M.V.Damania & Co.
What is Transfer Pricing?
M.V.Damania & Co.
Intent of Indian TP Regulations
(International transactions)
Shifting of Profits
India
Overseas
Associated
Enterprise
(AE Co.)
Indian Co.
Tax @ 32.45%
Tax @ lower rate
approx 10%
Shifting of Losses
Tax Saving for the Group – Loss to Indian revenue
M.V.Damania & Co.
International Transaction
A transaction between two
Associated Enterprises,
Either or both of whom are
Non - Residents,
in the nature of
Purchase, sale, lease of
Provision of Services
Borrowing/Lending of money
Tangible/intangible property
M.V.Damania & Co.
Cost Sharing arrangements

Capital related: 26% or more equity holding.

Management related: Appointment of one or more EDs >1/2 of the
BOD.

Control: Wholly dependent know-how etc., 90% or more of raw
materials supplied etc.

Loan advanced by one enterprise => 51% of the BV of total assets of
the other enterprise.

One enterprise guarantees => 10% of the total borrowings of the
other enterprise.
M.V.Damania & Co.

Common control

Firm/AOP/BOI holds not less than 10 % interest in other
Firm/AOP/BOI

There exists between 2 enterprises any relationship of mutual
interest as may be prescribed.
M.V.Damania & Co.
A Ltd. (Indian Co.) has taken loan from
foreign bank of ` 2.56 crore during F.Y.
2012-13. Book Value of A Ltd. is ` 5 crore
as on date of borrowing and on 31st
March, 2013 Book Value is ` 6 crore.
Are A Ltd. & Bank AEs ?
M.V.Damania & Co.
SPECIFIED DOMESTIC TRANSACTIONS
UNDER INCOME TAX ACT – 1961
M.V.Damania & Co.
Intent of TP Regulations…
(Domestic transactions)
Shifting of expenses
India
Indian Co.
Loss making
India
Related Enterprise
Profit making
Tax @ 32.45%
Reduced tax due to
shifting of profits
Tax @ 32.45%
No tax or reduced tax due to loss
Shifting of income
Tax Saving for the Group – Loss to Indian revenue
M.V.Damania & Co.
Intent of Indian TP Regulations… (Domestic transactions)
Particulars (Ordinary Situation)
Co. X (SEZ)
Co. Y (DTA)
Income
500
1000
Income from related party
100
-
Expenses
300
800
Expense to related party
-
100
Profit/ Loss
300
100
Tax rate applicable
0%
32.45%
Tax
-
32.45 (100*32.45%)
Particulars (Planned Situation)
Co. X (SEZ)
Co. Y (DTA)
Income
500
1000
Income from related party
200
-
Expenses
300
800
Expense to related party
-
200
Profit/ Loss
400
-
Tax rate applicable
0%
32.45%
Tax
-
-
M.V.Damania & Co.
Loss to
Revenue –
Tax Saving
to the Group
Intent of TP Regulations…(Domestic transactions)
Particulars (Ordinary Situation)
Co. X (DTA)
Co. Y (DTA)
Income
500
1000
Income from related party
100
-
Expenses
700
800
Expense to related party
-
100
Profit/ Loss
(100)
100
Tax rate applicable
32.45%
32.45%
Tax
-
32.45 (100*32.45%)
Particulars (Planned Situation)
Co. X (DTA)
Co. Y (DTA)
Income
500
1000
Income from related party
150
-
Expenses
700
800
Expense to related party
-
150
Profit/ Loss
(50)
50
Tax rate applicable
32.45%
32.45%
Tax
-
16.23 (50*32.45%)
Present
Loss to
Revenue* –
Tax Saving
to the
Group
* By shifting of income from a profit making company to a loss making company, the group could reduce its tax
liability by 16.23 for the current year, though the impact will be reversed in future years given carry forward of losses.
M.V.Damania & Co.
Overview of Provisions of Section 92BA
Inter unit transfer of goods & services by
undertakings to which profit-linked deductions
apply
Expenditure
incurred
between
related
parties
defined under
section 40A
SDT
Transactions between undertakings, to which
profit-linked deductions apply, having close
connection
M.V.Damania & Co.
Any other
transaction
that may be
specified
Relationship can exists
any time during the year
Sec 40A (2)(b) – Related Party
Sr.No
Payer / assessee
Payee
(i)
Individual
Any relative
[defined in sec. 2(41) to mean husband, wife, brother, sister, lineal ascendant or
descendant]
* Definition of Relative u/s 56(2) not relevant
(ii)
Company
any director or relative of such director
Firm (includes LLP)
any partner or relative of such partner
AOP
any member or relative of such member
HUF
any member or relative of such member
(iii)
Any Assessee
any individual having substantial interest in the assessee’s business or relative of such
individual
(iv)
Any assessee
a Company, Firm, AOP, HUF having substantial
interest in the assessees business
or
any director, partner, member
or
relative of such director, partner or member
or (newly inserted)
any other company carrying on business or profession in which the first mentioned
company has substantial interest.
A Ltd. (holding co)
X Ltd. (subsidiary co)
Y Ltd. (subsidiary co)
M.V.Damania & Co.
Case 1 - Director or any relative of the
Director of the taxpayer – Section
40A(2)(b)(ii)
Case 2 - To an individual who has
substantial interest in the business or
profession of the taxpayer or relative of
such individual – Section 40A(2)(b)(iii)
Assessee
(Taxpayer)
Director
Substantial interest >20%
Assessee
(Taxpayer)
Relative
Mr. A
Mr. D
Mr. C
Mr. A
Mr. D
Relative
Covered transactions
Holding Structure
M.V.Damania & Co.
Mr. C
Relative
Case 4 – Any other company carrying on
business in which the first mentioned
company has substantial interest – Section
40A(2)(b)(iv)
Case 3 – To a Company having substantial
interest in the business of the taxpayer or
any director of such company or relative of
the director – Section 40A(2)(b)(iv)
Mr. D
A Ltd
Assessee
(Taxpayer)
Substantial interest >20%
Substantial
interest >20%
C Ltd
Substantial interest >20%
Relative
Director
Assessee
(Taxpayer)
Substantial interest >20%
Mr. C
A Ltd
Covered transactions
Holding Structure
M.V.Damania & Co.
B Ltd
Case 5 – To a Company of which a director has a substantial interest in the business of the taxpayer
or any director of such company or relative of the director – Section 40A(2)(b)(v)
Director
B Ltd
Substantial
interest >20%
Mr. A
Relative
Mr. C
Mr. D
Covered transactions
Holding Structure
M.V.Damania & Co.
Assessee
(Taxpayer)
Case 6 – To a Company in which the
taxpayer has substantial interest in the
business of the company – Section
40A(2)(b)(vi)(B)
A Ltd
Substantial interest >20%
Assessee
(Taxpayer)
B Ltd
D Ltd
Covered transactions
Holding Structure
M.V.Damania & Co.
Mr C
Relative
Substantial
interest >20%
Assessee
(Taxpayer)
Case 7 – Any director or relative of the
director of taxpayer having substantial
interest
in
that
person–
Section
40A(2)(b)(vi)(B)
Substantial interest >20%
Mr B
A Ltd is a manufacturing Company.
A Limited Purchases RM from B Ltd. of Rs. 4.5 Cr and sales FG to B
Limited of Rs 5.5cr.
B Limited has substantial interest in A Limited.
Analyze if the above transaction is covered under SDT for A
Limited and B Limited?
If in the above case A ltd. Is located in SEZ(special economic zone) area.
Is this transactions covered under SDT?
M.V.Damania & Co.
A Limited (Indian Company) is holding
24 % shares in B Inc.(Overseas
Company).
Analyze if A Limited and B Inc. are
associate enterprise.
M.V.Damania & Co.
M.V.Damania & Co.