tpr.pdf

Prashant Kotecha

Study Circle – Baroda Branch of WIRC

Transfer Pricing In India An Update - 2

CA. Prashant N Kotecha

Study Circle - Baroda Branch of WIRC 2

CO

NT

EN

TS

� Transfer Pricing in India

� Increased Focus of IRA

� Key Triggers for TP Adjustments

� Recent Issues in TP Audit

� Recent Rulings

� Recent Updates in the Finance Bill, 2011

� Other Important Topics in Respect of Transfer

Pricing

1 June 2011

Transfer Pricing in India Transfer Pricing in India


Study Circle - Baroda Branch of WIRC 1 June 2011 3

Snapshot of Indian Regulation

� Relatively new legislation - Introduced with effect from

April 1, 2001

� International transactions between associated

enterprises need to satisfy the arm’s length criterion

(ALP - price applied between independent enterprises in

uncontrolled conditions)

� Compliance Requirements

i. Maintenance of contemporaneous documentation (to

substantiate ALP)

ii. Annual filing of Accountant’s Report (Form 3CEB)

� Steep Penalties

– Fixed Amount of Rs. 1,00,000 if 3CEB is not filed

– 2% of International Transactions if no Documentation

– Can be Upto 3 times the tax sought to be evaded

� Concept of Arithmetic mean

� Limited judicial precedence

� Assessment procedure stringent


Study Circle - Baroda Branch of WIRC 4 1 June 2011

Approach to Transfer Pricing

Prescribed Methods

Method Functions Approach

Comparable

Uncontrolled Price

(CUP)

Direct Method –

Product

Comparability

Critical

Prices of each

transaction is to

be benchmarked

Resale Price Distribution

Function

Prices to be

benchmarked

considering ALM

Cost Plus

Service Function;

Contract

Manufacturing

Prices to be

benchmarked

considering ALM

Profit Split

Transfer of

intangibles or

multiple

transactions

Analysis of

Allocation of Profit

and loss

Transactional Net

Margin

Manufacturing &

Sales functions –

FAR Comparability

critical

Net Operating

Margin to be

Benchmarked

� Typical International Transactions:

Import of components; Payments towards

technology support; Export of finished

products, Reimbursement of expenses

� Remuneration based on FAR Analysis

Assists in economic characterization and

determination of compensation

� Most Appropriate Method (MAM):

To be used for testing ALP

� Aggregative Approach

Interlink Between transactions required to be

established

Public Database is required to analyze the ALM

earned by ICC

� Transaction specific approach

Technical Payouts, Management Fee, Cross

Charges. Cost Benefit analysis necessary



Functional, Assets & Risk Analysis

Comparable Analysis Financial Analysis

Internal External

Compliance – a Step by Step Approach

Selection of Most Appropriate Method

Profit Level Indicator

Accountants Report Documentation



Transfer Pricing Compliance Timeline – Illustration for

A.Y. 2011-12

Sr.

No. Compliance Timeline Relevant Provision

1. Filing Accountants Report along with Tax Return,

Maintenance of Documentation 30 Nov. 2011

Section – 92E r.w.

Section – 139(1)

2. Limitation for Initiating transfer pricing audit by the

tax administration 30 Sep. 2012

Proviso to Section –

143(2)(ii)

3. Limitation for completing transfer pricing audit 31 Oct. 2014

Section – 92CA(3) r.w.

Second Proviso to

Section – 153(1)

4. Limitation for Completing regular assessment

31 Dec. 2014

If 144C

BY 28-02-2015

Second Proviso to

Section -153(1)

5. Limitation of Completing regular assessment

(If reference is made for exchange of information)

30 June 2015

If 144C

BY 30-08-2015

Second Proviso to

Section - 153(1)(b)

5.

Limitation for Re-Assessment (where income

escaped < Rs. 1,00,000) 31 Mar. 2016 Section – 149(1)(a)

6. Limitation for Re-Assessment (where income

escaped ≥≥≥≥ Rs. 1,00,000) 31 Mar. 2018 Section – 149(1)(b)

7. Date till which documentation is required to be

maintained 31 Mar. 2020

Section – 92D and Rule

– 10D(5)



Increased Administrative focus of IRA

�Finance Act, 2009 – Focused on Transfer Pricing – Introduction of

Safe Harbor Rules

�Finance Bill, 2011 – Proposes amendments to give more power

to TPO.

�Proposal in DTC to Increase in Scrutiny time limit from 33 months

to 45 months.

�DTC proposes to introduce CFC Rulings, thin capitalization and

APA

� Increase number of cases with transfer pricing adjustments

� Increased number of training to TPOs on International TP Laws

and Practices.

�Step to Synchronize Customs and TP Authorities.

�Significant adjustments to companies in IT, Pharmaceuticals,

Financial Services, Automobiles, and Chemical Sectors. CA. Prashant N Kotecha


Audit Process

File tax return and Accountant’s Report (30th November)

Reference to be made to TP Officer (‘TPO’) by the

Assessing Officer (‘AO’); Compulsory Reference to be made

by AO if international transactions exceed INR 1500 million

for AY 2005-06 onwards (Internal guidelines)

Based on results of above mentioned procedure assessing

officer passes the order

TP Audit

Notice to be issues by the TPO - TPO calls for supporting

documents and evidence

Rectification application

mistake

Rectification application

can be made against the

order of TPO for apparent

mistake

Appeal can be made

within the order of the AO

Appeal can be made

against the order of AO as

order of TPO included

within the order of the AO

DRP Mechanism-

Finance Act 2009

Appeal Procedure

Appeal to Commissioner of

Income Tax

Passes an order

Income Tax Appellate

Tribunal

High Court - only on matters

related to law

Supreme Court

Constitutional Bench



Draft

Order

by AO Assessee

Files

Objection

with DRP

Conveys Acceptance /

no action taken by

Assessee

30

days

DRP passes

Directions

1 Month AO

Order

AO

Passes

Final

Order

ITAT Order

AO Passes

Final order

9 Months

30 Days



DRP Process Chart

Recent Trends

� Revenue target driven approach

� FAR analysis – disregarding taxpayers business

� Ad-hoc economic adjustments - rule of thumb applied in most cases Aggregation of

transactions

� TNMM most commonly used by tax payers - about 72% of cases Tax Authorities

prefer CUP and CPM

� Updation of comparables with captioned year’s data during audit proceedings -

contemporaneous principle

� Use of secret comparables

� Lopsided selection of comparables - rejection of loss making companies, inclusion

of high profit companies, inclusion of high turnover companies etc.

� Use of standard benchmarking sets - example IT, ITes, Gem and Jewellery, Contract

R & D etc. Unrealistic benchmark for captive service providers

� Major adjustments in IT, ITeS, FMCG, Pharma, Automobiles, Chemicals etc.

Precedents set in earlier years - generally followed

� Cases referred back to the TPO



Status and Statistics

� 5 years of TP audit completed

� Various rulings at ITAT level

� Few rulings at High Court level

� Increased sophistication in analysis of

comparable database



Assessment

Year

No. of Cases

selected for

TP Audit

Upward

Adjustment in

cases (%)

Approx.

Adjustment (` in crore)

2002-03 1,081 22% 1,500

2003-04 1,501 23% 2,500

2004-05 1,768 27% 3,500

2005-06 1,479 25% 5,500

2006-07 1,717 59% 10,000

2007-08 > 2,000 > 65% >25,000

Source: PTI

Key Triggers for TP Adjustments

�Losses / low margins with significant transactions with

Associated Enterprises

�Allocation of common expenditure

�Intra group management services fees

�Allocation of Marketing expenditure

�Royalty / Fees for technical collaboration

�Payment for Intangibles – patents , trademarks, brands,

logo etc.

�Significant variation in profitability of Assessee and its AEs.

�Low Mark-Up for captive services providers (particularly

ITeS Industry)

�Loan / Corporate Guarantee transactions



Recent Issues of TP Audit

� Royalty

� Intellectual Properties / Intangibles

� Interest on Loans

� Corporate Guarantee

� Services provided by Captive units

�Management Fees, Cost allocation, Cost

contribution

� Other important TP Audit Issues.



Royalty



Indian regulatory scenario:

� SIA used to publish information on royalty rates approved by the Government

pursuant to various technical collaboration proposals. SIA has discontinued

publishing this data effective September 2004

� Rates for royalty under the automatic route prescribed by Department of

Industrial Policy & Promotion:

� Lump sum payment of USD 2 million

� Recurring royalty of 5% on domestic sales and 8% on export sales for

technology agreements/collaboration

� Recurring royalty of 1% on domestic sales and 2% on export sales for use

of trademark/brand name, to the foreign collaborator

Royalty



Issues considerable:

� Lack of documentation in respect of receipt of Technology / continued technical

support from AE for which royalty is being paid.

� Assessee lacks in proving the reasons for paying royalty for more than 20 years

� Disregards to Specific situation of the Assessee - Nestle India (Delhi ITAT) [111

TTJ 498] - inappropriate to test the reasonableness of the remuneration on the

yardstick of profit of the year in which the payment is made

� Increase in rates at which Royalty is paid without change in technology being

received from AE

� Necessary to analyze cost (comparable cost, basis of charge) vs. benefit (need

for availing services, value attributable to services)

� Application of CUP for benchmarking – inadequate comparables

� FEMA ceilings / comparable FIPB / SIA approvals are not being accepted as CUP

for defending the arm’s length. Recent relaxation in royalty payout limits

increases the challenge of defending the arm’s length nature of royalty

payments

Intellectual Properties / Intangibles



� Payment for use of brand not accepted unless commercial rationale /

benefit test is demonstrated

� Economic v. Legal ownership

� Marketing Intangibles

� Technology

� Intangibles

� Trademarks

� Patents

� In recent audits, the TP authorities have examined the marketing

activities and spending by Indian subsidiaries developing local market

intangibles that are legally owned by overseas parents or other

affiliates - Maruti Suzuki (Delhi HC) [233 CTR 105 ]

� Special importance to such transactions by OECD (Chapter VI of TP

Guidelines)

Interest on loans



� Regulatory Scenario - Exchange Control regulations permit raising ECB from

foreign collaborator/ equity holder under the automatic route. ECB can be used

for capital expenditure

� Key factors affecting comparability- terms of loan, credit standing of the

borrower, currency of the loan, collateral, fixed vs. floating interest rate etc.

� Manner of Benchmarking

� Evaluation of interest rates charged in similar uncontrolled transactions -

Standard Bank Rates - LIBOR, PLR

� Practical Issues:

� Non-availability of data relating to comparable loan transactions in public

domain

� Adjustment for differences in risk profile of the borrower

� Thin-capitalization provisions / Re-characterization of debt into equity -

with the introduction of Direct Tax Code

Perot systems (Delhi ITAT) [130 TTJ 685] and

VVF Ltd (Mumbai ITAT) [ITA No.673/Mum/06]

Corporate Guarantee



� Corporate Guarantee by Assessee against the loan taken by its AE

� Nominal fees or no fees charged unlike Banks

� Benchmarking:

� Comparing total cost of borrowing (interest + guarantee) with

uncontrolled loan transactions

� Comparison of fees charged by Banks / financial Institution is

difficult to be considered as CUP

� Analysis of the credit worthiness of the AE should be carried out

� Calculation of fees based on the benefits derived by AE

Captive Service Provider



� Low margins maintained in view of lower risk profile

� Unavailability of comparable data for captive service providers

� Comparables selected by the taxpayers and TP authorities are

entrepreneurs assuming significant risks

� Inadequate guidance on working capital and risk adjustments Ad-hoc

filters applied by the TP authorities for selecting high margin

comparables

� TP Audit - AY 2004-05 - Various Indian affiliates of US MNCs engaged in

IT services were subject to adverse TP adjustments

� TP Authorities determined mark-up on costs in the range of 24-30% as

ALP

� Some US MNCs invoked Mutual Agreement Procedure (‘MAP’) under

Article 27 of India- US Tax Treaty.

� Pursuant to ongoing discussions, Competent Authorities of India and US

have proposed a resolution based on a mark-up of 18% on costs for

software and 24% for ITeS.



� Justification of cost benefit analysis

� Lack of supporting documentation to substantiate cost

allocation, actual receipt of services, etc.

� Confidentiality issues within the group

� Inadequate comparable data

� Lack of guidance on Cost Contribution Arrangements

Management Fees, Cost allocation / Contribution



� Use of captioned year data preferred over multiple year data

� Re-run of comparable companies

� Interest on delayed realization from debtor AEs

� Ad-hoc aggregation / segregation of transactions

� Cherry picking of comparables

� Rejection of loss making comparables

� Ad-hoc risk adjustments in certain cases to account for varying risk

profiles

� High risk for low margin and loss making companies

� Foreign comparables challenged and local comparables preferred

� Use of secrete comparable

� Discretionary use of OECD guidelines

Other Important TP Audit Issues

Recent Important Rulings Recent Important Rulings



Maruti Suzuki India Ltd. Vs. Addl. CIT (Delhi)

� Facts of the Case

� Maruti Suzuki India Ltd. (“Assessee”) is a Joint Venture company of Suzuki Motor

Corp. (“Suzuki”) [54.20% share holding]

� Assessee is engaged in the business of manufacture and sale of automobiles and

trading in spares and components.

� Assessee entered into a license agreement with Suzuki in 1992.

� The salient features of the said agreement are:

• Suzuki to provide all technical information and know-how for manufacture,

sale and after-sales service

• Responsibility of Assessee to develop and promote sales of vehicles / spares

• Exclusive right granted by Suzuki to use the licensed information and licensed

trademark “Suzuki”

• All products, parts, containers, packages etc, to bear the trademark “MARUTI

SUZUKI”

� Before entering into said agreement Assessee were using Brand “MARUTI”

� Assessee started to use brand “Maruti Suzuki” on rear side of the Vehicles

manufactured and sold by it in India.



233 CTR 105 – HC Delhi , 328 ITR 210



� Logo on the front side of the vehicle is replaced from “M” to “S” during the year

under consideration (A.Y. 2005-06)

� Suzuki charged substantial amount of royalty from Maruti for using the brand

� Maruti has incurred advertisement expenditure of ` 4,092 Crores

� Order of TPO

� TPO considering CPM as the Most Appropriate method calculated the Brand Value of

“Maruti” to be at Rs. 4,420 Crores after adding 8% margin over cost. He Asked to

show cause as to why this is not to be considered as deemed transfer of Brand and

accordingly adjustment should be made.

� Assessee replied the show cause notice and also filed writ

� “Suzuki” was a weaker brand in India as compared to “Maruti” which was a super

brand hence the earlier brand is piggybacked on the latter.

� No compensation for brand creation and advertisements by Suzuki

• 50% of Royalty paid as no compensation received for trademark piggybacked

on the trademark of Maruti (` 99.3 Crores)

• Non-routine advertisement expenditure amounting to ` 107.22 crores

• Total adjustment of ` 206.52 crores



233 CTR 105 – HC Delhi , 328 ITR 210


� Order of HC

� HC remanded the matter to TPO for fresh adjudication while doing so HC also gave

certain direction / guidelines to be followed as under:

• No obligation on Suzuki to pay if the use of logo is at the discretion of the Maruti.

If Maruit is mandatorily required to use the foreign trademark / logo, appropriate

payment should be made by Suzuki for the benefit it derives in form of marketing

intangibles

• The ALP has to be determined taking into account all the rights and obligations of

the parties under the international transaction

• Suitable adjustments to be made considering the individual profiles of the

entities and other facts and circumstances of the case

• Maruti to be compensated only if the promotional expenses incurred by Maruti

are more than what a comparable independent domestic entity would have

incurred, the use of foreign trademark / logo is mandatory and the benefit to

Suzuki is not merely incidental.

• Appropriate comparables to be identified and suitable comparability adjustments

to be made

• If Maruti obtained any concession from Suzuki to offset the extra expenditure

incurred, this would not automatically entail a payment by Suzuki.



233 CTR 105 – HC Delhi , 328 ITR 210


� Order of SC (2010-TII-01-SC-LB-TP)

� Before the case shall be decided afresh by the TPO, Assessee filed

Appeal to Apex Court and claimed that the when the HC has not only

set aside the original show cause notice but it has made certain

observation on the merits of the case and has given directions to the

TPO the matter virtually concludes the matter.

� Apex court held that the TPO, who had already issued fresh show

cause notice in accordance to HC order, shall proceed as per the law

uninfluenced by the observations / directions given by the HC.



233 CTR 105 – HC Delhi , 328 ITR 210

GE Capital Canada (International Jurisprudence)

� Structure of Transaction



USA Canada

GE US

GE Capital

Canada

Third Party

creditor

Payment of

Guarantee

fees

Guarantee

Borrowing through

CP (Canada) and

unsecured

debentures (Europe)

2009 TCC 563 and 2010 FCA 290



� GE US is parent of GE Capital Canada

� Both operate as unregulated financial services entities

� GE US provides unconditional guarantee for Canada’s debt issuance and

starts charging a fee @ 1% of outstanding debt

� Between 1996 and 2000, GE Canada paid a ‘guarantee fee’ to GE USA for

the provision of an explicit guarantee relating to commercial paper and

unsecured debentures issued in the name of GE Canada.

� The guarantee allowed GE Canada to benefit from cheap debt associated

with a ‘AAA’ rating.

� The Canadian tax authorities disallowed the deduction of the payments

totaling approximately $ 136 million on the basis that GE Canada could have

raised the funds on the same terms and conditions simply by virtue of its

association with the GE Group (‘Implicit support’).



2009 TCC 563 and 2010 FCA 290


� Question before Canadian Tax Courts

Q1: Whether GE Capital should pay a guarantee fee to GE US?

� The judge ruled that GE Capital Canada could not have raised the

necessary funds at the low interest rates it benefitted from without the

explicit guarantee from GE US

� Therefore the guarantee was necessary in order for the subsidiary to

execute on its business plan.

Q2: What is the most appropriate transfer pricing method and methodology?

� The judge concluded that the correct methodology is to use the yield

approach (interest saved) by first applying a two-step:

• estimating the stand-alone or status-quo credit rating and then

notching that credit rating for the affect of the parent-subsidiary

relationship,

• looking at the spread in corporate bond yields between the parents

credit rating of AAA and the estimated credit rating of GE Capital

Canada



2009 TCC 563 and 2010 FCA 290


� Question before Canadian Tax Courts

Q3: Should the parent-subsidiary relationship be considered while assessing the

credit risk?

� The judge concluded that the parent-subsidiary relationship must be

considered in determining the credit rating of the subsidiary, but that it is

not reasonable to expect that implicit support would equalise the

subsidiary’s credit rating to that of its parent.



2009 TCC 563 and 2010 FCA 290

Perot Systems TSI (India) Ltd. Vs DCIT


� Assessee is a part of MNC Group and extended foreign currency loan

(interest free) to two of its AEs in Bermuda and Hungary.

� Loans were extended of USD 1.5 million to Bermuda company and 4.6

million to Hungary Company

� TPO determined the ALP of interest considering LIBOR of 2001-02 for USD

being 2.39% and added average basis point charged by 5 companies

selected by TPO being 1.64%. Therefore the Arm’s Length interest

determined at LIBOR + 1.64% applying CUP.

� CIT(A) upheld the view of TPO

� Argument of the Assessee

� Notional income cannot be charged to tax only real income can be taxed

� The Loans are meant to earn dividends and therefore it is quasi capital

� The AEs were in start-up phase no one would have lent money

� Claimed variation of + / - 5%



130 TTJ 685 – ITAT Delhi

Perot Systems TSI (India) Ltd. Vs DCIT

� Held by ITAT

� The concept of taxing only real income as laid by Apex court cannot to come

to the rescue of the assessee as the said law is not applied to Chapter – X of

IT Act.

� This is not the case of ordinary business transactions and therefore notional

interest shall be charged to tax

� There is no feature in the agreement to prove that the loans were quasi

capital in nature

� The contention of the assessee for not considering the interest on interest

free loans as international transaction is rejected.

� One of the AE is in tax heaven and not charging interest on loans from such

AE is classic case of violation of TP norms

� RBI’s Approval can not be the factor for determining ALP

� 5% variation cannot be allowed as there are only one ALP



130 TTJ 685 – ITAT Delhi

Key Recent Rulings



Case Synopsis

VVF Ltd Vs DCIT

[ITAT Mumbai]

[1 TTR 326]

(Interest Free Loans)

Facts

• The taxpayer advanced interest free loans to its AEs out of its own funds and

determined the ALP as Nil

• The TPO made an upward adjustment by adopting 14% p.a. (rate charged by

Citibank on cash credit) paid by taxpayer as arm’s length interest

Taxpayer’s Contentions

• Loan was granted to AEs out of the interest free funds and since the taxpayer

had sufficient interest free funds it was justified in not charging interest on the

loans given to the AEs

• Real income concept advocated

• On a without prejudice basis, the taxpayer submitted that the TPO in

subsequent assessment years had computed the arm’s length price of the

international transaction of interest free loan at 4.5 percent per annum

• The taxpayer submitted a letter from bank as external CUP

Tribunal Decision / Observations

• Cost of funds is not relevant for determining CUP

• Need to see comparable transactions – internal or external

• CUP compares the price of an international transaction with that of

comparable uncontrolled transaction

• Comparable transaction should be a forex loan

• ITAT rejected the application of CUP by the TPO (rate on cash credit)

• VVF Ltd. had availed foreign currency loan from ICICI

• Using the interest rate charged thereof, confirmed the addition for interest

Key Recent Rulings



Case Synopsis

Nimbus

Communication

Vs. Asst. CIT

[132 TTJ 351]

Interest on

outstanding

amount of AE

Facts

• Taxpayer had receivables outstanding from AEs for > 180 days

• TPO attributed interest on extended credit and made

adjustment

• For adjustment TPO used rate of interest charged for inter-

company loan


• Taxpayer has not charged interest on delayed payments from

third parties

• Taxpayer has not paid interest on delayed payments to its

creditors

• TPO has not followed any of the methods in making

adjustment

• Loans and trade credit are different and not comparable

• ITAT deleted adjustment on merits and law

Key Recent Rulings



Case Synopsis

DCIT Vs. Jindal

Dyechem Industries

Pvt. Ltd.

[ITAT Delhi]

[ITA NO.

2877/DEL/2009]

Interest free Loan

Facts

• Assessee has provided interest free loan to its AE a wholly owned

subsidiary (WOS).

• Some advances given for purchase of bullion remained outstanding

since long.

• AO invoked provisions of the Sec – 92

• Assessee objected and claimed that case must be referred to TPO

• Notional interest should not be charged to tax since it receives

regular dividend and pays tax

• AO determined ALP considering LIBOR + 1.25%

• CIT (A) agreed with the Assessee and deleted the addition


• AO is not mandatorily required to refer all the cases to TPO

• Set aside to CIT(A) for deciding issue afresh

Key Recent Rulings



Case Synopsis

Logix Micro Systems

Ltd.

ITAT Bangaluru

[42 SOT 525]

[ITA No.423

/Bang/2009]

Interest on

outstanding amount

of AE

Facts

• Assessee is engaged in software consultancy and development

• It provided services to its AEs.

• Other international transactions: purchase of software and capital

goods from AEs

• Applied TNMM and determined ALP

• TPO accepted the TNMM as MAM and all transactions to be at Arms;

Length

• However TPO found that at the last day of FY total outstanding

payment from AE was ` 7.73 crores out which ` 5.53 crores was

outstanding for more than 6 months

• TPO charged notional interest at PLR of 10.25% on ` 5.53 crores

• CIT(A) agree with TPO that such outstanding partook character of

loan however allowed relief by applying rate of interest at LIBOR /

US-FED instead PLR


• AO is not mandatorily required to refer all the cases to TPO

• Set aside to CIT(A) for deciding issue afresh

Key Recent Rulings



Case Synopsis

Logix Micro Systems

Ltd.

ITAT Bangaluru

[42 SOT 525]

[ITA No.423

/Bang/2009]

Interest on

outstanding amount

of AE


• The ALP of such outstanding amount should not calculated

considering the same as loan but it should be determined

considering the factor that if the fund were brought back by Assessee

within reasonable time it would have earned income on the said

funds. [opportunity cost]

• The decision of CIT(A) for considering LIBOR or US-FED rate is

overruled and held that the funds were to be brought in India and

income lost due to non-remittance was to be generated in India

therefore application of US rates is not logical.

• Further, ITAT also rejected the rate of PLR as ALP of blocked funds

should be determined on the basis of the deposit rate and not at the

lending rate.

• In view of above ITAT held that the Arm’s Length interest on blocked

funds amounting to ` 5.53 crores should calculated at the rate of 5%

instead of 10.25%

Key Recent Rulings



Case Synopsis

Amadeus India Pvt.

Ltd. Vs. ACIT

ITAT Delhi

[ITA No.

5203/Del/2010]

Jurisdiction of TPO

Facts

� Assessee is JV between Bhatia family (95% equity) and German Travel

Services (5% equity)

� Provides data process and related services to AEs and it is responsible

for allowing access to subscribers to Amadeus products in the

Territories of India, Bangladesh and Nepal

� Applied TNMM for all the transactions with PLI OP/TC being 43.46%

against the comparable 8.02%

� TPO accepted the ALP of all the transactions reported by the

Assessee. However, he found that the Assessee has incurred

abnormal AMP expenditure in respect of AEs Brand being 40.87% of

sales

� TPO determined AL expenditure of 12.16% of sales being average

AMP expenses of three companies selected by him

� The TPO made upward adjustment to the income of ` 32.93 crores

being 10% mark-up on such expenditure

� Assessee questioned the jurisdiction of TPO as said transaction was

not referred by the AO

Key Recent Rulings



Case Synopsis

Amadeus India Pvt.

Ltd. Vs. ACIT

ITAT Delhi

[ITA No.

5203/Del/2010]

Jurisdiction of TPO


� Provisions of section – 92CA(1) is very clear that the TPO has to

determine ALP of the Transactions referred by AO.\

� The said interpretation is supported by the CBDT Instruction no.

3/2003 wherein role of TPO is explained

� Suo moto, he cannot take cognizance of any international transaction

for suggesting adjustment in arm's length price.

� Additions / Adjustments made by TPO and AO is sought to be

deleted.

Key Recent Rulings



Case Synopsis

CA Computer

Associated Pvt. Ltd.

Vs. DCIT

Mumbai ITAT

[37 SOT 306]

[ITA No. 5420 AND

5421/Mum/2006]

[2010-TII-05-ITAT-

MUM-TP]

[Bad Debt cannot be

the factor for ALP]

� Assessee is a 100% subsidiary of a USA-based software company -

engaged in business of licensing infrastructure software products of

the parent company - also sets up Technical Support Centre to provide

support services to end users on behalf of the parent company - also

develops customized software .

� Assessee has filed loss return

� TPO reduces the quantum of royalty payment on the ground that

when some of sales did not fructity for various reasons, and the same

were written off by the assessee in the same financial year, there is no

question of paying royalty on such sales merely on the basis of raising

invoices and has made adjustment accordingly.

� The Jurisdiction of TPO was questioned. Further, it was argued that

the TPO has not selected any method for determining the ALP as

prescribed in 92C.

� Hon’ble ITAT concluded that under the Indian Transfer Pricing

Regulation bad debts written off cannot be factor to determine the

ALP. Further, the TPO has exceeded his limitation by following the

method which is not authorized under the Act or Rules. Accordingly

the AO was directed to accept the ALP of Royalty as determined by

the Assessee.

Key Recent Rulings



Case Synopsis

ACIT vs. Dufon

Laboratories

Mumbai ITAT

[39 SOT 50]

[IT Appeal No. 1399

(Mum.) of 2009]

[2010-TII-26-ITAT-

MUM-TP]

[Various

Adjustments to PLI]

Turnover or quantity difference:

� The sale to Non-AE is of 1150 Kgs only, whereas there is a sale to the

magnitude of 62,000 Kgs. to the AE which will have a bearing on the

prices. Volume sold is a significant factor in fixing the price.

Geographical difference:

� In the case of Ranbaxy Laboratories Ltd. v. Asstt. CIT it has been held

that it could have been appreciated if a particular entity in a particular

country was sought to be compared with some similar entity in that

very country as geographical situations in several ways influence the

transfer pricing.

Profile of Customer:

� The transaction with high profile clients such as AKZO Nobel or Isola is

different when compared to small sales to small players in South East

Asian business.

Survival of the Assessee:

� In order to capture and maximize its profits of the big and flourishing

market of USA and Europe, the Assessee has to depend on its AE only

Key Recent Rulings



Case Synopsis

Global Vantedge Pvt.

Ltd. Vs. DCIT –

Delhi ITAT

[1 TTR 326]

[37 SOT 1]

(Tested Party)

(Revenue Sharing

Agreements)

(Adjustment to PLI)

(Application of

TNMM)

(Comparability)

� Structure Bermuda – Mauritius – India

� Assessee is engaged in rendering IT enabled services.

� Enters into an revenue sharing agreement for providing services with one

of the fellow subsidiary in USA.

� US based company contracting with clients in USA to provide services of

debt collection and telemarketing services. Due to lack of enough

infrastructure for executing the work, it diverts the work to the Assessee.

� Assessee received 90.6% of the total revenue earned by USA Based AE

whereas only 18% of total revenue earned by the Assesssee from services

rendered to Independent clients. Assessee benchmarked the International

Transaction considering AE as the Tested Party.

� TPO concluded that the Assesssee itself should be considered as tested

party and considering the comparables made adjustment of Rs.14.70

crores against the total transaction of Rs. 8.32 crores.

� CIT (A) Confirmed the issue of Tested Party in favor of TPO. However held

that under revenue sharing total adjustment cannot exceed the amount of

total revenue earned by the Assessee and its AE.

� FAR analysis should be given importance while determining ALP.

� Transaction of Different nature cannot be aggregated for the purpose of

application of TNMM.

� Adjustment of 33.33% to the profitability has been allowed on account of

1/3rd idle capacity

Key Recent Rulings



Case Synopsis

Global Vantedge Pvt.

Ltd. Vs. DCIT –

Delhi ITAT

[1 TTR 326]

[37 SOT 1]

(Tested Party)

(Revenue Sharing

Agreements)

(Adjustment to PLI)

(Application of

TNMM)

(Comparability)

(5% Variance)

� CIT (A) calculated ALP at Rs. 11.38 Crores. In view that the ALP cannot

exceed total revenue it has been restricted to Rs. 9.16 Crores. CIT(A) did

not allow 5% adjustment as difference was exceeding 5% of ALP.

� Assessee and Department both filed appeal before ITAT

� ITAT held that neither assessee nor department had been able to point

out any basis or material or criteria to controvert the findings of CIT(A)

and hence the order of the CIT(A) is upheld.

Key Recent Rulings



Case Synopsis

CIT Vs. Glaxo

Smithkline Asia (P.)

Ltd.

[Supreme Court]

[195 TAXMAN 35]

[2010-TII-02-SC-LB-

TP]

� The Apex Court in deciding the Special Leave Appeal observed and

opined that that the transfer pricing provisions should also be

extended to domestic related party transactions and laid down some

principles as under:

� No interference if exercise is revenue neutral

� As per Apex Court, under invoicing of sales and over invoicing of

purchase would be revenue neutral under domestic transaction

unless:

� If one party is loss making and other is profit making

� If there are difference in rates charged between two different

related party on account of different status, area based incentives,

nature of activity etc.

� Apex court , further, opined that though it normally does not make

recommendations or suggestions, but in order to reduce litigation in

complicated matters, the question of extending Transfer Pricing

Regulations to domestic transactions require expeditious

consideration by Ministry of Finance and CBDT

Key Recent Rulings



Case Synopsis

Intel Asia Electronics

Inc, India Branch

Office Vs. ADIT

[Bangalore ITAT]

[ITA No.

131/Bang/2010]

[2011-TII-14-ITAT-

BANG-TP]

[Transfer of Assets]

Facts

� The assessee is a foreign company having a branch office in India.

� The Intel Technologies India Pvt. Ltd. is the AE of the Assessee

� Primarily engaged in sales and market support services

� Assessee decided to close down the office in India and transfer all its

assets and liabilities to its AE as going concern.

� The Consideration was determined as difference of value of assets

and liabilities in the books of the Assessee.

� The Value of assets was determined in accordance to the certificate of

Chartered Engineer and Registered Valuer

� TPO disregarded the valuation certificate on the ground that the

valuer has charged depreciation arbitrarily and applied net book value

method for determining ALP of transfer of PE business

� CIT(A) upheld the order by TPO and AO


� Rejection of Valuation report is upheld – Assets should be valued

using IT depreciation rates.

� Therefore the matter is set aside to the file of AO with direction to

determined the ALP using IT rates of depreciation.

Other Recent Rulings



Issues Cases

Dispute

Resolution Panel

JCB India Ltd

GAP International Sourcing India Pvt. Ltd. (2010-TII-59-ITAT-DEL-TP)

AIA Engineering Ltd. Vs. DRP (2010-TII-02-HC-AHM-TP)

Vodafone Essar Ltd. Vs DRP (Delhi HC) (2010-TII-22-HC-INTL)

Pankaj Extrusion Ltd. Vs ADIT (Guj. HC) (2010-TII-03-HC-AHM-TP)

Aircon International (India) Pvt. Ltd. Vs. DCIT (2011-TII-25-ITAT-DEL-TP)

Actis Advisers Pvt. Ltd. Vs. DCIT (2011-TII-05-DEL-TP)

Atotech India Ltd. Vs. ACIT (2011-TII-10-ITAT-DEL-TP)

Comparables Adobe Systems India Pvt. Ltd. Vs ACIT (2011-TII-13-ITAT-DEL-TP)

Bechtel India Pvt. Ltd. Vs. DCIT (2011-TII-07-ITAT-DEL-TP)

Intervet India Pvt. Ltd. Vs. ACIT (2010-TII-12-ITAT-MUM-TP)

Vedaris Technologies (P) Ltd. Vs. ACIT (2010-TII-10-ITAT-DEL-TP)

ACIT Vs. Toshiba India Pvt. Ltd. (2010-TII-14-ITAT-DEL-TP)

ACIT Vs. Cheminova India Ltd. (2010-TII-19-ITAT-MUM-TP)

Selection of MAM Star Diamond Group Vs. Dy. DIT (2011-TII-20-ITAT-MUM-TP)

Clear Plus India Pvt. Ltd. Vs. DCIT (2011-TII-23-ITAT-DEL-TP)

Monsanto Holdings Pvt. Ltd. Vs. DCIT (2011-TII-11-ITAT-MUM-TP)

ACIT Vs. Twinkle Diamond (2010-TII-09-ITAT-MUM-TP)

DCIT Vs. 3 Global Services Pvt. Ltd. (2010-TII-15-ITAT-MUM-TP)

Serdia Pharmaceuticals (India) Pvt. Ltd. Vs. ACIT (2011-TII-02-ITAT-MUM)

Other Recent Rulings



Issues Cases

Penalty J J Exporters Ltd. Vs. DCIT (2011-TII-08-ITAT-KOL-TP) – Delay in filing

ACIT Vs. Firmenich Aromatic (India) Pvt. Ltd. (2010-TII-17-ITAT-MUM-TP)

– 271(1)(c)

Open Technologies India Pvt. Ltd. Vs. DCIT (2010-TII-43-ITAT-DEL-TP) –

Non filing of 3CEB

ACIT Vs. Foster Wheeler India Pvt. Ltd. (2010-TII-56-ITAT-MAD-TP)

Jurisdiction of AO Ericsson AB Vs Addl. DIT (Delhi HC) (2010-TII-02-HC-TP)

Rejection of TP

Report

DCIT Vs. Indo American Jewelry Ltd (2010-TII-24-ITAT-MUM-TP)

Star Diamon Group Vs. DCIT (2011-TII-20-ITAT-MUM-TP)

Royalty Nestle India Ltd. Vs. DCIT (2007-TII-04-ITAT-DEL-TP) [111 TTJ 498]

ACIT Vs. Sona Okegawa Precision Forging Ltd. (2010-TII-41-ITAT-DEL-TP)

Loss making

comparable

ACIT Vs. Wockhardt Ltd. (2010-TII-46-ITAT-MUM-TP)

Quark Systems Pvt. Ltd. Vs. DCIT (2010-TII-02-ITAT-CHD-SB-TP)

Proposed Changes in Tax Law Proposed Changes in Tax Law



Proposed Changes in Finance Bill, 2011

� Determination of Arm’s Length Price

– Concept of +/- 5% Variance

� Additional powers to TPOs

� Transaction with person located in

notified territory

� Power to call information from

foreign competent authority

� Other important changes relating to

NR




� Determination of Arm’s Length Price – +/- 5% Variance

� Proviso to section – 92C(2)

� ALP determined is within the range of +/- 5% of

International transactions, is to be considered to be at

ALP

� It is argued and debated that the static cushion of 5% for

all type of industry segments and nature of transactions .

� The Finance Bill, 2011 proposes to amend the proviso for

withdrawing static cushion of 5% and to allow Central

Govt. to notify industry specific and transaction specific

variance.

� Step forward for implication of Safe Harbour




� Additional Powers to TPO

� There is dispute in respect of power of TPO is restricted

to transactions referred to him by AO

� In the case of Amadeus India Pvt. Ltd. , TPO determined

ALP of a transaction not mentioned in 3CEB and nor

referred by the AO

� ITAT held that the such Action of TPO is ultra vires

� Finance Bill, 2011 proposes to introduce new provision

under section 92CA(2A) to empower the TPO to

determine the ALP of such transactions.

� Further, powers of TPO is proposed to be enhanced by

amending Sec – 92CA(7) for conducting survey u/s 133A




� Transaction with person in notified territory

(proposed new section – 94A)

� New tool in “Tool Box” or a Deadly Weapon

� Transaction with person located in Notified territory

would be subjected to transfer pricing provisions

� Person located means: resident, Place of Business, or PE

� Such transactions shall not be allowed the accepted

variation band of ALP

� 30% TDS if assessee fails to provide required information

� In case amount received or credited to the account of

assessee the source of such person to be provided

� The provisions proposed to be applied from 1-06-2011




� Other important changes

� The last date for Filing of Return where TP provisions are

applicable is proposed to be extended to 30th November

from the A.Y. 2011-12

� The Liaison office are now required to file a Statement of

Activity in prescribed form within 60 days from the end

of FY.

� Reduced rate (15%) of tax on Dividends received from

foreign subsidiary (provision only for A.Y. 2012-13)

� The time taken for obtaining information (under DTAA or

EIA) from foreign tax authority shall be excluded for final

date of passing order u/s 153(2) (overall limit is 6

months) CA. Prashant N Kotecha


Other Important Topics

� Advance Pricing Agreements

� OECD defines APA as:

“an arrangement that determines, in advance of controlled transactions,

an appropriate set of criteria for the determination of the transfer

pricing for those transactions over a fixed period of time”.

� Objective to provide certainty to taxpayers with respect to their tax liability

relating to international transactions with associated enterprises

� APAs can be applied for a variety of transactions, e.g. dealings in goods/

services, financing arrangements, transfer and use of tangible / intangible

assets, etc. APAs are a voluntary process as the taxpayer decides what

transactions to address

� Types of APA:

� Unilateral APA

� Bilateral APA




� Advance Pricing Agreements

� Direct Taxes Code Bill 2010 proposes to introduce APA

� The CBDT with the approval of the Central Government may enter into an

agreement with the tax payer, specifying the manner in which the arm's

length price is to be determined in relation to an international transaction.

� The said agreement will be valid for a maximum period of five consecutive

financial years unless there is a change in law or facts.

� The agreement will be binding on the tax payer and the CIT and the income

tax authorities below him.




� Mutual Agreement Procedure (in respect of TP) � TP Adjustments may result into economic double taxation

� In view to avoid double taxation the enterprise of the

contracting state may initiate MAP for allowing corresponding

adjustment to the income if TP adjustments made in the case

of enterprise of the other contracting state.

� The right to initiate MAP has been given under the Article – 9

/ 10 of DTAA with many countries

� Mostly a procedure of consultation not litigation

� Application can be made as per Rule 44G in prescribed Form

34F

� Competent Authority of both the Countries would resolve the

issue

� Recently a MAP has been decided in respect of Arm’s Length

Margin to be kept by Captive service provider under the DTAA

between India and USA




� Controlled Foreign Company (“CFC”) � Provisions in respect of Controlled Foreign Company proposed to be

introduced by DTC Bill 2011.

� The Foreign company shall be regarded CFC if • It is a resident of a territory with lower rate of taxation (i.e. where taxes paid

are less than 50 percent of taxes on such profits as computed under the DTC),

and

• Its shares are not listed on any stock exchange recognized by such Territory, and

• It is, individually or collectively, controlled by persons resident in India (through

capital, voting power, income, assets, dominant influence, decisive influence,

etc.), and

• It is not engaged in active trade or business, and

• It has specified income exceeding ` 25 Lacs � The income attributable to CFC shall be included in the income of the

person resident in India

� The resident taxpayer will have to furnish details of investments and

interest in entities outside India in the prescribed form and manner

� The amount received from a CFC as dividend in a subsequent year will be

reduced from the total income to the extent it has been taxed as CFC

income in any preceding previous year

� Applicable to taxpayer irrespective of DTAA



Mindset of IRA

Extracts from FM’s inaugural address at the International Seminar on Transfer

Pricing organized by CBDT and OECD (17 – 19 February 2010)

“The transfer pricing regulations have come of age in India – both in terms of quality

of audits as well as the revenue generated for the Government. Till date, the

Directorate of Transfer Pricing has made an adjustment of Rs. 23,000 crore (approx.

US $ 5000 million), which is a great achievement in a small period of time. For this,

I appreciate the Income Tax Department.”

“I am very happy to learn that CBDT is making all efforts to improve technical skill of

the manpower posted in Directorates of Transfer Pricing. I am sure that CBDT by

increasing its dedicated transfer pricing resources and by improving their

specialists capabilities will be able to meet emerging challenges in administration

of transfer pricing regulation and would augment government’s effort to mobilize

more revenue for the development work.”

Views of DG International Tax, as reported in TP Week issue dated 13 April 2010

“India’s director-general of international tax and transfer pricing has said thin

capitalization, advance pricing agreements and safe harbour provisions are his three

priorities for the coming year.”



Defense Mechanism

� Robust documentation in respect of ALP analysis for each of international

transactions. Have precise FAR analysis separate for each international transaction

� If transaction in respect of Intangibles:

� If recurring payments (royalties)

• Documents for Technology received

• Cost of technology by AE

• Latest valuation of intangibles

• Status of Patent and Trademark rights held by AE

� If outright purchase

• Robust valuation reports

• Strong base for valuation

• Cost – benefit analysis

• Background documents

� Detailed comparative analysis and proper adjustment for differences

� Detailed document if high value used machineries procure from AE

� Drafting inter-company agreement or long term transfer pricing group policies

with utmost care CA. Prashant N Kotecha


Key Takeaway

TP is an ART and not a precise SCIENCE

Application of concepts requires flexibility and

judgment

TP is CONSULTING i.e. a PROCESS and not a PRODUCT

The Revenue will never understand the business as

well as you do BUT if you fail to explain your business

and pricing in easy “language”, you will encounter

ongoing expensive difficulties.



Contact Details

Prashant N. Kotecha

Assistant Manager

K. C. Mehta & Co.

Mob: 98251 53981

Mail: [email protected]



CA. Prashant N Kotecha Study Circle -

Baroda Branch of WIRC 63

tpr.pdf

Documents

india transfer pricing

contents transfer pricing

respect of transfer

far analysis assists

maintenance of documentation

step approach selection

alm cost

appropriate method mam