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1

Transfer Pricing in India

Vishal Gada

28 November 2013


2

Contents

1 Introduction to Transfer Pricing

2 Key components of Transfer Pricing

Methods for determining Arm’s Length Price

Transfer Pricing Documentation & Penalty

4

5

Specified Domestic Transactions 3

Transfer Pricing Issues6


3

Contents

7 Base Erosion and Profit Shifting

8 Location Savings

Advanced Pricing Agreement

Safe Harbour

10

11

Economic Scenario9

12 Case Studies and Case Laws

Transfer Pricing (‘TP’) -Introduction


5

Trend of Transfer Pricing Adjustments

Financial Year

No. of TP Audits Completed

Number of Adjust Cases

% of Adjust Cases

Amount of Adjust (Rs. In crores)

% increase in Amt of Adjust

2004-05 1,061 239 23 1,220 -

2005-06 1,501 337 22 2,287 87%2006-07 1,768 471 27 3,432 50%2007-08 219 84 39 1,614 -53%2008-09 1,726 670 39 6,140 280%2009-10 1,830 813 44 10,908 78%2010-11 2,301 1,138 49 23,237 113%2011-12 2,638 1,343 52 44,531 92%


6

2002 2003 2004 2005 2006 2007 2008 2009

0.3 0.6 0.91.7

2.3

5.3

9.3

13.3

TP Adjustments by Revenue(USD bn)**

** Ministry of Finance and Business Standard article dated 11 May 2013

On an average, TP adjustments are made on 54 percent of cases picked up for scrutiny

Impact may multiply with widening of definition of the term ‘International Transaction’ and application of Specified Domestic Transactions to domestic related party transactions

Transfer Pricing Litigation Scenario in India


7

Transfer Pricing: A Global Overview

New and expanding transfer pricing legislation and rules are in trend in many countries

Levy of Harsh penalties

Stepped up enforcement globally in the form of:

• More auditors, better training

• Increasingly sophisticated

• Change in scrutiny mechanism

Complex issues and transactions are picked up for scrutiny and increasingly challenged

India, China, Australia, Korea and Japan have all recently seen an increase in number of cases picked up for scrutiny

Other tax authorities have signaled intent to step up TP compliance and field audit work


8

Why Transfer Pricing?

Finance Minister’s speech on the rationale for introducing Transfer Pricing Regulations

“The presence of multinational enterprises in India and

their ability to allocate profits in different jurisdictions

by controlling prices in intra-group transactions has

made the issue of transfer pricing a matter of serious

concern. I had set up an Expert Group in November 1999

to examine the detailed structure for transfer pricing

legislation. Necessary legislative changes are being made

in the Finance Bill based on these recommendations.”

-Mr. Yashwant Sinha Finance Minister, Government of India

February 28, 2001


9

Provision Section / Rules Reference

Computation of Income from international transaction having regard to Arms Length Price

Section 92

Associated Enterprises Section 92A

International Transactions Section 92B

Specified Domestic TransactionSection 92BA / Section 40A(2)(b) / Section 80A / Section 80-IA / Section 10AA

Computation of Arm’s Length Price Section 92C read with Rule 10B and 10C

Power of Assessing Officer and Transfer Pricing Officer Section 92C / Section 92CA

Power of Board to make safe harbour rules Section 92CB

Advance Pricing Agreement Section 92CC / Section 92CD

Reference to Dispute Resolution Mechanism Section 144C

Documentation Requirements Section 92D / Rule 10D

Accountant’s Report Section 92E / Rule 10E and Form 3CEB

PenaltiesSection 271 (1) (c), Section 271AA, Section 271BA and Section 271G

Income escaping assessment Section 147

Definition Section 92F / Rule 10A

Statutory Regulations pertaining to TP in India


10

Background – What is Transfer Pricing?

Unrelated parties Transaction Price

Related parties Transaction Transfer Price

Transaction includes goods, services or finance

Implicit Assumption: Due to special relationship between related parties, high possibility of transfer price being different than the price that would have been agreed between the unrelated parties.

And such price charged between unrelated parties in uncontrolled conditions is referred to as the “arm’s length” price (ALP)


11

Computation of income from international transaction having regard to arm’s length price – Section 92

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

It has been explained that the allowance for any expense or interest arising from an international transaction shall also be determined having regard to an arm’s length price

Agreements / Arrangements towards cost allocations/ apportionments/ contributions in connection with benefit/ service / facility also covered under the TP regulations – Section 92(2)

Any allowance for an expenditure or interest or allocation of any cost or expense or any income in relation of the specified domestic transaction shall be computed having regard to the arm’s length price – Section 92(2A)

Transfer pricing provisions not 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 – Section 92(3)


12

Key constituents of Transfer Pricing

Transfer PricingSection 92 of the Income Tax

Act, 1961 (‘Act’)

Associated EnterpriseSec 92A

International Transaction

Sec 92B

Specified Domestic

TransactionSec 92BA

Arm’s Length Price

Sec 92C

Transfer Pricing Documentation

Sec 92D

Accountant’s Report

Sec 92E


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International Transaction - Section 92B(1)

Components of International transaction :

• Transaction;

• Between two or more associated enterprises;

• Either or both of whom are non-residents

Supply of goods / services

India Singapore

Parent Co.Resident

Subsidiary Co.

Non Resident


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What is an International Transaction?

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 such enterprises; or

A mutual agreement or arrangement for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises


15

Deemed International Transaction - Section 92B(2)

As per section 92B(2), transaction

undertaken with any person other than

associated enterprise shall be deemed

to be an International transaction if :

there exists a prior agreement

between such person and the

associated enterprise; or

the terms of the relevant

transaction are determined in

substance between such person

and the associated enterprise

A’s Parent 3rd party

A

Prior agreement

Services100%

A’s Parent 3rd party

A

Determination of terms

Services100%

A & the 3rd Party to be regarded as AEs

A & the 3rd Party to be regarded as AEs


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International Transaction – Definition Expanded – Finance Act 2012

Non reported transactions? • Guarantee

• Excess credit period

• Advance for services

Financing Transactions covered • Capital Financing

Business restructuring / reorganization covered

• Covered transactions even if related profit/ loss on future date

• Very wide coverage

Intangible properties defined • Marketing related intangible assets (customer list, customer contracts etc.)

• Human capital related intangible assets (organized and trained work force)

• Other property deriving value from intellectual content rather than physical attributes


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AE – Section 92A(1)

Section 92A (1) of the Income-tax Act states as under :

Associated Enterprise in relation to other enterprise, means an enterprise-

Which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; or

In respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise.


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AE – Primary Association

Parent Company

Subsidiary Company

Management/ Capital/Control

Parent Company

Subsidiary Company


Intermediary

Parent Company

Subsidiary Company 1


Subsidiary Company 2


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Two enterprises shall be deemed to be associated enterprises if, at any time

during the previous year:-

One enterprise holds directly or indirectly voting power of not less than 26% in

other enterprise

Any person holds directly or indirectly voting power of not less than 26% in each of

such enterprises

Loan advanced by one enterprise constituting not less than 51% of the book value

of assets of the other enterprise.

One enterprise provides guarantee of not less than 10% or more of the total

borrowings of the other enterprise

More than half of the board of directors or members of the governing board, or

one or more executive directors or executive members of the governing board of

one enterprise are appointed by the other enterprise

Deemed AE – Section 92A(2)


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Same person/s appoints more than half of directors on board or one executive

director in each of the two enterprises

One enterprise is wholly dependent on the knowhow, patents, copyrights, trade

marks, licenses, franchises or any other business or commercial rights of similar

nature of the other enterprise

90 percent of the raw materials consumed for the manufacture or processing of

goods and articles carried out by one enterprise is supplied by the other enterprise.

One enterprise is controlled by an individual , the other enterprise is also

controlled by such individual or his relative or jointly by such individual and relative

of such individual

Deemed AE – Section 92A(2)


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Deemed AE – Secondary Association

Deemed AssociatedEnterprises

Deemed AssociatedEnterprises

Power to appoint more than half of

directors

Loans in excess of

51% of total assets

Common executive director(s)

Guarantees in excess of 10% of total borrowings

Supply of raw materials

(90% or more)

Complete dependence

on IPRs

Existence of common

control

Holding shares carrying 26% or

more of the voting power


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International Transfer Pricing - Genesis

InternationalTransactions

Associated

Enterprises

(‘AEs’)

Not subject to Transfer Pricing

Income / expense to be computed having regard to Arm’s Length Price (‘ALP’)

Specified Domestic Transactions (‘SDT’)


24

The Legislative Intent (1/4)

Finance Act 2012 intends to extend the scope of Transfer Pricing provision to ‘Specified Domestic Transactions’

Coverage of TP expanded based on suggestions of Supreme Court in the case of CIT v Glaxo SmithKline Asia (P) Ltd. [2010-195 Taxman 35 (SC)]

Recognized revenue neutrality of domestic transactions except in situations of ‘tax holiday’ and ‘losses’

Aim is to remove complications in arriving at Fair Market Value (‘FMV’)

for applying provisions of Section 40A(2) and Section 80IA(10)

Tax laws to be amended for domestic transactions between related parties to be brought within ambit of Indian TP provisions

AO’s constraint of relevant documents can be addressed by

making it compulsory for taxpayer to maintain relevant documents and

obtain audit report from Chartered Accountant

Supreme Court Held


25

The Legislative Intent (2/4)

Loss making Unit

Profit making Unit

Shifting of Expenses

Shifting of Income

No tax due to loss

Tax reduced due to profit

shifting

Taxable Unit

Shifting of Income

Tax @ 33%

Tax Holiday Unit

Tax Exemption

Loss to Indian Revenue as a result of the above

Shifting of Expenses


26

The Legislative Intent – Domestic Tariff Area (‘DTA’) (3/4)

Particulars Co A Co B

Taxes in India 30% 30%

Sales to Related Party

Other Income 200 400

Purchase from RP -

Other Expenses 400 200

Profit/ Loss (100) 100

Tax - 30

Total Tax for the Group 30

Particulars Co A Co B

Taxes in India 30% 30%



Purchase from RP -


Profit/ Loss (50) 50

Tax - 15


Scenario 1 Scenario 2

•By shifting of expenses from a loss making company to a profit making company, the group could reduce its tax liability for the current year, though the impact will be reversed in future years given carry forward of losses.•To avoid such tax arbitrage cases and even though there is no erosion of tax base, SDT has been introduced.

100

100

150

150


27

The Legislative Intent – DTA and Tax Holiday Unit (4/4)

Scenario 1 Scenario 2

•By shifting of expenses from a tax holiday unit (Power) to a unit in the Domestic Tariff Area, the group could reduce its tax liability by 22.5.

•To avoid such cases Domestic TP has been introduced.

Particulars Tax Holiday

DTA

Taxes in India 0*% 30%



Purchase from RP


Profit/ Loss 150 150

Tax * - 45


Particulars Tax Holiday

DTA

Taxes in India 0*% 30%



Purchase from RP


Profit/ Loss 225 75

Tax * - 22.5

Total Tax for the Group 22.5

* Subject to MAT

150

150

225

225


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Scope

SDT defined to include

• any expenditure in respect of which payment has been made or to be made to a specified person [section 40A(2)(b)];

• any transaction referred to in section 80A;

• any transfer of goods or services referred to in sub-section (8) of section 80-IA;

• any business transacted between the taxpayer and other person as referred to in sub-section (10) of section 80-IA;

• any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which provisions of sub-section (8) or sub-section (10) of section 80-IA are applicable; or

• any other transaction as may be prescribed

Applicability

• Applicable where aggregate amount of transactions exceeds INR 5 crores in a year

• Applicable from FY 2012-13 onwards


29

Fair Market Value (FMV) versus Arm’s Length Price (ALP)

Pre-amendment


Section 92 – International transactions between two or more associated enterprises (either or both of whom are non resident) to be at Arm’s Length Price

Section 40A(2) – Payments to relatives and associated concerns to be at fair market value in order to qualify as business expenditure

Section 80-IA – If goods and services transferred between the eligible units and any other units or vice-versa are not found to be at market value, then deduction to be recomputed

Section 10AA – If goods and services transferred between the eligible units and any other units or vice-versa are not found to be at market value, then deduction to be recomputed

Fair Market Value

Concept of Fair Market Value for Domestic related party transactions


30


Post-amendment


Section 92(2) – Where in an international transaction or specified domestic transaction, two or more associated enterprises enter into a mutual agreement or arrangement for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises, the cost or expense allocated or apportioned to, or, as the case may be, contributed by, any such enterprise shall be determined having regard to the arm's length price of such benefit, service or facility, as the case may be. Section 92(2A) – Any allowance for an expenditure or interest or allocation of any cost or any income in relation to the specified domestic transaction shall be computed having regards to the arm’s length price

Concept of Arm’s Length Price for Domestic related party transactions


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Price which goods or services fetch on sale in

the open market

Price applied for a transaction in

uncontrolled conditions

No method prescribed

Any market pricing point can be treated as FMV

No deviation permitted from FMV

Six prescribed methods

Arithmetical mean of prices in case of more

than one price

Deviation of +/- 1% / 3%

Fair Market Value Arm’s Length Price

Definition

Computation Mechanism

Transaction Value

Deviation


32

Section 40A(2)(b) – Basics

Section 92BA extends TP to “any expenditure in

respect of which payment has been made or is to

be made to a person referred to in clause (b) of

sub-section (2) of section 40A”

Applies only to ‘expenditure’ in respect of

payments made or to be made to specified

persons

• No impact on income side

Only the entity incurring the expense will need to

complete the prescribed compliances

Expenditure by one group entity is income for

another group entity - arms length analysis may

consider both transacting parties


33

Section 40A(2)(b) – Specified Persons

Section 40A(2)(b) - list of persons / entities to be treated as related parties/ specified persons

• Specified persons having substantial interest ( i.e. more than 20% voting power or share in profits)

in taxpayer’s business and vice-versa covered;

• Scope expanded to include sister concerns

Illustrative list of entities / persons that may be included for a corporate taxpayer:

a) Company holds 20% or more equity in the tax payer;

b) Companies whose 20% or more shares are held by such a company that holds more than 20%

equity in the tax payer;

c) Companies in which the tax payer holds 20% or more equity;

d) Directors of tax payer company, and relatives of such Directors;

e) Directors of companies in category (a) above; and relatives of such Directors;

f) If an individual holds 20% or more equity in the tax payer, then relatives of such an individual; all

other companies where such individual is a Director; all other Directors of such a company, and

relatives of all such Directors; etc


34

Section 40A(2)(b) – Scope (1/2)

IndividualAssessee

Relatives Sec 40A(2)(b)(i)

Person in whose business / profession

assessee or his relative has substantial interest

Sec 40A(2)(b)(vi)(A)

Persons covered under section 40A(2)(b) – Applicable in case of Individual assessee

“Relative” - in relation to an individual, the husband, wife, brother or sister or any lineal ascendant or descendant of that individual

“Substantial interest” - A person is deemed to have a substantial interest in a business or profession, if,—(a) in a case where the business or profession is carried on by a company, such person is the beneficial owner of shares carrying not less than 20% of voting power; and(b) in any other case, such person is, at any time during the previous year, beneficially entitled to not less than 20 % of profits


35

Assesee Company

Company

Company

20%Director

Relative

Individual

Relative

Companies in which

individual is a Director

All Directors of such

Company

20%

AOPs in which individual is a

Member

All Members of such AOP

Firms in which

individual is Partner

All Partners of such Firm

HUFs in which individual is a

Member

All Members of such HUF

Firm AOP HUF

20%

Relative

Company

20%

20%

20%

Relative Relative

Partner

20% 20%

Member Member

Director

Relative

BOI

Relative

Member

20%

All Members of

such BOI

BOIs in which individual is a

Member

AOP Firm

20%

Relative Relative Relative Relative Relative

Circular No. 6-P, dated 6 July 1968 refers to direct and indirect relationship“Relative” - in relation to an individual, the husband, wife, brother or sister or any lineal ascendant or descendant of that individual

Section 40A(2)(b) –Scope (Illustrative) (2/2)


36

Illustrations

Section 40A(2)(b)(iv)


37

Illustrations

Section 40A(2)(b)(iv)


38

Taxpayer

ABC Ltd Mr. B

Mr. A

Mr. C

Section 40A(2)(b)(v)

Directo

r

Director Relative

Sub

stan

tial I

nter

est

Illustrations


39

Illustrations

Section 40A(2)(b)(vi)


40

Issue Relating to Indirect Holding


41

Issue 1 - Direct Vs Indirect Shareholding


42

Issue 2 - Whether SDT provisions applicable to transactions with non-residents?


43

Issue 3 - Capital Expenditure covered under purview of SDT provisions?


44

Issue 4 - Period of applicability of SDT to tax holiday units?


45

Issue 5 - Whether inter-unit cost allocation is a SDT?


46

Tax Holiday – Transfer Pricing Test

Tax holiday unit Other unit

Sub-section (8) of section 80-IA (and similar such provisions in 10AA and Chapter VI-A)

Inter unit transfers (goods and services etc.)

Other person having close connection

Tax holiday company

Business transacted (wider than transfer of goods or services)

Sub-section (10) of section 80-IA (and similar such provisions in 10AA and Chapter VI-A

Not corresponding to market value (adherence to ALP proposed)

Transactions to be reported in Accountant’s Report and arms’ length nature to be substantiated in TP Documentation

More than ordinary profits earned by business unit claiming deduction (adherence to ALP proposed)


47

Possible Tax Leakages – If ALP Not Followed (Illustrations)

X Ltd.(non-tax holiday)

Y Ltd.(non-tax holiday)

Sale at 120 v/s ALP (ie 100)

Disallowance of INR 20

[40A(2)(b)]


Y Ltd.(tax holiday)

Sale at 120 v/s ALP

(100)

Double Disallowance

INR 40

[40A(2)(b) and excessive profit]


Y Ltd.(tax holiday)

Sale at 80 v/s ALP

(100)

Inefficient pricing structure – Reduced tax holiday benefit


48

Domestic Transfer Pricing affecting tax holiday undertakings

Transactions to be reported in Accountant’s Report and arms’ length nature to be substantiated in the TP Documentation

Section Nature of undertaking covered

80IA Undertakings engaged in Developing, operating and maintaining, developing and operating and maintaining infrastructure

facilities Generation/ transmission or distribution of power Reconstruction / revival of power generating plants

80IB Undertakings located/ engaged in Industrially backward districts as notified Scientific research and development Refining mineral oil / commercial production of natural gas Operating cold chain facility for agricultural produce Processing, preservation and packing of meat / meat products or poultry / marine/dairy products Operating and maintaining a hospital of specified capacity

80IC Undertaking located in notified Centre/ Parks/ Areas in Sikkim Himachal Pradesh/ Uttaranchal North –Eastern states

80ID Undertaking engaged in business of hotel / convention centre in specified areas/ districts

10AA Undertakings having a Special Economic Zone unit


49

Issue 6 - How to benchmark Directors’ Remuneration?

Possible Benchmarking approaches

Limitations

•Ceilings provided in Companies Act, Central Government approvals, Listing agreement norms, DPE Guidelines, Shareholder and Board of Director resolutions, Remuneration Committee approvals

•Not applicable to private limited companies •Upper ceilings can be challenged by Revenue

•Peer review •Availability of reliable data may be a constraint

•Salary drawn elsewhere, simultaneously or previously

•Generally not available for promoter directors

•External publicly available salary data on HR websites

•Could be unreliable and difficult to obtain •May lead to cherry-picking


50

Issue 6 - How to benchmark Directors’ Remuneration?

Possible Benchmarking approaches

Limitations

•Comparison of ratio of Director’s remuneration to Total Cost (or Sales) with similar ratio for comparable companies

•No emphasis on individual capabilities of a Director •Limited comparable information on databases •Requires high degree of comparability with selected companies •No known correlation between remuneration and sales / cost of a company

•Subsumed under overall net profit based approach

•Cannot be applied for loss making companies Approach likely to be challenged by Revenue

•Qualitative analysis of educational qualifications, work experience, etc.

•Can be used as corroborative analysis


51

Miscellaneous Issues

Issues Possible views

What does ‘close connection’ for Section - Reliance on Section 92A and Section 40A(2)(b)80IA(10) mean? - Indirect shareholding covered?

Whether all transactions with a closely connected - View 1 - All transactions to report & benchmarkperson included or only those resulting in more - View 2 - Only transactions resulting in morethan ordinary profits? than ordinary profits to report and benchmark

Whether TP applicable if expense not claimed? - Transaction to be reported, not benchmarked?

Whether SDT applicable for entities covered - Possible to take position that not covered forunder presumptive taxation rules? transactions covered under Section 40A(2)(b)

- Tax holiday units?

Whether transactions between two eligible units - Nothing expressly stated in the provisions(having differential exemption) covered? - ICAI Guidance Note mentions transfers

between ‘eligible’ and ‘non-eligible’ business?

Are free of cost goods/ services/ loans covered? - Should not be an issue under Section 40A(2)(b)- Tax holiday units?

Methods for determining ALP


53

Computation of ALP – Section 92C

Prescribed Methods

Traditional Transaction Method

Transactional Profit Method

ResalePrice

Comparable Uncontrolled

Price

No hierarchy or preference of methods prescribed under the Act

Other Method

Price charged or paid / Price would have

been charged or paid

Section 92C prescribes six methods to compute ALP

Indian legislation provides an option to select the most appropriate method (‘MAM’)

Where more than one ALP is determined by application of the MAM , the arithmetic mean of such prices is taken to be the ALP

Cost Plus

ProfitSplit

TransactionalNet

Margin


54

OECD Guidelines Hierarchy

Comparable Uncontrolled Price Method

Most Preferred

Least Preferred

Cost Plus Method

Resale PriceMethod

Transactional Net Margin

Method

Profit Split Method

Traditional Transaction Methods

Transactional Profits Methods


55

Order of consideration of methods

The Indian transfer pricing regulations do not prescribe any specific

hierarchy of methods

The OECD guidelines state that traditional transactions methods are

preferable to transactional profit methods (in a situation where both can

be applied in an equally reliable manner).

Further, the OECD guidelines state that the CUP is the “preferred

method”, this should be used in preference to any others

Profit-based methods are often “one-sided” methods that use profits to

make inferences about pricing

• Assumes that profits are largely dependent on transfer prices

• Profit-based methods make sense if - and only if – the assumption

holds and profits are largely dependent on transfer prices

Application of TNMM to a specific tested party breaks down when

factors other than transfer pricing have a material impact on profits


56

Selection of Transfer Pricing Methods

Most appropriate method shall be the method best suited to the facts and

circumstances of each particular international transaction and which

provides the most reliable measure of an arm’s length price in relation

to the international transaction

Factors considered for selection of the most appropriate method

• Nature and class of international transaction

• Class of associated enterprise and functions performed

• Availability, coverage and reliability of data

• Degree of comparability between the International transaction

• Extent to which reliable and accurate adjustments can be made

• The nature, extent and reliability of assumptions for application of the

method

Ru

le 10C


57

Rule 10B(2) - Comparability Factors

Comparability factors

CharacteristicsDepends on type: tangible,

intangible or service

Functional Analysis

Conduct is best evidence of risk bearing,

should be consistent with control

Economic Circumstances

Geography, size of market, date and time

Contractual termsWhere not written,

deduce from conduct


58

Rule 10B(3) - Adjustments for Comparability

An Uncontrolled transaction shall be comparable to international transactions if:

None of the differences between the transactions being compared or between the enterprises entering into such transactions are likely to materially affect the price, or cost charged, or profit arising from, such transactions in the open market; or

Reasonable accurate adjustments can be made to eliminate the material effects of such differences.

Practical Experience – Kind of adjustments asked for:

Working capital adjustment

Volume adjustment

Idle capacity adjustment

Adjustment for difference in risk profile

Adjustment for differences in accounting policies

Adjustment for difference in depreciation rates


59

Rule 10B(4) - Usage of Multiple Year Data

The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into :

Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared.

Use of multiple year data considered useful to even out fluctuations caused by:

• Business cycles and

• Product life cycles e.g. : Seasonal sale of umbrellas

Multiple year data widely used due to non-availability of relevant year financial statements of comparable companies at the time of finalizing TP documentation

Practical Experience in Transfer Pricing audits:

• TPOs follow first leg of rule 10B(4), reject multiple year data

• Adopt only data relating to the relevant financial year and undertake adjustments (including the data which was not available at the time of filing of return)


60

Comparable Uncontrolled Price (‘CUP’) Method

Compares price charged for property/ service transferred in controlled transactions with price charged in comparable uncontrolled transactions i.e. related parties vis-à-vis unrelated parties

Requires strict / high level of comparability in products, contractual terms, economic terms, etc.

Most Direct Method for testing ALP and the Prices are Benchmarked

Conditions for use of CUP

• none of the differences between the transactions can materially affect price in the open market

• calls for adjustments to be made for differences which could materially affect the price in the open market e.g.:

Difference in volume/quality of product

Difference in credit terms

Risks assumed

Geographic market


61

CUP Method

Ext

ern

al C

UP

Unrelated Co. Y

Unrelated Co. Z

India

Tra

nsfe

r P

rice Internal CUP

Outside India

(e.g. USA)

India

Subsidiary Co

Parent Co

Unrelated Co. X

Two types of CUPs available - Internal CUP

& External CUP

Internal CUP - The price that the company

has charged in a comparable uncontrolled

transaction with an independent party

External CUP - The price charged in a

comparable uncontrolled transaction

between third parties when compared to a

price of controlled transactions

OECD - Priority to Internal CUP over

External CUP due to higher degree of

comparability

Outside India

(e.g. USA)


62

CUP Method – Case Study I

Unrelated Supplier A (Japan)

Unrelated Supplier B (Russia)

Related Supplier Foreign Co. (AUS)

Ind Co. (India)

An Indian company, mainly engaged in the refining and sale of copper metal

Indian Company purchases crude metal from both related and unrelated parties

Critical factors that affect the crude copper price are –

Volume;

• Tenure of supply contract (long term, short-term)

• Alloy mix of product (copper crude come with or without small quantities of other metal alloys like gold and silver)

• Other terms of contracts (FOB v/s. CIF, port of shipment etc.)


63

CUP Method – Case Study I

Criteria Related Party ForCo (Australia)Controlled

Unrelated Party A (Japan)Uncontrolled

Unrelated Party B (Russia)Uncontrolled

Tenure of Contract

Long Term (10 yrs)

Long Term (8 yrs)

Short Term (2 yrs)

Volume during year under consideration

2200 MT 3000 MT 9000 MT

Alloy Mix 0.5% Gold, 1% silver

1% Gold, 1% silver

None

Port of shipment

Australia Japan Russia

Price (per MT) INR 29,500 (applicable for entire year)

INR 32,000 (applicable for entire year)

INR 28,500 (applicable for entire year)

Other Terms FOB basis CIF basis FOB basis


64

Resale Price Method (‘RPM’)

Price paid by Sub Co. to AE is at arm’s length if the 25% resale margin earned by Sub Co. is more than margins earned by

similar Indian distributors`

Transfer Price INR 75

Resale Price INR 100

Subsidiary Co

Parent Co

Unrelated Co. Y

Outside India

India

Compares the resale gross margin earned by associated enterprise with the resale gross margin earned by comparable independent distributors

An arms’ length gross margin should be sufficient for a reseller to cover its operating expenses and make an appropriate operating profit (in light of its functions and risks)

Under this method comparability is less dependent on strict product comparability and additional emphasis is on similarity of functions performed & risks assumed

Method used in case of purchase of goods or services from related parties for resale to unrelated parties without substantial value addition

Preferred method for a distributor buying purely finished goods from a group company (if no CUP available)


65

RPM – Case Study I

Independent third party in India

End Customer

Foreign Manufacturer

Related party in India

COGS = INR 150Resale Price = INR 200

Gross Profit Margin = 50/200 = 25%

Transfer Price = ??

Resale Price = INR150

ALP= 150 – (150*25%) =112. 50

Sale to independent third party at INR 150 and sale to end customer by third party at INR 200

Sale to end customer by related party at INR 150

Particulars Amount

Gross Profit 50 i.e. (200-150)

Gross Margin 25% i.e. (50/200)

Arm’s Length Purchase Cost 112.50 i.e. [150 – (25% 0f 150)]


66

Cost Plus Method (‘CPM’)

Price charged by Sub co to AE is at arm’s length if the 25% mark up on

cost is more than that of similar Indian assemblers

Transfer Price INR 125

Direct cost & Indirect cost

of Production INR 30COGS INR 70

Outside India

India

Subsidiary Co

Parent Co

Unrelated Co. ZCompany Y

Method uses the costs incurred by the supplier of goods (or services) in a controlled transaction for goods or services provided to an related party

An appropriate cost plus mark-up is added to the above cost in light of the FAR Arm’s Length Price = Direct and Indirect Cost of Production (+) mark-up (based on benchmarking analysis) earned by comparables

Comparability under this method is not as much dependent on close physical similarity between the products

Larger emphasis on functional comparability


67

CPM – Case Study

B Ltd. derives technology support from

A Ltd.

(20 percent of normal GP)

Marketing Risks associated withservices rendered to customers other than A Ltd(10 percent of normal GP)

B Ltd. offered one month’s credit to A Ltd.(1.5 percent GP)D

IFF

ER

EN

CE

S

A Ltd. (AE)

100 man-hours @ INR2,000 per man-hourTotal Costs incurred(INR 175,000) C Ltd

(Third Party)

B Ltd. – Software Development +onsite and offsite consultancy services

@ INR 3,000 perman-hour

GP margin earned oncosts 40 %

B Ltd

Arm’s Length Price for

transaction between

B Ltd and A Ltd?

Pro

visi

on

of

serv

ice

s

Provision of services


68

CPM – Case Study – contd…

Direct and Indirect Costs (INR) 175,000

G.P. mark-up in comparable uncontrolled transaction (A) 40 %

Less:

Adjustment for Technology Support from A Ltd. (20% of 40%) (8%)

Risk adjustment – no market risk as regard trades with A Ltd. (10% of 40%) (4%)

Sub-total (B) 12%

Add:

Cost of credit to A Ltd. 1.5%

Sub-total (C) 1.5%

Arm’s length GP mark-up = (A) – (B) + (C) 29.50%

Arm’s length Income (INR) 226,625

Increased Income INR (226,625 – 200,000) 26,625


69

Profit Split Method (‘PSM’)

India

Outside India

Mfg Company B

Parent Co ATechnology intangibles

Marketing Co C - Marketing

intangibles

Profit Split Method is appropriate when

• Transactions which are not capable of being evaluated separately

• Analyzing tangible, intangible or services issues

• Parties are so interdependent and it is not possible to identify closely comparable transactions

Calculates the combined operating profit resulting from an inter-company transaction based on the relative value of each AEs contribution to the operating profit

The contribution made by each party is determined on the basis of a division of functions performed, valued, if possible using external comparable data


70

Transactional Net Margin Method (‘TNMM’) (1/2)

Subsidiary Co BNet margin 5%

Parent Co A

Unrelated CosNet margin 3%

Unrelated Cos

India

Outside India

Usually regarded as an indirect and one-sided method, but is most widely adopted

Applicable for any type of transaction and often used to supplement analysis under other methods

Most frequently used method in India, due to

Lack of availability of comparable uncontrolled prices and

Lack of gross margin data required for application of the cost plus method/ resale price method

Examines net operating profit from transactions as a percentage of a certain base

Operating margin should be compared to operating margin earned by same enterprise on uncontrolled transaction – Internal TNMM


71

TNMM (2/2)

Broad level of product comparability and high level of functional comparability

The application of the TNMM to a specific tested party breaks down when factors other than transfer prices have a material impact upon profits

Grouping of transaction – Relevant controlled transactions require to be aggregated to test whether the controlled transaction earn a reasonable margin as compared to uncontrolled transaction

Selection of Profit Level Indicator (‘PLI’) such as Operating Margin, Return on Value added expenses, Return on assets – Unaffected by transfer price

Benchmarking exercise

• Entity with similar industry classification to the tested party – through search in Prowess and capitaline plus databases

• Screen entities by applying appropriate quantitative filters, such as mfg sales <75%, R&D exp >5%, Advertisement exp >5%.

• Review financial and textual information available in the public database of the selected entities – for qualitative filters

• Computation of ALP


72

Summary of Methods

Methods Product Comparability

Functional Comparability Approach Remarks

CUP Very High Medium Prices are benchmarked

Very difficult to apply as very high degree of comparability required

RPM High Medium GPM (on sales) benchmarked

Difficult to apply as high degree of comparability required

CPM High High GPM (on costs) benchmarked

Difficult to apply as high degree of comparability required

PSM Medium Very High Profit Margins Complex Method, sparingly used

TNMM Medium Very High Net Profit Margins

Most commonly used Method


73

Determination of arm’s length prices using methods

Whether you arrive at a single

price? The arithmetic mean of such prices or a price which varies from such arithmetic mean by +/- 3 % / 1 % is the arm’s length price

Yes No

Notification No. 30/2013 [ F. No. 500 / 185 /2011-FTD I ], dated 15 April 2013 For “wholesale traders”- band defined to be 1% For all others- band defined to be 3%

Whether tolerance band is available even when there is single price?

General Atlantic v/s. ACIT (Mum ITAT)– Held - ALP shall be taken to be in the range of +- 5% in case of more than one comparable prices and since there was only one comparable , the benefit under the said proviso would not be available

The Development Bank of Singapore (Mum ITAT) - Held, benefit of +-5% under the second proviso to section 92C is available even when only ‘one price’ determined as ALP;

No Yes

Transfer Pricing Documentation


75

Documentation - Basics

Profile of industry

Profile of group

Profile of Indian entity

Profile of associated enterprises

Transaction terms

Functional analysis (functions, assets and risks)

Economic analysis (method selection, comparable benchmarking)

Forecasts, budgets, estimates

Agreements

Invoices

Pricing related correspondence (letters, emails etc)

Description and analysis of uncontrolled transaction

Description and analysis of methods considered and adopted

Methodology related

• Contemporaneous documentation requirement – Rule 10D

• Documentation to be retained for 9 years

• No specific documentation requirement if the value of international transactions is less than one crore rupees

Transaction related

Price relatedEntity related


76

Entity Related Documentation

Corporate Background

Understanding taxpayer’s business, including its legal structure and the terms of its contracts, is fundamental to transfer pricing analysis

The documentation must start with a basic analysis of who does what and in what legal capacity

Identify the related parties to cross-border transactions

Shareholding pattern viz. name of the shareholder and % of shareholding

Determine the parties’ legal status (subsidiary or branch) and

Whether the relationship is as agent or principal

Profile of the taxpayer and multinational group/ associated enterprises should be properly documented

An understanding obtained in this phase will help carrying out Industry analysis


77

Entity Related Documentation

Industry Analysis

Industry analysis provides the first indication of whether the prices reflect the market conditions

It has to be contemporaneous – relate to the period of the documentation

Important factors to be considered

Broad description of industry in which the taxpayer operates

Product characteristics – generic/ specialty products

Market dynamics – e.g. matured, growing, nascent etc. including geographical dispersion of activities

Market positioning – wholesaler/ retailer, contract/ full fledged manufacturer

Existence of any restrictive regulations e.g. Drug Price Control Order (‘DPCO’) in pharmaceutical industry


78

Functional analysis

The revenue / profits generated by a company are attributable to • Functions performed; • Assets deployed; and • Risks assumed

in its business operations

Functions performed

Assets employed

Characterization A functional analysis facilitates the characterization of related parties in respect of

a specific transaction taking into account their functions, assets and risks and assists in establishing a degree of comparability with similar transactions in uncontrolled conditions

Risks assumed


79

Functions performed

Analysis of activities carried out by each of

the parties to the transaction

Focus should be on identification of critical

functions which add value to the

transaction

Assists in comparing principal functions

performed by the entities in a controlled

transaction with the functions performed in

uncontrolled transactions


80

Assets employed

Analysis of the type of assets and their nature needs to be understood

Helps in determination of their contribution to the business process/economic

activity

Facilitates understanding of respective roles played by the entities participating in

the International transaction

Knowledge of assets owned and employed by the entities facilitates determination

of the profit margin to be earned by them


81

Risks assumed

Analysis of risks undertaken by each transacting entity

As the risk increases, the expected return should increase

as well

The potential risks are company and industry specific

Only important risks should be described and quantified

Important to distinguish between which entity bears risks

as per legal terms and which one bears as per the

economic substance of the transaction


82

FAR to Characterisation…a journey

FAR is a fact finding process covering inter alia:

•Group Overview

• Company Overview and Product Profile

• Organization Structure (Roles)

• Group Business Strategy

• Industry Overview

• Understanding of value-chain

• Agreements

• Public Documents (Annual Report, Website)

A functional analysis facilitates the characterization of related party

Helps identify the Transfer Price

Assist in establishing a degree of comparability with similar transactions in uncontrolled conditions


83

Manufacturing Value Chain

Increasing functions, assets and risks

Risks and rewards are directly related

Toll Manufacturer

Contract Manufacturer

Licensed Manufacturer

Full Fledge Manufacturer

Incr

easi

ng

pro

fit

po

ten

tial


84

Price Related Documentation

Economic Analysis

Economic analysis refers to benchmarking the financial parameters of the taxpayer and

comparable companies

Document any adjustments made for differences in functions/ risks borne by the

comparables vis-à-vis taxpayer

Search strategy to be clearly documented

• Selection of Most Appropriate Method (‘MAM’), Tested Party, Profit Level Indicator

• Analysis of internal comparables

• Databases used and applicability of filters used to select comparables

• Search methodology and basis for acceptance / rejection of companies

• Workings of actual application of MAM

Periodic review of TP Policy and TP documentation


85

Transaction Related Documentation

Agreements / contracts etc. with AEs or unrelated parties in respect of similar international

transactions

Documents that may be helpful for showing the process of price negotiations with the

related parties such as agreements, invoices, emails/ faxes

Official publications, reports, studies & databases from Government of foreign countries

Research reports & technical publications of institutions of national or international repute

Price publications including stock market quotations or commodity market quotations


86

Documentation : Key Points under Rule 10D

Indian TP documentation requirements are staggering

Rule 10D prescribes detailed set of requirements pertaining to

Organizational Structure

Nature of business/industry and market conditions

Controlled transactions

Background documents

Comparability: functions, assets and risk analysis

Selection of transfer pricing method

Application of the transfer pricing method

Assumptions, strategies, policies

Supporting information


87

Pre-project planning

•Preparation of project plan

Functional analysis

•Interviews•Questionnaires•Discussions with Management•Characterization of each entity•Agreement reviews

Economic Analysis

•Search strategy •Access to local & global database•Analysis of internal comparables•Judicious identification of arm’s length range

Additional Analysis

•Understand existing costing mechanism•Determination of billing methodology

Issuance of Documentation

•Consultation with management•Finalization of Transfer Pricing Documentation

Stage 1 Stage 2 Stage 3 Stage 4 Stage 5

Transfer Pricing Process


88

Accountant’s Report – Section 92E / Rule 10E

To be obtained by every person entering into an international transaction and specified domestic transaction

To be filed by the due date for filing return of income (now e-filing mandatory)

Opinion whether prescribed documents have been maintained, the particulars in the report are “true and correct”

Relevant annexures and appendices be attached

Inputs: • Related party ledgers extracts

• Related party Schedule under AS-18

• Sample Invoices/ Vouchers / DN / CN

• Relevant intra-group agreements

• CUP information

Form No. 3CEB

[See rule 10E]

Report from an accountant to be furnished under section 92E relating to international transaction(s)

1. We have examined the accounts and records of ENTITY NAME AND POSTAL ADDRESS - PAN No. relating to the international transactions entered into by the assessee during the previous year ending on 31st March 2013.

2. In our opinion proper information and documents as are prescribed have been kept by the assessee in respect of the international transaction (s) entered into so far as appears from our examination of the records of the assessee.

3. The particulars required to be furnished under section 92E are given in the Annexure to this Form. In our opinion and to the best of our information and according to the explanations given to us, the particulars given in the Annexure are true and correct.

Place : Ahmedabad

Date : For XYZ Co.

Chartered Accountants


89

CBDT vide notification 86/2013 dated 01 November

2013, notified Cyprus under Section 94A of the

Income Tax Act, 1961 for not providing information

to Indian Income Tax Authorities

This notification would have far reaching

implications on entities of India having

transactions with any person in Cyprus

Cyprus : Notified Jurisdictional Area u/s 94A


90

Brief implications of the same are as follows : -

• Applicability of TP : If an assessee enters into

a transaction where one of the parties to the

transaction is a person located in Cyprus, then

all the parties to the transaction shall be deemed

to be AE and the transactions shall be deemed

to be an international transaction. Consequently,

all TP provisions will apply;

• Payment to Financial Institution : Assessee

needs to furnish an authorization under Form

10FC to financial institution to provide relevant

information to tax authorities while claiming

deduction in respect of any payment made to

any financial institution in Cyprus;



91

• Conditions for deductibility : Assessee needs to

maintain and furnish information as prescribed

under Rule 21AC(5) in order to avail deduction in

respect of any other expenditure or allowance from

the transaction with a person located in Cyprus;

• Unexplained Receipts : Onus is now on assessee

to satisfactorily explain source of money if received

from person in Cyprus;

• Higher withholding rate : Any payment made to a

person located in Cyprus shall be liable for

withholding tax at 30 per cent or a rate prescribed in

the Act, whichever is higher


Transfer Pricing Assessment


93

Key Audit Triggers

Consistent losses / low margins of the assessee attributable to inter-company transactions

Significant changes in profitability of the assessee and its AEs

High Royalty / Technical fee payouts, Cost recharges, Management Fees, Cost allocations

Net losses incurred by routine distributors

Low mark-ups for services

Application of Ratio’s such as ROCE / Berry ratio / cash profit instead of net margins

Significant Advertisement and marketing spends by manufacturing / distribution companies

Use of foreign comparables

Substantial increase in transfer pricing audits and disputes across the Globe , India is no exception….


94

Key Transfer Pricing Issues (1/3)

Marketing Intangibles / AMP issue

Typical allegations by Transfer Pricing Authorities

Assessee spends significant amount on AMP benefitting the AE by creating marketing intangibles without corresponding compensation/ reimbursement to the Assessee

Compare expense to sales ratio of taxpayer with other comparables – disallows AMP expense in excess of “bright-line” as TP adjustment alleging contribution by taxpayer is towards strengthening AE owned brands

Expectation of mark-up on AMP expense in excess of bright line – mark-up determined itself subjective

A recent ruling by Delhi Special Bench of ITAT now holds an important precedence value to justify department’s stand over AMP issue. Key points held by the ruling:

Approves the use of “Bright line test” to determine cost/ value of international transaction.

AMP expenditure to not include expenditure “in connection with” sales.

Disproportionately high AMP spend cannot justify AMP adjustment unless brand promotion for/ on behalf of the foreign AE exists.

Way forward – robust comparability analysis over 14-point comparability criteria, appeal and remand back proceedings for prior year disputes, APA for subsequent years


95


Management Cross -charges

Fee for brand

usage / technical know-how

Payment of management recharges typically disallowed at lower levels on grounds related to failure to satisfy “need”, “benefit” and / or “evidence” tests

Basis of cost allocation scrutinized in detail Disallowances made on arbitrary basis – shareholders’ activity, duplicative etc. Most judicial precedents have stressed on importance of maintaining robust documentation

satisfying the need, benefit and evidence test for services received from the AEs

1. Royalty payment by an Indian entity to foreign AE acceptable. Commercial rationale/ business wisdom cannot be challenged by tax authorities - upheld in various Tax Rulings

2. Brand name/ Intangible property developed by Indian entity and used by the foreign AEs will also require royalty payout by the foreign AE

3. Emphasis on 3 key issues – (1) Need/benefit test; (2) Evidence of having received technical know-how; and (3) determination of arm’s length price

Points to be considered: Tax authorities may challenge royalty payment for current year incase same not paid in the

past years; Tangible benefit received / receivable and quantification of benefit – whether Royalty

embedded in price paid? Payments incurred towards brand royalty along with high AMP (e.g. AMP to popularize

foreign brand) – potential red flag and may lead to tax consequences; Increasingly viewed as a cash repatriation tool by tax officers; and Aggregation approach under TNMM – challenged


96


TP adjustments being made on account of under valuation of shares where Foreign parent has made investments in an Indian subsidiary

Typical FactsForeign parent company infuses share capital in the Indian

subsidiary (at face value or at certain value per share arrived using DCF or other valuation methodology)

The Revenue takes a position that the shares have been issued to the Holding Company at an undervalued price / less that the fair market value of the shares;

The TP adjustment carried out by the TPO is twofold:Difference between the actual issue price and the ALP

considered as notional incomeNotional interest computed by considering the difference

between the actual issue price and the ALP as loan

Foreign Holding Co.

Indian Wholly Owned

Subsidiary

In India

Outside India

Purchase of shares of Indian

Company

Share Valuation

No specific Indian TP regulations guidance for benchmarking of corporate guaranteesRevenue’s Perspective Insistence on arm’s length compensation for giving guarantee Ad-hoc adjustments made Shareholder/investor function vis-à-vis service Explicit vs Implicit guarantee Credit rating of subsidiary company vs credit rating of the Parent / affiliate company

Corporate Guarantees


97

Transfer Pricing and Customs


98

TP & Customs -Need for harmonious analysis

While the end-result of establishing the “Arm’s Length Price” is divergent from Customs and Transfer Pricing perspective, the arguments to defend the proposed related price as arm’s length price is based on a common set of facts and information

It is essential to maintain the same set of facts and arguments before both authorities

Department of Revenue constituted a “Joint Working Group (JWG)”comprising senior officials from Income Tax and Customs Department to study the subject of Transfer Pricing under the respective Laws and suggest measures of co-operation between the two Departments

Implications Customs

Allegations of “ under-invoicing” if it can be established that the reported value is deliberately reduced to avoid paying additional Customs duties ;

Allegations of misrepresentation of facts/ fraudulent practices leading to possible confiscation of goods at Customs ports

Show Cause Notices alleging the facts presented to justify submissions made before GATT Valuation authorities is inappropriate, hence incremental Customs duty should be deposited with interest and penalty

Income Tax Act Transfer Pricing adjustment resulting in increase in taxable incomeWould trigger penal consequences if concealment of income deemed


99

Focused team of Transfer Pricing Officers (TPOs)

Assessing Officer

Commissioner of Income-tax (Appeals)

Dispute Resolution Panel (DRP)Panel of 3

Commissioners

Income-tax Appellate Tribunal (ITAT)

(Final fact finding authority)

Supreme CourtHigh Court

Mutual Agreement Procedure (MAP)(Alternate Dispute

Resolution Mechanism)

Advance Pricing Agreement

(APA)(introduced in

Finance Act 2012)

TPOs revert with findings on TP matters

Reference by AO to TPO for TP matters

TP Assessment and Appellate Process


100

Penal provisions

Sr.No.

Type of penalty Section Penalty

1 a) Failure to keep and maintain prescribed information/ documents

271AA

2% of the value of each international transaction or specified domestic transaction

(b) Failure to report any such transaction or

(c) Maintain or furnish incorrect information/ document

2 Failure to furnish information / documents during assessment u/s 92D 271G

2% of the value of each international transaction or specified domestic transaction

3 Adjustment to taxpayer’s income during assessment

271(1)(c) 100% to 300% of tax on adjustment amount

4 Failure to furnish accountant’s report u/s 92E

271BA INR 100,000


101

Key Points for success in Transfer Pricing audits in India

Detailed Functions-Assets-Risks analysis

Proactive Planning

Agreements / contracts should exist for transactions between Associated Enterprises

Price setting mechanisms to be documented

Localization of Global Transfer Pricing policies

Documentation should completely describe search methodology, basis for inclusion / exclusion of comparables, etc.

Substantiate business, economic and commercial rationale

Maintain detailed cost-benefit analysis with respect to cross charges (intra-group services)

Strategizing and providing appropriate information during the audit

Emerging Issues


103

Recent Controversies


104

Base Erosion and Profit Shifting (‘BEPS’)

Background

The free movement of capital and labour, the shift of manufacturing bases from high-cost to low-cost locations, the gradual removal of trade barriers, technological and telecommunication developments as a result of Globalisation has opened up opportunities for MNEs to greatly minimise their tax burden

This has led to a tense situation in which citizens have become more sensitive to tax fairness issues. It has become a critical issue for all parties since:

• Governments are harmed – In developing countries, the lack of tax revenue leads to critical under-funding of public investment that could help promote economic growth

• Individual taxpayers are harmed – When tax rules permit businesses to reduce their tax burden by shifting their income away from jurisdictions where income producing activities are conducted, other taxpayers in that jurisdiction bear a greater share of burden

• Businesses are harmed – Fair competition is harmed by the distortions induced by BEPS


105


Digital economy - The spread of digital economy also poses challenges for international taxation.

• The digital economy is characterized by an unparalleled reliance on intangible assets, the massive use of data, the widespread use of multi-sided business models;

• Difficulty of determining the jurisdiction in which value creation occurs;

• This raises fundamental questions as to how enterprises in the digital economy add value and make their profits and how the digital economy relates to the concepts of source and residence or the characterization of income for tax purposes

• It is important to examine closely how enterprise of the digital economy add value and make their profits in order to determine whether and to what extent it may be necessary to adapt the current rules in order to take into account the specific features of that industry and to prevent BEPS


106


It also relates to arrangements that achieve no or low taxation by shifting profits away from the jurisdictions where the activities creating those profits take place

Taxation is at the core of countries sovereignty, but the interaction of domestic tax rules in some cases leads to gaps and frictions. The international standards have sought to address these frictions in a way that respects tax sovereignty, but gaps remain.


107


The G20 finance ministers called on the OECD to develop an action plan to address

BEPS issues in a co-ordinated and comprehensive manner

OECD developed an Action Plan – Action Plan identifies 15 specific actions

Objective of the Action Plan :

to provide necessary instruments to governments to prevent corporations from

paying little or no taxes


108

BEPS – 15 Points Action Plan (1/4)

Address the tax challenges of digital economy

Neutralize effects of hybrid mismatch arrangements – neutralize the effect of

double non-taxation, double deduction etc.

Strengthen Controlled Foreign Company (‘CFC’) rules

Limit base erosion via interest deductions and other financial payments – TP

guidelines need to be developed regarding pricing of related party financial

transactions

Counter harmful tax practices more effectively, taking into account transparency

and substance – priority on improving transparency


109


Prevent treaty abuse – prevent treaty benefits in inappropriate circumstances

Prevent artificial avoidance of PE status - also include related Profit Attribution

issues

Assure transfer pricing outcomes are in line with value creations: intangibles –

develop rules to prevent BEPS by moving intangibles among group members

Assure that transfer pricing outcomes are in line with value creation: risks and

capital – develop rules to prevent BEPS by transferring risks among, or

allocating excessive capital to, group members

Assure that transfer pricing outcomes are in line with value creation: other high-risk

transactions


110


Establish methodologies to collect and analyze data on BEPS and the actions to

address it - Develop recommendations regarding indicators of the scale and

economic impact of BEPS and ensure that tools are available to monitor and

evaluate the effectiveness and economic impact of the actions taken to address

BEPS on an ongoing basis

Require taxpayers to disclose their aggressive tax planning arrangements -

Develop recommendations regarding the design of mandatory disclosure rules for

aggressive or abusive transactions, arrangements, or structures, taking into

consideration the administrative costs for tax administrations and businesses and

drawing on experiences of the increasing number of countries that have such rules


111


Re-examine transfer pricing documentation - rules regarding transfer pricing

documentation to enhance transparency for tax administration

Make dispute resolution mechanisms more effective - Develop solutions to

address obstacles that prevent countries from solving treaty related disputes under

MAP

Develop a multilateral instrument - Analyze the tax and public international law

issues related to the development of a multilateral instrument to enable jurisdictions

that wish to do so to implement measures developed in the course of the work on

BEPS and amend bilateral tax treaties


112

Concept of Location Savings

What is Location Savings?

Typical cost savings include savings pertaining to:

• Labour costs;• Raw material costs;• Rent and property taxes;• Training costs• Infrastructure costs and• Incentives including tax exemptions

Most low cost locations occur in the ‘Developing World’ (e.g.- India, China, Malaysia etc)

Location savings = net savings from difference of input cost (e.g. labour cost) in a specific location, compared to an alternative location or locations

Net ‘Cost savings’ realized by an MNC as a result of relocating manufacturing functions / production / operation sites from a ‘high cost’ to ‘low cost’ jurisdiction to obtain

competitive advantage


113

Location Savings & Transfer Pricing

Quantification and allocation of ‘location savings’ is a subject matter of controversy between tax payers and revenue authorities

Whether the entire cost difference after the transfer of functions / processes to low cost jurisdiction is ‘location savings’ i.e. how to quantify location savings ?

Even if ‘location savings’ is quantified, who is rightful owner of additional profits from location savings, the parent company or the overseas subsidiary (‘AE’) i.e. Attribution ?

Existence and allocation of ‘location savings’ depends upon the bargaining power of the parties

Factors determining relative bargaining positions;

• Economic or beneficial ownership of intangible property

• Monopoly power such ownership bestows (uniqueness of the intangible)

• Relative competitive position


114

Location Savings & Transfer Pricing

Economic analysis necessary to assess:

Whether or not an MNE benefits from Location Savings in certain locations – Before/ After comparison

Which entity (parent/local subsidiary) is entitled to such benefits

Other Profit Other Profit

Savings due to difference in input

costs

Production Cost

Production Cost

Cost Difference

After Transfer Before Transfer

Location Savings


115

Judicial Precedent : GAP International Sourcing (India) Pvt. Ltd.

GAP International Sourcing (India) Pvt. Ltd. vs ACIT (ITA Nos. 5147/Del 2011 & 228/Del/2012)

The Delhi Bench of Tribunal in the case of GAP International Sourcing (India) Pvt. Ltd. held :

“that Location Savings arise to the industry as a whole and there is nothing to prove

that the taxpayer was sole beneficiary. The objective of sourcing from low cost

countries is to survive in stiff competition by providing a lower cost to its end-

customers. The advantage of Location Savings is passed onto the end-customer via a

competitive sales strategy. Thus, no separate / additional allocation is called for on

account of Location Savings.”

GAP International Sourcing has rejected the applicability of “Location Savings” to the

particular case in a competitive situation (where the location advantages are passed onto

customers), however, it has not rejected the concept of “Location Savings”.


116

Points to Ponder

Assuming a certain value of location savings the allocation of gains between two parties depends on their relative bargaining power, which in turn depends on the goals,

resources and constraints on each of the parties.

What constitutes an appropriate allocation of location savings requires detailed analysis. Highly subjective.

Total cost savings in a lower-cost jurisdiction are sometimes offset by additional costs associated with relatively poor infrastructure in areas, such as power and telecoms, which reduce productivity.

In many cases location savings are passed on to customers in the form of lower prices and do not lead to higher profits. In such cases, simple before-and-after comparisons of costs could overestimate location savings.

It is not an easy task to quantify and allocate location savings.

• A careful evaluation of historical data (e.g. comparison of the unit level price), the FARs of both the parties, the product life cycle, the approach of the market players and the available alternatives etc. should be considered.

Economic Scenario


118

High Fiscal Deficit

Weak global demand due to economic slowdown in

European Union and the US led to widening of India’s

trade deficit to USD 167.2 billion during April 2012-

January 2013 from USD 154.9 billion during the same

period last year

India even witnessed 13.6 percent rupee

depreciation from an average value of 47.9 during

April 2011-January 2012 to 54.4 during April 2012-

January 2013

The investment inflow this year was also slow

during the first half of 2012-13, as investors turned

towards the US dollar amid global uncertainty


119

Measures to mitigate Fiscal Deficit

Motive :

Government wants to create an investor friendly

environment in India in order to have desired economic

growth and the fiscal deficit in FY13 at 5.2 percent of GDP

Measures :

Relaxation in FDI caps (for aviation, broadcasting,

retail, Insurance and pension etc.)

Disinvestment in PSUs

Postponement of GAAR implementation

Introduction of APA and Safe Harbour


120

Paradox

Recent TP notices against the companies like Shell, Vodafone,

Nokia etc. would definitely lead to undermine the credibility of

Finance Minister P Chidambaram's repeated promises to

overseas investors that India would provide a non-adversarial

and stable tax regime.

Moreover, Shell has argued that taxing the money received by

Shell India is in effect a tax on foreign direct investment, which

is contrary not only to law but also to the spirit of the recent

global trip by finance minister P Chidambaram to attract further

investment to India.

Advance Pricing Agreement (‘APA’)


122

APA - Basics

Typically adjustments by TP officer in

any tax year are replicated by TP

officers in subsequent years as well

Given this an APA could be considered

in India in order to mitigate litigation in

India and move towards tax certainty

Under the newly introduced APA rules in

India an APA can be entered into for:

determining the ALP; or

specifying the manner in which the

ALP is to be determined


123

APA - Key Provisions (1/2)

APA legislation effective 1 July 2012 & APA Rules notified 30 August 2012

Types - Unilateral, Bilateral, Multilateral

Can be entered into for determining Arm’s Length Price (ALP) or specifying manner in which ALP is to be

determined

Validity – Up to 5 years (renewal possible)

Cannot be applied retrospectively

Coverage – Existing/ongoing transactions & New transactions - ‘Specified domestic transactions’ not

covered

Mandatory Pre-Filing Application & Consultation – option to remain anonymous

Specified formats for Pre-Filing Application & Final Application

Option to withdraw from APA process at any stage – after Pre-Filing or during Final APA negotiations

APA Directorate to include panel of experts - Economists, Statisticians, etc.


124

APA - Key Provisions (2/2)

Annual APA Compliance Report & Compliance Audit – in lieu of TP Documentation & TP

Assessment

Processing Fees (only at Final Application stage):

Estimated timeline for Unilateral APAs – 1 year; Bilateral / Multilateral APAs – 2 to 3 years

Effective controversy management tool internationally

“We agree that implementation will be the key and I can assure you that the Indian tax administration is keen to make this APA program a

huge success.” Director General of Income Tax, Mrs Promila Bhardwaj, during the first ever webinarinitiated by KPMG in September 2012

Transaction Value Fees

Up to Rs 1 billion / approx US$ 20 million Rs 1 million / approx US$ 20,000

Up to Rs 2 billion / approx US$ 40 million Rs 1.5 million / approx US$ 30,000

Over Rs 2 billion / approx US$ 40 million Rs 2 million / approx US$ 40,000


125

Key advantages of an APA in India

Provides tax certainty for covered

transactions upto 5 years.

Reduces the risk of double taxation (in

case of bilateral / multilateral APAs).

No exposure to interest and penalty where

terms of the APA are complied with.

Reduction of documentation and saving in

time, cost and resources.

Even the Indian tax authorities prefer

APAs which provides them certainty as

well.

Even though an APA in India applies only

prospectively, it may have a persuasive

value in litigation and open audit years.


126

APA in India - Experience thus far (1/2)

Over 150 formal pre-filing APA applications were received as on 31 March 2013*

Approximately 90 percent pre-filings converted to applications i.e. 146* APA applications

have been filed to date

Large Multinational corporations are a part of initial set of companies to participate in

the APA

Approach of the APA team has been rational and pragmatic during the APA meetings

International TP experts attending some of these meetings have welcomed the

collaborative approach and pragmatism of the Indian APA team

* Based on Taxsutra articles dated 19 March 2013 and 2 July 2013


127

APA in India - Experience thus far (2/2)

Discussions on the various APA cases happening in

Bangalore, Delhi and Mumbai

Some cases are discussed at specific location based

on specific activities. For e.g. the IT / ITES activities

will be primarily done by APA team in Bangalore

The initial focus is on the Functions Assets and Risks

(‘FAR’) analysis to which the APA team is paying

attention in great details

Site visits by the APA teams in progress. To date the

visits have been scheduled in consultation with the

taxpayers and have been conducted in a cordial and

un-intrusive manner.

Based on the FAR analysis, the economic analysis

will be done followed by rounds of discussions and

negotiations

Sector-wise APAs filed*

ServicesManufacturing

* Approximate


128

APA Program – Summary

Discussio

ns

•First round of discussions already in process - experience satisfactory so far

•International TP experts have welcomed the collaborative approach of the Indian APA team

•Some cases are discussed at specific locations based on specific activities. E.g. IT / ITES activities will be primarily done by APA team in Bangalore

FAR

•The APA team has been laying strong emphasis on first establishing and mutually agreeing on detailed FAR – logical and sensible approach.

•Based on the FAR analysis, the economic analysis will be done followed by rounds of discussions and negotiations

Site Visit

s

•Site visits by the APA teams in progress (about 50 conducted) which are helpful in assessing the correct functional profile.

•To date the visits have been scheduled in consultation with the taxpayers and have been conducted in a cordial and un-intrusive manner.

Applicatio

ns

•Over 150 formal pre-filing APA applications were received as on March 31, 2013. 146 APA applications filed to date

•MNC giants from pharma, consumer electronics, media, cement, telecom, etc. have filed applications

•Currently no cases on PE attribution

Revenue perspective

•After the cadre restructuring (due later this year), the APA department would get additional manpower

•Due to sensitivity of business information highest level of confidentiality will be maintained

•The fact that cancellation of APA could be done only by CBDT is sufficient safeguard. APA will not be cancelled for any arbitrary reason

Unilateral APAs expected to be concluded in a time frame of 9-15 months

Safe Harbor


130

Safe Harbor Rules - Background

“Safe harbour” - Circumstances in which the income-tax authorities shall accept the transfer

price declared by the assessee

Introduced in India by Finance (No.2) Act, 2009 w.r.e.f. 1.4.2009 and new Section 92CB inserted in the

Act

Safe Harbour Rules have been framed based on the recommendations of the Rangachary Committee –

Committee to Review taxation of development centres and the IT sector chaired by N. Rangachary

Rangachary Committee has submitted six reports including specific sector-wise/transaction-wise reports

for

• IT Sector,

• ITES Sector

• Contract R&D in the IT and Pharmaceutical Sector

• Financial Transactions-Outbound loans

• Financial Transactions-Corporate Guarantees

• Auto Ancillaries-Original Equipment Manufacturers


131

Safe Harbor Rules - Background

The below Safe Harbour margins shall be applicable:

International Transaction Value of International Transaction (INR)

Safe Harbour Margin

IT / ITES Services

-

20% or more up to transaction value of INR 500 cr. And at least 22% beyond 500 cr.

ITES being knowledge processes outsourcing services 25% or more

Intra-group loan to wholly owned subsidiary •does not exceed INR 50 crore •exceeds INR 50 crore

•SBI base rate plus 150 bps• SBI base rate plus 300 bps

Corporate guarantee •does not exceed INR 100 crore •exceeds INR 100 crore +credit rating related conditions

•Commission /fee of 2 % or more•Commission /fee of 1.75 % or more

Specified contract research and development services wholly or partly relating to software development

- 30% or more

Landmark Rulings


133

Shell India (1/2)

Facts:

Shell India issued equity shares to its foreign group entity at the valuation undertaken by an independent valuer

The valuation is challenged by the transfer pricing officer and revalued based on certain assumptions following the discounted cash flow approach;

Issue:

Foreign entity subscribed shares of its Indian group entity at prices much lower than the market price

Foreign Group Entity

Issue of shares based on valuation report obtained by the Independent

valuer

Indian Company


134

Shell India (2/2)

Transfer Pricing (TP) Adjustments:

The shortfall in total value of shares, as alleged by the TPOs, has been considered as a TP adjustment and to this extent an addition has been made to the total income of Indian Company. [Primary TP]

Further, the TPOs alleged that since there was a shortfall in the consideration paid by the Foreign group entity, Indian company has not received the full amount it should have received from its Foreign group entity and the said shortfall actually resided with Foreign group entity. This shortfall therefore could be characterized as a loan advanced by Foreign group enity in favour of Indian Company, on which there should be an arm's length interest receivable in India by the Indian Company. [Secondary TP adjustment]


135

LG Electronics (1/2)

Facts:

Indian company is a subsidiary of its Foreign Company

Indian company is engaged in manufacturing of Electronic goods in India

Indian Company incurs Advertising Marketing and Promotion (AMP) expenses for marketing the goods produced in India

The average AMP expenses incurred by companies in the industry is considered as Bright Line for the purpose of Transfer Pricing analysis

Indian company has incurred AMP expenses which exceeds the Bright Line limit as determined above

Brand Creation / Marketing Intangible

Indian Company

Foreign Company

Excessive AMP

Expenses

Owner of Brand

In India

Outside India


136

Excess AMP expenses incurred by the Indian Company enhances the brand value of Foreign Company

Indian tax authorities have contended that AMP expenditure incurred by a

taxpayer at a level that exceeds the “bright line” is to be reimbursed with a mark-up

Tribunal accepting the contentions of TPO held that excessive AMP expense incurred by Indian company enhances the brand legally owned by the foreign AE

The amounts enhancing brand value should be paid by the foreign AE along with an arm’s length mark-up

LG Electronics (2/2)


137

Maruti Suzuki India Ltd

Facts: Indian Company entered into a License Agreement with Foreign Company for manufacture

and sale of automobiles

Under the agreement, the Indian Company is under contractual obligation to use the joint trademark ‘Maruti Suzuki’ on all the vehicles as well as parts manufactured sold by it in India

Indian Company had incurred high expenditure on advertisement, marketing and distribution activity for developing the brand

Foreign Company did not compensate the Indian Company for developing the market intangibles

Issue:The Indian Company does not require any compensation for the use of logo / trademark of

the Foreign Company so long as the advertising, marketing expenses incurred by the domestic entity do not exceed the expenses incurred by the comparable independent Indian Company

In case, the expenses incurred by domestic entity are more than the expenses incurred by comparable independent domestic entity, the foreign AE needs, to suitably compensate the domestic entity, in respect of brand building and the advantage obtained by the foreign AE


138

Serdia Pharmaceuticals India Private Limited – (1/2)

Facts

Serdia a pharmaceutical company imported “Active Pharmaceutical Ingredient” (API) from its AE for manufacture of drugs.

Serdia imported API from its AE at prices higher than that paid for similar APIs by other companies

Serdia adopted Transactional Net Profit Margin (‘TNMM’) as the most appropriate method with operating profit of 8.76% and justified the arm’s length price.

TPO rejected TNMM and adopted the Comparable uncontrolled price (‘CUP’) method for benchmarking the international transaction of import of APIs


139

Serdia Pharmaceuticals India Private Limited – (2/2)

Issues Ruling

Sale price by AEs to third parties in other countries

Sale price in transaction between AEs and third party overseas customers cannot be compared to sales price between AEs and Serdia due to geographical differences and non availability of data

Acceptance of price by Customs Authorities

Acceptance of price by Customs Authorities does not imply that transactions are at arm’s length from transfer pricing perspective

Priority of methods for transfer pricing analysis

TPO can decline taxpayer’s selection of most appropriate method with cogent reasons-Traditional transactional methods (CUP,CPLM,RPM) are to be preferred over traditional profit based methods (PSM and TNMM)

Reliance on overseas judicial pronouncements

Though not binding, rationale and logic of said decisions may be relied upon

No Income – No TP?


141

Dana Corporation - AAR

Facts:

A non resident company holds shares in Indian Company

Non resident company transfers shares of Indian Company to US company without any consideration

Issues:

Whether capital gains is attracted ?

Are transfer pricing provisions applicable in the above transaction ?

Ruling :

AAR held that since the transaction was without any consideration , the computation mechanism for determining capital gain failed

Hence the transaction was not liable to capital gain tax in India

Further AAR also held that Section 92 was not independent charging section. As there was no income under the section 45 read with section 48, transfer pricing provisions were not applicable

US Company

Non Resident Company

Transfer of shares in Indian Company without consideration

No Income - Transfer Pricing provisions are not applicable


142

Castleton Investment Limited - AAR

Facts: A Mauritius Company holds shares of an Indian Company It transfers the shares of Indian Company to the Singapore Group Company As per India Mauritius tax treaty, the above transfer of shares by Mauritius Company

to the Singapore Company is exempt from capital gains tax in India

Issue: Whether transfer pricing provisions are applicable even though transfer of shares is

exempt from capital gains in India?

Ruling: The above transfer of shares is not taxable in India by resorting to the beneficial

provisions of India – Mauritius Tax treaty. It was further held that non-chargeability to tax under the beneficial provisions of a tax

treaty does not absolve the applicant from filing the return of income under section 139 of the Act.

Accordingly, transfer pricing provisions would be applicable even though the transfer of shares is not chargeable to tax in India

No Income - Still Transfer Pricing provisions applicable

Summary : Key Takeaways


144

Problems with Indian TP : Summarized

TP is not art, its not science…..its magic!

No proper comparables available

Grossly improper comparables being used

No clear method or quantification for adjustments

Cherry-picking of comparables by all parties

Disparate Data sources are a bone of contention

Documentation requirement overload

Lack of knowledge & skill-set

Concepts such as ‘Location Savings’ not even acknowledged

Growth of “intangible” economy ignored completely

Overburdening of taxpayer

Bottom-line: Current TP implementation devolves frequently into absurdities and can

provide inequitable results


145

Problems with Indian TP : Summarized

In connection with these controversies, tax experts are of the opinion that handling of transfer

pricing in India by the tax authorities is in developing stage and, hence, requires major fine-

tuning and improvement

Unless and until a pragmatic approach is adopted by the revenue authorities in the matters of

litigation especially on Transfer Pricing front, India will fail to boost investors’ confidence

Having said that, if the government fails to do so, it might get difficult for the Government to meet

fiscal deficit target set at 4.8 per cent of GDP and to achieve 5.7 percent growth for FY 2014 on a

possible fall in the revenue mop-up side

Case Studies


147

Case Study # 1

Foreign Group Entity

Issue of Zero Coupon Bond

Indian Company

Facts: Indian Company and its Foreign Group entity are associated

enterprise as per Section 92A of the Act.

Indian Company had issued Zero Coupon Bond to its Foreign Group Entity

No payment of interest is to be made by Indian Company to its Foreign Group Entity

No Transfer Pricing implications from Indian Company perspective.

Issue:

Whether there can be any Transfer Pricing implications for Foreign Group entity in India?

Outside India

In India


148

Facts: A Ltd is into manufacturing of Pharmaceutical

products in India

A Ltd. sale its product in USA through independent agents in USA.

B Inc. provides Business Support Services to A Ltd.

A Ltd. and B Inc. are associated enterprise as per Section 92A of the Act.

Indian Company does not receives same or similar services from any third party

Also, B Inc. does not provides same or similar services to any third party

Issue:

How to compute Arm’s Length Price for the services provided by B Inc. to A Ltd.

B Inc. (Manufacturer)

A Ltd.(Manufacturer)

USA

India

Case Study # 2

Bu

sin

ess

Su

pp

ort

Se

rvic

es

Independent Agent

End Customer

Supplier of Raw Material

End Customer


149

Case Study # 3

Foreign Co.

Holding Co.

Sub Co. 2Sub Co. 1

overseas

India

Facts :

Holding company receives service fees from :

INR 6 crores from Sub Co. 1 INR 4 crores from Sub Co. 2 INR 8 crores from Foreign Co.

Implications :

Applicability of domestic TP provisions to a) Holding Co b) Sub Co. 1 c) Sub Co. 2 d) F Co.


150

Case Study # 4

Facts :

Holding company makes payment for services to :

INR 2 crores to Sub Co. 1 INR 2 crores to Sub Co 2 INR 2 crores to Foreign Co.

Total services payment – 6 crores

Implications :

Whether Domestic TP would apply to the Holding Company

Foreign Co.

Holding Co.

Sub Co. 2Sub Co. 1

overseas

India


151

Case Study # 5

Company X has given a loan of INR 10 crores @ 18% to Company Y

Arm’s Length Price (‘ALP’) of the interest determined at INR 1.2 crores as against the actual payment of INR 1.8 crores by Company Y

Implications

Implications for Company X and Company Y?

Scenario : What will the implications if in this case, the interest free loan is utilized by Company Y for its tax holiday unit?

Company X

Company Y

Inte

rest Loan


152

Glossary

Abbreviations and Acronyms Full Name

AEs Associated Enterprises

ALP Arm’s Length Price

AMP Advertising Marketing and Promotion expense

APA Advance Pricing Agreement

AO Assessing Officer

BEPS Base Erosion and Profit Sharing

CBDT Central Board of Direct Taxes

CIF Cost Insurance and Freight

CIT(A) Commissioner of Income Tax Appeals

CPM Cost Plus Method

CUP Comparable Uncontrolled Price Method

DPCO Drug Price Control Order

DRP Dispute Resolution Panel

DTA Domestic Tariff Area


153

Glossary


FOB Free on Board

FAR Functions, Assets and Risks

FDI Foreign Direct Investment

FMV Fair Market Value

FY Financial Year

GAAR General Anti Avoidance Rules

GDP Gross Domestic Product

GP Gross Profit

INR Indian Rupee

IPR Intellectual Property Rights

ITAT Income Tax Appellate Tribunal

MAM Most Appropriate Method

OECD Organization for Economic Co-operation and Development

PLI Profit Level Indicator


154

Glossary


PSM Profit Split Method

R & D Research and Development

ROCE Return On Capital Employed

RPM Resale Price Method

SDT Specified Domestic Transaction

The Act Income Tax Act, 1961

The Rules Income Tax Rules, 1962

TPO Transfer Pricing Officer

TNMM Transactional Net Margin Method


155

Questions & Answers

Questions

&

Answers

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Tax & Regulatory Services

Ahmedabad

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