellation significant changes to the underlying terms looking, flexible and
and withdrawal of the agreement. Non compliance can lead allows for various
of APA to cancellation of an APA. A taxpayer is also situations that could arise
free to withdraw an APA application if a
mutually acceptable outcome is not
reached
 Thank you
and best of luck for
your exams
CA. Vijay Iyer
CA. Nitin Narang