CA Ganesh Rajgopalan
Intensive Workshop on Transfer Pricing
JB Nagar CPE Study Circle jointly with the WIRC
26th October, 2012

Transfer pricing provisions
◦ International transactions
◦ Specified domestic transactions
CA Ganesh Rajgopalan
October 26, 2012
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Association for
International Transactions
CA Ganesh Rajgopalan
October 26, 2012
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Whether AE?
International
Transaction?
TP provisions apply
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October 26, 2012
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“For the purposes of this section and sections 92, 92C, 92D and 92E,
"international transaction" means a transaction between two or more
associated enterprises, either or both of whom are non-residents, in the
nature of 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,….” [Sec. 92B]

Characteristics-

Excluded-
◦ a transaction
◦ Between two or more AE
◦ At least one of whom is a NR
◦ Transactions between non-AEs
 transaction presumed at arm’s length
◦ Transactions between AEs where both (all) are residents
 Transactions between foreign PEs of Residents?
◦ Non-business transactions?
 Between individuals/HUF
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October 26, 2012
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
A person (including a permanent establishment of such person)

Engaged◦ In any specified activity, or
◦ in investment, or providing loan or
◦ in business of acquiring, holding, underwriting or dealing with securities

whether such activity or business is carried on, directly or through
one or more of its unit/divisions/subsidiaries, or

whether such unit/division/subsidiary located at the same or
different place
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October 26, 2012
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
In common parlance◦ Economic activity capable of producing profits
◦ Exercised in an independent manner
◦ Consisting of well defined actions
◦ Having economic character

Enterprise and business -synonymous

“Engaged in” –
◦ connotes doing more than one act,
◦ continuity of action

“Enterprise” signifies activity as also the organisation

Person and enterprise distinct terms
◦ Personal investments not amounting to business whether enterprise?
◦ Personal transactions whether covered?
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October 26, 2012
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92A. (1) For the purposes of this section and sections 92, 92B, 92C, 92D, 92E
and 92F, "associated enterprise", in relation to another enterprise, means an
enterprise—
(a) which participates, directly or indirectly, or through one or more
intermediaries, in the management or control or capital of the other
enterprise; or
(b) in respect of which one or more persons who participate, directly
indirectly, or through one or more intermediaries, in its management
control or capital, are the same persons who participate, directly
indirectly, or through one or more intermediaries, in the management
control or capital of the other enterprise.
CA Ganesh Rajgopalan
October 26, 2012
or
or
or
or
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

Sub-section (1)(a)
◦
◦
◦
◦
An enterprise
which participates
Directly or indirectly or through intermediaries
in management or control or capital of another enterprise
Sub-section (1)(b)
◦
◦
◦
◦
One or more persons
participates
Directly or indirectly or through intermediaries
in management or control or capital of two enterprises

Refers not to a transaction/business but to the enterprise itself

“Participate” – to take part

“Directly or indirectly”
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October 26, 2012
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
Sec. 92A(1)(a)
Sec. 92A(1)(b)
A
A
B
B
D
E
C
C
AEs
A-B
B-C
A-C
AEs
C-D
C-E
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October 26, 2012
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
Deemed instances [sub-section (2)]
◦ By reason of
 substantial holding of voting power
 substantial lending
 substantial functional involvement
 Control/interest

Does not create a fiction
◦ Only includes what is obvious when one enterprise in a position to control the other

At any time during the year
 Condition absent in sub-section (1)
 Whether AE for period before condition is satisfied or after condition ceases?

Essential condition for AE?
 Owning one share – participation in capital?
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October 26, 2012
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Amendment vide Finance Act 2002

Memorandum explaining the provisions of Finance Bill
“It is proposed to amend sub-section (2) of the said section to clarify that the mere
fact of participation by one enterprise in the management or control or capital of the
other enterprise, or the participation of one or more persons in the management or
control or capital of both the enterprises shall not make them associated enterprises,
unless the criteria specified in sub-section (2) are fulfilled.”
Note on Clauses

◦ “Clause 38 seeks to amend section 92A of the Income-tax Act relating to meaning of
associated enterprise.
It is proposed to amend the said sub-section (2) so as to insert the words “For the
purposes of sub-section (1)”. The proposed amendment is of clarificatory nature.”
CBDT Circular

◦
Example about 100% of non-voting capital-not an AE
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October 26, 2012
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
Memorandum
•
not an external aid for construction?
•

“usually not an accurate guide of the final Act… In the Explanatory
Memorandum, headings are fairly wide and matters collected under
the same heading may be diverse not giving a true indication of the
object of the legislation” [Shashikant Laxman Kale v Union of India
(1990) 185 ITR 104 (SC)]
Whether deeming criteria mandatory or circumscribed by
Sub-sec. (1)
 Bank lending to an enterprise without participation in management,
control or capital

Sanchez Capital Services [26 taxmann.com 61]
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October 26, 2012
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
Facts◦ Assessee subsidiary of FCo. ZCo (which was 20% shareholder) was shown as AE in
Form 3CEB for the past three years. Adjustment made in AY 2008-09.



Revenue’s contentions◦ shareholding structures and relationships between Z and F groups remain
unexplained
◦ No minimum threshold prescribed; even 1% shareholding participation sufficient
◦ When two enterprises AE u/s 92A(1), no need to consider deeming provisions in
s.sec (2)
Assessee’s contentions
◦ submitted Form No.3CEB by way of abundant precaution
◦ sub-section 1 & 2 to be read together to identify whether AE relationship exists;
Memorandum explaining the provisions in the Finance Bill, 2002 relied on
Ruling
◦ Just filing Form 3CEB cannot result in these two as AEs unless sec. 92A are satisfied
◦ Detailed explanations given how these provisions [sec. 92(2)] not applicable.
◦ However, not clear from records whether there is any relationship as prescribed u/s
92A(1)(a)(b). Hence remanded.
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October 26, 2012
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“(a) one enterprise holds, directly or indirectly, shares carrying not less
than twenty-six per cent of the voting power in the other enterprise;
(b) any person or enterprise holds, directly or indirectly, shares carrying
not less than twenty-six per cent of the voting power in each of such
enterprises”

Directly or indirectly

Indirectly –


A
◦ Registered holder or beneficial owner
60%
◦ Proportionate?
B
Convertible instruments
◦ Potential equity interest to be considered?
40%
Voting power-
C
◦ May not apply to non-corporate entities
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October 26, 2012
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“(c) 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
(receiving) enterprise;
(d) one enterprise guarantees not less than ten per cent of the total
borrowings of the other enterprise;”

Lender participation in management or control or capital required?
Percentage

Total assets not defined


◦ at the time of advancing of loan or at any time the loan subsists
◦
◦
◦
◦
Fixed assets at gross or net block
Revalued amount in books or historical cost
Net of current liabilities or otherwise
Deferred revenue expenditure/ P & L debit
Guarantee
◦ Performance guarantee
◦ Guarantee relating to trade payables
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October 26, 2012
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(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;
(f) more than half of the directors or members of the governing board, or one
or more of the executive directors or members of the governing board, of
each of the two enterprises are appointed by the same person or persons;


Actual appointment relevant, not power to appoint
Only year of appointment or later years?
◦ Instances where JV partners take turns in appointing ED
◦ Where the Board strength undergoes change


Appointing CEO/top executives whether covered?
Applies to entities other than companies
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October 26, 2012
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the manufacture or processing of goods or articles or business carried out by
one enterprise is wholly dependent on the use of know-how, patents,
copyrights, trade-marks, licences, 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, of which the other enterprise is the owner or in respect of which
the other enterprise has exclusive rights;




Also covers services
Whether enterprise carrying on single activity or multiple
activities
Whether activity for which IPR, etc is used is primary activity
Whether IPR owner participates in management or control
◦ appointment of strategic personnel
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October 26, 2012
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(h) ninety per cent or more of the raw materials and consumables
required for the manufacture or processing of goods or articles carried
out by one enterprise, are supplied by the other enterprise, or by persons
specified by the other enterprise, and the prices and other conditions
relating to the supply are influenced by such other enterprise;
(i) the goods or articles manufactured or processed by one enterprise, are
sold to the other enterprise or to persons specified by the other
enterprise, and the prices and other conditions relating thereto are
influenced by such other enterprise;




Does not apply to services
Global supply contracts with third party supplies covered
Price & other conditions influenced how determined
No percentage stipulated for goods sold
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October 26, 2012
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(j) where 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;
(k) where one enterprise is controlled by a Hindu undivided family, the other
enterprise is controlled by a member of such Hindu undivided family or by a
relative of a member of such Hindu undivided family or jointly by such
member and his relative;
(l) where one enterprise is a firm, association of persons or body of
individuals, the other enterprise holds not less than ten per cent interest in
such firm, association of persons or body of individuals;


No percentage specified in (j) & (k)
One person (non-individual) controlling two enterprises
◦ Clause (k) & (l)

Control-
◦ Management /operational/ownership control?
◦ “interest” implies ownership
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October 26, 2012
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(2) A transaction entered into by an enterprise with a person other
than an associated enterprise shall, for the purposes of sub-section
(1), be deemed to be a transaction entered into between two
associated enterprises,
- if there exists a prior agreement in relation to the relevant
transaction between such other person and the associated enterprise,
or
- the terms of the relevant transaction are determined in substance
between such other person and the associated enterprise.
CA Ganesh Rajgopalan
October 26, 2012
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

B is interposed and the terms of the
transactions are determined between
AE2 and B. U/s 92B(2), AE1 and B are AEs.
AE2
Sale at 365
days credit
Global sourcing arrangements
B
Sale at 30
days credit
AE1
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October 26, 2012
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Association for
Specified Domestic Transactions
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October 26, 2012
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

Does not cover all domestic transactions
Coverage
◦
◦
◦
◦
Sec. 40A(2)(b)
Sec. 80A
Sec. 80(IA)
Other provisions of Chapter VIA
 Sec. 80-IAB, 80-IB, 80-IC, 80-ID, 80-IE
◦ Sec. 10AA
◦ Other transactions prescribed
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October 26, 2012
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
Transactions with non-residents covered?
◦ For instance, A Ltd holds shares of B Ltd carrying 21% voting
power

For the purposes of this section and sections 92, 92C, 92D and 92E,
"international transaction" means a transaction between two or
more associated enterprises, either or both of whom are nonresidents..….[S. 92B]

For the purposes of this section and sections 92, 92C, 92D and 92E,
"specified domestic transaction" in case of an assessee means any
of the following transactions, not being an international
transaction…[S. 92BA]
CA Ganesh Rajgopalan
October 26, 2012
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
Expenditure incurred between associates which is excessive or
unreasonable having regard to
◦ Fair market value of goods, services or facilities (no disallowance if ALP), or
◦ legitimate needs of the business (Disallowance possible even if ALP) or
◦ benefit derived or accruing therefrom (Disallowance possible even if ALP).

Does not cover income of the taxpayer


Capital expenditure – applicability
Deductions in respect of which heads of income

Substantial interest defined-

Direct interest only covered
Relative defined

◦ Durga Rice & Gen Mills vs. AO [TS-446-ITAT-2012 (Chandi)]
◦ Deduction u/s 57 – applicability [s. 58(2)]
◦ Beneficial owner of shares carrying not less than 20% voting power
◦ Beneficially entitled to not less than 20% of profits of business
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October 26, 2012
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
Beneficial owner vs. indirect holding
A
A
B
B
C
C
D
E
A-D - Y
D-E - Y
B-D - Y
C-D - N
C-E - N
A-B - Y
B-C - Y
A-C - N
CA Ganesh Rajgopalan
October 26, 2012
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Taxpayer
Payee
Individual
Company
Firm
AOP
HUF
Any assesse carrying on
business or profession
Relative
Director/relative
Partner/relative
Member/relative
Member/relative
 Individual who has substantial interest in assessee’s
business
 Relative
 Company having SI in assessee’s business or
 its director or
 relative of director
 Another company carrying on business or
profession where the first co. has SI.
 Firm/AOP/HUF having substantial interest in
assessee’s business or
 its partner/member or
 their relative
Any assesse carrying on
business or profession
Any assesse carrying on
business or profession
CA Ganesh Rajgopalan
Clause of s.
40A(2)(b)
(i)
(ii)
(ii)
(ii)
(ii)
(iii)
October 26, 2012
(iv)
(iv)
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Taxpayer
Payee
Any assesse carrying on
business or profession




Individual
Company
Firm/AOP/HUF
Clause of s.
40A(2)(b)
If such individual is director/partner/ member of
company/ firm/AOP/HUF,
Such a company/firm/ AOP/HUF
Directors/partners/members
Their relatives
A person in whose business assesse or his relative has
substantial interest
A person in whose business assesse-co. or its director
or relative has substantial interest
A person in whose business assesse-firm/AOP/HUF or
its partner/member or relative has substantial interest
CA Ganesh Rajgopalan
October 26, 2012
(v)
(vi)(A)
(vi)(B)
(vi)(B)
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Sec. 2(41)
Not specified
Spouse
Father
Mother
Son
Daughter
Father’s father
Father’s mother
Mother’s mother
Mother’s father
Son’s son
Son’s daughter
Daughter’s son
Daughter’s
daughter
Brother
Sister
Sec. 56(2)(vi) Expln
Member of HUF
Spouse
Father
Mother
Son
Daughter
Father’s father
Father’s mother
Mother’s mother
Mother’s father
Son’s son
Son’s daughter
Daughter’s son
Daughter’s daughter
Sec. 6, Companies Act
Member of HUF
Spouse
Father
Mother (including step-mother)
Son (including step-son)
Daughter (including step-daughter)
Father’s father
Father’s mother
Mother’s mother
Mother’s father
Son’s son
Son’s daughter
Daughter’s son
Daughter’s daughter
AS 18
Not specified
Spouse
Father
Mother
Son
Daughter
Brother
Sister
Brother (including step-brother)
Sister (including step-sister)
Brother
Sister
CA Ganesh Rajgopalan
October 26, 2012
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Sec. 2(41)
Sec. 56(2)(vi) Expln
Sec. 6, Companies Act
AS 18
Not specified
Member of HUF
Member of HUF
Not specified
Father’s father
Father’s father
Father’s father
Father’s mother
Father’s mother
Father’s mother
Mother’s mother
Mother’s mother
Mother’s mother
Mother’s father
Mother’s father
Mother’s father
Son’s son
Son’s son
Son’s son
Son’s daughter
Son’s daughter
Son’s daughter
Daughter’s son
Daughter’s son
Daughter’s son
Daughter’s daughter
Daughter’s daughter
Daughter’s daughter
Brother or sister of spouse
Brother/sister of either parents of
the individual
Lineal ascendant/ descendant of
spouse
Spouse of brother or sister
Brother’s wife
Sister’s husband
Spouse of brother/sister of spouse
Spouse of brother/sister of either
parents
Spouse of any lineal ascendant/ Son’s wife, Daughter’s husband, Son’s son’s
descendant
wife, Son’s daughter’s husband, Daughter’s
son’s wife, Daughter’s daughter’s husband
Spouse of any lineal ascendant/
descendant of spouse
CA Ganesh Rajgopalan
October 26, 2012
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
Whether applies to govt companies where President of India or Governor
of a State holds majority of shares and exercises or controls voting rights

Where the registered shareholder does not hold the beneficial interest in
the shares

Whether payment of expenditure to a subsidiary covered
◦ Held not covered under clause (iv) of Sec. 40A(2)(b) [V.S. Dempo & Co. (P.) Ltd.
[2011] 196 TAXMAN 193 (Bom.)]
CA Ganesh Rajgopalan
October 26, 2012
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
Sec. 80-IA(8) / Sec. 80A(6)
◦ Applies to goods and services
◦ Deals with two units of same enterprise
 Internal transfers


Sec. 80-IA(10)
Steps-
◦ Due to a close connection between the assessee and any other person,
there exists a course of business; and
◦ AO determines that transaction is so arranged to produce more than
ordinary profits for the tax holiday unit
◦ the transaction price will be substituted by ALP
 Close connection
 Not defined
 Can one apply association defined under Sec. 40A(2)(b) or sec. 92A?
 Could cover relative u/s 56(2)(vii)
CA Ganesh Rajgopalan
October 26, 2012
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Thank you!
Email: [email protected]
CA Ganesh Rajgopalan
October 26, 2012
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