www.pwc.com
IFA Conference
Recent Amendments in
Transfer Pricing
Rahul K Mitra
6th July, 2012
Mumbai
Agenda
A
Transfer Pricing (TP) Scenario in India
B
Amendments in International TP by Finance Act, 2012
Recent amendments in Transfer Pricing
PwC
6th July, 2012
Page 2
TP scenario India
•
Seven rounds of TP audits completed in 2011
•
Aggregate TP adjustments in 2011 audit cycle [FY 2007–08]  Rs 45,000 crore appx;
cumulative TP adjustments in first six audit cycles  Rs 50,000 crore appx
•
India contributes > 70% litigation in TP globally (volume) at level of Tribunal/ Tax Courts or
above  should taxpayers & Revenue continue to litigate ?
•
Generally two broad categories of TP litigation –
― Pure comparability issue (IT & ITeS companies)  requires fundamental reforms in
Indian TP regulations [“inter-quartile range” & “multiple year data” concepts]
― Complex transactions on fundamentals of TP  requires significant improvement for all
constituents [taxpayers, to start with]
Recent amendments in Transfer Pricing
PwC
6th July, 2012
Page 3
Getting things right

Presently only emphasis on comparables, less on fundamentals of TP

FAR analysis  Characterisation  “Tested party”  TP Method  Select Comparables

MNC Group’s overall profile & global TP policy to be considered

Taxpayers open to adopt fresh TP method/ strategy before DRP/ Tribunal

Vital points :
―
Setting of pricing policy  “test what is set”
―
Robust documentation, capturing FAR & economic analyses
―
Inter-company agreement
―
TP policy/ planning  documentation  audit defense
―
Share information of Foreign AEs
Recent amendments in Transfer Pricing
PwC
6th July, 2012
Page 4
Amendments in International TP by Finance Act, 2012
•
Introduction of Advance Pricing Agreements (APAs) effective 1st July, 2012
•
Clarification re “international transactions” & “intangibles”
•
Clarification re powers of Transfer Pricing Officer (TPO)
•
Clarification re 5% range around arithmetic mean (AM) for arm’s length price (ALP)
•
Limitation of range to 3% around AM effective FY 2012-13 (AY 2013-14)
•
TP compliance extended to certain domestic transactions
Recent amendments in Transfer Pricing
PwC
6th July, 2012
Page 5
International Transactions
• Illustrative definition wref AY 2002-03
• Clarificatory in nature
• No possible extra liability on taxpayers
• Financial Transactions (e.g. guarantees) included  always there
• Business Restructuring/ Reorganisation included :
- Mere portability of profit potential on flight of functions to attract exit cost ?
- Transfer of intangibles/ impairment of contractual rights pre-requisite for exit cost ?
- OECD Model & ATO guidelines vs. German regulations
- What would India adopt ?
Recent amendments in Transfer Pricing
PwC
6th July, 2012
Page 6
Intangibles
• Illustrative definition wref AY 2002-03
• Clarificatory in nature
• Source of legislation :
- Website (www.valuetech.com)
- US TP Regulations (Section 482-4)
• No possible extra liability on taxpayers
• Revenue’s continued focus on niche areas
• Recognition of human intangibles  impact on portability of functions outside India
• OECD’s draft guidelines on intangibles  emphasis on FAR for intangible related returns
Recent amendments in Transfer Pricing
PwC
6th July, 2012
Page 7
Powers of TPOs
• Judicial rulings  TPO cannot adjudicate any issue unless expressly referred to by AO
• Finance Act, 2011  sub-section (2A) to section 92CA :
- Post 1st June, 2011, TPO can adjudicate any issue even if not referred to by AO
• Finance Bill, 2012  sub-section (2B) of section 92CA :
- If no Form 3CEB filed with respect to any “international transaction”, TPO can
adjudicate any issue coming to his notice during TP assessment
- Wref 1st June, 2002
- Not to impact closed assessments as on 1st July, 2012
• How to read harmoniously ?
• Taxpayers advised (always) to pursue fundamentals of TP than legal arguements
Recent amendments in Transfer Pricing
PwC
6th July, 2012
Page 8
5% range around AM for ALP
• Prior to amendment by Finance Act, 2009, scope for interpretation  whether standard
deduction (SD) available, even if taxpayer’s transfer price (TP) fell outside 5% range on ALP
• Conflicting views of Tribunals
• Finance Act (No 2) Act, 2009 :
- 5% range around taxpayer’s TP & no SD
- Applicable to pending TP assessments as on 1st October, 2009 [Object’s Clause]
• Tribunals still ruled amendment as applicable from AY 2010-11 [ignoring Object’s Clause]
Recent amendments in Transfer Pricing
PwC
6th July, 2012
Page 9
5% range around AM for ALP
…. contd
• Finance Act, 2011 :
- AY 2012-13 onwards  CBDT to notify varying ranges on TP; & no SD
• Finance Bill, 2012 :
- Assessments completed up to 30th September 2009  5% range on ALP & no SD
- Wref AY 2002-03
- Not to impact closed assessments as on 1st October, 2009
- Assessments pending on 1st October, 2009 to AY 2011-12  5% range on TP & no SD
- AY 2013-14 onwards  CBDT to notify varying ranges on TP; not exceeding 3%; & no SD
• No range notified for AY 2012-13; fiscal year completed
• What would taxpayers do for FY 2011-12 (AY 2012-13) ? Operate above AM ?
• Same fate for FY 2012-13 (AY 2013-14) ?
Recent amendments in Transfer Pricing
PwC
6th July, 2012
Page 10
Concept of Inter-quartile Range vs. AM
• Extreme results indicate abnormal business conditions  generally excluded from arm’s
length range
• AM  results distorted due to extreme values (outliers) inter-quartile range automatically
eliminates outliers
• Median  less susceptible to distortion on account of extreme values, as outliers removed
through upper/ lower quartiles  better measure of central tendency
• Inter-quartile range encapsulates 50% actual observations, vis-à-vis (+/-) 5% range around
AM or any other artificial range, which has limited statistical rationale
• OECD recommends inter-quartile range
• 15 countries (both developed & developing economies) follow inter-quartile range
• Inter-quartile range  mitigate 50% litigation in TP in India re comparability analysis
• Empirical evidence for AY 2007-08 (case studies)  ITeS & IT
Recent amendments in Transfer Pricing
PwC
6th July, 2012
Page 11
Thank you
Rahul K Mitra
National leader, Transfer Pricing
PwC India
New Delhi Office
Email : rahul.k.mitra@in.pwc.com
Mobile : +91 98300 55281
The information contained in this presentation is of a general nature only. It is not meant to be comprehensive and does not constitute
legal or tax advice. PricewaterhouseCoopers ("PwC") has no obligation to update the information as law and practice change. The
application and impact of laws can vary widely based on the specific facts involved. No reader should act or refrain from acting on the
basis of any material contained in this presentation without obtaining advice specific to their circumstances from their usual PwC
client service team or their other advisers. The materials contained in this presentation were assembled in June 2010 and were based
on the law enforceable and information available at that time.
© 2010 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers
International Limited, each of which is a separate and independent legal entity.
Source of definition of Intangible Property
Recent amendments in Transfer Pricing
PwC
6th July, 2012
Page 13
Source of definition of Intangible Property
…. contd
• US TP regulations [Section 482 – 4]
- Patents, inventions, formulae, processes, designs, patterns, or knowhow;
- Copyrights and literary, musical, or artistic compositions;
- Trademarks, trade names, or brand names;
- Franchises, licenses, or contracts;
- Methods, programs, systems, procedures, campaigns, surveys, studies, forecasts,
estimates, customer lists or technical data;
- Other similar items that derives its value not from its physical attributes but from
its intellectual content
Recent amendments in Transfer Pricing
PwC
6th July, 2012
Page 14
ITeS case study for AY 2007-08
Particulars
XYZ Ltd. - Tax payer
Average (AM)
Lower limit under 92C(2)
Lower Quartile
Median
Upper limit under 92C(2)
Upper Quartile
Recent amendments in Transfer Pricing
PwC
OP/TC
15.00%
30.21%
24.01%
12.62%
27.31%
35.25%
35.25%
6th July, 2012
Page 15
IT case study for AY 2007-08
Particulars
PQR Ltd. - Tax payer
Average (AM)
Lower limit under 92C(2)
Lower Quartile
Median
Upper limit under 92C(2)
Upper Quartile
Recent amendments in Transfer Pricing
PwC
OP/TC
15.00%
25.04%
19.08%
14.19%
23.18%
32.71%
35.25%
6th July, 2012
Page 16