Finance Act 2001 introduced chapter X in the Income Tax Act , 1961
Chapter X Special provisions relating to AVOIDANCE OF TAX
Sections
Particulars
92
Computation of Income from International Transaction having regard to
arm’s length price
92A
Meaning of Associated Enterprise
92B
Meaning of International Transaction
92BA
Meaning of Specified Domestic Transaction
92C
Computation of arm’s length price
92CA
Reference to Transfer Pricing officer
92CB
Power of Board to make safe harbour rules
92CC
Advance Pricing agreement
92CD
Effect to advance Pricing Agreement
92D
Maintenance and keeping of information and document by persons entering
into an international transaction and specified domestic transaction
92E
Report from an accountant to be furnished by persons entering into
international transaction
92F
Definitions of certain terms relevant to computation of arm’s length price
Other Relevant Rules and Forms
Rules
Particulars
10A
Meaning of expressions used in computation of arm’s length price
10AB
Other method of determination of arm’s length price
10B
Determination of arm’s length price under section 92C
10C
Most appropriate method
10D
Information and documents to be kept and maintained under section 92D
10E
Report from an accountant to be furnished under section 92E
Forms
Particulars
3CEB
Report from an accountant to be furnished under section 92E relating to
international transaction or a specified domestic transaction
Section 92 : Computation of Income from International Transaction having
regard to arm’s length price
(1) Any income arising from an international transaction shall be computed having
regard to the arm’s length price.
(2) An international transaction or a specified domestic transaction between two or
more associated enterprises for the allocation or apportionment of, or any
contribution to, any cost or expense incurred or to be incurred shall be determined
having regard to the arm's length price
(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
(3) Transfer pricing is not applicable where ALP has the effect of reducing the
income chargeable to tax or increasing the loss
EXAMPLES
Ex 1: An enterprise in India sells goods to an AE in USA for Rs. 100000/whereas ALP is Rs. 300000/-. Therefore the income of the Indian enterprise
shall be determined with reference to ALP of Rs. 300000/-
Ex 2 : An enterprise in India purchases goods from an AE for Rs. 200000/where as ALP is Rs. 70000/-. The income of the Indian enterprise shall be
computed w.r.t Rs. 70000/-
Ex 3 : An Indian enterprise takes a loan from an AE in UK @ 24% whereas
the market rate of interest is 11% p.a . Then in such a case the allowance of
interest to Indian enterprise shall be on the basis of ALP of 11%
Ex 4 : Allocation or apportionment of costs or expenses
An AE incurs research and development of Rs. 3000000/- and Rs.
2000000/- are allocated to Indian AE . To ensure whether Indian AE is
deriving benefit in line with the R&D expenditure allocated.
Section 92A : Meaning of Associated Enterprise
• An enterprise which participates , directly or indirectly or through one or more
intermediaries, in the management or control or capital of the other enterprise.
• Both the enterprises have the same persons who participate directly or indirectly or
through one or more intermediaries, in their management or control or capital.
The above mentioned criteria of management or control or capital is explained
exhaustively in sub section (2). No other situation can be construed as triggering AE
relationship.
How do you ascertain this control?????
a) Holds directly or indirectly atleast 26% of the voting power
b) Any person holds atleast 26% in each of such enterprise
c) A loan advanced not less than 51% of the book value of the total assets of the other
enterprise
d) Guarantees atleast 10% of the total borrowings
e) One enterprise appoints 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 other enterprise
f) Directors or members as specified in point e) appointed by the same person in both the
enterprises
g) 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,etc of which the other
enterprise is the owner or in respect of which the other enterprise has exclusive rights
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
Continued…
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
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 ; or
l)
Enterprise holds 10% or more interest in firm, AOP and BOI.
m) Any other mutual interest, as prescribed.
Case study 1
A Ltd.
Participates in
Management/
Capital/control
C Ltd.
B Ltd.
I Ltd.
Intermediary
Participates in
Management/capital
/control
D Ltd.
Fact : In the above example, A & B , conjointly and simultaneously ,
participate in the management, capital and control of C and D.
Ans : Consequently, C and D are to be construed as Associated Enterprises.
Section 92B : Meaning of International Transaction
-Between two ASSOCIATED ENTERPRISES and
- Atleast one of whom must be a NON RESIDENT
-A transaction of ………
purchase, sale , transfer , lease or use of tangible or intangible property; or
provision of services; or
capital financing including lending or borrowing or guarantee; or
any other transaction having a bearing on the profits, income, losses, or assets of such
enterprises. And
shall include a mutual agreement or arrangement between two or more associated
enterprises for the allocation or apportionment of, or any contribution to, any cost or
expense incurred or to be incurred in connection with a benefit, service or facility
provided or to be provided to any one or more of such enterprises.
- A transaction of business restructuring or re-organization ,irrespective of the fact that it has
bearing on the profits, income, losses, or assets of such enterprise at the time of transaction
or at any future date.
Deeming provision- Section 92B(2)
Ex:
X in India
Associated Enterprise
Y holds 35% shares of X
Transaction betn X
&Z
Y in Australia
Associated Enterprise
Z in UK
Unrelated party
A transaction between X India & Z UK shall be deemed to be a transaction between
associated enterprises if in relation to that transactioni.
There exists a prior agreement between the Z UK and the Y Australia; OR
ii. The terms of the relevant transaction are determined in substance between Z UK and
the Y Australia.
Case study 2
Associated
enterprise
A Inc. – US Co.
B Inc. – US Co.
Branch, a Permanent
establishment
Indian subsidiary
C Ltd.
D Ltd.
Transaction
The above transaction has even though originated , executed and concluded within
India, shall be an international transaction as it is between two associated
enterprises and one of the party is a non resident.
Even when a transaction is between two non resident associated enterprises, the
transfer pricing provisions shall apply if the income Is taxable as per the provisions
of the Income Tax act, 1961
Reason behind application and extension of scope of transfer pricing regulations to
specified domestic transactions
CIT Vs Glaxo Smithkline Asia (P) Ltd. – Supreme Court
The assessee did not have any employee other than a company secretary and all
administrative services relating to marketing, finance, HR etc were provided by Glaxo Smith
Kline Consumer Healthcare Ltd (“GSKCH”) pursuant to an agreement under which the
assessee agreed to reimburse the costs incurred by GSKCH for providing the various services
plus 5%. The costs towards services provided to the assessee were allocated on the basis
suggested by a firm of CAs. The AO disallowed a part of the charges reimbursed on the
ground that they were excessive and not for business purposes which was upheld by the
CIT (A). However, the Tribunal deleted the disallowance on the ground that there was no
provision to disallow expenditure on the ground that it was excessive or unreasonable
unless the case of the assessee fell within the scope of s. 40A (2).
Held that:



No interference is called for as the entire exercise is a revenue neutral exercise, if it
is between unrelated parties.
The larger issue is whether Transfer Pricing Regulations should be limited to crossborder transactions or whether the Transfer Pricing Regulations be extended to
domestic transactions. In domestic transactions, the under-invoicing of sales and
over-invoicing of expenses ordinarily will be revenue neutral in nature, except in
two circumstances having tax arbitrage such as where one of the related entities is
(i) loss making or (ii) liable to pay tax at a lower rate and the profits are shifted to
such entity;
the question of extending Transfer Pricing regulations to domestic transactions
require expeditious consideration by the Ministry of Finance and the CBDT may
also consider issuing appropriate instructions in that regard.
Section 92BA – Meaning of Specified Domestic Transaction
i.
Any expenditure in respect of which payment has been made or is to be made to person
referred to in Section 40A(2) clause (b)
ii. Any transaction referred to in section 80A
iii. Any transfer of goods or services from eligible business referred to in sections 80IA,
80IAB, 80IB,80IC, 80ID , 80IE & 10AA to other business for a value which is less than
the market value thereby affecting profits and leading to tax erosion
iv. More than ordinary profits are earned by the assessee in eligible business to due close
connection between such assessee and any other person
v.
any transaction, referred to in any other section under Chapter VI-A to which similar
provisions of section 80IA(8) & 80IA(10) are applicable.
vi. Any other transaction as may be prescribed
AND where the aggregate of such transactions exceeds 5 CRORES
Explanation : For the purpose of sub section 8 of section 80IA, “market value” in relation to
any goods or services meansa. The price that such goods or services would ordinarily fetch in the open market; or
b. The arm’s length price as defined in section 92F, where transfer of such goods or services
is a specified domestic transaction referred to in section 92BA.
Section 92C : Computation of Arms Length Price
• FAR analysis : Functions performed, Assets employed and Risks assumed
• Determination of the MOST APPROPRIATE method
• Six methods :
1. Comparable uncontrolled price method
2. Resale price method
3. Cost plus method
4. Profit split method
5. Transactional net margin method
6. such other method as may be prescribed by the Board
Arithmetical mean of all the prices ,
if more than price is determined by the most appropriate method
Example 1 :
International transaction at Rs. 157

Price as determined by most appropriate
method :
Price 1 : Rs. 170
Price 2 : Rs. 160
Price 3 : Rs. 150
Price 4 : Rs. 140
Arithmetic mean : Rs. 155

3% of actual transaction price : Rs. 4.71

As the variation between ALP and
actual transaction price is less than 3% ,
Rs. 157 shall be the arm’s length price.

Example 2 :
International transaction at Rs. 145

Price as determined by most appropriate
method :
Price 1 : Rs. 180
Price 2 : Rs. 170
Price 3 : Rs. 140
Price 4 : Rs. 130
Arithmetic mean : Rs. 155



3% of actual transaction price : Rs. 4.35
As the variation between ALP and
actual transaction price is more than 3%
, Rs. 155 shall be the arm’s length price.
Section 92C continued…
Variation between ALP and
the actual transactional value of
the international transaction or
specified domestic transaction is
less than or equal to 3% of the
actual transactional value
Actual transactional value deemed
to be ALP
Variation between ALP and
the actual transactional value of
the international transaction or
specified domestic transaction is
greater than 3% of the actual
transactional value
ALP shall be as determined by the
most appropriate method
Section 92C continued…
Where the assessing officer may proceed to determine the arm’s length
price in accordance with section 92C(1) & (2)
(a) Price charged in international
transaction or specified domestic
transaction has not been determined under
section 92C(1) & (2)
(b) Any information and document have
not been kept and maintained by the
assessee in accordance with section
92D(1) and rules made in this behalf.
(c) The information or data used in the
computation of arm’s length price is not
reliable or correct.
(d) The assessee has failed to furnish
within the specified time, any information
or document which he was required to
furnish by a notice issued under section
92D(3)
An opportunity of being heard , to show cause prior to initiating the computation
under section 92C(3)
Section 92C continued…
Two proviso s to section 92C(4) after determination of ALP by the assessing
officer

No deduction shall be allowed under section 10AA or under Chapter VIA
in respect any amount of adjustment so made.

That income of one associated enterprise shall not be recomputed merely
by reason of one adjustment made in the case of the other associated
enterprise on determination of arm’s length price by the assessing officer.
Example :
B Inc holds 27% equity shares of A Ltd. B Inc provides knowhow to A Ltd.
for which A Ltd. pays a royalty of Rs. 100 lacs to B Inc. A Ltd. deducts TDS
of Rs. 25.75 and remits Rs. 74.25 to B Inc. A Ltd. files its return of Income of
Rs. 300 lacs after claiming expenditure of Rs. 100 lacs on royalty. B Inc also
files return of Income in India as under :
Royalty payment
Tax as per sec 115A
Less : TDS
Tax payable
100.00 lacs
B Inc
25.75 lacs
25.75 lacs
27%
equity
Provides know-how
nil
A Ltd.
The AO on the basis of information
available with him determines the ALP
of royalty to be Rs. 40 lacs.
TAX IMPLICATIONS ??????
Royalty payment
TAX IMPLICATIONS….
• A Ltd and B Inc. are associated enterprise as per Section 92A.
• Since B Inc is a non resident and is providing know-how to A Ltd. for
which royalty is being paid, there is an INTERNATIONAL TRANSACTION
as per section 92B.
• Section 92C empowers the Assessing officer to determine the taxable
income of A Ltd. on the basis of information in his possession on the basis of
arms length price of Rs 40 lacs.
• The assessing officer will accordingly assess the income of A Ltd. at Rs 360
lacs after disallowing the royalty of Rs 60 lacs.
• As per Explanation 7 to section 271(1)(c), Rs 60 lacs is deemed as
concealed income on which penalty for concealment of income shall be
levied.
• As per the first provision to section 92C(4), deduction under section 10AA
or Chapter 10AA or under Chapter VI-A otherwise allowable to A Ltd. shall
not increase on account of additions of Rs 60 lacs.
• As per second provision to section 92C(4) , B Inc cannot claim that its
income should be Rs 40 lacs instead of Rs 100 lacs and cannot claim refund
of TDS of Rs 15.45 lacs.
FAR ANALYSIS
It focuses on three aspects i.e. Functions Performed , Assets Employed & Risk
Assumed
Analysis of functions performed
1. Design and development of a product
2. Sourcing of materials
3. Manufacturing
4. Warehousing
5. Sales and distribution
6. Technical services
7. Conceptualization and specifications of services performed
8. Customer support
Analysis of Assets employed
1. Whether the assets are owned or leased
2. Whether activity is capital or labour intensive
3. Presence or absence of intangibles
Analysis of risks assumed
Nature of risks Particulars
1. Financial risk a.
b.
c.
d.
Capital contribution
Method of funding
Funding of losses
Bad debts
2. Product risk
a.
b.
c.
d.
e.
f.
Design and development of product
Up-gradation of product
After sale services
Risks associated with R&D
Product liability risk
Intellectual property risk if any
3. Market risk
a. Development of market including advertisement and
product promotion etc.
b. Business volume risk
c. Assured sales risk
d. Fluctuations in demand and prices
e. Credit and collection risk
resale price
method
Comparable
uncontrolled
price method
cost plus
method
Rule 10B : Determination of arm's
length price under section 92C
Any other method
as provided
in rule 10AB
profit split
method
transactional
net margin
method
Comparable uncontrolled price method
Step 1 : Determine the price charged or paid for the property transferred or
services provided in a comparable uncontrolled transaction
Step 2 : Such price is adjusted to account for the functional differences between
the international transaction and the comparable uncontrolled transaction which
could effect the price in the open market
There are two types of CUP :
----Internal CUP
----External CUP
Step 3 : Such adjusted price is the arms length price.
Example on CUP:
30 % equity shares
A Ltd.
B Ltd.
A Ltd. supplies 10000 CD writers to B Ltd. at Rs. 2000/unit
A Ltd. supplies 100 CD writers to C Ltd. at Rs. 3000/unit
Sale to C Ltd. is CIF. Sale to B Ltd. is FOB. C&F = Rs. 550/unit
Sales to C Ltd. backed by warranty. No warranty to B Ltd.
Warranty cost = Rs. 250/unit
Bulk trade discount to B Ltd. Rs 20/unit
Sales price per unit to C Ltd :
3000
Less : Differences to be adjusted
1. On account of freight & insurance
550
2. On account of warranty cost
250
3. On account of bulk order discount
Arms length price
20
2180
Price charged from B Ltd. 10000 * 2000
2,00,00,000
Arms length price
2,18,00,000
Increase in income by
10000 * 2180
18,00,000
Resale price method





Step 1 : The price at which the property purchased or services obtained by the
enterprise from an associated enterprise are sold to an unrelated enterprise is first
determined
Step 2 : Such resale price is reduced by normal gross profit margin accruing to the
enterprise from the purchase and resale of similar goods in a comparable
uncontrolled transaction. If there is no comparable uncontrolled transaction, then
take gross profit of unrelated person from purchase and resale of similar goods
Step 3 : Reduce the expenses incurred by the enterprise in connection with such
purchase
Step 4 : Adjust the price so arrived in step 3 to the extent of functional differences
Step 5 : The adjusted price arrived at Step 4 is the ALP.
Example on RSP method
30% equity
purchases
A Ltd.
B Ltd.
Re sales
C Ltd.
B Ltd. holds 30 % equity shares of A Ltd.
A Ltd. imports 1000 towels from B Ltd. at a price of Rs. 2900/unit. And then
These are sold to C Ltd at Rs. 3000/unit.
A Ltd. bought similar products from D Ltd. and sold to E Ltd. at 12 % gross
Profit on sales
B Ltd. offers a quantity discount of Rs. 10/unit to A Ltd. whereas D Ltd.
Does not offer such discount.
Freight at Rs. 10/unit and customs incurred at Rs. 25/unit
in case of purchase from B Ltd.
Ans :
Arms length price is as under:
Resale price of goods purchased from B ltd.
Less: normal gross profit at 12%
3000
360
Less: expenses connected with freight & customs duty
35
Less: quantity discount allowed by B ltd.
10
Arms length price
2595
Price paid to B ltd. 1000* 2900
29,00,000
Arms length price 1000* 2595
25,95,000
Increase in income of A ltd.
3,05,000
Cost plus method





Step 1: Determine the direct and indirect costs of production in respect of property
transferred or services provided to an associated enterprise
Step 2 : Determine the normal gross profit mark up to such costs which will arise
from transfer of similar goods or services to an unrelated enterprise or in a
comparable uncontrollable transaction.
Step 3: The normal gross profit mark up determined In Step 2 should be adjusted to
account for the functional differences if any
Step 4: The cost arrived in step 1 shall be increased by such adjusted profit mark up
as arrived at in step 3
Step5 : The sum so arrived at is the arms length price.
Example on cost plus method
35% equity
B Ltd.
A Ltd
A Ltd. holds 35% shares in B Ltd.
B Ltd. develops software and provides consultancy services for customers
Onsite as well as offsite.
B Ltd. during the year billed A Ltd. for 100 man-hours at Rs. 2000/man hour.
The total cost for executing this work amounted to Rs. 175000.
However B Ltd. Billed C Ltd. at the rate of Rs. 3000/man hour for same level of
Manpower and earned a gross profit of 50 % on its cost.
• Thus the transactions of B Ltd. with A ltd. and C Ltd. are comparable subject to
following differences to which value in terms of gross profit % is assigned in order
to arrive at an adjusted gross profit margin.
Particulars
Technology support extended by A ltd. to B Ltd. (not in case of C Ltd.)
Quantity discount
No risk in case of services rendered to A ltd.
One month credit to A Ltd. unlike to C Ltd.
% of normal
profits
20%
10%
10%
3%
Calculation of arms length price
Price charged to C Ltd.
Gross profit mark up in case of C Ltd.
3000
50%
Less: Functional differences
1. Technology support (20% of 50%)
10%
2. Quantity discount (10% of 50%)
5%
3. Risk factor (10% of 50%)
5%
30%
Add : Cost of credit period
1.5%
Arms length gross profit
31.5%
Total cost
1,75,000
Arms length income(175000*31.5% +175000)
2,30,125
Profit split method

Applicable in transactions involving transfer of unique intangibles or in multiple
transactions which are so interrelated that they cannot be evaluated separately for
the purpose of determining ALP.
Step 1 : The combined net profit of the associated enterprise arising from the
transaction in which they are engaged, is determined
Step 2 : The relative contribution made by each of the AEs is evaluated on the basis of
FAR analysis and on the basis of relative external market data which indicates how
much contribution would be evaluated by unrelated enterprise performing
comparable functions in similar circumstances
Step 3 : The combined net profit is then split amongst the enterprises in proportion to
their relative contributions, as evaluated in step 2
Step 4 : The profit so apportioned is at arms length price.
Residual Analysis approach : In the first stage, each AE is allocated an Arm’s length
remuneration for its non unique contributions to the controlled transactions based
on any of the four methods I.E CUP, RPM, CPM or TNMM.
While the residual net profit remaining after such allocation may be allocated in
proportion to their relative contribution, based on analysis of facts and
circumstances.
Example on Profit split method
27 % equity
ZMC Ltd. Singapore
Amco Ltd. India
Crest Ltd. USA
32% equity
Crest Ltd. USA received an order from Trium Ltd. USA for developing a software in
which all the above three entities integrally contributed. A consideration of $ 50000
was received by Crest Ltd.
Crest paid $10000 to ZMC Ltd. and $12000 to Amco Ltd.
A profit of $10000 is earned. Amco India incurred a cost of $9500
On the basis of FAR, relative contribution of each of them is as follows:
Amco Ltd - 50%
ZMC Ltd. Crest Ltd. -
20%
30%
Arms length price under profit split method
Price charged by Crest Ltd.
$ 50000
Amco Ltd. India ‘s share of revenue
$ 12000
ZMC Ltd. singapore’ s share
$ 10000
Crest Ltd. USA ‘s share
$ 28000
Combined total profits
$ 10000
Evaluation of relative contribution:
Amco Ltd - 50%
ZMC Ltd. - 20%
Crest Ltd. - 30%
Total cost of Amco Ltd.
$ 5000
$ 2000
$ 3000
$ 9500
Income of Amco Ltd. India arms length price
Actual revenue of Amco Ltd.
Increased income
$ 14500
$ 12000
$ 2500
Transactional net margin method




Step 1 : The net profit margin realized by the enterprise is computed in relation to costs
incurred or sales effected or assets employed or any other base
Step 2 : Net profit margin realized by the enterprise or an unrelated enterprise from a
comparable uncontrolled transaction is computed
Step 3 : Net profit margin ascertained in step 2 is adjusted for functional differences
Step 4 : net profit margin so adjusted is taken into account to arrive at an arms length price
Example on transaction net margin method:
Hindustan lever exports shampoos to Unilever UK, an AE & earns a net profit of 10% on sales
Sales are Rs. 10000 crores and net profit Rs. 1000 crores
Procter and gamble exports shampoos and earns a net profit of 15% . 2% of net profit is mainly
due to sale to European countries
Therefore , adjusted net profit Is 13% , when applied to sales 1300 crores.
Addition of 300 crores to income.
The comparability of international transaction with uncontrolled transaction shall be
judged with reference to the following:
•
Specific characteristics of the property transferred or services
•
Functions performed, assets employed or risks assumed
•
contractual terms whether they are formal or in writing
•
Conditions prevailing in the markets , geographical location, size of the market,
laws and government orders in force, costs of factors of production, overall
economic development, level of competition, wholesale or retail level markets
An uncontrolled transaction shall be said to comparable when :
1. None of the differences material enough present affecting the price or cost charged
or profits
2. reasonable accurate adjustments can be made to eliminate material differences
Data for comparison should be taken specifically of the year concerned
or at the max two years prior to that.
Rule 10C : Most appropriate method
Factors to be considered:
1. Nature and class of transactions
2. Class or classes of AEs
3. FAR analysis
4. Availability, coverage and reliability of data necessary for application of the method
5. Degree of comparability between actual transaction and transaction between uncontrolled
conditions.
6. Extent to which reliable and approximately accurate adjustments can be made
7. Nature and extent of assumptions required to be made
Section 92CA : Reference to Transfer pricing officer
(1) Assessing officer , with previous approval of commissioner , refer the computation of ALP in
relation to an international transaction or specified domestic transaction to TPO , if it considers it
necessary and expedient.
(2) The TPO to serve notice on the assessee requiring him to produce all the evidence.
(2A)Where any other international transaction (other than referred in (1) above) , comes to the
notice of the TPO during the course of the proceedings before him, the provisions of this chapter
shall also apply.
(2B)The TPO will have power to challenge the computation of ALP of those transactions which
have not been mentioned in the report furnished under section 92E.
(3) Determination of ALP by TPO and he will send a copy to the AO
(3A)An order under sub section 3 to be made at any time before sixty days prior to the date on
which the period of limitation in section 153 or 153B expires
(4)The AO shall compute the total income in conformity with the ALP so determined
(5)Mistake apparent from records- 154 by TPO
(6)Re computation by AO under sub section 5
(7)TPO can exercise powers of summoning or calling for the details for the purpose of inquiry and
investigation under section 131(1) and 133(6)
Objections to the order
Of TPO
Accept the draft order
File objections
Within 30 days from
The date of receipt
Of draft order from AO
To dispute resolution
Panel.
Appeal before CIT
(Appeals) after
obtaining
Final order from AO
By keeping silent
Against the draft
Order.
Section 144C : Dispute Resolution Panel
• DRP – Collegium of three commissioners
• Eligible assessee – One who has suffered transfer pricing adjustment in the order passed by
the TPO and any foreign company.
(2) On receipt of the draft order, the eligible assessee shall, within thirty days of the receipt
by him of the draft order,—
(a) file his acceptance of the variations to the Assessing Officer; or
(b) file his objections, if any, to such variation with,—
(i) the Dispute Resolution Panel; and
(ii) the Assessing Officer.
3) The Assessing Officer shall complete the assessment on the basis of the draft order, if—
(a) the assessee intimates to the Assessing Officer the acceptance of the variation; or
(b) no objections are received within the period specified in sub-section (2).
(4) The Assessing Officer shall, notwithstanding anything contained in section 153, pass the
assessment order under sub-section (3) within one month from the end of the month in
which,—
(a) the acceptance is received; or
(b) the period of filing of objections under sub-section (2) expires.
(5) The Dispute Resolution Panel shall, in a case where any objection is received under subsection (2), issue such directions, as it thinks fit, for the guidance of the Assessing Officer to
enable him to complete the assessment.
(6) The Dispute Resolution Panel shall issue the directions referred to in subsection (5), after considering the following, namely:—
(a) draft order;
(b) objections filed by the assessee;
(c) evidence furnished by the assessee;
(d) report, if any, of the Assessing Officer, Valuation Officer or Transfer
Pricing Officer or any other authority;
(e) records relating to the draft order;
(f) evidence collected by, or caused to be collected by, it; and
(g) result of any enquiry made by, or caused to be made by, it.
(7) The Dispute Resolution Panel may, before issuing any directions referred to
in sub-section (5),—
(a) make such further enquiry, as it thinks fit; or
(b) cause any further enquiry to be made by any income-tax authority and
report the result of the same to it.
(8) The Dispute Resolution Panel may confirm, reduce or enhance the variations
proposed in the draft order so, however, that it shall not set aside any proposed
variation or issue any direction under sub-section (5) for further enquiry and
passing of the assessment order.
(9) If the members of the Dispute Resolution Panel differ in opinion on any
point, the point shall be decided according to the opinion of the majority of the
members.
(10) Every direction issued by the Dispute Resolution Panel shall be binding
on the Assessing Officer.
(11) No direction under sub-section (5) shall be issued unless an opportunity
of being heard is given to the assessee and the Assessing Officer on such
directions which are prejudicial to the interest of the assessee or the interest
of the revenue, respectively.
(12) No direction under sub-section (5) shall be issued after nine months
from the end of the month in which the draft order is forwarded to the eligible
assessee.
(13) Upon receipt of the directions issued under sub-section (5), the
Assessing Officer shall, in conformity with the directions, complete,
notwithstanding anything to the contrary contained in section 153, the
assessment without providing any further opportunity of being heard to the
assessee, within one month from the end of the month in which such
direction is received.
(14) The Board may make rules for the purposes of the efficient functioning
of the Dispute Resolution Panel and expeditious disposal of the objections
filed under sub-section (2) by the eligible assessee.
Section 92CB Safe Harbour rules
Safe Harbour means circumstances in which the income tax authorities
shall accept the transfer price declared by the assessee.
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The determination of arm's length price under section 92C or section 92CA shall be
subject to safe harbour rules.
The Board may, for the purposes of sub-section (1), make rules for safe harbour.
CBDT has constituted Rangachary committee to notify safe harbour rules
E.g. circular No 6/2013 dated 29.06.2013 was issued to deal with development
centers engaged in contract R&D services with insignificant risks
Section 92D Maintenance and keeping of information and
document by persons entering into international transaction or
specified domestic transaction
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To keep and maintain books of accounts and such information , as may be prescribed
Period for which books to be maintained as prescribed by the board. To be maintained for a
period of 8 years from the end of the relevant assessment year.
The assessee shall be required to submit such information as asked for within 30 days of
the receipt of such notice from the AO or CIT (Appeals). Can be further extended to 30
more days
No documentation if the aggregate value of such transactions doesnot exceed 1 crore
rupees
Section 92E Report from an accountant to be furnished by persons entering
into international transaction [or specified domestic transaction] - due date –
30th November of the relevant assessment year
Section 92F Definitions of certain terms
Enterprise wise
Documents –
Describing
Relations with AE
, nature of
Business etc.
Types of
Information &
Documents
Computation related
Documents –
Methods
considered,
adjustments
Made to
Transfer price,
Assumptions,
Policies.
Transaction
Specific documents
-Functional
Analysis of each
Transaction,
Contractual terms,
Economic,
Market analysis
Section 271(1)(c) & explanation to
section 271
Penalty for failure to furnish particulars
of income, concealing or inaccurate
furnishing in case of any amount of
international or specified domestic
transaction so added unless the
transaction was computed under
section92C and in good faith.
Section 271AA Penalty for failure to keep
and maintain information and documents
Without prejudice to 271 & 271BA,
Fails to keep & maintain under section
92D(2)
Fails to report such transaction
Maintains or furnishes incorrect
information
100% to 300% of tax sought to be
evaded
2% of the value of each international
transaction or specified domestic
transaction
Section 271BA Penalty for failure to
furnish report from the accountant
Form 3CEB
Section 271G Penalty for failure to furnish
information or document as required under
section 92D(3)
AO or CIT (Appeals) may direct
Rs. 100000/2% of the value of each international
transaction or specified domestic
transaction
Advance Pricing Agreement (only for international transactions)
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Advance Pricing agreement is an agreement between a taxpayer and a taxing
authority on an appropriate transfer pricing methodology for a set of transactions
over a fixed period of time in future.
Section 92CC & 92CD deals with it.
The board with the prior approval of CG may enter into an APA with any person
undertaking an international transaction
include determination of the ALP or specify the manner in which arms length price
shall be determined and that will be in line with the provisions of section 92C or any
other method with such adjustments or variations as may be necessary or expedient
so to do.
International transaction , which is covered under such APA shall be determined in
accordance with the APA only.
APA shall be valid for 5 consecutive years
APA shall be binding only on the person and the commissioner (including income tax
authorities subordinate to him ) in respect of the transactions in relation to which the
agreement has been entered into
APA shall not be binding if there is any change in any laws or fact having bearing on
such APA
The board may declare with the approval of Central government by a order any such
agreement to be void ab initio if it finds that the agreement has been obtained by the
person by fraud or misrepresentation of facts. Once the agreement has been declared
void ab initio, all the provisions of the act shall apply to the person as if such APA
had never been entered into
Where an application is made by the person for entering into an APA, the proceeding
shall be deemed to be pending in case of the person for the purposes of the Act.
Unilateral APA
If only one tax
administration
Of the tax payer
Is involved in the
APA.
Such APA is binding
Only on the tax payer
Who is an applicant
And the tax
administration
who is the
Other party of the APA.
APA Types
Bilateral APA
APA binding on
The tax
Administration of the
AE and the AE
Which is in
Other tax jurisdiction.
Therefore it avoids
Economic Double
Taxation
Transfer Pricing Process
Identification
Of intra group
Transactions
Adjustments
Identification
Of comparable
Transactions
FAR Analysis
Determination
Of ALP
Documentation
Selection of
Most appropriate
Method
Return filing
Establishing
Comparability ,
Adjustments
TP Assessment
Concept of SHAREHOLDER Activity
If a service is availed from one group member by another group member and
such service would have been paid if availed from a third party , then such
service needs to be paid for by the member availing the same to the member
providing the same in the group.
In addition there will be a different service which is rendered generally by a
parent to its subsidiaries. This service is rendered not at the instance of the
member availing such service, but rendered to all the members of the group
by the parent member. This service is more of a parental obligation or an
effort to maintain consistency in quality . This is onerous responsibility of a
parent co. against its subsidiaries. This is more of a duty than a service
otherwise rendered for a charge. This is called a “shareholder activity”
Arms length price should be determined in respect of intra group service
both from the perspective of the service provider and service recipient.
Concept of Tested party
Tested party is the one who performs least complex functions and who
doesnot use non routine intangible. However from a practical perspective , it
may be desirable to use an entity for which comprehensive data is available
as tested party though such entity is a complex functional entity.
Delhi bench of ITAT judgment :
Ranbaxy laboratories (2008) 167 taxmann 306(Del)
Global Vantedge (2010) 1 ITR (Trib.) 326 (Del.)
BRIGHT LINE TEST
LG Electronics Inc.
Korea
Royalty
payment
LG Electronics India
Private Limited
Subsidiary
Special Bench Decision in the case of L.G. Electronics: (2013) 29 taxmann.com.300
FACTS :
L.G. Electronics India Private Limited (“the assessee”) obtained a right from the AE to
use technical information, designs, drawings and industrial property rights for the
manufacture, marketing, sale and services of agreed products, for which it agreed to pay
royalty @ 1 per cent. The AE allowed the assessee to use its brand name and trademarks
to products manufactured in India “without any restriction”.
Observations :
The Transfer Pricing Officer (“TPO”) concluded that the assessee was
promoting LG brand as it had incurred expenses on AMP to the tune of
3.85% of sales vis-à-vis 1.39% incurred by a comparable. Accordingly,
TPO held that the assessee should have been compensated for the
difference.
• Applying the Bright Line Test, the TPO held that the expenses in excess of
1.39 % of the sales are towards brand promotion of the AE and proposed a
transfer pricing adjustment.
• The Dispute Resolution Panel (“DRP”) not only confirmed the approach
of the TPO, but also directed to charge a mark-up of 13 % on such AMP
expenses towards opportunity cost and entrepreneurial efforts.
Concept of Bright Line Test
Origin : Origin of Dispute in USA - DHL Case
There is a difference between product promotion and brand promotion.
Product promotion primarily targets an increase in the demand for a
particular product whereas Brand Promotion results in creation of
Marketing Intangibles.
The expenditure on advertisement and brand promotion expenses which
exceed the average of AMP expenses incurred by the comparable
companies in India, is required to be reimbursed/ compensated by the
overseas associated enterprise.
In that case , the Indian AE becomes the economic owner of the brand,
the legal owner being the Foreign Enterprise.
SOME BASIC CONTROVERSIAL ISSUES??????
•Whether traditional transaction methods have precedence over transactional profit
methods?
Delphi TVS Diesel Systems Ltd. v. Asstt. CIT (Chennai)(URO)
Whether when a transaction to transaction or item to item comparison is
possible, that should always be preferred for determining ALP and proper
adjustment can be carried to account for difference that could materially
effect prices in open market of related items rather than transactional net
margin method.
• Application of filters such as turnover filters , export revenue filters etc ?
Transwitch India Pvt Ltd vs. DCIT [TS-105-ITAT 2013 (bang) – TP]
Patni telecom Services Pvt Ltd vs. ACIT [ TS-102-ITAT-2013(HYD)-TP]
A high turnover company cannot be bench marked against low turnover company
because size of the company makes difference in terms of economies of scale
• Internal TNMM versus external TNMM?
Birla Soft India Ltd. [2011] 44 SOT 664 (Delhi)
Held that the assessee was justified in taking internal benchmarking analysis on stand alone
basis by placing on record working of operating profit margin from international transactions
with AE and transactions with unrelated parties undertaken in similar functional and economic
scenarios and the same should be the basis for determination of arms length price in respect of
international transactions undertaken with the associated enterprise. We therefore hold the
transfer pricing officer had no mandate to have recourse to external comparables when in the
present case internal comparables were available which could be applied to determine the arms
length price with AE. We therefore direct the AO /TPO to determine the arms length price of
international transaction with AE by making internal comparisons of the net margin earned by
the assessee from the international transactions with the AE and the profit earned by the
assessee from international transactions with unrelated parties.
• Whether overall profit earned by both the AE’s for third party is relevant or not?
Global Vantedge (2010) 1 ITR(Trib.) 326 (Del)
It is often argued by the tax payers before the appellate authorities that
overall profit earned by the tax payer and his AE abroad must be considered
by the transfer pricing authorities in making any TP adjustment. In other
words income assessed in the hands of tax payer in India and income
assessed in the hands of AE abroad cannot be more than what is totally
earned from the third parties. If this rule is not followed it obviously results
in economic double taxation by taxing same income in the hands of tax
payer in India and his AE abroad by virtue of TP adjustments.
Ariston Thermo India Ltd. v. DCIT
Held that adjustments by the tax payer due to under utilization of
capacity could be made .
The tribunal rejected the department’s contention that economic
adjustments can only be made on the basis of comparables.
Hinduja Global Solutions v. ACIT (ITA No. 254/Mum/2013)
The Mumbai Bench of the Income Tax Appellate Tribunal held that ,
where the lending of money was in foreign currency to its AE the
domestic prime lending rate would have no applicability and the
interbank rate fixed should be taken as benchmark rate for international
transactions.
It, therefore held that LIBOR rate has to be adopted in the instant case.
Vijai Electricals Ltd. Vs ACIT (ITAT Hyderabad)
The Hyderabad Bench of the Income Tax Appellate Tribunal held that
Transfer pricing provisions do not apply
• to an investment in share capital of overseas companies and
• to transactions where no income has arisen.
Perot Systems TSI vs DCIT (ITAT Delhi)
Held that the loans were in reality not loans but were quasi capital because the
agreement shows them to be loans. The argument that loans were given interest
free is not acceptable because it is not an ordinary business transaction but an
international transaction between two AEs.
Section 92B defines an international transaction to mean any transaction
between AEs in the nature of lending or borrowing money. Therefore in
considering the arm’s length price of a loan , the rate of interest has to be
considered and income on account of interest can be attributed.
Ascendas (India ) Private Limited v DCIT
The Chennai Bench of the Income tax Appellate Tribunal held that the
discounted cash flow method is preferable in determining the arm’s
length price for the sale of shares.
Symantec Software Solutions Private Limited vs ACIT (ITAT Mumbai)
Held that the TPO could consider the financial information of comparable
not available at the time of TP study.
Google India Pvt. Ltd. vs DCIT (ITAT Banglore)
Held that super profit making companies are to be excluded from the
list of comparable before making transfer pricing adjustments.
Transfer Pricing Alerts
• Interest to be charged on delayed payments from Associated Enterprises
• Role of Transfer Pricing Officer limited to determining the arm’s length
price
• Corporate Guarantee with no impact on profits , income, losses or assets of
a guarantor not considered international transaction.
• Share Application cannot be recharacterised as interest free loan.
• Internal CUP with adjustments preferred over TNMM.
• Adjustment for difference in capacity utilization allowed.
• Price Publications of independent organizations – acceptable CUP.
• Reimbursements of costs require arm’s length price determination.
• Tribunal strikes down arbitrary lifting of corporate veil by TPO.
Amendments vide Finance Act 2014
• Roll Back Provisions in APA w.e.f. 01/10/2014
• Power to levy Documentation penalty extended to TPO w.e.f. 01/10/2014
• Introduction of Range concept (under analysis)
• Allowability of multiple year data for benchmarking (expected to come)
• Deeming TP provisions – section 92B(2) to apply irrespective whether such
independent person is a resident or not – w.e.f. 01/04/2015
SOURCES
• Income Tax Act, 1961
• Income Tax Rules
• Guidance Note on Report under Section 92E of the Income Tax Act, 1961
• Transfer Pricing provisions by CA Vinod Gupta
• Google – Search Engine
• International Taxation – A basic study by P.V.S.S Prasad and Sampath
Raghunathan
CA Pankti SHAH
Membership No. 141994
Email ID : shahpankti1989@gmail.com