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1. B as i c s o f T r a n s f e r P r i c in g Poonam Khaira Sidhu , IRS CIT-1, Dispute Resolution Panel-1, New Delhi.

2. Int r oduct i o n

3. Transfer pricing  is the setting of the  price  for goods and services sold between controlled (or related) legal entities within an enterprise. For example, if a subsidiary company sells goods to a parent company, the cost of those goods paid by the parent to the subsidiary is the  transfer price .

4. T r ans f e r P ri c i n g in I nd ia Pr ior to A p r il 1 , 200 1 Ba s i c p r o v i s ion s e x i st e d bu t w e re r a r el y applie d E x pe rt Gr ou p s e t u p i n No v e m be r 199 9 to st ud y globa l tr an sf e r p r i c in g p r a ct i c e s A p r il 1 , 200 1 on w ar ds Co m p r ehen s i ve legi s la t io n in tr odu c e d i n Unio n Budge t 200 1 Spe c ia l P r o v i s ion s r ela t in g to a v oidan ce o f t a x [ Chap t e r X ] [ Se ct ion s 9 2 to 9 2 F o f t h e I n c o me T a x A ct 1961 ] P r o v i s ion s r ela t in g to Spe c i f ie d Do m e st i c T r an s a ct ion s ( ‘SD T ’ ) w e re in tr odu c e d v id e F inan ce A ct, 201 2 De t aile d Rule s p r o v idin g guidan ce f o r appli c a t io n o f t h e legi s la t io n fr a m e d [ Rule s 10 A to 10 E o f t h e I n c o me T a x Rule s 1962 ] 3

5. 5 P r ov i s i on s – A n ove r v i e w Sec 92 Sec 92A Sec 92B Se ct i on 92BA Sec 92C & R u l e 10B and 10C C omputat i on of any i n c ome f rom an i nte r nat i onal t r an s a ct i on h a v i n g re g ard to a rm 's l ength p r i c e ( 'ALP " ) A ss o c i ated Ente r p r i s e (“AE” ) Inte r nat i onal T r an s a ct i on Spe c i f i ed D ome st i c T r an s a ct i on Methods for C omputat i on of ALP & v a r i at i on f rom ALP Sec 92 C A Sec 92 C B Sec 92 C C & 92 C D Sec 92D & R u l e 10D Sec 92E & R u l e 10E Sec 92F & R u l e 10A R efe r en c e to T r an s fer Pr i c i ng O f f i c er (“TP O ” ) Safe H a r bour r u l es Ad v an c e p r i c i ng ag r eement D o c umentat i on A cc ountant ’ s R epo r t D ef i n i t i ons ( AL P , Ente r p r i s e, T r an s a ct i on)

6. 6 T r ans f e r P ri c i n g - Concep t T r an sf e r P r i c in g r e f e rs to t h e p r i c in g o f in t e r na t iona l tr an s a ct ion s / SD T be t w ee n t w o a ss o c ia t e d en t e r p r i s e s Du e to s pe c ia l r ela t ion s hi p be t w e e n r ela t e d pa rt ie s, t h e tr an sf e r p r i ce m a y b e di f f e r en t t ha n t h e p r i ce t ha t w o u l d ha ve bee n ag r ee d be t w ee n un r ela t e d pa rt ie s P r o v i s ion s r equi re de m on str a t io n o f “tr an sf e r p r i c e ” i s a t “ a rm ’ s leng t h ”

7. T ra n sfe r P ri c i n g – Con ce p t c ontd .. I nt er n a t i on al t ra n sac t i on s 92B goods s e r v i c es i ntang i b l es l oans I nd e p e nd e n t e nt i t y A ss o cia t ed e nt er p rise 92A 92A R esi d e n t R esi d e n t T ra n s f er p rice 7 A r m ’ s le ngt h p rice 92 C

8. A r m ’ s L e ng t h P ri c e P ri c e a pp li e d o r p r opo se d to b e a pp li e d i n a t r a n sac t i o n b e t w e e n p e r s on s o t h e r t h a n ass o c i a t e d e n t e r p ri ses , i n un c on t r o ll e d c ond i t i on s D ete rmi nat i o n o f a rm ’ s l engt h p ric e s u si n g on e o f th e P r e scri be d method s W he t he r y o u a rr i v e a t a s i ng l e p r i c e ? T h e p rice thu s dete rmi ne d is th e a rm ’ s l engt h p rice T h e a ri thmet ic mea n o f s u ch p ric e s o r a p rice w h ich v a ri e s f r om s u ch a ri thmet ic mea n b y +/ - 3% ( o r 5 % till 1-4-2012 a s th e c a se ma y be ) is th e a rm ’ s l engt h p rice ( 92 C( 2 )). I t is pe r t i nen t to not e tha t th e r ang e c on c ep t ha s bee n i nt r odu c e d v i d e Fi nan ce A ct , 201 4 Y e s No 8

9. 9 App li cab ility T he p r ov i s i ons of Sec t i on 92 t o 92F of t he Act a r e app li cab l e on l y i f : T he r e a r e t w o or m o r e en t e r p r i ses ( de f i ned i n Sec 92F) T he en t e r p r i ses a r e Assoc i a t ed en t e r p r i ses ( de f i ned i n Sec 92A) T he en t e r p r i ses en t er i n t o a t r ansac t i on ( de f i ned i n Sec 92F) T he t r ansac t i on i s an I n t e r na t i onal t r ansac t i on or S D T ( de f i ned i n Sec 92B & Sec 92BA) Con s equen c e s o f t he se p r o v i s ion s: C o m pu t a t i on of i nco m e/ e x penses hav i ng r ega r d t o t he A rm ’ s l eng t h p r i ce ( Sec t i on 92 ( 1 ) ) M a i n t enance of p r esc r i bed D ocu m en t a t i on ( Sec t i on 92D r ead w i t h R u l e 10 D ) O b t a i n i ng of Accoun t an t ’ s r epo r t ( under Fo r m 3 C EB) ( Sec t i on 92E) T o ensu r e co m p li ance w i t h t he a rm ’ s l eng t h p r i nc i p l e, s t i f f Pena l t i es have been p r esc r i bed

10. 9 Sec ti o n 92 F & Ru le 10A ( d ) – “ T r ansac ti o n De fi n iti on ” Sec tion 92 F – Definitions. “ T ra n sac tion ” in c lu d e s a n a rr a n ge m e n t, unde rst a n di n g o r a ct io n i n c on c e rt, - W he t he r o r n o t s u ch a rr ang e m en t, unde rst a ndi n g o r a ct io n i s f o rm a l o r i n w r i t ing ; o r W he t he r o r no t s u ch a rr ange m en t, unde rst a ndi n g o r a ct io n i s in t ende d to b e en f o rc eabl e b y lega l p r o c eeding s. Ru le 10 A ( d ) – “ T ra n sac t i on ” i n cl udes a number of cl o s e l y li n k ed t r an s a ct i ons

11. Sec ti o n 9 2 – I nco me fr o m I n t e r na ti ona l T r ansac ti o n 92 ( 1 ) – A n y in c o m e a r i s in g fr o m a n int e r n a tion a l t ra n sac tion [ in c lud i n g e x pe n di t u re / in t e r e st] s hal l b e c o m pu t e d h a v in g r e g a rd to t h e arm ’ s l e ngth p r i c e AL P i s t h e p r i ce applie d o r p r opo s e d to b e applie d be t w ee n non - AE ’ s Sha r in g o f c o sts o r e x pen s e s a m on g AE ’ s s hal l b e i n a cc o r dan ce w i th AL P o f bene f i t / s e rv i ce o r f a c ili ty 92 ( 3 ) T h e p r o v i s ion s a re no t in t ende d to b e applie d i n c a se de t e rm ina t io n o f a rm ’ s leng th p r i ce r edu c e s t h e in c o me c ha r geabl e to t a x o r in cr ea s e s t h e lo ss a s t h e c a se m a y b e (A ls o r e l e v ant i n th i s r ega r d a r e p r o visi ons of C i r c u l ar 14 /2001) 1

12. Assoc i a t e d En t e r p ri s e – M ean i n g ( Sec ti o n 92A ) A ss o c ia t e d e n t e r p r i se m e an s a n en t e r p r i s e w h i ch di r e ct l y o r indi r e ct l y pa rt i c i p a t e s t h r oug h on e o r m o re in t e r m e dia r i e s i n t h e m ana g e m en t, c on tr o l o r c api t a l o f t h e o t he r en t e r p r i s e . F o r e x a m ple , A C B Both A and B a r e a ss o ci ated ente r p r is es of C A 12 C B E D and E a r e a ls o a ss o ci ated ente r p r is es of C si n c e they ha v e a c ommon u l t i mate pa r ent ( A) D

13. Inte r nati on a l T r ansac ti o n & S pecifie d D o m esti c T r ansact io n 13

14. 14 I n t e r na ti ona l tr ansac ti o n ( Se c 92B ) T r an s a ct i ons bet w een t w o or mor e a ss o c i ated ente r p r i s es E i ther or both of w hom a r e non -r e s i dents T r an s a ct i on r e l ates to: pu r chase , sa le o r l eas e o f t ang i b le o r i n t ang i b le p r ope rt y ; o r p r o v i s i o n o f se r v i ces ; o r l end i n g o r bo rr o w i n g m one y ; o r an y o t he r tr ansac ti o n ha v i n g a bea ri n g o n t h e p r o fit s , i nco m e , l osse s o r asse ts o f t h e en t e r p ri ses ; o r m u t ua l ag r ee m en ts o r a rr ange m en ts f o r a ll oca ti o n o r appo rti on m en t o f, o r an y con tri bu ti o n t o , an y cos t o r e x pens e i ncu rr e d

15. 15 I n t e r na ti ona l tr ansac ti o n ( Se c 92B ) - Exp l ana ti o n T he e x p r e ssi on ‘ Inte r nat i onal t r an s a ct i on’ i n cl udes - Pu r c ha s e, s a l e, t r an s fe r , l ea s e or u s e of tang i b l e p r ope r ty Pu r c ha s e, s a l e, t r an s fe r , l ea s e or u s e of i ntang i b l e p r ope r ty C ap i tal f i nan c i ng, any t y pe of bo rr o w i ng, l end i ng or gua r antee, pu r c ha s e or s a l e of ma r k etab l e s e c u r i t i es or any t y pe of ad v an c e, pa y ment or defe rr ed pa y ment or r e c e i v ab l e or any other debt a r i s i ng i n the c ou r s e of bu s i ne s s Pr o v i s i ons s e r v i c es T r an s a ct i on of bu s i ne s s r e st r u c tu r i ng or r eo r gan i z at i on ente r ed i rr e s pe ct i v e of the fa ct that i t has a bea r i ng on the p r of i t, i n c ome, l o ss es or a ss ets of s u c h ente r p r i s es at the t i me of the t r an s a ct i on or at any futu r e date Intangible Property defined at explanation ii to 92B(2).

16. Dee m e d I n t e r na ti ona l tr ansac ti o n – Se c 92B ( 2 ) T r an s a ct i ons w i th non - a ss o c i ated ente r p r i s es s ha l l be deemed to be t r an s a ct i ons bet w een AEs and s ha l l be s ub j e ct to t r an s fer p r i c i ng r egu l at i ons i n c e r ta i n c a s es A ’ s Pare nt 3r d p ar t y Pri or a g reeme nt T r an s a ct i on bet w een A and 3 r d pa r ty a l s o s ub j e ct to t r an s fer p r i c i ng no rm s, i f: 3r d p ar t y A – a p ri o r ag r ee m en t e x i s ts be t w ee n A ’ s pa r en t an d 3 rd pa rty ( bo th non -r es i den t s ) in r e l a ti o n to se r v i ce s r ende r e d b y A to t h e 3 rd pa rt y ; o r 16 A A ’ s Pare nt D e t ermi n a t ion of t erm s – t e r m s o f tr ansac ti o n a re de t e r m i ne d in subs t anc e b y A ’ s pa r en t an d 3 rd pa rty

17. Dee m e d I n t e r na ti ona l tr ansac ti o n – Se c 92B ( 2 ) A me nd me nt a s p e r Fin a n c e A c t 201 4 - D eem i ng p r o visi on w ou l d a ls o app l y to c a s es w he r e the th i r d pa r ty i s an Ind i an r e si dent A E Cas e I Cas e II A E h i t P ri o r a g r eeme n t w i t h t h ir d p a r ty D eeme d I n t e r n a t i on a l t r a n sac t io n Off s ho r e P ri o r a g r eeme n t w i t h t h ir d p a r ty D eeme d I n t e r n a t i on a l t r a n sac t io n 17 Th ird Par t y Th ird Par t y

18. 18 Spec ifi e d Do m es tic tr ansac ti o n ( Se c 92BA ) [‘ SDT ’] Any of the s pe c i f i ed t r an s a ct i on s, not be i ng any i nte r nat i onal t r an s a ct i on, name l y E x pend it u re in r espec t o f w h i c h pa y m en t ha s bee n m ad e is to m ad e to pe r so n r e f e rr e d to in S ec ti o n 40 A ( 2 )( b ) ; T r ansac ti o n r e f e rr e d to in S ec ti o n 80 A ; T r ans f e r o f good s o r se r v i ce s r e f e r ee d to in sub - sec ti on ( 8 ) o f S ec ti o n 80 -IA A n y bus i nes s tr ansac t e d be t w ee n t h e assesse e an d o t he r pe r son s a s r e f e rr e d to in sub - sec ti o n ( 10 ) o f sec ti o n 80 -IA A n y tr ansac ti on , r e f e rr e d to in an y o t he r sec ti on s unde r C hap t e r V I-A o r S ec ti o n 10 AA , to w h i c h p r o v i s i on s o f sub - sec ti o n ( 8 ) o r sub - sec ti o n ( 10 ) o f sec ti o n 80 -IA a re app li cab le A n y o t he r tr ansac ti o n a s m a y b e p r esc ri be d N o t e : T h e p r ov i s i on s o f SD T w ou ld b e app li cab le if t h e a gg r egate v a l ue of the t r an s a ct i on e xc eeds I N R 5 Cr o r e

19. Mos t A pp r op r iat e Metho d

20. P r esc ri be d m e t hod s - O EC D OE C D T r a n s f e r P ri c i n g M e t hod s 20 T r a d i t i o n a l T r a n sac t i o n M e t hod s T r a n sac t ion a l P r o f i t M e t hod s Co m pa r ab l e Uncon tr o ll e d P r i c e Resa l e P r i c e M e t ho d Cos t P l u s M e t ho d P r o f i t Sp li t M e t ho d T r ansac t i on a l Ne t M a r g i n M e t ho d

21. 21 P r esc ri be d M e t hod s a s pe r Se c 92 C r ea d w ith Ru le 10 B T ra dition a l t ra n sac tion me thods C ompa r ab l e U n c ont r o ll ed Pr i c e Method ( CU P) - 10B ( 1 )( a) R e s a l e Pr i c e Method ( R PM) - 10B ( 1 )( b) C o st P l us Method ( C PM) - 10B ( 1 )( c ) T ra n sac tion a l p r ofit me thods Pr of i t Sp li t Method - 10B ( 1 )( d) T r an s a ct i onal N et Mar g i n Method - 10B ( 1 )( e) A ny oth e r me thod p rescr ib e d by the Ce nt ra l B o ar d of D i rec t T axe s O ther Method – 10B ( 1 )( f)

22. P r esc ri be d M e t hod s a s pe r Se c 92 C r ea d w ith Ru le 10 B 1. Comparable uncontrolled price method , by which,—( i ) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified;

23. P r esc ri be d M e t hod s a s pe r Se c 92 C r ea d w ith Ru le 10 B contd 2. Resale price method , by which,—( i ) the price at which property purchased or services obtained by the enterprise from an associated enterprise is resold or are provided to an unrelated enterprise, is identified;( ii ) such resale price is reduced by the amount of a normal gross profit margin accruing to the enterprise or to an unrelated enterprise from the purchase and resale of the same or similar property or from obtaining and providing the same or similar services, in a comparable uncontrolled transaction, or a number of such transactions;( iii ) the price so arrived at is further reduced by the expenses incurred by the enterprise in connection with the purchase of property or obtaining of services; the price adjusted to take into account differences, which could materially affect the amount of gross profit margin in the open market is taken to be an ALP of the purchase of the property or obtaining of the services by the enterprise from the associated enterprise;

24. P r esc ri be d M e t hod s a s pe r Se c 92 C r ea d w ith Ru le 10 B contd 3. Cost plus method , by which,— ( i ) the direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise, are determined; the amount of a normal gross profit mark-up to such is determined and adjusted to take into account the functional and other differences, which could materially affect such profit mark-up in the open market; the costs referred to in sub-clause ( i ) are increased by the adjusted profit mark-up and the sum so arrived at is taken to be an arm's length price in relation to the supply of the property or provision of services by the enterprise;

25. P r esc ri be d M e t hod s a s pe r Se c 92 C r ea d w ith Ru le 10 B contd 4. Profit split method , applicable in transfer of unique intangibles or in multiple international transactions so interrelated that they cannot be evaluated separately for the purpose of determining the ALP of any one transaction, by which— ( i ) the combined net profit of the AEs from the international is determined; ( ii ) the relative contribution made by each of the AEs to the earning combined net profit, is evaluated on the basis of the functions performed, assets employed, risks assumed by each enterprise and on the basis of reliable external market data which indicates how such contribution would be evaluated by unrelated enterprises performing comparable functions in similar circumstances; ( iii ) the combined net profit is then split in proportion to their relative contributions, as evaluated under sub-clause ( ii ); ( iv ) the profit thus apportioned to the assessee is taken into account to arrive at an ALP in relation to the international transaction.    Provided  that the combined net profit referred to in sub-clause ( i ) may, in the first instance, be partially allocated to each enterprise so as to provide it with a basic return appropriate for the type of international transaction  wrt market returns achieved for similar types of transactions by independent enterprises, and thereafter, the residual net profit remaining after such allocation may be split amongst the enterprises in proportion to their relative contribution.

26. P r esc ri be d M e t hod s a s pe r Se c 92 C r ea d w ith Ru le 10 B contd 5. Transactional net margin method , by which,—( i ) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base;( ii ) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base;( iii ) the net profit margin referred to in sub-clause ( ii ) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; ( iv ) the net profit margin realised by the enterprise and referred to in sub-clause ( i ) is established to be the same as the net profit margin referred to in sub-clause ( iii ); ( v ) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction.

27. P r esc ri be d M e t hod s a s pe r Se c 92 C r ea d w ith Ru le 10 B contd  6. [   ( f )   any other method as provided in rule 10AB.   ]

28. Na tu r e a nd c l as s o f t h e in t e r na t iona l tr an s a ct ion s T h e c l as s of ass o c i a t e d e nt er p r i se s en t e r in g in to t h e tr an s a ct io n an d t h e f un ct ion s pe rf o rm e d b y t he m t ak ing into acc ount asse ts em plo y e d a nd r i sk s ass u me d b y s u ch en t e r p r i s e s A v a il a bilit y , c o v e r a ge a nd re li a bility of d a ta ne c e ss a ry f o r appli c a t io n o f m e t ho d De g re e of c o m p ara bility e x i st in g be t w e e n t h e in t e r na t iona l tr an s a ct io n an d t h e un c on tr olle d tr an s a ct io n an d be t w e e n t h e en t e r p r i s e s en t e r in g in to s u ch tr an s a ct ion s T h e e x t en t to w hi ch re li a ble a nd acc u ra te a dju s t me nts ca n be ma de o n a cc oun t o f an y di f f e r en c e s be t w e e n t h e in t e r na t iona l tr an s a ct ion s an d t h e c o m pa r abl e un c on tr olle d tr an s a ct io n o r t h e en t e r p r i s e s en t e r in g in to t he se tr an s a ct ion s T h e n a tu re , ex t e nt a nd re li a bility of ass u m ptions r equi r e d to b e m ad e i n appli c a t io n o f a m e t hod . S e l ect io n o f t h e M o st A pp r op r i ate Met ho d “MAM”(R ul e 10C) 2 1

29. Functi on a l & E cono m i c A nalysi s

30. 2 3 Func ti ona l & Econo mic Ana l y s is U nde r t ake de t a il ed Func t i ons, Asse t s and Ri sk ana l y s i s ( ‘ F A R ’) C ha r ac t e r i ze t he t r ansac t i on I den t i f y t he t es t ed pa r t y Look i n t e r na ll y f or t h i r d - pa r t y t r ansac t i ons Fo rm u l a t i ng t he sea r ch s t r a t egy Pe r f o r m an e x t e r nal sea r ch – r esea r ch co m pa r ab l es based upon cha r ac t e r i za t i on of t he r e l a t ed - pa r t y en t i t y /t r ansac t i on Assess co m pa r ab ili t y – by app l y i ng quan t i t a t i ve and qua li t a t i ve f il t e r s R ev i ew and f i na li ze co m pa r ab l es Ad j ust co m pa r ab l e da t a ( i f r equ i r ed) Se l ec t i on of P r o f i t Level I nd i ca t or ( ‘ PL I ’) C o m pu t a t i on of A rm ’ s Leng t h P r i ce

31. Arm ’ s Lengt h R ang e & P L I

32. 32 Th e A rm ’ s Leng th Rang e In mo st c a s e s, i t i s not po ss i b l e to i dent i fy a s i ng l e p r i c e that c an be c on s i de r ed to be an un c ont r o ll ed p r i c e. It may be that a number of d i f fe r ent t r an s a ct i ons a r e equa ll y c ompa r ab l e. Se v e r al c ompa r ab l e t r an s a ct i ons c an the r efo r e def i ne an a rm ’ s l ength r ange of po ss i b l e t r an s fer p r i c e s. O v e r a l l r ange may c onta i n e x t reme s. Ind i an l eg i s l at i on r e c ogn i z es on l y a r i thmet i c mean ( w i th s pe c i f i ed v a r i at i on – 1% to 3 % ) . H o w e v e r , w i th e f fe ct f rom 01 Ap r i l 2014, v i de F i nan c e A ct 2014, i t i s p r opo s ed to adopt i nte r- qua r t il e r ange. D eta il ed r egu l at i ons a r e y et to be p r e sc r i bed. If t r an s fer p r i c e fa ll s w i th i n the s pe c i f i ed r ange, p r i c i ng s hou l d be c on s i de r ed to be at a rm ’ s l ength.

33. Choos i n g a PL I T y pe s o f PL Is s pe c i f ie d i n t h e r egula t ion s Re t u rn o n s ale s Gr o ss M a r gi n O pe r a t in g M a r gi n Re t u rn o n c o sts Be rry Ra t i o Ne t Co st Plu s Re t u rn o n c api t a l e m plo y e d Re t u rn o n O pe r a t in g A ss e ts 33

34. A va il ab le PL Is – Re t u rn o n sa l e s ( Con t d ..) O pe r a t in g M a r gi n (“OM”) : M ea s u r e s p r o f i t/r e t u rn ea r ne d o n s ale s a ft e r c o v e r in g C OGS an d ope r a t in g e x pen s e s ( i . e ., S G & A e x pen s e ) 34 OM = Opera t i ng P ro f i t N et S a l es

35. A va il ab le PL Is – Re t u rn o n cos ts Be rry Ra t i o (“ BR ”) : M ea s u r e s t h e r e t u rn ea r ne d o n ope r a t in g e x pen s e s O pe r a t in g e x pen s e s = S G & A + Dep r e c ia t io n an d A m o rt i z a t io n M o st o ft e n u s e d to t e st di str ibu t o rs 35 B R = Gro s s P ro f i t Opera t i ng E x pen s es

36. A va il ab le PL Is – Re t u rn o n cos ts ( Con t d ..) Ne t Co st Plu s (“ NCP ”) : M ea s u re t h e r e t u rn ea r ne d o n t o t a l c o sts T o t a l Co sts = C OGS + O pe r a t in g e x pen s e s M o st o ft e n u s e d to t e st s e rv i ce p r o v ide rs 36 NC P = Opera t i ng P ro f i t T o t al C o s t s

37. A va il ab le PL Is – Re t u rn o n cap it a l e m p l o y e d Re t u rn o n O pe r a t in g A ss e ts M ea s u r e s r e t u rn ea r ne d o n c api t a l e m plo y e d M o st o ft e n u s e d to t e st m anu f a ct u r e rs 37 R OA = Opera t i ng P ro f i t Opera t i ng A ss e t s

38. T r ansfe r Pr icin g - C o m plianc e s

39. E ntity re l a t e d Pr i c e re l a t e d T ra n sac tion re l a t e d P r o f ile o f i ndu st ry P r o f ile o f g r ou p T r an s a c t i o n t e r m s F un ct i on a l ana l y s is ( f un ct i on s , a ss e t s an d ri sks ) Ag r ee m en t s I n v o i c e s Docu m en t a ti o n – Se c 92 D an d Ru le 10 D P r o f ile o f I nd i a n en t i t y P r o f ile o f a ss o c i a t e d en t e r p ri s e s E c ono m ic ana l y s is ( m e t ho d s e l e ct i o n , c o m pa r ab le ben c h m a r k i n g ) F o r e c a s ts , budge ts , e st i m a t e s P ri c i n g r e l a t e d c o rr e s p on d e n c e (l e tt e r s , e m a ils e tc ) Con t e m po r aneou s do c u m en t a t io n r e q ui r e m en t Need s t o b e f ile d w i t hi n 3 o r 6 da y s w he n c alle d f o r De t aile d do c u m en t a t io n i s no t r e q ui r e d t o b e m ain t aine d i f t h e agg r ega te va l u e o f al l in t e r na t iona l t r an s a c t ion s doe s no t e x c ee d on e c r o re r upee s 39

40. 40 A cc oun ta n t ’ s re po rt – Ru le 10 E A cc oun t an t's r epo rt i n F o rm No . 3CE B to b e f ile d b y du e da te E ss en t iall y c o mm en ts o n t h e f ollo w ing : w he t he r t h e t a x pa y e r ha s m ain t aine d t h e tr an sf e r p r i c in g do c u m en t a t io n a s r equi r e d b y t h e legi s la t ion , w he t he r a s pe r t h e tr an sf e r p r i c in g do c u m en t a t io n t h e p r i c e s o f in t e r na t iona l tr an s a ct ion s a re a t a rm ’ s leng t h , an d c e rt i f ie s t h e v alu e o f t h e in t e r na t ional /s pe c i f ie d do m e st i c tr an s a ct ion s a s pe r t h e boo ks o f a cc oun t an d a s pe r t h e tr an sf e r p r i c in g do c u m en t a t io n a re “tr u e an d c o rr e ct”

41. Con se qu e n c e o f T P non -c omp li a n c e Puni t i ve c on s equen c e s i n t h e e v en t o f non -c o m plian ce w i th T P p r o v i s ion s in c lude : Add i t i onal tax on i n c ome a r i s i ng f rom TP ad j u s tment D en i al of ‘ tax ho li da y ’ on i n c ome a r i s i ng f rom TP ad j u s tment (Pr o v i s o to Sec 92 C ) D eemed tax e v a s i on, r e s u l t i ng i n a pena l ty of 100% to 300% of tax a r i s i ng f rom the ad j u s tment, un l e s s good fa i th and due d ili gen c e i s demon st r ated – Sec 271 ( 1 )( c ) 2% t r an s a ct i on v a l ue pena l ty for not ma i nta i n i ng p r e sc r i bed do c umentat i on/ fu r n i s h i ng of i n c o rr e ct i nfo r mat i on – Sec 271AA 2% t r an s a ct i on v a l ue pena l ty for not fu r n i s h i ng p r e sc r i bed i nfo r mat i on w i th i n s pe c i f i ed t i me – Sec 271G R s .100,000 pena l ty for non - f ili ng/be l ated f ili ng of A cc ountant ’ s R epo r t – Sec 271BA 41

42. S af e H a r bou r R ule s

43. 43 Sa fe Ha r bou r Ru l e s – Backg r oun d La w in tr odu c e d i n I ndi a i n F inan ce ( No . 2 ) A ct, 200 9 Ran g a c ha r y C o mm i tt e e s e t u p to r e c o mm e n d Sa fe Ha r b ou r Rule s f o r a n u m b e r o f s e ct o rs D r a ft Rule s, r elea s e d b y C en tr a l B o a rd o f Di r e ct T a x e s i n A u gu st 2 13 , a r e ba s e d o n t h e Co mm i tt ee ’ s r epo rt Con s u l t a t i ve a pp r oa c h adop t e d b y t h e G o v e r n m en t i n f i n ali z i n g r ule s – c e rt ai n c hange s w e re m ad e ba s e d o n st a k eholde rs c o mm en ts F ina l r ule s ha ve bee n no t i f ie d i n Sep t e m be r 201 3 P r o v id e t h a t t h e tr an sf e r p r i c e de c la r e d b y t h e “ elig i bl e t a x pa y e r” i n r e s pe ct o f “ eli g ib l e tr an s a ct ion ”, s hal l b e a cc ep t e d b y t a x au t ho r i t ie s i n s pe c i f i e d c i rc u mst an c e s

44. Sa fe Ha r bou r Ru l e s – Snapsho t ( 1 / 2 ) 44 N a tu re o f i nt er n a t i on al T ra n sac t i o n Cond i t i o n Sa f e H ar bou r op era t i n g mar g in o n op era t i n g ex p e n ses So f t w a r e de v e l op m e nt se r v i ces w i th i ns i g n i f i cant ri sk IT IT enab l ed se r v i ces w i th i ns i g n i f i c a nt ri sk A gg r e g ate v a l ue of t r ansact i ons does not e x ceed R s.500 c r o r es ( App r ox U SD 80 M n) A gg r e g ate v a l ue of t r ansact i ons e x ceeds R s.500 c r o r es ( App r ox U SD 80 M n) N ot l ess than 20 per cent N ot l ess than 22 per cent III. Kno w l ed g e P r ocess Outsou r c i ng N o tu r no v er th r esho l d N ot l ess than 25 per cent ( KPO) se r v i ces w i th i ns i g n i f i cant ri sk C ont r act R &D se r v i ces ( w ho ll y or N o tu r no v er th r esho l d pa r t l y ) , w i th i ns i g n i f i ca n t ri sk, r e l at i ng to so f t w a r e de v e l op m e n t N ot l ess than 30 per cent Gene ri c pha r m ace u t i c a l d r u g s N ot l ess than 29 pe r cent M anu f a ctu r e and e x po r t of 90 per cent or m o r e of total tu r no v er a r e i n co r e auto co m pon en ts natu r e of O ri g i nal E q u i p m ent M anu f actu r e r N ot l ess than 12 per cent sa l es non - co r e auto co m pon en t N ot l ess than 8.5 pe r cent

45. Sa fe Ha r bou r Ru l e s – Snapsho t ( 2 / 2 ) 45 N a tu re o f i nt er n a t i on al T ra n sac t i o n Cond i t i o n Sa f e H ar bou r op era t i n g i nt erest ra t e / f ee Ad v anc i ng i nt r a - g r oup l oan T o w ho ll y o w ned non -r es i de n t subs i d i a r y Inte r est r ate i s not l ess than Loan sou r ced i n Ind i an R upees base r ate of SBI as on 30th June of the r e l e v ant p r e v i ous y ear E x c l udes l oans by ente r p ri ses en g a g ed p l us i n l end i ng or bo rr o w i ng i n the no r m al cou r se of bus i ness • 150 bas i s po i nts [ w he r e a m ou n t of l oan does not e x ceed R s. 50 c r o r es ( app r ox U SD 8 M n ) ] 300 bas i s po i nts [ w he r e a m ou n t of l oan e x ceeds R s. 50 c r o r es ( app r ox U SD 8 M n ) ] Cotton Naturals decision of Delhi HC P r o v i d i ng e x p li c i t co r po r ate g ua r antee On beha l f of w ho ll y o w ned non -r es i de n t subs i d i a r y C o mm i ss i on or f ee at the r ate of A m ount of g ua r antee does not e x ceed not l ess than 2 per cent per R s.100 c r o r es ( App r ox U SD 16 M n) annum on the a m ount g ua r ante e d A m ount of g ua r antee e x ceed i ng R s.100 c r o r es (( App r ox U SD 16 M n ) ) and the C o mm i ss i on or f ee at the r ate of c r ed i t r at i ng of the bo rr o w i ng AE done by not l ess than 1.75 per cent per an a g ency r e g i ste r ed w i th SEBI i s of annum on the a m ount ade q u a te to h i g hest sa f ety g ua r ante e d e x c l udes pe r f o r m a n ce g ua r antees and l ette r s of co m f o r t

46. S afe Har b o u r Ru les – P r oce du r e: F or e x e r c i s i ng the s afe ha r bour opt i on, a ta x pa y er w ou l d need to fu r n i s h F o rm 3 C E F A on or befo r e the due date for fu r n i s h i ng r etu r n of i n c ome for the r e l e v ant y ear ( i n c a s e opt i on i s e x e r c i s ed for one y ea r ) or for the f i r st y ear ( i n c a s e opt i on i s e x e r c i s ed for mor e than one y ea r) . A v a li d l y e x e r c i s ed s afe ha r bour opt i on w il l c ont i nue to rema i n i n fo r c e for a pe r i od of 5 y ea r s or pe r i od opted by the ta x pa y er ( i n F o rm 3 C E F A) , w h i c he v er i s l e ss. F ile F o rm 3 C E F A T a x O f f i c e r m i gh t r e f e r t h e m a tt e r t o T P O if neede d Pa s s a n o r de r r ega r d i n g a cc ep t an c e o r r e j e ct i o n w i t h in 2 m on t h s D ee m e d t o b e c on s i de re d a s a cc ep t ed , if n o o r de r is pa ss e d w i t h in 2 m on t h s I f e li g i b ili t y is no t a cc ep t ed , T a x pa y e r ha s t o f ile ob j e ct i on s w i t h C o mm i ss i one r w i t h in 1 5 da y s C o mm i ss i one r pa ss e s h is o r de r w i t h in 2 m on t h s 46

47. A dvanc e Pr icin g A g r ee m en t ( A P A)

48. Agreements between taxpayers and governments and dispute resolution Tax authorities of most major countries have entered into unilateral or multilateral agreements between taxpayers and other governments regarding the setting or testing of related party prices. These agreements are referred to as  advance pricing agreements  or  advance pricing arrangements  (APAs). Under an APA, the taxpayer and one or more governments agree on the methodology used to test prices. APAs are generally based on transfer pricing documentation prepared by the taxpayer and presented to the government(s). Multilateral agreements require negotiations between the governments, conducted through their designated  competent authority  groups. The agreements are generally for some period of years, and may have retroactive effect. Most such agreements are not subject to public disclosure rules. Rules controlling how and when a taxpayer or tax authority may commence APA proceedings vary by jurisdiction. Source: Wikipedia.

49. O ve r v i e w o f A P A p r oces s Ph ase 1 Pr e - f ili ng c on s u l tat i on* Ph ase 2 Ph ase 3 F o r mal f ili ng of • Po st - f ili ng A P A app lic at i on meet i ng and negot i at i ons Ph ase 4 F i na li z i ng and s i gn i ng an A P A Ph ase 5 Annual c omp li an c e and mon i to r i ng Re n e w a l of A P A : P r o c e ss s i m ila r to o r igina l APA , n o p r e -f ilin g r equi r e d 4 1 * T h e AP A au t ho r i t ie s a re al so ope n t o ha v e a p re ‘p r e - f ilin g ’ m ee t in g w i t h t h e t a x pa y e rs

50. I n iti a l y ea r o f A P A r o ll ou t… A pp r o x i m a t e l y 140 A P A a pp lica t i on s f iled du ri n g 2012 - 13 (F irst Y ear ) A pp r o x i m a t e l y 225 a pp lica t i on s f iled du ri n g 2013 - 14 ( Sec on d Y ear) Approximately 580 todate Maxi mu m Numb er o f A P A in i n i t ial y ears a n y w h ere in th e w o rld Mo s t ly fo r un ila t eral A P A – s om e w i t h opt i o n fo r b ila t eral B ila t eral a pp lica t i on s are f r om U S, U K a n d Ja p an 41 cases c on cl ud ed to date. 4 2

51. Ro ll bac k p r ov i s i o n Ro ll b ack t o b e a pp lied fo r a p eri o d no t excee d i n g fou r y ears p rece d i n g th e f irst y ear t o w h ich A P A a pp lies Fo r i n s t a n ce, if A P A h as b een a g reed f r om FY 2015 - 16 on w ar d s, th en th e a g ree m e n t m ay also c o v er p ri o r fou r y ears i.e. 20 1 1 - 12 t o 2014 - 15 A m e n d m e n t w ill t ake e ff ect f r om 1 O c tob er 2014 Mann er o f a pp lica b ilit y fo r th e y ears und er a ud it / a pp eal / (op e n ) y ears A dd i t io n al F ees 4 3

52. Reference to TPO: Section 92CA Where taxpayer has entered into international transaction, and AO considers it necesscary or expedient so to do, he may, with the previous approval of Principal CIT or CIT refer ALP iro international transaction to TPO.

53. Than k yo u