Auto Industry trend Transfer Pricing
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Transcript of Auto Industry trend Transfer Pricing
Auto Industry trend – Transfer Pricing
o Background
o Facts of Industry
o Recent development of industry
o Economic downtrend
o Major drivers to economic downtrend
o Transfer Pricing Impact
Background – TP
– Auto Industry
o TP much beyond the
boundaries of Income Tax
laws
o Pricing of Tangible &
Intangible goods not the
only motive of tax savings.
o Other external factors
influences the pricing
o Analysis of the impact
from TP perspective of
industry downtrend.
Facts of Auto Industry
o Chief component of economic growth
o Connects the industrial & cultural framework
o Contributes towards employment, economic growth & rapid
movement
o Contributes to 7.5% of the Indian GDP
o Automobile Mission Plan 2016-2026 projects India amongst the
top 3 manufacturing Centre.
Recent development – Auto Industry
o IOCL & HPCL swapping batteries for EVs this December
o Govt efforts to reduce the consumption of eco-destructive fuels
o Niti Ayog suggestion towards transition of full EVs for 3
wheelers by 2023 & 2 wheelers by 2025.
o MSIL and M&M have sighted confidence to be a global EV hub
Economic Downtrend…..
o Slowdown in the automobile sector is ongoing
o MSIL, HMIL, M&M, Tata Motors & HCIL have experienced downtrend
What is driving
the slowdown?
o Declining GDP growth rate
o Liquidity crunch & skepticism
from lenders
o Regulatory & policy changes
o Changes in consumer behavior
Transfer Pricing Impact
The Transfer pricing impact on the following:
o Royalty Rate
o Tangible Transaction
o Impact on ECB from Associated Enterprise
o Profitability (PLI)
- Capacity Utilization
- Blockage of Inventory
- Profitability analysis from TP perspective
Transfer Pricing Impact
o Royalty Rate
Vendors to the OEM would be the most impacted. Usually such vendors have long term
relationship with the OEM. It is also true that for some of the vendors, the dependency
with few OEM is too highly concentrated, keeping in mind the long-term relationship.
Royalty is based on the percentage of sales In order to benchmark the Royalty Rate, the
company choose either sophisticated database such as “Royalty Stat” or use over
aggregate approach using some profit-based method. In case of transaction-based
approach, it may be difficult to rely on such global database, as there may not be any
significant change in the royalty rates. Also it is not possible for the companies renegotiating the royalty rates for such inverted growth, which is potentially temporary.
Transfer Pricing Impact
o Tangible Transaction
Here, we are only dealing with purchase of goods including raw
materials (may be in SKD / CKD) from its associated enterprises.
These purchases are made in order to supply to their domestic
customers in India. The challenges will be more severe as it would
significantly impact their profitability and it may be very difficult for the
local subsidiary to renegotiate with their group companies.
Transfer Pricing Impact
o Impact on ECB from Associated Enterprise
State Bank of India (SBI) has recently relaxed the credit terms for
automobile dealers in order to help the auto sector tide over stress.
Given this, it may be anticipated that such relaxations are provided to
OEMs in the automobile sector. If this happens, Companies shall
repay the loans from AEs which have relatively stricter credit terms
(credit period, interest rates etc). This may reduce Transfer Pricing
compliance including the arm's length price analysis for the interest
paid to AEs by these companies.
Transfer Pricing Impact
o Profit Level Indicator
Looking at the ongoing slowdown in the automobile industry, one can easily reckon the ineffectual profitability. It will be important to analyze how these incidents will impact the profit level indicator (PLI) of manufacturers and traders from the Transfer Pricing Perspective.
- Capacity Utilization: Taxpayers and revenue authorities resort to making capacity utilization adjustments to moderate the profitability of comparable companies where there exists significant disparity between the capacity utilized by the Assessee and the comparable companies. Where companies like Hyundai and Mahindra and Mahindra have listed no production days, whether capacity utilization adjustment can be made or not will require an intricate analysis. Such adjustment may neutralize the impact on profit margins of the assessee and the comparable companies arising on account of working capital involved and the funds blocked therein.
Transfer Pricing Impact
o Profit Level Indicator….(contd.)
- Blockage of Inventory: Even as production correction brought relief to
manufacturers on account of stockpiles and reduced wholesale dispatches by
manufacturers to dealers/traders reduced the investment blockage, relevance of
working capital and its applicability will differ from entity to entity. Duration of
working capital cycle substantially affects the additional cost incurred by a business
by way of interest on borrowing from the open market.
Transfer Pricing Impact
o Profit Level Indicator….(contd.)
- Profitability Analysis from TP perspective: Whether an Income/expense be
treated as non-operating item in determining the PLI has always been a subject
matter of discourse. To fight the decline in revenues, certain companies have laid
off their employees since they are not operating in full scale. However, this may
have increased the employee benefit expenses in terms of leave encashment, PF,
Gratuity, etc. which wouldn’t have been incurred in normal circumstances. To boost
up the revenues, any Vendors/OEMs/Dealers or their foreign counterparts opts for
the measures like providing high discounts or additional benefits. Such factors
should also be considered appropriately while calculating profit margins from
Transfer Pricing analysis. Additionally there should also be a careful analysis while
selecting the comparable for comparing the profitability of an assessee keeping in
mind the judicial pronouncements supporting the impact of industry slowdown on
the profitability of companies operating in that sector.
Conclusion
Hence, it is very important to have robustness of the Transfer price document and
apply various acceptable economic adjustments possible and well can be
demonstrated. Having close eye on the various industry reports to substantiate the
ground of lower profitability and economic adjustments.
Here above we have provided some of the examples of the adjustments,
depending upon the facts for each of the tested party there are many more industry
adjustments possible.
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