Transfer pricing in india_A snapshot_DNS Advisors

Transfer Pricing in India – A snapshot

Background

Indian Transfer Pricing (‘TP”) regulations were introduced in 2001 with an intent to protect revenue leakage in international transactions with related parties by shifting profits from India to overseas jurisdictions.

The Finance Act, 2012 has further extended the scope of TP provisions to specified domestic transactions.

The amendment is in accordance with the suggestion made by the Supreme Court in case of Glaxo Smithkline Asia (P) Ltd. wherein the intent is to curb tax arbitrage possible in cases where companies tend to shift profits from one tax paying entity to another tax exempt or loss making entity within India.

© DNS Advisors. All rights reserved.

Basic Understanding

Transfer Pricing refers to the pricing of International Transactions between two Associated Enterprises

A price between unrelated parties is known as the Arm’s Length Price (“ALP”)

Due to the special relationship between related parties, the transfer price may be different than the price that would have been agreed between unrelated parties

The provisions relating to TP require that all ‘International Transactions’ with ‘Associated Enterprises’ should be at Arm’s Length Price


Legal Framework

International Transfer Pricing provisions are covered under

Section 92 to 92F in the Indian Income Tax Act, 1961;

Rule 10A to Rule 10E of the Income Tax Rules; and

Sections 271(1)(c), 271 AA, 271 BA and 271 G.

Provisions are not applicable if the application of transfer pricing provisions lead to a

reduction in the income chargeable to tax or

increasing the loss


International Transaction “International transaction” means

a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provisions of services, or lending or borrowing money 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 entered into by an enterprise with a person other than an associated enterprise shall, be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise


Associated Enterprise “Associated Enterprise” means an enterprise Which participates, directly or indirectly, or through one or more

intermediaries, in the management or control or capital of the other enterprise; or

In respect of which one or more persons who participate, directly or

indirectly or through one or more intermediaries, in its management or control or capital, are the same person who participate, directly or indirectly or through one or more intermediaries in the management or control or capital of the other enterprise


Arm’s Length Price (‘ALP’) The arm’s length price in relation to an international transaction shall be

determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the board may prescribe namely: Comparable uncontrolled price method (CUP) Resale price method (RPM) Cost plus method (CPM) Profit split method (PSM) Transactional net margin method (TNMM) Such other method as may be prescribed by the board


For the 1st time, CBDT has introduced the 6th method by way of Notification no. 18/2012, dated May 23, 2012, thereby inserting Rule 10AB. The new method states that “any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all relevant facts”. This Rule is applicable from FY 2011-12 onwards.

Documentation

Taxpayer has to maintain extensive documentation (specified under Rule 10D) incase aggregate value of international transactions exceeds INR 1crore

Rule 10D emphasizes on description of the Group, International Transaction,

Functional Analysis, Risk Analysis, Selection and Application of Most Appropriate Method, Search Process, etc.

The documentation is to be kept and maintained for a prescribed time i.e. 8

years The documentation is to be furnished within 30 (extendable up to 60 ) days of

Revenue’s request


Accountant’s Report Mandatory filing of Accountants Report u/s 92E (in Form 3CEB) irrespective of

value of international transactions

The Accountant’s report should be filed on or before the due date for filing the corporate income tax return, i.e. on or before November 30th every year in respect of the tax year.

The Accountant’s report essentially comments on the following:

Whether the tax payer has maintained the prescribed TP documentation as required by the legislation;

Whether as per the TP documentation the prices of international transactions are at arm’s length; and

Certifies the value of the international transactions as per the books of accounts and as per the TP documentation are “true and correct”.


Penalties Default Penalty

Failure to maintain documents 2% of the transaction value

Failure to report transaction in report from Chartered Accountant * 2% of the transaction value

Maintain or furnish incorrect information or documents *

2% of the transaction value

Failure to furnish documents 2% of the transaction value

Failure to furnish accountants report Rs 100,000

If adjustment is treated as concealment of income

100% to 300% of the tax on adjustment

* Introduced by Finance Act, 2012


Introduced by Finance Act 2012


Basic Understanding

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

loss making or

liable to pay tax at a lower rate and the profits are shifted to such entity

The Finance Bill 2012 has introduced the transfer pricing provisions in respect

of specified domestic transactions as well.

Meaning of Specified Domestic Transactions (‘SDT”) is contained under

section 92BA


Specified Domestic Transactions Scope of transfer pricing has expanded to cover Specified domestic transactions

(“SDT”) between related parties w.e.f. AY 2013-14

SDT means - any expenditure in favour of a person referred to in clause (b) of sub-section (2) of section

40A;

any transaction referred to in section 80A;

any transfer of goods or services referred in S. 80-IA (8);

any business transacted as referred in S. 80-IA(10);

any transaction, referred to in any other section under Chapter VI-A or section 10AA, to

which provisions of sub-section (8) or sub-section (10) of section 80-IA are applicable (Refer

separate slide); or

any other transaction as may be prescribed, © DNS Advisors. All rights reserved.

Provisions SDT will be subject to transfer pricing compliances at par with the norms applicable

to international transactions only where the aggregate of such transactions entered in the previous year exceeds a sum of five crore rupees.

This provision shall not apply if it results in reduction of taxable income/increase in loss

The arm’s length price (ALP) in relation to specified domestic transaction would be determined by any of the methods as prescribed u/s 92 C as applicable in case of International Transactions.


Documentation and Accountants Report

Taxpayers meeting the threshold criteria, have to mandatorily maintain detailed transfer pricing documents for all Specified Domestic Transactions

Taxpayer needs to obtain an Accountant’s Report in form 3CEB from a Chartered Accountant and furnish the same with the Revenue authorities before the due date of filing the tax return, i.e on or before 30th November of the tax year.


Penalties Default Penalty

Failure to maintain documents 2% of the transaction value

Failure to report transaction in report from Chartered Accountant * 2% of the transaction value

Maintain or furnish incorrect information or documents *

2% of the transaction value

Failure to furnish documents 2% of the transaction value

Failure to furnish accountants report Rs 100,000

If adjustment is treated as concealment of income

100% to 300% of the tax on adjustment

* Introduced by Finance Act, 2012


Other Amendments


Definition of International Transaction

The definition of international transaction amended to provide clarity

The amendment would have a retrospective effect & would apply w.e.f AY 2002-03 and later

Tangible property transactions: “the purchase, sale, transfer, lease or use of tangible property including building,

transportation vehicle, machinery, etc, or any other article, product or thing”

Intangible property transactions: “the purchase, sale, transfer, lease or use of intangible property, including the transfer of

ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licenses, franchises, customer list, marketing channel, brand, commercial secret, know-how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature”


Definition of International Transaction

Financial transactions: “capital financing, including any type of long-term or short-term borrowing, lending

or guarantee, etc”

Provision of services: “Provision of market research, market development, scientific research, legal or

accounting service, etc Tangible property transactions”

Business restructuring: “a transaction of business restructuring or reorganization, entered into by an

enterprise with an associated enterprise, irrespective of the fact that it has bearing on the profit, income, losses or assets of such enterprises at the time of the transaction or at any future date”


Arm’s Length Range (“ALP”)

Initial Law

• Income Tax Act provided the taxpayer with the option to adopt a price that may vary from the ALP by an amount not exceeding 5% of the ALP.

Finance Act 2009

• Taxpayer would be within the range if the ALP is within +/- 5% of the transfer price.

Finance Act 2012

• Arm’s length range has been reduced further and would be limited to 3% w.e.f. AY 2013-14 - actual range not yet specified


The CBDT, vide notification no. 31/2012 dated August 17, 2012, has retained the 5% tolerance band for AY 2012-13

Penalty provisions

In addition to existing penalties prescribed for non compliance of TP provisions in respect of international transactions or specified domestic transaction, failing to report a transaction and furnishing incorrect information will attract a penalty of 2% of the value of each such transaction.

This amendment will take effect from 1st July 2012.


About DNS DNS Advisors is a specialized corporate advisory firm promoted by young and dynamic professionals having rich experience in the field of assurance, taxation, financial and Management consultancy. Our team members, while sharing a common vision, belong to diverse technical business and financial background. We deploy specialize and multi disciplinary teams to serve assignments requiring specific skills.


What we offer

In relation to transfer pricing, we offer the following services:

Transfer pricing documentation for AY 2012-13

Transfer pricing benchmarking analysis for AY 2013-14

Preparation and filing of Form 3CEB


Besides these and other traditional services, we at DNS Advisors specializes in following domains:

XBRL Conversion Services

Business Valuations

Deal Structuring and International Taxation

FEMA Compliances for Inbound/Outbound Investments

Business setup services in and outside India including Tax havens

Other Service Offerings


Contact us

DNS Advisors Pvt Ltd Delhi W 123, Greater Kailash Part II New Delhi – 110048 Tel: 011 40535910

Contact Persons Naveen Goyal M +91 99110 95297 E [email protected] Neha Bansal M +91 98109 04228 E [email protected]


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Transfer pricing in india_A snapshot_DNS Advisors

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