Transfer Pricing
Section 92 of Income Tax Act,1961
CA Final Course Paper 7 Direct Tax Laws , Chapter 16
CA. Vijay Iyer
CA. Nitin Narang
Background
Multinational Enterprises (MNE) carry out business in
multiple countries
Tax rates vary from country to country
MNE may be able to reduce tax cost by moving profits from
high tax to low tax jurisdictions
Tax authorities want to prevent the illegitimate shifting of
profits and want to protect their tax base
Legislative framework necessary to define appropriate tax
base
Intent behind introduction of Transfer
Pricing (TP) provisions in India
Growth of investments by multinationals in India
Increase in cross border transactions of multinational
enterprises in India
Potential risk of erosion of India’s tax base
Need for a statutory framework to examine intra-group crossborder transactions
Concepts in Transfer Pricing
Arm’s Length Price
• The price charged in a transaction
between unrelated parties
Transfer Price
• The price charged in a transaction
between two associated enterprise
Uncontrolled
Transaction
• Transaction between two unrelated
parties
Controlled Transaction
• Transaction between two associated
enterprises or related parties
Concept of TP
Associated
enterprise
Independent
entity
Transactions
Taxpayer
Transfer
price
Independent
entity
Arm’s length
price
Applicability
 TP Provisions contained in Section 92 to 92F of the Act
 TP Provisions apply to Transactions (defined in Sec 92F);
 Transactions between two or more Enterprises (defined in Sec 92F);
 The enterprises are Associated Enterprises (AEs) (defined in Sec
92A);
 The transaction is an International Transaction (defined in Sec 92B).
 Effective 1 April 2012, TP provisions shall also apply to
specified domestic transactions (SDT) (defined in Sec
92BA)
Compliance Requirements
 Computation of income/ allowance of expenses having
regard to the Arm’s length price [Section 92]
 Maintenance of prescribed Documentation (Section 92D &
Rule 10D)
 Obtaining of Accountant’s report (under Form 3CEB) (Section
92E)
 To ensure compliance with the arm’s length principle, stiff
Penalties have been prescribed (Sections 271AA, 271BA,
271G, 271(1)(c))
Legislative Provisions
 Section 92(1) –
Any income arising from an international transaction shall be computed
having regard to the arm’s length price
Explanation - the allowance for any expense or interest arising from an
international transaction shall also be determined having regard to the
arm’s length price
 Section 92(3) –
The provisions are not intended 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
International Transaction (Section 92B)
 Transactions between two or more AEs, either or both of whom are
non-residents
 Transaction relates to:
 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 the enterprises; or
 Mutual agreements or arrangements for allocation or apportionment of, or any
contribution to, any cost or expense incurred
International Transaction (Section 92B)
Intangible
Property
Tangible Property
►
►
Purchase, Sale,
Transfer, Lease
/Use of
property/article/
product/ thing
Includes Building,
Vehicle,
machinery etc.
►
►
Purchase, Sale,
Transfer, Lease
/Use of IP
Includes Transfer
of ownership/use
of rights/other
commercial right
Capital
Financing
►
►
►
►
Long/short term
borrowing/
lending
Guarantee
Purchase/Sale
Securities
Advances/recei
vables,
Payments/any
debt etc
Provision of
Services
►
►
►
►
Market
Research/
Development
Technical
Service
Scientific
Research
Legal/
Accounting
Service etc.
Business
Restructuring
►
Transaction of
Business
restructuring/reorg
anization with AE
irrespective of
bearing
profit/income/loss
or assets – at the
time of
transaction/future
date
Definition of Intangible Clarified
Marketing
Trademarks, Trade Names, Brand Names , Logos
Technology
Process Patents , Patent Applications, Technical
Documentation, Technical know-how
Artistic
Copyrights, Literary work, Musical Compositions, Maps,
Engravings
Data Processing
Software Copyrights, Proprietary software, Automated
databases, Integrated circuit Masks & Masters
Engineering
Industrial Design ,Product Patent ,Trade Secrets , Engineering
Drawings , Blueprints , Proprietary Documentation
Customer
Customer Lists , Customer Contracts, Customer
Relationship, Open Purchase Orders
Definition of Intangible Clarified
Contract
Favourable Supplier Contracts, License agreements , Franchise
agreements , non-compete agreements
Human Capital
Trained, Organised workforce, Employment agreements, Union
Contracts
Location`
Leasehold interest, Mineral exploitation rights, Easements, Air rights,
Water rights
Goodwill
Institutional / Professional Practice / Celebrity goodwill, Personal
goodwill of professional, General business going concern value
Similar
Similar item deriving its value from its intellectual content
Others
Methods, Programmes, Systems, Procedures, Campaigns,
Surveys, Studies, Forecasts, Estimates etc.
Do the following transactions need to be
benchmarked?
Purchase of fixed assets
Transfer of shares in an Indian company to a non resident
External Commercial borrowing
Free-of cost services availed by Indian company
Payment for use of intangibles such as royalty
Reimbursement of expenses
Associated Enterprise
Meaning of Associated enterprises (Section 92A)
A
Both A and B
are associated
enterprises of C
B
C
A
B
C
D
E
D and E are also
associated
enterprises of C
since they have a
common ultimate
parent (A)
Direct or indirect participation
(through one or more
intermediaries) in management,
control or capital
Meaning of Associated Enterprises (Section 92A(2)
Capital
Management
Activities
Control
26% direct or
indirect holding
by the
enterprise
Appointment of
more than half
of the directors
Supply of >90%
of the raw
materials
Common
control
By the same
person in both
enterprises
One or more
executive
directors
Wholly dependent
on the intangibles
provided
Control by
relative of
jointly
Loan >= 51% of
total assets
Appointed by
the same
person in both
enterprises
Sales under
influenced prices
and conditions
Control by HUF
and other
member of HUF
/ relative
Guarantee >=
10% of
borrowings
Deemed Associated Enterprises - Sec 92B(2)
Prior
Prior agreement
agreement
A’s
A’s Parent
Parent
3rd party
A
Determination of terms
A’s Parent
A
3rd party
A transaction with an unrelated
company (3rd party) is deemed to
be a transaction with an associated
enterprise and subject to transfer
pricing regulations if a prior agreement exists between
A’s AE and 3rd party in relation to
services rendered by A to the 3rd
party; or
terms of transaction are determined
in substance by A’s AE and 3rd party
Determination of arm’s length price
Arm’s length price
Price applied or proposed to be applied in a transaction between persons
other than AEs, in uncontrolled conditions
Determination of arm’s length prices using one of the Prescribed methods
Yes
The price thus determined is
the arm’s length price
Whether
you arrive
at a single
price ?
No
The arithmetic mean of such
prices, read with sec 92C(2)
(i.e. not exceeding the
tolerance range (which has an
upper ceiling of 3%) of the
transfer price)
Prescribed Transfer Pricing Methods
OECD Transfer Pricing Methods
Traditional Transaction Methods
Comparable
Uncontrolled
Price

Resale
Price
Method
Cost Plus
Method
Transactional Profit Methods
Profit Split
Method
Transactional
Net Margin
Method
Other Methods
New Method
New method has been prescribed by the Central Board of Direct Taxes - Any method that takes
into account the price that has been charged or paid, or would have been charged or paid, for the
same or similar uncontrolled transaction, with or between non-associated enterprises, under
similar circumstances considering all the facts, shall be regarded as one of the recognized
methods for determining the Arm’s Length Price
Comparable Uncontrolled Price Method
(“CUP Method”)
CUP entials comparison of PRICE of
comparable uncontrolled transaction
with the controlled transaction
• Identify comparable transactions
• Adjust the price of such
transactions to account for
differences between the controlled
transaction and the uncontrolled
transaction
• The adjusted uncontrolled price is
the arm’s length price
Controlled
transaction
A Inc.
(USA)
$10
A Ltd.
(India)
Uncontrolled
transaction
B Inc.
(USA)
$11
C Ltd.
(India)
Resale Price Method (“RPM”)
RPM entails comparison of Gross Margin on
resale of goods purchased from an associated
enterprise
• Identify comparable transactions /
companies
• Determine gross margin (Gross Profit /
Sales) of the uncontrolled transactions /
companies
• Adjust the gross margin for differences in
functions, assets and risks between the
comparable transactions and the controlled
transaction
• Determine the arm’s length price of the
controlled transaction based on the adjusted
gross margin on comparable transactions
Controlled
transaction
A Inc.
(USA)
Uncontrolled
transaction
B Inc.
(USA)
$10
A Ltd.
(India)
$12
Customers
C Ltd.
(India)
GM 25%
Customers
Resale Price Method (“RPM”)
 Gross Margin of Comparable transaction is 25%
 Applying Resale Price Method
 Sale Price of A Ltd. (A)
- $ 12
 Applying the arm’s length
gross margin of 25% (B)
-$3
 Arm’s length price of the related
party purchase transaction (A-B)
-$9
 Related Party Transaction Price
- $ 10
Cost Plus Method
Cost Plus Method entails comparison of Gross
Margin on supply of goods or services to an
associated enterprise
• Identify comparable transactions /
companies
• Determine gross margin (Gross Profit / Cost
of Goods/Services Sold) of the uncontrolled
transactions / companies
• Adjust the gross margin for differences in
functions, assets and risks between the
comparable transactions and the controlled
transaction
• Determine the arm’s length price of the
controlled transaction based on the adjusted
gross margin on comparable transactions
Controlled
transaction
Uncontrolled
transaction
Third
Party
Supplier
Suppliers
$10
A Ltd.
(India)
$12
A Inc. (USA)
C Ltd.
(India)
GM 25%
Customers
Cost Plus Method
 Gross Margin of Comparable transaction is 25%
 Applying Cost Plus Method
 Cost of Goods Sold of A Ltd. (A) - $ 10
 Applying the arm’s length
gross margin of 25% (B)
- $ 2.5
 Arm’s length price of the related
party purchase transaction (A+B)
- $ 12.5
 Related Party Transaction Price
- $ 12
Transactional Net Margin Method
(“TNMM Method”)
Comparison of Net Profit comparable
uncontrolled transaction / companies with the
net margin of the controlled transaction
Net margin may be computed with reference to
cost, sales or any other relevant profit level
indicator
• Identify comparable transactions / companies
• Adjust the price of such transactions to
account for differences between the
controlled transaction and the uncontrolled
transaction
• Determine the arm’s length price for the
related party transaction on the basis of the
adjusted net margin of the uncontrolled
transactions
Controlled
transaction
A Inc.
(USA)
Uncontrolled
transaction
B Inc.
(USA)
$60
A Ltd.
(India)
C Ltd.
(India)
$100
Customers
Net Profit /
Sales =
4%
Customers
Net Profit /
Sales =
5%
Transactional Net Margin Method
 Net Margin of Comparable transaction is 5%
 Applying TNMM Method
 Sales of A Ltd. (A)
- $ 100
 Applying the arm’s length
net margin of 5% (B)
-$5
 Net Margin of A Ltd.
 Total Costs of A Ltd.
 Related party transaction cost (C) - $ 60
 Unrelated party costs (D)
- $ 36
 Arm’s length price of the related
party purchase transaction (A-D-B)
- $59
 Related Party Transaction Price
- $ 60
Profit Split Method
Controlled
transaction
Splitting the profit from the whole
transactions between various related
parties based on their relative
contribution.
•
•
Identify comparable transactions for
every related party involved in the
transaction (i.e. transactions
comparable to A Inc., A BV and
A Ltd. )
Determine net profit earned by
comparable companies
A Inc.
(USA)
A BV
(Netherlands)
know-how
know-how
A Ltd.
(India)
(developed
know-how)
Customers
Profit Split Method
Controlled
transaction
•
•
Attribute profits to each related party
involved i.e. A Inc, A BV and A Ltd.
Allocate the super normal-profit / loss
to each related party involved (i.e. A
Inc., A BV and A Ltd.) on the basis of
their relative contribution
•
Relative value of the know-how
developed by A Inc., A BV and A
Ltd.
A Inc.
(USA)
A BV
(Netherlands)
know-how
know-how
A Ltd.
(India)
(developed
know-how)
Customers
Sixth Method-Rule 10AB
•
Where the application of the five specific methods is not possible due
to difficulties in obtaining comparable data or due to uniqueness of
transactions
•
Intangibles or business transfers, transfer of unlisted shares, sale
of fixed assets, revenue allocation/splitting, guarantees provided
and received, etc.
• Examples of application:
•
Third party quotations
•
Valuation reports
•
Commercial & economic models
Most appropriate method
►
Rule 10C (1) – Method which provides the most reliable measure of an
arm’s length price in relation to an international transaction or a Specified
Domestic Transaction
►
Most reliable measure would depend on availability of comparable data
►
Comparable data is more likely to be available for benchmarking an entity that is
relatively less complex
►
For a complex entity that has intangibles and multiple operations, it is very difficult to
find a true comparable.
►
Gross margin of manufacturing comparable companies may not be possible to
decipher from Schedule VI Profit and Loss Account and hence Cost Plus is usually
very difficult to apply in practice
Comparables
►
All methods require comparables
►
Transfer price is set/ defended using data from comparable
transactions
►
Comparable transaction should be independent and similar to tested
transactions
►
Factors for judging comparability (Rule 10C(2)):





nature of transactions undertaken (i.e. type of goods, services etc.)
company functions
risks assumed
contractual terms (i.e. similar credit terms)
economic and market conditions
Case Studies
Case Study 1
A Inc. USA
(owns intangibles
and is complex)
Sale of tablets
100kgs
at Rs
90/kg
10kgs at Rs
100/kg
A India
Third parties in India
Which method applies to this transaction and why?
Case Study 1 (Answers)
 Most Appropriate Method would depend on the
availability of comparable data
 If comparable prices for ‘identical’ tablets is available
then CUP may be applied (with minor adjustments)
 If gross margin of comparable distribution companies is
available, RPM may be used
 Cost Plus may not be appropriate method for
benchmarking an intangible-owning complex entity
 If gross margin of comparable distribution companies is
not available, TNMM may be the only method that could
be applied since PSM applies only where intangibles are
owned by the Indian entity and the foreign AE
Case Study 2
XYZ UK
Royalty - 3% of gross sales
XYZ Netherlands
(Licensor of
technology)
XYZ India
Royalty - 8% of net sales
XYZ UK, XYZ Netherlands and XYZ India are associated
enterprises
Which method can be applied to this transaction? Can CUP
be applied?
Case Study 2 (Answers)
 Transaction between XYZ US and XYZ Netherlands
is a controlled transaction and therefore is not an
arm’s length price
 Comparison of transaction between XYZ US and
XYZ Netherlands with the controlled transaction
between XYZ India and XYZ Netherlands is not
appropriate
 If XYZ US was an unrelated party to XYZ
Netherlands, comparison of the royalty rates may
have been possible after adjusting for the
difference in the base (CUP method)
 If CUP is not possible to apply, then TNMM may be
applied as the most appropriate method
Case Study 3
1000 kgs at
Rs 80/kg
Third parties in USA
X Inc USA
100 kgs at
Rs 90/kg
X Ltd India
100 kgs at
Rs 90/kg
XYZ Inc, USA (Group
Company)
90 kgs at
Rs 100/kg
Third parties in India
Which method can be applied to this transaction? How would
you defend TP for X Ltd India
Case Study 3 (Answers)
 X Inc. has supplied to third parties in the US at
$80/kg while it has supplied to X India at $90/kg
 Quantity supplied to third parties is 10 times more
than the quantity supplied to X India and hence a
direct comparison of the prices may not
appropriate
 Appropriate adjustment for volume discount to be
offered to a substantial customer may be required
before comparison with the controlled transaction
 Where such comparison is not possible, RPM or
TNMM may be applied depending upon the
available comparable data (Refer Case Study 1)
Case Study 4
ABC Inc., USA
Outside India
Import of master
copy of software
for duplication
and resale
Royalty
payments for
distribution
based on net
sales
--------------------------------------------------------------------India
ABC India
(duplication and
distribution)
Which method can be applied to the transactions?
Can royalty be disallowed to the extent of bad debts as it is
based on net sales?
Customers
in India
Case Study 4 (Answers)
 Selection of the most appropriate method would depend
on available comparables
 If comparable software duplicators and distributors are
identified and their Royalty rates are available in the
public domain, CUP may be an appropriate method
 In the absence of CUP data, RPM and TNMM may be
explored
 Since the functions of ABC are not merely distribution,
RPM may be applied only if a perfect comparable is
identified
 In the absence of comparable data for RPM, TNMM may
be applied as the most appropriate method
Case Study 5
►
XYZ India sells wipers to
XYZ USA. Similar wipers are
purchased by XYZ USA from
third parties in China
►
CUP method applied by XYZ
India
►
Transfer Pricing Officer
disregarded CUP on the
basis that conditions
prevailing in the market are
not similar
►
How would you defend the
case?
XYZ USA
XYZ India
Third parties
in China
Case Study 5 (Answers)
 If the wipers purchased from China and India are
identical, CUP may be the most appropriate
method
 Chinese and Indian economies may be similar and
therefore, the Chinese suppliers price may be a
suitable benchmark
 For the purchaser (XYZ US) it does not matter
where is purchases from (related or unrelated
party) so long as the same wiper is supplied by
both
 Therefore, the uncontrolled transaction would
serve as a basis for determining the price of the
transaction between XYZ US and XYZ India
Case Study 6
ABC USA
Sold for Rs. 50 crores
based on valuation report
from independent valuer
Sale of
registered
patents
ABC India
(entrepreneur and
developer of patents)
Which method applies to this transaction and why?
Case Study 6 (Answers)
 A valuer’s report based on generally accepted
valuation methodology is a reasonable estimate of
how third parties may value intangibles when such
intangibles are sold to unrelated parties
 Therefore the valuer’s report provides a
computation of arm’s length price
 Since the arm’s length price determination is based
on methods that may be applied by third parties to
determine their transaction prices in uncontrolled
transactions, such determination would fall under
the Sixth Method under the Indian TP Rules
Domestic TP
Introduction – Pre Finance Act, 2012
Tax Authority empowered to disallow payments to “related parties”
which are “excessive” or “unreasonable”
In case of inter-unit transfer of goods/services, tax holiday profits to
be determined based on Fair Market Value (FMV) of goods/ services
Tax Authority empowered to re-compute tax holiday eligible profit if
undertaking makes more than ordinary profits as a result of
arrangements with closely connected persons or otherwise
No specific methodology prescribed for disallowance/ tax holiday
profit adjustment
Introduction – Finance Act, 2012
TP provisions extended to certain Specified Domestic Transactions(SDTs) with
effect from Financial Year 2012-13
Seeks to create legally enforceable obligation on taxpayers to maintain
proper documentation
Is intended to provide objectivity in determining reasonableness of
expenditure and income eligible for tax holiday
Monetary threshold of INR 50 Million (approx. USD 900,000) provided for
applicability of the provisions
Allowance for expenditure or allocation of cost or expense or any income in
relation to SDT to be computed having regard to Arm’s Length Price (ALP)
Definition of SDT
Payments to related parties as defined under section
40A(2)(b)
Tax holiday related transactions (eligible business)
Any transaction referred to in section 80A
Any transfer of goods/services referred to in section 80IA(8)
Any business transaction referred to in section 80IA(10)
Any transaction under Chapter VI-A or u/s 10AA – to which
provisions of section 80IA (8) or section 80IA (10) apply
Any other transaction as may be prescribed
Domestic TP – Applicability
Taxpayer cannot apply TP to SDT so as to reduce total income
that is subject to tax
Monetary threshold of INR 50M to be computed based on
aggregate of payments and receipts to which the provisions
apply during a FY
Definition of the term “related parties” for the purposes of
expense disallowance expanded to cover entities which have
common beneficial ownership
TP provisions applicable to international transactions are largely
applicable to SDT as well, with the exception of Advance Pricing
Agreement (APA) provisions
Eligible business covered
Section
Tax payers covered
Deduction
10AA
Persons with income from Special
Economic Zone (SEZ) units
100% for the first 5 years
50% for the next 5 years
50% of the profits or amount credited to SEZ re -investment
reserve, whichever is less for next 5 years
80 -IA
Infrastructure developers
100% for a period of 10/15 years out of 15/20 years, as the
case may be, from the date of commencement of operation
80 -IA
Telecommunication service
providers
100% for a period of 5 years
30% for the next 5 years
out of 15 years from the date of commencement of operations
80 -IA
Developers of Industrial park
100% for a period of 10 years out of 15 years from the date of
commencement of operations
80 -IA
Producers or distributors of
power
100% for a period of 10 years out of 15 years from the date of
commencement of operations
80 -IAB
Developers of SEZ
100% for a period of 10 years out of 15 years from the date of
commencement of operations
80 -IB
Small scale industry engaged in
operating Cold storage plant
30% of profits for the first 10 years
80 -IB
Industrial undertaking in
Industrially backward state as
mentioned in VIII Schedule (ex:
Jammu and Kashmir )
100% of profits for 5 years and
30% for the next 5 years
80 -IB
Multiplex theaters and convention
centre
50% for the first 5 years
Eligible business covered (contd…)
Secti
on
Tax payers covered
Deduction
80 -IB
Company carrying on scientific research
and development
100% of profits for first 10 years
80 -IB
Eligible housing projects
100% of profits from such business
80 -IB
Eligible hospitals
100% of profits for first 5 years
80 -IC/
80 -IE
Persons with units in North-eastern states
claiming deduction
100% for a period of first 10 years
80 -ID
Hotels located in districts having World
Heritage site
100% of profits for first 5 years of commencement of
business
Section 40A(2) – Payments to related
parties
Payments by taxpayers to certain specified persons covered within the
ambit of section 40A(2)
Where the taxpayer/assessee is a company, following persons regarded
as ‘specified persons’
• Directors of the taxpayer company or any relative of such directors
• Individuals having Substantial Interest (SI) in the business of taxpayer company or
any relative of such individual
• Persons having a SI in the business of the taxpayer company
• Directors of the entities having SI in the business of the taxpayer company or any
relatives of such directors
• Any company having the same holding company (which holds a SI) as that of the
taxpayer company
• A company of which a director has a SI in the business of the taxpayer company, any
director of such company or any relative of such director
• Persons/entities in which taxpayer company/its directors/ their relatives have a SI
Payments by an individual, firm, AOP and HUF to certain specified
persons are also covered within the ambit of section 40A(2)
Section 40A(2) – Payments to
related parties
A person shall be regarded as having a SI in a
business if at any time during the previous year
• Such person is the beneficial owner of shares carrying not less
than 20% of the voting power (in case of a company)
• Such person is beneficially entitled to not less than 20% of the
profits of such business (in any other case)
Beneficial ownership
• Term not defined but can be understood as a person who
ultimately enjoys the income/asset and also controls it
• Need not be in existence for the entire year but is sufficient if it is
in existence for only part of the year
Section 40A(2) – Payments to related
parties
General scope of Section 40A(2)
• Applicable to taxpayers making the payment/incurring expenditure and
not to recipients of such income
•Can ALP testing of recipient be relied upon to support arm’s length
nature of expense?
•No correlative relief for recipient if payer subject to a TP adjustment
• If no payment is made or payment is less than ALP, cannot be considered
as “excessive/ unreasonable”
• Expenditure should be towards ‘goods’, ‘services’ or ‘facilities’
• Capital expenditure, depreciation outside the purview of section 40A(2)
• Generally, following payments may be covered:
•Payment towards purchase of raw materials, services, use of asset
•Payment towards sharing of common premises/facilities
•Payment of interest on loan
•Payment of managerial remuneration, salary, bonus etc to directors
Payments to related parties – Illustration
 Any payment towards
expenditure by
 ACo to its own directors
as remuneration, salary,
bonus etc
X Co (Indian
company)
Beneficial
Share holding
>20%
A Co (Indian
company)
Beneficial
Share holding
>20%
B Co (Indian
company)
 ACo to XCo
 ACo to directors of XCo
 ACo to Relatives of
directors of A Co and X Co
 ACo to BCo
 Any payment towards
expenditure by
 XCo to ACo/BCo
Tax holiday eligible business
SDT provisions apply to business transactions/transfers referred to
in section 80A, 80IA(8), 80IA(10), 10AA, Chapter VI-A provisions
Section 80A(6) and Section 80IA(8) require adjustment to tax
holiday profits where
• Goods and services of eligible business are transferred to any other business carried
on by the same taxpayer and vice versa
• Consideration for such transfer as recorded in the accounts of eligible business
does not correspond to market value of such goods/services
• In such cases, tax authorities/ taxpayer required to recompute tax holiday claim by
reference to ALP of such goods/services
Overlap between 80A(6) and 80IA(8) not of much consequence
Applies to all tax holiday claims under Chapter VI-A/ Section 10AA
Tax holiday eligible business
 General scope of Section 80A(6)/ 80IA(8)
 Covers transfer of goods/ services held by “eligible business” to
another business or vice versa
 Existence of two or more separate businesses of the same
taxpayer
 Transfer of goods/ services between the businesses
 Does not contemplate an artificial or hypothetical segregation of
profits between tax holiday unit and the rest of the enterprise
 Once threshold is satisfied, inter-unit transfer price may be need
to be determined by hypothesizing the businesses as separate &
distinct enterprises for determining ALP
 Provides for a “two-way” adjustment (both favorable as well as
adverse) and is a mandatory provision
 Is in the nature of notional adjustments for determining profits
eligible for tax holiday
Tax holiday eligible business
 General scope of Section 80IA(10)
 Tax officer empowered to re-compute tax holiday profits if:
 more than “ordinary profits” have arisen in the eligible business
due to transactions between closely connected persons or for
other reasons
 Provides for only “one way” adjustment i.e. only adverse
adjustment at the discretion of the tax officer
 Is in the nature of notional adjustment for determining
profits eligible for tax holiday
 Tax officer may invoke the provision in case of SDT on the
basis of ALP determination
 Onus still on tax officer to establish that the course of business
was arranged to produce more than ordinary profits?
TP compliance requirements
Transfer Pricing Documentation
► Ownership Structure
► Profile of multinational group
Entity Related
► Business description/ Profile of industry
► Nature and terms (including price) of international transactions
► Description of functions performed, risk assumed and assets
employed (functional analysis)
► Records of economic and market analysis (economic analysis)
► Record of budgets, forecasts, financial estimates
Price Related
► Any other record of analysis (if, any) to evaluate comparability
of international transaction with uncontrolled transaction(s)
► Description of method considered with reasons of rejection of
other methods
► Details of transfer pricing adjustment(s) made (if, any)
► Any other information e.g. data, documents like invoices,
agreements, price related correspondence etc.
Transaction Related
Transfer Pricing Documentation
Detailed documentation not required in case aggregate value of all international
transactions does not exceed one crore rupees (five crores in case of specified
domestic transactions)
List of supporting documents are also provided in the law
Contemporaneous data requirements
Documents to be retained for a fixed period from end of the assessment year
Need to obtain Accountant’s report (under Form 3CEB) to be filed along with the return
of income
Accountant’s report (Form 3CEB)
- Rule 10E
Obtained by every tax payer filing a return in India and having international
transaction or SDT
To be filed by due date for filing return of income
Essentially comments on the following:
whether the tax payer has maintained the transfer pricing
documentation as required by the legislation,
whether as per the transfer pricing documentation the prices of
international transactions are at arm’s length, and
certifies the value of the international transactions as per the books of
account and as per the transfer pricing documentation are “true and
correct”
TP Penalties - Section 271
Default
Penalty
Post - inquiry adjustment (deemed
concealment of income)

Section 271(1)(c)
100 - 300% of tax on the adjusted
amount
Failure to maintain documents
Fails to report transactions /
Maintains or furnishes incorrect
documents
 Section 271AA
2% of the transaction value
Failure to furnish documents
Section 271G
Failure to furnish accountants
report  Section 271BA

2% of the transaction value
Rs 100,000
Transfer Pricing Audit Process
Transfer Pricing Calendar
Indian Financial Year (‘FY’) – 1 April to 31 March
• Due date of completion of Transfer Pricing Documentation
and filing of Form 3CEB (Accountant Report)
• 30 November following the FY
• Time limit for completion of assessment
• 46 months from the end of the FY (i.e. 31 January 2013
for the FY 2008-09)
• Retain Documentation for 8 years
Routine Audit Process
AO to determine
ALP u/s 92C(3)
Taxpayer to file
objections with
DRP*
DRP to pass
directions*
AO also may
refer
determination of
ALP to the TPO
AO to pass Draft
order
AO to pass final
order
Taxpayer to
substantiate
transfer price as
ALP to TPO
AO to compute
taxable income
Appeal/
Rectification
TPO to determine
ALP by passing an
order
Intimation to
taxpayer & AO
* If the tax payer files chooses to file
objections with the Dispute Resolution Panel
(DRP). The taxpayer also has an option to file
an appeal with the Commissioner of Income
Tax (Appeals) against the final assessment
order of the AO
Timelines for DRP route – A Snapshot
• 34 months
from end of
AY
TPO to pass
order
AO to pass
draft order
• 36 months
from end of
AY
• Within 30
Days of
receipt of
Draft Order
Objections
before DRP
DRP to pass
directions
• Within 9
months of
Draft Order
• Within 1
month
Final AO
Order passed
Timelines for CIT (A) route – A Snapshot
• 34 months
from end
from AY
TPO to pass
order
AO to pass
draft order
• 36 months
from end of
AY
• Within 60
days of the
draft order
AO passes
final Order
Appeal to
CIT(A)
• Within 30
days from
receipt of AO
Order
• No time limit
CIT(A)
Order
Domestic Law Dispute Resolution Process
TPO’s
Order
AO’s draft
order
DRP
objections
Tribunal
AO’s Final
Order
DRP order
High
Court
Supreme
Court
Advance Pricing Agreements
What is an APA?
Finance Act, 2012 – Salient features
 An agreement between the Central Board of Direct
Taxes (CBDT) and any person
 determining the arm’s length price (ALP) or
 specifying the manner in which the ALP is to be
determined in relation to an international transaction
 Flexibility to determine arm’s length price using
unspecified method/ adjustments/variations, as
necessary
 Valid for the periods specified in the APA and for a
maximum period of 5 consecutive years
 Binding on taxpayer and tax authority, unless there is
a change in law/ facts
 No provision for “roll back”
Indian APA rules- Overview
 New rules introduced in Income-tax Rules, 1962 – Rules 10F-10T and Rule
44GA
 Rules 10F-10T contain procedures for APA applications in general; Rule
44GA contains the procedure to deal with requests for Bilateral APAs/
Multilateral APAs
 Overview of the process
Pre-filing
►
►
►
Unilateral vs bilateral
vs multilateral
Pre-filing meeting
(anonymous also
permitted)
Pricing study and
strategy
Evaluation and
negotiation –
Agreement
APA request
►
Industry overview
►
Supply chain
overview
►
FAR analysis
►
Proposed
economic
analysis
►
Proposed term
►
Field work (functional
interviews, review
financial statements)
►
Government-togovernment process
►
Position papers – face
to face meetings
►
Critical assumptions
►
Drafting and concluding
APAs
Execution and
monitoring
►
Annual report,
record-keeping
►
Audit
►
Revocation,
cancellation or
revision
►
Renewal
Administrative structure in India for APAs
UNILATERAL
Chairperson CBDT
Director General of
Income Tax
BILATERAL /
MULTILATERAL
 All APAs
to be approved
by the Central Government
 Common team at the back
end for unilateral and bilateral
/ multilateral APAs
Chairperson CBDT
Competent
Authority
Director APA
Director APA
Team of Officers,
economists and
statisticians
Team of Officers,
economists and
statisticians
Key Features & Implications
Feature
Description
Implication
Taxpayer can pursue an
APA for its existing intercompany transactions
with India
Eligibility
Any person who has undertaken or is
proposing to undertake an international
transaction
Types of APAs
Framework allows unilateral, bilateral and
Multilateral APAs
Flexibility to choose the
type of solution
depending on
requirements.
Pre-filing
application and
consultation
Prescribed format provided for pre-filing.
Application will be followed by a meeting
with the APA authority. Pre-filing on a noname or anonymous basis is also permitted
This is a mandatory step
in the process and will
offer an opportunity to
determine the scope and
broad terms of the APA
and identify potential
issues for consideration.
No timeframe proposed
as of now
Key Features & Implications
Feature
Filing Fee for
APA
Filing timeline
APA application
Description
Implication
Prescribed fee in the range of USD 18,000
to USD 37,000 depending on the value of
transactions sought to be covered in the
APA
Filing fee kept steep to
deter non serious
applications
The application can be filed anytime (i)
before the first day of the financial year for
which the application is made in respect of
existing or continuing transactions; or (ii)
before undertaking a proposed transaction
APAs will apply
prospectively for the
period sought to be
covered (upto five
consecutive years). No
past year can be covered
and hence, no roll-back
mechanism.
Prescribed format provided requesting
extensive details of the taxpayer’s
business, transactions and industry.
Taxpayer should be
prepared to submit
detailed information
voluntarily. In the absence
of any firewall provisions,
sharing of this information
by the APA authority with
other departments within
the tax administration
cannot be ruled out
Key Features & Implications
Feature
Description
Implication
Evaluation and
negotiation
APA authority is empowered to hold
meetings with the applicant, request for
additional information, and visit the
applicant’s business premises to arrive at
its final decision
The process is
consultative. The APA
Authority and taxpayer
shall prepare a proposed
mutually agreed draft
agreement in the end.
However taxpayer would
not be party to the
discussions between the
CAs in the bilateral
process
Agreement
The APA authority needs to seek approval
from the Central Government to enter into
the APA
Taxpayer may need to
wait for some time for the
final approval
Bilateral &
Multilateral
APAs
The CAs would negotiate the terms of the
agreement. The APA process will not be
initiated unless the foreign taxpayer has
filed a request with the CA of his country
Taxpayer would need to
file an application with CA
to kick off the bilateral /
multilateral APA process
Key Features & Implications
Feature
Description
Implication
Post APA
compliance
An Annual Compliance Report (ACR) needs
to be filed for each year covered by the
APA and a compliance audit would be
undertaken to monitor adherence to the
terms of the APA
Taxpayer would need to
substantiate continued
satisfaction of the critical
assumptions, correctness
of the supporting data or
information and
consistency of the
application of the transfer
pricing method
Revision,
cancellation
and withdrawal
of APA
APAs can be revised in the event of
significant changes to the underlying terms
of the agreement. Non compliance can lead
to cancellation of an APA. A taxpayer is also
free to withdraw an APA application if a
mutually acceptable outcome is not
reached
The program is forward
looking, flexible and
allows for various
situations that could arise
Thank you
and best of luck for
your exams
CA. Vijay Iyer
CA. Nitin Narang