Case Studies on Transfer Pricing Case Studies on Transfer Pricing
Samir Gandhi
February ‘2007
2003/2004
Italy New Zealand Mexico Korea France Czech Republic Spain Australia South Africa USA
China Slovakia Brazil Italy New Zealand Mexico Korea France Czech Republic Spain Australia South Africa USA
Germany Kazakhstan Russia Denmark Belgium Venezuela Argentina Canada UK China Slovakia Brazil Italy New Zealand Mexico Korea France Czech Republic Spain Australia South Africa USA
Thailand Portugal Poland Peru India Netherlands Germany Kazakhstan Russia Denmark Belgium Venezuela Argentina Canada UK China Slovakia Brazil Italy New Zealand Mexico Korea France Czech Republic Spain Australia South Africa USA
Hungary Colombia Malaysia Thailand Portugal Poland Peru India Netherlands Germany Kazakhstan Russia Denmark Belgium Venezuela Argentina Canada UK China Slovakia Brazil Italy New Zealand Mexico Korea France Czech Republic Spain Australia South Africa USA
February ‘2007
Transfer Pricing Officer (TPO)
AO to refer TP cases to TPO – international transactions > INR 5 Crores ( 15 Crores)
Copy of order sent to the AO and tax payer
AO to incorporate TPO’s order in the Assessment Order
Send Notice to tax payer - Hearing / Document Analysis /
No site visits / No interviews
February ‘2007
Director of Income-tax,
Adjustments - INR 1,500 Crores.
TNMM method most commonly used by tax payers.
Reliance on precedents of tax year(s) March 2002 & March 2003.
Tax Board will develop case selection tools – more focused examinations in future years.
February ‘2007
Background
XYZ Inc., a fortune 500 Company is in the business of manufacturing of automobiles
XYZ India is a 100 % subsidiary and provides CAD designing services.
XYZ India is a captive service provider and is compensated on a C + 10 % mark up.
XYZ India has applied the TNNM as the Most Appropriate Method using comparables operating in ITeS industry. –
PLI applied - Operating Margin / Operating Cost
February ‘2007
Rejection of Companies having only domestic transactions
Rejection of Multiple year data
Own set of Comparables provided without any search process (cherry picking)
Proposed mark up of 30% -40%
Position of the Tax Payer
Loss cannot be the sole criteria for rejection (entrepreneurial risk)
TNNM requires functional comparability
Integrated Service Provider to be excluded
Companies having intangibles to be excluded ( unique software, brand name etc)
Adjustment for :
Working Capital
February ‘2007
“One size fits all” approach
Comparables proposed inappropriate (no consideration for intangibles, differences in business models, etc.)
Justifies markup saying “even after paying high markups, cost savings will be substantial”
Adjustment of risk vis-à-vis third party comparables disallowed
Working capital adjustments of 2% allowed in some cases
February ‘2007
Consideration for service rendered by Indian Enterprises.
R & D, Marketing, Technical Services etc.
Composition of Costs.
Denial of “Set–off”.
“Benefit Test” critical.
Determination of allocated amount.
Application of TNMM and Exchange Control Regulations not sufficient.
Substantiation of receipt of know-how including updates.
Evidence of negotiation.
Details of Foreign Enterprise.
Payments for trademark.
Aggregation of Transactions
“ Single entity approach”
Transactionwise analysis preferred.
Material differences – volume, quality, terms of sale, geographical differences etc. disregarded.
Acceptance of TNMM with reluctance.
Product vs. Functional comparability.
Disregarding Loss making companies from Comparables set.
February ‘2007
Enterprise with Losses – “Entrepreneur risk” not acceptable.
Higher Gross Margin, but losses at Net level due to significant marketing expenses.
Resale Price Method Vs. TNMM.
Reimbursement of marketing expenses by Foreign Enterprise.
February ‘2007
Risk Assessment - Selection of Audits.
Safe Harbors eg. Services.
Effective MAP Process and APA.
February ‘2007
10. Everybody does it!
8. My country needs it more than you!
7. It’s part of the game!
6. Thought they wouldn’t notice!
February ‘2007
1. My boss made me do it!
2. It makes good commercial sense!
3. We’ll shift some back here in later years!
4. We already have too much profit over here!
5. It’s really just an accounting adjustment!
February ‘2007