Gaurav Kalra Transfer Pricing PP-TP.pptx

Transfer Pricing

1. TRANSFER PRICING

2. TRANSFER PRICING Section 92- Computation of Income from International Transaction with regard to ALP 92A- Meaning of Associated Enterprise 92B- Meaning of International Transaction 92BA Meaning of Specified Domestic Transaction 92C- Computation of Arm’s Length Price 92CA- Reference to Transfer Pricing Officer

3. TRANSFER PRICING 92CB- Safe Harbour Rules 92CC & 92CD- Advance Pricing Agreement 92D-Maintenance, keeping and furnishing information and Documents 92E- Report from an accountant 92F- Definitions

4. What is Transfer Pricing? Transfer pricing is an accounting and taxation practice that allows for pricing transactions between subsidiaries that operate under common control or ownership. The transfer pricing practice extends to cross-border transactions as well as domestic ones. Transfer Price is the price at which one enterprise transfers the goods/services/intangibles to the other enterprise.

5. History of Transfer Pricing in India Introduced in India in 2001-02 for International Transactions Transfer Pricing is covered in Chapter-X of the Act Sections 92 to 92F Rules 10A to 10THD Transfer Pricing for domestic transactions introduced in 2012 w.e.f. AY 2013-14 (Sec 92BA)

6. Need for Transfer Pricing Rise of large number of MNCs Increased cross border transactions Different tax rates Transactions between group companies not determined by market forces Likely nature to avoid tax by manipulating transfer prices

7. How Profits are Manipulated Suppose a company A purchases goods for 100 rupees and sells it to its associated company B in another country for 200 rupees, who in turn sells in the open market for 400 rupees. Had A sold it direct, it would have made a profit of 300 rupees. But by routing it through B, it restricted it to 100 rupees, permitting B to appropriate the balance. The transaction between A and B is arranged and not governed by market forces. The profit of 200 rupees is, thereby, shifted to the country of B. The goods is transferred on a price (transfer price) which is arbitrary or dictated (200 hundred rupees), but not on the market price (400 rupees).

8. Basic Terminologies used in Transfer Pricing Adjustment – Downward -Revision of items of expense like purchase of goods, royalty & service charges and Upward - revision of revenue items by TPO. Arm’s Length Price (ALP) – The price which the goods or services would fetch in a normal market scenario. Associated Enterprise (AE) – The entities who are governed by common control or ownership Comparable party – The third party/parties with whose prices the comparison of assessee’s prices are being made. Controlled transactions – Transactions between AE’s

9. Basic Terminologies used in Transfer Pricing FAR Analysis – Functions, Assets & Risks analysis Most Appropriate Method (MAM ) – The method chosen by the assessee to evaluate his transactions. This can be different for different types of transactions for the same year. TPO can choose to apply a different MAM. Tested Party – Generally the assessee whose transactions are being evaluated (sometimes the AE is also taken as the tested party) Uncontrolled transactions – Transactions taking place in market driven conditions( Between Non AE’s)

10. Section 92 Computation of Income Section 92(1), 92(2) and 92(3) Indian Transfer Pricing provisions provide that Any income arising from an “ International Transaction” - Allowance for any expenses or interest arising from an international transaction Cost sharing arrangements between "associated enterprises" ("AEs") – Similar provisions for SDT - 92(2A) shall be computed or determined having regard to the " arm’s length price “ However, no adjustment is permissible which has the effect of reducing the income or increasing loss

11. 92A Associated Enterprise An "enterprise" is an associated enterprise which participates directly or indirectly in the management or control or capital of the other enterprise. OR, through one or more intermediaries. This can be explained as under:

12. 92A Associated Enterprise 2) For the purposes of sub-section (1), two enterprises shall be deemed to be associated enterprises if, at any time during the previous year— (a) one enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in the other enterprise; or (b) a loan advanced by one enterprise to the other enterprise constitutes not less than fifty-one per cent of the book value of the total assets of the other enterprise; or     

13. 92A Associated Enterprise (d) one enterprise guarantees not less than ten per cent of the total borrowings of the other enterprise; or (e) 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; or

14. 92B International Transaction Section 92B(1) It is defined as a transaction between two or more AEs, either or both of which are non-residents. The transactions are in the nature of : Purchase/sale/lease of tangible property Purchase/sale/lease of intangible property or Provision of services or

15. 92B International Transaction Lending or Borrowing Of Money or Any other transaction having a bearing on profits, income, losses or assets of such enterprises and

16. 92BA Specified Domestic Transaction Expenditure in respect of which ‘payment has been made or is to be made’ to a ‘related person referred to in Section 40A(2)(b)’. Deleted from AY 2017-18 Transaction between Eligible Business for deduction u/s 80-IA, 80-IAC, 80-IB, 80-IC etc. (Chapter VIA-C deductions) and Any other business of the same assessee Of Goods or Services either sold or purchased by the eligible unit. Provisions of SDT will be applicable only when aggregate value of all SDT’s exceeds 20 Crores .

17. 92BA Specified Domestic Transaction Expenditure

18. 92C Computation of ALP 92C(1) The arm's length price in relation to an international transaction or specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :—

19. 92C Computation of ALP ( a ) Comparable uncontrolled price method; ( b ) Resale price method; ( c ) Cost plus method; ( d ) Profit split method; ( e ) Transactional net margin method; ( f ) Such other method as may be prescribed by the Board.

20. Methods for determination of ALP Traditional transaction methods Comparable Uncontrolled Price Method Resale Price Method Cost Plus Method Transactional profit methods Transaction Net Margin Method (TNMM) Profit Split Method Other Method as prescribed by the Board.

21. Comparable Uncontrolled Price Method CUP method compares the “price” charged in a controlled transaction with that charged in a comparable uncontrolled transaction. Appropriate When the transaction between the two associated enterprises are in similar quantities under similar terms as that with an independent enterprise in similar market.

22. Comparable Uncontrolled Price Method Limitation Difficulty in availability of reliable comparable data, especially when it requires Strict Comparability for Products Similarity, Contractual terms, economic terms etc. Not suited to business where product or service is unique

23. Comparable Uncontrolled Price Method INTERNAL CUP PARENT CO ARMS LENGTH PRICE SUBSIDIARY CO THIRD PARTY THIRD PARTY PRICE UNRELATED CO - B EXTERNAL CUP UNRELATED CO - A ARMS LENGTH PRICE OUTSIDE INDIA INDIA

24. Cost Plus Method Under the Cost Plus Method, ALP is determined by adding profit mark up to the direct and indirect cost of production incurred with respect to goods transferred or service provided. Appropriate: In cases involving manufacture, assembly, production of tangible products or services that are sold / provided to AEs.

25. Cost Plus Method Comparability under this method is not as much as dependent on close physical similarity between the products. Large emphasis on functional comparability Not suited for businesses where the product or service range is unique

26. Resale Price Method RPM compares a distributor’s / reseller’s gross margin on controlled transactions with the gross margins of comparable independent firms. Applies to trading / marketing activities, including activities of pure resellers where products are resold without any value addition

27. Resale Price Method Appropriate: When the seller add little value to the goods and not alter the physical properties of goods before resale; Packing, repacking, labeling or minor assembly does not ordinarily constitute physical alteration. Limitation: When the reseller adds substantial value to the end product or service;

28. RESALE PRICE METHOD (RPM) Contd MANUFACTURER DISTRIBUTOR THIRD PARTY CLIENT THIRD PARTY CLIENT DISTRIBUTOR THIRD PARTY MANUFACTURER CONTROLLED TRANSACTION UNCONTROLLED TRANSACTION COMPARISION OF GROSS MARGIN AND OTHER COSTS (RESALE PRICE MARGIN) SALE PRICE (RESALE PRICE) SALES In resale price method, the resale price margin (i.e., Gross margin) that the reseller earns from the controlled transaction is compared with the gross margin from comparable uncontrolled transaction

29. Profit Split Method Profit Split Method (PSM) is applicable for International Transactions involving transfer of unique intangibles. Multiple International Transactions which are so interrelated that ALP of any one of transaction cannot be evaluated separately PSM first identifies the combined profit of the related parties arising from the transaction in which they are engaged. The relative contribution made by each related party is then evaluated on the basis of the FAR Analysis. The combined profit is then split amongst the parties in proportion to their respective contributions.

30. Transactional Net Margin Method In TNMM the assessee attempts to establish the ALP of transactions by looking at the profits attained from those transactions and comparing these profits with the profits attained by similar Non AEs having similar transactions One of the most widely used methods – can be used for manufacturing and service sectors The Net Operating Profit Margin on cost or revenue (depending on the transaction) of the assessee is computed This OPM is compared with the mean margin of the comparable companies

31. TRANSACTIONAL NET MARGIN METHOD (TNMM) Step 1: Net profit margin of controlled transaction Step 2 : Net profit margin of uncontrolled transaction Step 3: Compare net profit arrived by step 1 and 3 Step 4: The difference arrived in Step 4 is taken to determine ALP PARENT CO UNRELATED CO SUBSIDIARY CO UNRELATED CO NET MARGIN 3% NET MARGIN 8% OUTSIDE INDIA INDIA

32. Other Method Residual method, notified from AY 2012-13 (Rule 10AB) Used when none of the other five main methods are appropriate Generally used for transactions like import of capital goods, subscription to share capital, reimbursement or other transactions which are not capable of being evaluated under the main methods.

33. Summary of Methods for determination of alp Method Procedure Usage Comparable uncontrolled price method (CUP) Comparison of price charged or paid for property transferred or services provided in a comparable uncontrolled transaction Used mainly in respect of transfer of goods, provision of services, financial transactions. Resale-price method (RPM) Considers the price at which property purchased or services obtained by the enterprise from an AE is resold or are provided to an unrelated enterprise Used mainly in case of distribution of finished goods or other goods involving no or little value addition Cost plus method (CPM) Considers direct and indirect costs of production incurred by an enterprise in respect of property transferred or services provided and an appropriate mark-up Used mainly in respect of provision of services, transfer of semi finished goods, long-term buying and selling arrangements

34. Summary of Methods for determination of alp ( contd ) Method Procedure Usage Profit-split method (PSM) Considers combined net profit of the AEs arising from the international transaction and its split amongst them. Used mainly in report of transactions involving integrated services provided by more than one enterprise, transfer of unique intangibles, multiple inter-related transactions, which cannot be separately evaluated Transactional net margin method (TNMM) Considers net profit margin realised by the enterprise from an international transaction entered into with an AE. Used in respect of transactions for provision of services, distribution of finished products where resale price method cannot be adequately applied, transfer of semi-finished goods Any other method as prescribed by the CBDT The CBDT has prescribed a sixth method from AY 2012-13 onwards The choice has been left to the TPO to adopt any method that he thinks fit.

35. 92CA-Reference to TPO 92CA(1)- Where any person, being the assessee, has entered into an international transaction or specified domestic transaction in any previous year, and the Assessing Officer considers it necessary or expedient so to do, he may, with the previous approval of the Principal Commissioner or Commissioner , refer the computation of the arm’s length price in relation to the said international transaction or specified domestic under section 92C to the Transfer Pricing Officer.

36. 92CA CONTENTS OF REFERENCE Name, PAN, Asst . Year Whether IT, SDT or both Approval of Pr.CIT/CIT Form 3CEB (in full with Annexure) Screenshot of CASS reason (or) Condition as per CBDT Ins .3 OF 2016

37. 92CA 92CA(2)- Provides that where a reference is so made, the Transfer Pricing Officer shall serve a notice on the assessee requiring him to produce or cause to be produced on a date to be specified therein, any evidence on which the assessee may rely in support of the computation made by him of the arm's length price in relation to the international transaction referred to him by AO as above.

38. 92CA 92CA(3)- The TPO passes an order under Sub-section (3) of section 92CA after verifying the evidences produced by the assessee during the course of TP audit proceedings determining the ALP in relation to the IT or SDT in accordance with Sec. 92C(3) and sends a copy of the order to the AO and to the assessee. This is similar to 143(3).

39. 92CA 92CA(3A)- Provides that such order under sub-section (3) may be made by the TPO at any time before 60 days prior to the date on which the period of limitation referred to in section 153, or as the case may be, in section 153B for making the order of assessment or reassessment or re-computation or fresh assessment, as the case may be, expires.

40. 92CA 92CA(4)- On receipt of the order under sub-section (3), the Assessing Officer shall proceed to compute the total income of the assessee under sub-section (4) of section of 92C in conformity with the arm’s length price as so determined by the Transfer Pricing Officer.

41. 92CA 92CA(2A)- Where any other international transaction other than an international transaction referred under sub-section (1), comes to the notice of the Transfer Pricing Officer during the course of the proceedings before him, the provisions of this Chapter shall apply as if such other international transaction is an international transaction referred to him under sub-section (1).

42. 92CA

43. 92CB SAFE HARBOUR RULES Safe Harbour provides for circumstances under which the income tax authorities shall accept the transfer pricing declared by the assessee. It is a set of rules directed at simplifying transfer pricing compliance applicable to a specific category of tax payers / transactions . The eligible assessees under Safe Harbour rules: The eligible assessee under Safe Harbour Rules in India has been defined in Rule 10TB. The eligible assessee is as under: An assessee who is engaged in providing software development services or information technology-enabled services or knowledge process outsourcing services , with insignificant risk, to a non-resident associated enterprises. Who has made any intra-group loan?

44. 92CB SAFE HARBOUR RULES Who has provided a corporate guarantee? Who is engaged in providing contract research and development services wholly or partly relating to software development, with insignificant risk, to a foreign principal The assessee who is engaged in providing contract research and development services wholly or partly relating to generic pharmaceuticals drugs, with insignificant risk, to a foreign principal An assessee engaged in manufacture and export of core or non-core auto components

45. 92CB SAFE HARBOUR RULES Rule 10TC defines Eligible international transactions between the eligible assessee (as mentioned above) and its associated enterprise 1. Provision of software development services; 2. Provision of information technology enabled services; 3. Provision of knowledge process outsourcing services;

46. 92CB SAFE HARBOUR RULES 4. Advance of intra group loan; 5. Provision of corporate guarantee; 6. provision of contract research and development services wholly or partly relating to software development; 7. provision of contract research and development services wholly or partly relating to generic pharmaceuticals drugs; 8. manufacture and export of core auto components; 9. manufacture and export of non-core components; 10. receipt of low value-adding intra-group services from one or more members of its group.

47. 92CB SAFE HARBOUR RULES Introduced by CBDT on 18 th September, 2013 for International Transactions and on 4 th February 2015 for SDT under Sec 92CB. Optional in nature and can be opted for by filing Form 3CEFA or 3CEFB (for IT & SDT respectively) Rules 10TA to 10TG deal with SHR for International Transactions and Rules 10TH to 10THD with SDT No TP audit is conducted for the period when the assessee opts for SHR

48. 92CC & 92CD ADVANCE PRICING AGREEMENT An APA is an agreement between a tax payer and tax authority determining the transfer pricing methodology for pricing the tax payer’s international transactions for future years. The methodology is to be applied for a certain period of time based on the fulfilment of certain terms and conditions (called Critical assumptions ). Advance Pricing Agreements are agreements signed by assessee with the Board where prices of products or services are agreed to in advance. Can be Unilateral (with the assessee) or Bilateral (where the tax authorities of AE are also party) or Multilateral (where more than one tax jurisdiction is involved) The margins are fixed after negotiations Five year period

49. 92CC & 92CD ADVANCE PRICING AGREEMENT Compliance with the agreement is verified by compliance audit conducted by TPO annually during the currency of APA No TP audit is conducted during the currency of the Agreement Rules 10F to 10T and Form 3CEC for pre filing meeting and Form 3CEF for ACR. Rule 10-O – The assessee has to furnish Annual Compliance Report in Form 3CEF to Director General of Income Tax (International Taxation) within 30 days of the due date of filing of income tax return or within 90 days of entering into the agreement, whichever is later, for each year covered under the agreement.

50. 92CC & 92CD ADVANCE PRICING AGREEMENT Compliance Audit of APA under Rule 10P : Transfer pricing officer is obliged to carry out compliance audit of the agreement for each year (covered under the agreement) on the basis of compliance audit report submitted by the assessee. The compliance audit report shall be submitted within 6 months from the end of the month in which annual compliance report is submitted by assessee.

51. 92CC & 92CD ADVANCE PRICING AGREEMENT Roll Back Provisions [section 92CC(9A)] In order to reduce current pending litigations, income tax law provides provision for roll back mechanism under the APA scheme. Roll back provisions means application of APA terms and conditions from the years prior the year of application. Income tax act allows application of APA terms from 4 years prior to the year in which application for APA is made by filing form 3CEDA along with application of APA. In case applicant applies for roll back provisions, he has to compulsory opt it for all 4 previous years (preceding the first year for which APA applies).

52. 92CC & 92CD ADVANCE PRICING AGREEMENT Effect to APA [section 92CD] 1. In case taxpayer has furnished the income tax return (for any assessment year to which APA applies) before the date of entering into the agreement, then to comply with APA, he has to furnish a modified return within 3 months from the end of the month in which the APA has been entered into. 2. In case the assessment for the period covered by APA is completed, then AO will pass an order modifying total income as per APA within 1 year from the end of the financial year in which modified return is furnished. 3. In case the assessment is for the period covered by APA is pending with AO, then AO need to proceed with assessment taking into consideration the modified return furnished by assessee. The period of limitation for completion of assessment in this case will be extended by 12 months.

53. 92D 92D.  (1) Every person who has entered into an international transaction or specified domestic transaction shall keep and maintain such information and document in respect thereof, as may be prescribed (2) Without prejudice to the provisions contained in sub-section (1), the Board may prescribe the period for which the information and document shall be kept and maintained under that sub-section. Rule 10 D- Information and documents required to be maintained Keep and maintain the information and documents for 8 years from the end of relevant assessment year)

54. Penalty for Non Maintenance of Documents 271AA .  Penalty for failure to keep and maintain information and document in respect of international transaction. —Without preju­dice to the provisions of section 271, if any person fails to keep and maintain any such information and document as required by sub-section (1) or sub-section (2) of section 92D, the Assessing Officer or Commissioner (Appeals) may direct that such person shall pay, by way of penalty, a sum equal to two per cent of the value of each international transaction entered into by such person.“

55. Penalty for Non Compliance 271G.  If any person who has entered into an international transaction or specified domestic transaction fails to furnish any such information or document as required by sub-section (3) of  section 92D , the Assessing Officer or the Transfer Pricing Officer as referred to in  section 92CA  or the Commissioner (Appeals) may direct that such person shall pay, by way of penalty, a sum equal to two per cent of the value of the international transaction or specified domestic transaction for each such failure .

56. 92E Every person who has entered into an international transaction or specified domestic transaction during a previous year shall obtain a report from an accountant and furnish such report on or before the specified date in the prescribed form duly signed and verified in the prescribed manner by such accountant and setting forth such particulars as may be prescribed. Prescribed Form- Form 3CEB (Rule 10E)

57. 92E Failure to furnish it attracts Penalty u/s 271 BA 271BA.  If any person fails to furnish a report from an accountant as required by  section 92E , the Assessing Officer may direct that such person shall pay, by way of penalty, a sum of one hundred thousand rupees.

58. 92F DEFINITIONS 92F.   ( i ) "accountant" shall have the same meaning as in the  Explanation  below sub-section (2) of  section 288 ; Explanation. —In this section, "accountant" means a chartered accountant as defined in clause ( b ) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949 (38 of 1949) who holds a valid certificate of practice under sub-section (1) of section 6 of that Act

59. 92F DEFINITIONS ( ii ) "arm's length price" means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions; ( iii ) "enterprise" means a person (including a permanent establishment of such person) who is, or has been, or is proposed to be, engaged in any activity, relating to the production, storage, supply, distribution, acquisition or control of articles or goods, or know-how, patents, copyrights, trade-marks, licence , franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process,