June 14, 2013
CPE Committee of the ICAI
By:
CA. Gaurav Garg








Meaning of Transfer Pricing
Arm’s Length Principle
Approach to Profit Adjustment
Applicability on Specified Domestic Transaction
Compliance
Transfer Pricing Documentation
Transfer Pricing Methods
Accountants Report
JGarg Economic Advisors
2





Mechanism or exercise
through which
price for transfer or say transfer price, of,
tangibles, intangibles, services, capital financing etc.
is computed.
Mechanism to compute an arm’s length price is given in
section 92C of Act read with Rule 10B and 10C.
JGarg Economic Advisors
3





Mechanism or exercise
through which
price for transfer or say transfer price, of,
tangibles, intangibles, services, capital financing etc.
is computed.
Mechanism to compute an arm’s length price is given in
section 92C of Act read with Rule 10B and 10C.
JGarg Economic Advisors
4


Section 92(2A)
“Any allowance for an expenditure or interest or allocation of any
cost or expense or any income in relation to the specified
domestic transaction shall be computed having regard to the
arm's length price.”
Principle
 Prices set for a transaction






between related parties
should
for tax purposes
be derived from prices
which would have been applied by unrelated parties
in similar transactions under similar conditions in the open
market.
JGarg Economic Advisors
5
Broadly there are two approaches to profit adjustments:

Global formulary apportionment approach

Transfer pricing adjustment approach
A India
A India
A India
A China
A China
A UK
A UK
A China
A UK
JGarg Economic Advisors
6


The Finance Act 2012 extended the scope of Transfer
Pricing provision to ‘Specified Domestic Transactions
(‘SDT’)
The SDT would include the following:
 Expenditure for which payment is made or to be made
to domestic related parties-40A 2(b) payment
 Tax Holiday/ Deductions claimed by the taxpayer,
where;
 Transfer of goods or services between various
businesses of same taxpayer
 More than ordinary profits derived from transactions
with closely connected persons
Transfer Pricing provisions to apply to the ‘Specified Domestic
Transactions’ if the aggregate value exceeds five crores
7

92BA. 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,
namely:—
(i) any expenditure in respect of which payment has been
made or is to be made to a person referred to in section
40A(2)(b) –
JGarg Economic Advisors
8

Section 40A(1)
◦ Applicability restricted to the computation of income under
the head “Profits and gains of business or profession”

Section 40A(2)
◦ Applicable on expenditure in respect of which payment has
been made or it to be made
◦ Expenditure in respect of goods, services or facilities

Q&A
◦
◦
◦
◦
Interest free loan given to related party
Corporate guarantee without any charge
Goods sold at lower value
Capital expenditure
JGarg Economic Advisors
9


This provision is applicable only on “expenditure” and
not on “income”.
Provisio to section 40A(2)(a)
“Provided that no disallowance, on account of any
expenditure being excessive or unreasonable having
regard to the fair market value, shall be made in respect
of a specified domestic transaction referred to in
section 92BA, if such transaction is at arm's length price
as defined in clause (ii) of section 92F.”
JGarg Economic Advisors
10
(ii) any transaction referred to in section 80A
Assessee
Undertaking/ unit /
enterprise / eligible
business
Goods/ Services
Any other business
JGarg Economic Advisors
11
(iii) any transfer of goods or services referred to in subsection (8) of section 80-IA
Assessee
Undertaking/ unit /
enterprise / eligible
business
Goods/ Services
JGarg Economic Advisors
Any other business
12
(iv) any business transacted between the assessee and other
person as referred to in sub-section (10) of section 80-IA
Close Connection
Assessee
Any other reason
Independent
tax payer
Eligible business with
more than ordinary
profits
JGarg Economic Advisors
13
(v) any transaction, referred to in any other section under
Chapter VI-A or section 10AA, to which provisions of subsection (8) or sub-section (10) of section 80-IA are
applicable;
◦ 10AA - Special provisions in respect of newly established Units in
Special Economic Zones.
◦ 80IAB - Deductions in respect of profits and gains by an
undertaking or enterprise engaged in development of Special
Economic Zone.
◦ 80IB - Deduction in respect of profits and gains from certain
industrial undertakings other than infrastructure development
undertakings.
◦ 80 IC - Special provisions in respect of certain undertakings or
enterprises in certain special category States
◦ 80ID - Deduction in respect of profits and gains from business of
hotels and convention centers in specified area.
◦ 80IE - Special provisions in respect of certain undertakings in
JGarg Economic Advisors
14
North-Eastern States
(vi) any other transaction as may be prescribed
and where the aggregate of such transactions entered into by
the assessee in the previous year exceeds a sum of five crore
rupees.
JGarg Economic Advisors
15
Example:
During FY 2012-13, A Ltd. entered into following
transactions with its related parties:
(a) Salary paid to Directors : Rs. 6 million
(b) Purchases from related party : Rs.25 million
(c) Sales to related party : Rs.35 million
(d) Loan taken from related party : Rs.100 million
(e) Provision for interest on loan taken: Rs.10 million
(f) Purchase of capital asset : Rs.15 million
Also A Ltd. as two units and one of the unit is a Chapter VI-A
unit claiming tax deduction, following transactions in relation
to same:
(g) inter-unit transfers : Rs.20 million
(h) Allocation of common expenses : Rs.10 million
JGarg Economic Advisors
16
Value of Specified Domestic Transaction
(a) Salary paid to Directors :
(b) Purchases from related party :
(e) Provision for interest on loan taken:
(g) inter-unit transfers :
Total :
Rs. 6 million
Rs.25 million
Rs.10 million
Rs.20 million
Rs.61 million
As value of specified domestic transaction is 6.1 crore i.e. more
than threshold limit of 5 crore, transfer pricing provision would
be applicable on these transactions.
JGarg Economic Advisors
17

As per section 92(3), transfer pricing provision are not
applicable if:
“The provisions of this section shall not apply in a case where
the computation of income under sub-section (1) or subsection (2A) or the determination of the allowance for any
expense or interest under sub-section (1) or sub-section
(2A), or the determination of any cost or expense allocated or
apportioned, or, as the case may be, contributed under subsection (2) or sub-section (2A), has the effect of reducing the
income chargeable to tax or increasing the loss, as the case
may be, computed on the basis of entries made in the books
of account in respect of the previous year in which the
international transaction or specified domestic transaction
was entered into.”
JGarg Economic Advisors
18






Transfer pricing provision on specified domestic transactions
are applicable from FY 2012-13 / AY 2013-14.
Taxpayer must compute an arm’s length price of specified
domestic transaction as per the methods prescribed under
section 92C.
Burden of proof is on the taxpayer to establish the arm’s
length price and to maintain related documents.
Must obtain a report under Form 3CEB (till now no separate
Form as been prescribed for specified domestic transaction)
from a Chartered Accountant and file it before tax authorities
within due date of filing of return of income.
Due date for filing tax return would be 30 November for a
taxpayer on whom transfer pricing provisions are applicable.
Tax payer must submit the transfer pricing document to the
tax authorities, within 30 days of the receipt of notice from
the department.
JGarg Economic Advisors
19

Penalties
◦ Non maintenance of documents, fail to report transaction,
maintain or furnishes an incorrect information or document
– 2% of the value of controlled transaction – Section 271AA
◦ Non filing of Form 3CEB – Rs.100,000/ - Section 271BA
◦ Failure to furnish information or document to tax
authorities – 2% of the value of controlled transaction –
Section 271G
JGarg Economic Advisors
20


Relevant provisions relating to transfer pricing documentation
is given under Section 92D of the Act read with Rule 10D of
the Rules.
Section 92 D of the Act read with Rule 10E of the Rules
◦ Should be prepared on contemporaneous basis
◦ Should be kept and maintained for 8 years from the end of
the relevant assessment year
◦ No fresh documentation required for continuing
transactions unless there is some significant change which
can have impact on pricing
JGarg Economic Advisors
21

Refer section 92D of the Act read with Rule 10D of the Rules
Types of Documents
Enterprise wise
Transaction
specific
JGarg Economic Advisors
Computation
related
22

Enterprise-wise documents
◦ Ownership structure of the taxpayer
◦ Profile of the Group
◦ Name of Associated Enterprises, address,, legal status,
country of tax residence, ownership linkage and business
◦ Business of the taxpayer, description of industry
JGarg Economic Advisors
23

Transaction-specific documents
◦ Description of transaction
◦ Functional Asset & Risk Analysis
◦ Industry / market condition, forecasts/ budget, financial
estimates
◦ Uncontrolled transactions and comparability analysis
JGarg Economic Advisors
24

Computation – related documents
◦ Most appropriate method
◦ Computation of arm’s length price
◦ Assumptions, policies and price negotiation
◦ Transfer pricing adjustment
JGarg Economic Advisors
25
TP Methods
OECD Guidelines
Indian Regulations
CUP Methods
CUP Methods
Resale Price Method
Resale Price Method
Cost Plus Method
Cost Plus Method
Profit Split Method
Profit Split Method
Transactional Net Margin Method
Transactional Net Margin Method
JGarg Economic Advisors
26

In general
◦ Comparable Uncontrolled Price (“CUP”) Method compare prices.
◦ Resale Price Method (“RPM”) compares gross margins.
◦ Cost Plus Method (“CPM”) compares profit mark-ups on costs.
◦ Profit Split Method (“PSM”) refers to the (total) profits from
transactions and splits them among the parties based on the
level of contribution.
◦ Transactional Net Margin Method (“TNMM”) analyses net profit
in relation to an appropriate base, such as costs, sales or
assets.
◦ Other Method (Rule 10AB) takes into account the price which
has been charged or paid, or would have been charged or
paid, for the same or similar uncontrolled transaction.
JGarg Economic Advisors
27

Section 92 E
“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”




Applicable on all type of Assessee who has entered into specified
domestic transaction
Value of Specified domestic transaction should not be less than
5cr in aggregate
Accountant means Chartered Accountant in practice
Specified date shall have the same meaning as assigned to “due
date” in Explanation 2 below sub-section (1) of section 139 i.e.
30th day of November of the assessment year
JGarg Economic Advisors
28

As per the Guidance Note of ICAI on Section 92E:
◦ Para 9.9 & 9.10 - Ensuring completeness of the listing of
international transactions is the responsibility of the taxpayer. CA
should obtain MRL from the taxpayer.
◦ Para 9.12 – CA should go through the records maintained by the
taxpayer and match the same with documents prescribed however
CA is not responsible for the content of the transactions and
documentation maintained by the taxpayer.
◦ Para 9.13 - If any document is not maintained, then the
accountant should suitably qualify his report or disclose the same
in his report depending upon the facts and circumstances of each
case.
JGarg Economic Advisors
29

As per the Guidance Note of ICAI on Section 92E:
◦ Para 9.17: The accountant must limit his scope of work and the
review procedures to the extent certified in Form No.3CEB. For
e.g. in the Annexure the method which has been used to
determine the arm’s length price needs to be stated. In this
context the accountant is only required to ensure that the method
stated as being used to determine the arm’s length price by the
assessee has actually been used and it is not the accountant’s
responsibility to ensure that the method so used is the most
appropriate method as prescribed by the Board.
JGarg Economic Advisors
30
CA. Gaurav Garg
JGarg Economic Advisors Pvt. Ltd.
Email: gaurav@jgarg.com
Mobile: +91 98999 94934
Landline: 011 – 47094934
:011 - 65394934
www.jgarg.com
JGarg Economic Advisors