Presentation on Transfer Pricing

Transfer Pricing – A Discussion
Gurgaon Branch of NIRC of ICAI
10
th
October, 2015 by CA Sanjay Agrawal

TARGET AUDIANCE
• All our new professionals like to start ……..
• All our seniors who wish to enter into ………
• All other professionals who are not having
much exposure in this practice …….
• All professionals who are practicing …….
HONESTLY
• Not for those who are experts… as I shall
learn from them…
2

WHAT SHOULD BE OUR TAKE AWAYS?
• Legal Framework of Transfer Pricing
Provision under the Act……..
• Understand the procedure, process and
implementation ………
• How to Determine Arm’s Length Price (ALP)
Under the Act …….
• Understanding of application of various TP
method to calculate ALP …….
• How to proceed to prepare TP
documentation and TP Study ………
• How to issue certificate in Form No.
3CEB……..
3

4
Legal Framework of TP Provisions
(Introduced by the Finance Act 2001)

Chapter-X: Special Provision relating
to avoidance of Tax (TP Provisions)
• The Explanatory Memorandum to the Finance Bill, 2001
explains the need for and the rationale for introduction of
transfer pricing provisions:
• ♦ The profits derived by such enterprises carrying to business
in India can be controlled by the multinational group, by
manipulating the prices charged and paid in such intra-group
transactions, thereby, leading to erosion of tax revenues.
• ♦ With a view to provide a statutory framework which can lead
to computation of reasonable, fair and equitable profits and
tax in India, in the case of such multinational enterprises, new
provisions were to be introduced in the Income-tax Act.
• Constitutional validity of chapter X provisions
• In Coca Cola India Inc. v. Asstt. CIT [2009] 177 Taxman 103
(Punj. & Har.), it was held that Chapter X of the Act was not
violative of Article 14 of the Constitution. Further, there was no
lack of the legislative competence for enacting the provisions
of sections 92 to 92F [as amended by the Finance Act, 2001,
with effect from 1-4-2002] contained in Chapter X of the Act.
5

• 92: Computation of Income from
international transaction having regard
to arm’s length price.
• 92 A:Meaning of associated enterprise.
• 92 B:Meaning of International transaction.
• 92BA:Meaning of specified domestic
transaction
• 92 C: Computation of arm’s length price.
• 92CA:Reference to TPO
• 92CB:Power of board to make safe harbor
rules.
6

• 92CC: Advance Pricing Agreement.
• 92CD: Effect of Advance pricing agreement.
• 92D: Maintenance, keeping of information and
documents by person entering into international
transaction or SDTs.
• 92E: Report from accountant to be furnished by person
entering into international transaction or SDTs.
• 92F: Definitions of certain terms relevant to
computation of arm’s length price etc.
• 93: Avoidance of income tax by transactions resulting
in transfer of income to non residents.
• 94: Avoidance of tax by certain transactions in
securities.
• 94A: Special measures in respect of transactions with
persons located in notified jurisdictional area.
7

• Rule 10A: Meaning of Expressions used in
computation of ALP.
• Rule 10AB: Other Method of determination of
ALP.
• Rule 10B: Determination of ALP under Section
92C.
• Rule 10C: Most Appropriate Method.
• Rule 10D: Information and documents to be
kept and maintained u/s 92D.
• Rule 10E: Report from an accountant u/s 92E.
• Rule 10F: Meaning of Expressions used in
matters in respect of APA.
• Rule 10G: Person Eligible to apply for APA.
8

• Rule 10H: Pre-filling consultation.
• Rule 10I: Application for APA.
• Rule 10J: Withdrawal of Application for APL.
• Rule 10K: Preliminary processing of application.
• Rule 10L: Procedure to be followed for APA.
• Rule 10M: Terms of the Agreement.
• Rule 10MA: Roll Back of the agreement.
• Rule 10N: Amendments to Application.
• Rule 10O: Furnishing of annual compliance.
• Rule 10P: Compliance Audit of Agreement.
• Rule 10Q: Revision of Agreement.
9

• Rule 10R: Cancellation of an agreement.
• Rule 10RA: Procedure for giving effect to
rollback provision of an agreement.
• Rule 10S: Renewing an agreement.
• Rule 10T: Miscellaneous.
• Rule 10TA: Definitions Safe Harbour Rules.
• Rule 10TB: Eligible Assesses.
• Rule 10TC: Eligible International
Transaction.
• Rule 10TD: safe Harbour ….
• Rule 10TE: Procedure…. Till Rule 10THD
10

Penal Provisions:
• Section 271 (1)©: 100% to 300% of tax of
adjusted amount
• Section 271 AA: 2% of the value of each
ITs/SDTs for not maintaining of documents.
• Section 271BA: Rs. 1 lac for Failure to
furnish Report Form 3CEB
• Section 271G: 2% of the value of each
ITs/SDTs for Failure to furnish documents as
required by AO, TPO or CIT(A).
11

Understand the procedure, process and
12

Conditions:
• There should be an international transaction
between two or more associated enterprises.
• At least one of the AE should be non resident.
• The international transactions should give rise
to any one or more of the following:
• Income;
• Expenditure;
• Interest;
• Sharing of cost of expenses;
• Transaction should be recorded at ALP;
13

Assessment Procedure & DRP Mechanism:
• Reference to TPO; mandatory if IT exceeds 15 crores,
otherwise discretionary;
• Notice by TPO to the assessee;
• Scrutiny and passing of TP order within 34 months from
EOAY;
• AO to pass the draft order based on TPO order within
60days from TPO order;
• Assessee to accept or file objections to DRP or Appeal
before the CIT (A) within 30days ;
• DRP to issue direction to AO within 9 months from the
EOM in which draft order is received by Assessee
• AO to issue Final order within 1 month of receiving
direction of DRP;
• Assessee to file appeal to ITAT or accept;
14

Documents/Information/Record to be
Maitained Rule 10D (1) :
 Description of the ownership
structure;
 Profile of the multinational Group;
 Broad description of the business;
 Nature & Terms including pricing;
 Description of the Function
performed;
 Record of Economic and market
analyses;
 Record of uncontrolled transactions;
15

Documents/Information/Record to be
Maintained Rule 10D (1)……. :
 Record of the analysis performed;
 Description of the method considered;
 Record of Actual working carried out;
 Assumptions, policies and price
negotiations;
 Details of adjustments if any;
 Any other information, data or
document including official publication,
report of market research studies,
Price publications, Published accounts,
Agreements and contracts, Letters and
correspondence;
16

Computation of Arm Length Price ………
• Obligation to compute income at arm’s length
price of all international transactions
• ALP--“Price between unrelated parties in
uncontrolled conditions” [Section 92F(ii)]
• ALP should be a mirror image of a price
charged for a similar transaction between two
unrelated entities transacting in uncontrolled
conditions;
• Price of a transaction in open market is
reflective of functions performed, assets
employed and risks Assumed i.e.(FAR Analysis);
• FAR Analysis helps to identify the adjustments
required and judging comparability under Rule
10B(2) and Rule 10B(3).
17

FAR Analysis- Approach
• Understanding the business model of
the taxpayer;
• Study the characteristics of the
transactions;
• Identify suitable comparables;
• Benchmarking with uncontrolled
comparables;
• Determination of arm’s length price.
18

Computation of Arm’s Length Price (ALP)
Section 92C based on any one of following
Methods……. :
 Comparable Uncontrolled Price (CUP);
 Resale Price Method (RPM);
 Cost Plus Method (CPM);
 Profit Split Method (PSM);
 Transaction Net Margin Method (TNMM)
 Any other method based on information,
data or document including official
publication, report of market research
studies, Price publications, Published
accounts, Agreements and contracts,
Letters and correspondence w.e.f.
23.5.2012 Rule 10AB;
19

Comparable uncontrolled Price Method (CUP);
Internal CUP or External CUP;
• Appropriate:
-When tax payer or other group company buys/sells similar
goods in similar quintiles under similar terms from/to an
independent enterprise in similar market (Internal CUP)
- When the independent enterprise buys/sells similar goods in
similar quintiles under similar terms from/to an independent
enterprise in similar market (External CUP)
• Limitation:
-Difficulty in availability of reliable comparable data, especially
in the case of external comparables.
-Absence of objective method to monetize difference in
contractual obligations;
-Not suited to niche businesses where product or service range
is unique.
20

Resale Price Method (RSP)
• Appropriate:
-when the seller add little value to the goods and
not alter the physical properties of goods before
resale; Pakacking, repacking, labeling or minor
assembly does not ordinarily constitute physical
alteration.
-when tangible goods like cars or FMCG products,
intangible like packaged services software etc.
• Limitation:
-When the reseller adds substantial value to the
end product or services;
-Non availability of reliable comparable data in case
of external comparables.
21

Cost Plus Method(CPM)
• Appropriate:
-Provision of standardized services (e.g.
medical transcription or call centre business)
-Joint Facility management
-Long term buying and selling contracts
-Transfer of semi finished goods for
manufacturing.
• Limitation:
-Not suited for niche businesses where the
product or service range is unique.
-Non availability of reliable comparable data in
case of external comparables.
22

Profit Split Method(PSM)
• Appropriate:
–Integrated consultancy contracts executed by group
companies located in multiple jurisdiction;
-Contracts involving creation of value added intangibles
by multiple group.
-When the transactions are so integrated and mutually
dependent
–When the revenue streams and efforts are not uniform
across various arrangements/contracts.
• Limitation:
-Extreme levels of subjectivity involved in determination
of relative contributions by multiple entities.
-Determination and apportionment of cost could be
practical challenge especially in case of common costs.
23

Transaction net margin Method (TNMM)
• Appropriate:
–Suitable for sectors with standardized goods and services
where the product and service range are extremely
comparable;
- Best use of commercial database like Prowess and Capitaline,
similar to CPM.
-Where internal and external comparables are not available for
applying CUP, the method is most appropriate.
–When the revenue streams and efforts are not uniform across
various arrangements/contracts.
• Limitation:
-Not suitable where goods and services are unique and the
methods of delivery are not comparable.
-Determination and apportionment of cost could be practical
challenge especially in case of common costs.
24

Any other Method
Notification No. 8/2012dated 23.05.2012Rule10AB w.e.f AY 2012-
13
• MAM is considered Based on considering the following:
• the nature and class of international transaction;
• the class/classes of associated enterprises entering into the
transaction and the functions performed by them taking into
account asset employed/to be employed and risks involved;
• the availability, coverage and reliability of data necessary for
the application of method;
• the degree of comparability between international transaction
and the uncontrolled transaction and between the enterprises
involved;
• the extent to which accurate adjustments for differences can
be made to make uncontrolled transaction comparable; and
• the nature, extent and reliability of the assumptions involved in
the method.
25

Report of Accountant U/s 92E & Rule 10E-
Form 3CEB ………
26

Accountant Responsibility ………
• Can he be only Statutory Auditor?
• Is NOC from previous auditor required?
• Should have letter of appointment…
• Tax Auditor can but Internal auditor should not and
also the firm of accountants maintaining books of
accounts..
• Should get proper MRL with regard to each clause;
• Primary responsibility of assessee to furnish
information in audit report under section 92E
• Responsible to report on the reasonableness of
documentation/information required u/s 92D.
• Responsible to report on the method and
procedure to calculate ALP u/s 92C .
27

• Income shall be deemed to have escaped assessment
where the assessee has failed to furnish a report in
respect of an international transaction which he was so
required under section 92E. w.e.f. 1-7-2012
• Examination of only those accounts and records of the
assessee which relate to ITs/SDTs entered into by him
during the previous year under audit.
• Ascertaining and reporting whether the assessee has
maintained proper information and documentations
prescribed in respect of international transactions SDTs
entered into by him.
• Examination and certification of particulars given in the
Annexure to Form No. 3CEB are true and correct.
• Responsible to report on the method and procedure to
calculate ALP u/s 92C as maintained by the assessee .
28

• While conducting the audit, the auditor will have to use his
professional skill and expertise and apply such tests as
required in the circumstances.
• The auditor should clearly state in his report that figures
from general purpose audited financial statements have
been used and relied upon;
• Based on the strength of internal controls of the assessee,
he may apply appropriate sampling techniques.
• The concept of 'materiality' is relevant in audit under
section 92E.
• The auditor should obtain a management representation
from the assessee containing the following particulars
regarding each associated enterprise with whom the
assessee has entered into international transactions:
• Name, Address, legal status, country of residence &
linkages among various associated enterprises
29

• Income shall be deemed to have escaped assessment
where the assessee has failed to furnish a report in
respect of an international transaction which he was so
required under section 92E. w.e.f. 1-7-2012
• Examination of only those accounts and records of the
assessee which relate to ITs/SDTs entered into by him
during the previous year under audit.
• Ascertaining and reporting whether the assessee has
maintained proper information and documentations
prescribed in respect of international transactions SDTs
entered into by him.
• Examination and certification of particulars given in the
Annexure to Form No. 3CEB are true and correct.
• Responsible to report on the method and procedure to
calculate ALP u/s 92C as maintained by the assessee .
30

Open house
31
Questions…
CA Sanjay Agrawal
Dinesh Mohan & Co.
Chartered Accountants
Tel (Direct): +91 124 4604 126
Cell: +91 9810116321
email: sanjay@charteredaccountantsindia.in

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