1. Transfer Pricing

2. Transfer Pricing S-61 Shivendra Kant Tewari Delhi Police S-17
Chandrakant Chellani
Indian Air Force
S-71
Vivek Dwivedi
Marg Limited
S-52
Ritesh Arora
Bharti Airtel
S-25
Kapil Juneja
Ciena India
N-47
R.K Mahapatra
Skyline Business College
N-4
Amit Jain
Northern Railways
N-22
Indranil Chatterjee
NDPL
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3. Plan Introduction to Transfer Pricing Transfer Pricing Policy
TP Determination Process & Documentation
Indian Perspective
OECD guidelines
Global Perspective
TP Methods
Case Studies – Discussions
Conclusion
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4. Introduction to TP : Definitions
Transfer Pricing is simply the act of pricing of goods and services or intangibles when the same is given for use or consumption to a related party.
OECD defines Transfer Pricing: “Prices at which the Enterprises transfers fiscal goods and intangible property or provides services to Associated Enterprises”.
From the perspective of a Taxing State, there is only a finite amount of global tax to be shared between all Prudential Taxing State.
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5. Reasons for Transfer Pricing
Corporate Tax Differential.
High Customs Duty
Restriction on Profit repatriation
Ownership Restrictions
Fiscal Incentives
Loss of Government revenues
Leads to distortion in BoP
Affects the location of International production and employment.
Affects the FDI
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6. Transfer Pricing: Conflicting Perspectives
Government’s Perspective: Tax erosion
taxable profits of MNEs are not artificially shifted out
True reflection of economic activity undertaken in the country by MNE
MNE’s view: Management tool
a decision with the group objectives in mind
a management tool to manage the value chain
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7. Historical Background
Goes back to 1915 when it was first introduced in UK.
Followed by US in 1917.
In British India, it finds mention in the Income-tax Act, 1922.
In 1960’s USA - more stringent TP legislation Internal Revenue Service begins to audit TP of MNEs.
In 1979 OECD report – stating the guiding principles for states to formulate TP policy
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8. Transfer Price Regulations
International
OECD formulated “Guidelines on transfer pricing”. They serve as generally accepted practices by the tax authorities
India
The Finance Act 2001 introduced the detailed TPR w.e.f. 1st April 2002
The Income Tax Act
Customs Law
Excise Law
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9. OECD Formed as part of Marshal plan after WW-II
30 Member: Developed & Democratic Countries
Provide Statistics, Analysis, Forecast of Socio-Economic situation
Assist Member Nations to:
Formulate Domestic and International Policies
Compare Experiences and Identify Best Practices in economic, social and tax policy
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10. OECD’s Recommendations
Arm’s Length Principle (Article 9 of the OECD Model Tax Convention):
“ Where conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.”
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11. TRANSFER PRICING POLICY
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12. Transfer Pricing Policy
ARM’s Length Standard (ALP):
OECD encouraging nations to adopt the “Arms Length Principle” (ALP)
ALP are those prices that prevail in transactions between two unrelated entities
The Tax Authorities : MNEs to have transactions between related enterprises based on ALP.
Defaulting MNE faces : double taxation / Heavy Penalties & possibility of costly litigation.
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13. ARM’s Length pricing
Arm’s Length Price (ALP) – This is the price that would be charged in uncontrollable transactions, i.e. when parties are unrelated. Two most common methods of doing this are
Checking the price in a similar transaction between two totally different parties and A B vs. CD.
Checking the price in a similar transaction between one of the involved party and one unrelated party. AB vs. AC.
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14. ALP: Some issues
More than one Transfer Price, that are defendable in any transaction.
Transfer pricing band rather than a singular transfer price.
Roadblocks in implementing ALP:
Specialized nature of goods/ services and uniqueness of intangibles
Non availability of comparable transaction between Independent entities
A huge administrative burden on part of tax authorities
Confidentiality issues
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15. Arm's length price:
Shall be determined by one of the methods specified in Section 92C in the manner prescribed in Rules 10A to 10C that have been notified vide S.O. 808 E dated
Specified methods are as follows:
a. Comparable uncontrolled price method;
b Resale price method
c. Cost plus method
d. Profit split method or
e. Transactional net margin method
f. Any other method as may be prescribed by Central Board of direct taxes
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16. Associated Enterprises
In nutshell:
Associated Enterprise in relation to another 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   
Enterprises in which common persons participate directly or indirectly, through one or more intermediaries in their management, control or capital
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17. TRANSFER PRICING DETERMINATION PROCESS AND DOCUMENTATION
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18. TP Determination Process
Mgmt Approach
Neutral / Pro Active
Mgmt Goal of Profit Maximisation
Reqmts of Different Tax Authorities
Transfer Price
Apply Adjustments
Study Transaction :
Tangibles / Intangibles
Economic & Financial Analysis
Fact Finding & Comparability Analysis
Identify Comparable Tx, Study Differences
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19. Documentation Requirement
Information concerning Associated Ent.
Info on Independent Ent performing similar functions
Nature & Terms of Transaction
Economic & Market Conditions
Business relation of Associated Ent
Sales & Operational results of last few Yrs
Info about functions performed
Info about risks assumed
Record of Negotiations
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20. INDIAN PRESPECTIVE
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21. Transfer Pricing and India
It finds mention in the Income-tax Act, 1922.
Section-92 of Income Tax Act, 1961, provided that if the tax authority believes that the transaction between the resident and non resident resulted in less than ordinary profit for the resident due to close connection between the two , it can recompute the income of the resident.
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22. Section 92 of Income Tax 1961 Contd.
This section comprises of two parts.
Part 1: prescribes the contents on which charge arose that is there should be a business carried out between the resident and the non resident and the clause of business was so arranged as to produce non profit or produce less than expected profit
Part 2: imposed the charge empowers the revenue officer to determine the amount of profit which may reasonably be deemed to have been desired from there
The leading case decided by Supreme Court u/s 42 ( 2) of the Act as Mazagaon dock Ltd Vs CITCEPT.
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23. Shortcomings of Section 92
The provision applied to transactions between a resident and a non resident. Isolated transactions would be outside the preview of the section.
The provision is not applicable, when a non resident enter into a transaction with another non resident. Therefore, business transactions between a permanent establishment of a non resident company and a non resident were not covered.
Intangibles and services are not covered.
Applies only when a business is carried on between two closely connected enterprises.
The emphasis is on the ‘profit’ rather than adjustment of prices or income.
The term close connection was not defined and therefore there was arbitrariness in applying the provision.
There are no rules concerning documentation.
Burden of proof is on the Assessing Officer without any documentation in his possession.
Rules 10 and 11, for determining ‘profits’ are not in accordance with the arm’s length principle.
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24. Objective of the amendments:
The increasing participation of multinational groups in economic activities in the country. The profits can be controlled by the Multi national group, by manipulating the prices thereby leading to erosion of tax revenues.
Provide a statutory frame work which can lead to computation of reasonable fare and equitable profits and tax in India.
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25. New Section 92
The Finance Act, 2001 substituted section 92 with a new section and introduced new sections 92A to 92F in the Income-tax Act, relating to computation of income from an international transaction having regard to the arm's length price, meaning of associated enterprise, meaning of information and documents by persons entering into international transactions and definitions of certain expressions occurring in the said section.
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26. Section 92A Meaning of associated enterprise.
(1) Associated enterprise, in relation to another enterprise, means an enterprise-
(a) which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; or
(b) 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 persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise.
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27. Section 92A continued Deeming Provisions.
(2) Two enterprises shall be deemed to be associated enterprises if, at any time during the previous year,-
(a) one enterprise holds, directly or indirectly, shares carrying not less than 26% of the voting power in the other enterprise; or
(b) any person or enterprise holds, directly or indirectly, shares carrying not less than 26% of the voting power in each of such enterprises; or
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28. Section 92A continued
(c) a loan advanced by one enterprise to the other enterprise constitutes not less than 51% of the book value of the total assets of the other enterprise; or (d) one enterprise guarantees not less than 10 % of the total borrowings of the other enterprise; or (e) 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 one enterprise, are appointed by the other enterprise; or
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29. Section 92A continued
(f) more than half of the directors or members of the governing board, or one or more of the executive directors or members of the governing board, of each of the two enterprises are appointed by the same person or persons; or (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, copyrights, trade-marks, licenses, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights; or
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30. Section 92A continued
(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; or (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; or (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; or
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31. Section 92A continued
(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) where one enterprise is a firm, association of persons or body of individuals, the other enterprise holds not less than ten per cent. interest in such firm, association of persons or body of individuals; or
(m) there exists between the two enterprises, any relationship of mutual interest, as may be prescribed.
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32. Section 92B A transaction entered into with an unrelated person:
Meaning of 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 provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises.
A transaction entered into with an unrelated person:
(2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), 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;
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33. Section 92D
Maintenance, keeping of information and document by persons entering into an international transaction.
Rule 10D provides the nature of documents that should be maintained in case of an International Transactions.
General Information.
Specific Information.
Any other relevant Information.
Supporting Information.
Correspondences and Communications.
Documentation Period:8 years from the end of assessment year.
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34. Section 92E Report from Accountant.
Provides that every person who has entered into an international transaction during a previous year shall obtain a report from an accountant. (Rule 10E and form No. 3CEB have been notified in this regard).
Penalties have been provided as a disincentive for non-compliance with procedural requirements
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35. Section 92F
Definitions of certain terms relevant to computation of arm’s length price, etc.
(i) Accountant
(ii) Arm’s length price.
(iii) Enterprise.
(iii a) Permanent establishment.
(iv) Specified date.
(v) Transaction.
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36. Burden of Proof Primary onus is on assessee to establish that:
Arm’s length prices are complied
Method followed is the most appropriate
If tax authority claims that proper method has not been followed then burden of proof shifts
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37. Penalties Associated with TP
In failure to carry out a statutory obligation, an order for imposing penalty is issued which results in quasi-criminal proceedings.
Penalty provisions incorporated in sections 271, 271 AA, 271 BA, 271 G and 273 B of the Income Tax Act w.e.f 1st April, 2002.
Failure to maintain information and document in respect of international transaction - Sec 271AA
Failure to furnish report under sec 92E – Sec 271BA
Failure to furnish information or documents under sec 92D - Sec 271G
There must be deliberateness in not abiding a legal requirement & conclusion should be drawn on facts and specific findings.
Penalty not to be imposed if it is proven that there was reasonable cause for the said failure Section 273B

38. TP Implications of Indirect Taxes
Excise Law
Customs Law
Related Entities
Relative: Direct interests
Relative and Distributor
Inter-Connected undertaking
The concept of related entities is not clearly defined
Valuation Rules
Unrelated Entities:
115% of the cost of manufacture
Related Entities:
If the buyer uses for further production, then same rules apply as in case of unrelated entities
If the buyer resales the goods, the value of goods shall be the normal transaction value at which these are sold by the related person at the time of removal
Transactional Value (similar to CUP method):
In case of ambiguity due to multiple values, lowest value is taken as ALP (vs. the Arithmetic mean as in CUP method)
Deductive Value (similar to RPM)
Computed Value:
ALP = Total Cost of Supplier + Markup
Typically used for export of semi-finished goods and goods manufactured under contract
Residuary Method:
When none of the previous methods suffice

39. OECD
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40. OECD Formed as part of Marshal plan after WW-II
30 Member: Developed & Democratic Countries
Provide Statistics, Analysis, Forecast of Socio-Economic situation
Assist Member Nations to:
Formulate Domestic and International Policies
Compare Experiences and Identify Best Practices in economic, social and tax policy
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41. The OECD Guidelines
Tax administrations should take care to ensure that the administration of a penalty system as applied in such cases is fair and not unduly onerous for taxpayers.
The imposition of a sizable no fault penalty based on the mere existence of an understatement of a certain amount would be unduly harsh when it is attributable to good faith error rather than negligence or an actual intent to avoid tax.

42. The OECD Guidelines
It would not be fair to impose penalties on taxpayers that made a reasonable effort in good faith to set the terms of their transactions with related parties in a manner consistent with arm’s length principle.
It would not be appropriate to impose a transfer-pricing penalty on a taxpayer for failing to consider data to which it did not have access. In the same way it would not be fair to impose penalty for failure to apply transfer-pricing method that would have required data that was not available to the taxpayer.
Among OECD member countries, penalties for tax understatement are frequently calculated as a percentage of understatement ranging from 10% to 200%.

43. International Double taxation
Economic double taxation - multiple taxes are levied on different persons on one and the same income
Legal double taxation - taxes are repeatedly imposed on one and the same person by more than one country on the same income
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44. Dispute resolution Causes of Dispute :
Complex, absence of objective standard, large amounts involved, and failure to narrow the issue.
Interpretation of the OECD model.
Different methods of transfer pricing.
Conflicts in country’s taxation laws and DTAA .
Methods to resolve Dispute :
Appeals
Mutual Agreement Procedure-MAP
Advance Pricing Agreement-APA
Arbitration Process
Safe Harbour Rule
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45. GLOBAL PERSPECTIVE
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46. Basic approach
The arm length principle is the basis principle followed by all countries in determining transfer prices of transactions between related entities of an MNC.
USA: As per Section 482 of Internal revenue code, 1986 – in case of related party transactions the taxable income of US taxpayer must reflect arms length transfer prices.
United Kingdom: The provisions apply to cross border relations between associated enterprises. The rules provide for the adjustment of income if the conditions of the actual transactions depart from arms length standard and created a potential advantage for the purpose of UK taxation.
Canada: parties not dealing at arm’s length are considered as separate entities. The revenue authorities have the power to readjust the amounts reported in non arm’s length cross border transactions if the terms and conditions differ from that of arm’s length.
India: Transfer pricing provisions are incorporated in section 92 & 92F of the act. The law provides that any income arising from or expenses and interest payments related to an international transaction, shall be computed having regard to the arms length price.
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47. Related party/ associated enterprise
US: Section 482 of US regulation allows the revenue department to reallocate income or expenses between parties owned or controlled directly or indirectly by the same interest.
United Kingdom: the regulations regarding connected persons are based on OECD guidelines. The law defines connected persons as persons or enterprise, which in case of individual is his wife or husband, or is a relative, or the wife or husband of a relative. A company is treated as an associated company of the other if one of the two has control of the other, or both are under the control of the same person or persons.
Australia: an overseas entity & a non resident individual are considered as related entities when If overseas entity or the nonresident individual participates directly or indirectly in the management control or the capital.
China: Article 52 of tax regulations define an associated enterprise as an enterprise that has direct or indirect ownership or control over finance , sales etc or direct or indirect ownership or control of both the companies by a third party.
India: Two enterprises would be regarded as associated enterprise if an enterprise participates in the management, control or capital of the other enterprise, either directly, indirectly or through one or more intermediaries.
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48. Control
The tax authorities are primarily concerned with transactions between entities which are under same or common control.
US: The transfer pricing rules operate if 2 or more organizations/ trades/ business are controlled by the same interests indirectly or directly. If more than 50% of the voting shares were held, directly or indirectly, by another company it would generally be regarded as under the control of the second company.
UK: control is defined as the capacity of a person means of shareholding or the possession of voting powers.
India: the concept of special relationship is recognized in the deeming provision of associated enterprise.
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49. Basis for adjustment of price
United Kingdom: adjustment of price is done to the price that that the relevant service would have fetched if the parties had been independent parties acting at arm’s length. Section 770 of the UK IT act can be evoked which deals specifically with the sales or purchase of under value or over value of goods.
USA: regulations provide for adjustment that would have resulted if an uncontrolled taxpayer were dealing with another uncontrolled taxpayer even at arm’s length.
Japan: The law prohibits the deduction of onerous or gratuitous transfer of assets or rendering of services or gratuitous acquisition of assets, and would measure the extent to which a transfer was onerous by comparing the prices paid with the current value.
India: Assessing officer may determines the arm’s length price after adjustment when the price charged or paid in international transaction is not in accordance with provisions of the act or documents relating to transaction has not been maintained by assessed or the information supplied is mollified.
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50. Documentation requirements
Different countries that have explicit rules for specified document requirement include USA, UK, Canada, Australia, Denmark, Sweden, Germany & India.
OECD guidelines also give general rules for documentation.
Documentation would be as far as possible contemporaneous and thus maintained as & when transactions take place.
In India the provision relating to documentation is maintained in section 92D of the act & rule 10D of income tax rules.
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51. Burden of proof Rules differ from country to country
In Belgium, Denmark, Germany, Japan, Sweden, UK – the burden of proof lies with the tax authorities i.e. the tax payer does not have the onus to prove the correctness of the transactions.
In Australia, Brazil, Canada, South Africa the burden of proof lies with the tax payer.
In USA the initial onus is on taxpayer to proof that the prices charged are at arm’s length, once that is proves the onus passes onto the department to prove that the prices are not charged at arms length.
In India – the burden of proof lies with the taxpayer, however the burden shifts to the authority when the initial burden is discharged.
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52. METHODS FOR DETERMINING TRANSFER PRICING
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53. Comparable Uncontrolled Price (CUP)
CUP is price for identical property traded between the two independent parties under the same or similar circumstances. CUP charged for goods or services transferred in a controlled transaction is compared to the price charged in a comparable uncontrolled transaction.
Applicability:.
Provision of services.
Transfer of Intangible or tangible property.
Loans and financial transactions.
Assumptions:
A known comparable uncontrolled price exist for the same goods to or from independent parties.
The differences (if any) between the controlled and uncontrolled transactions would not materially affect the price in the open market.
Accurate adjustments can be made to eliminate the material effects of such differences.

54. Comparable Uncontrolled Price (CUP) contd.
Income Tax Rules – Rule 10B- Ref sub-Section (2) of section 92C
Steps for computing arm’s length price under CUP method :
Identify the price charged or paid for the property transferred or services provided in comparable uncontrolled transaction.;
Adjust such price to account for the difference if any, between the international transaction and the comparable controlled transaction, which could affect the price in the open market;
The adjusted price is taken to be the arm’s length price; The arm’s length price is compared with the price charged in the international transaction;
If there is any variance in international transaction price (ITP) and arm’s length price (ALP) charged then necessary adjustment should be made to rectify the variance.

55. Cost-plus Pricing Costs incurred by a supplier of a product or service
in controlled transaction by adding gross mark-up (Profit) to an
non-arm's length Enterprise. Cost includes:
Direct costs such as raw materials
Indirect costs such as repair and maintenance
Operating expenses such as Selling and Gen. Adim. Exp.
Applicability:.
• Sale of Semi-Finished Products to related parties.
• Long - Term buy & Sell Contract
• Controlled Transaction of Services
• Contract for Specialized Product i.e military equipment.

56. Resale price method
Reduce the price at which it is resold to an independent purchases by an appropriate markup
(ie, an amount that covers the resellers’ costs and profit).
This method is probably applicable to marketing operations.
However, determining an appropriate markup can be
difficult, esp when the reseller adds substantially to the value
of the product.
A Ltd.  B Enterprises(reseller) 
third party

57. Profit split method
Applicability - Transactions where integrated services are provided by more than one enterprise.
How to do - Combined net profit – arising from transactions is split among the enterprises involved on the basis of the functions performed/assets/CE/relative contribution.
PSM is used when transactions are inter-related and is not possible to evaluate separately.
As per Indian Rule - Rule 10B under section 92C of the Income Tax Act, 1961,gives the steps.
LIMITATION - This method has a limitation as to availability of the costs/revenue from the main contractor to ascertain the overall profits, etc.
Market data used for valuing may not be exactly comparable
Combined revenue and cost of the AE is difficult to be measured
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58. Transactional net margin method (TNMM)
TNMM focuses on the arm's length operating profit earned by one of the entities in the transaction.
Here Net Profit Margin (NPM) of a taxpayer is the main object of comparison.
How to Do - NPM that a taxpayer realises from a controlled transaction is compared with net margin earned in comparable uncontrolled transactions. This net margin so compared forms the basis of determining arm’s length price. Pre-interest margin.
Applicability - In the case of transfer of - Semi-finished goods; Distribution of finished products, Transaction involving provision of services.
Criteria - In TNM Method net profit margin is calculated on some appropriate base like costs, sales and assets.
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59. TNNM Return on Assets, Return on Sales
Berry Ratio - Gross Profit to Operating Expenses
Ratio of NPBT to Shareholder’s Fund
Ratio of NPBT or Sales to Number of Employees
Limitations –
The NM of a tax payer can be influenced by some factors that either do not have an effect, or have a lesser effect, on price or gross margins.
Taxpayer may not have information like profit attributable to uncontrolled transactions while entering in transaction with AE.
Suitable ratios may not be easy to work out.
Difficult to determine an appropriate corresponding adjustment when applying TNNM, particularly when it is not possible to work back to transfer price
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60. Recommended Methods Type of Transaction Possible method
Manufacturing of goods
CUP, C+, Profit split
Sale of goods
CUP, Resale price, Profit split, TNM
Provision of services
CUP, C+, TNM
Financing Products (loans, deposits, guarantees)
CUP, Profit split, TNM
Transfer of intangibles (technology, brand, know –how)
CUP, C+

61. Transfer pricing of intangibles
INTANGIBLE - Refers to any property that derives its value from its intellectual content rather than its physical attributes and includes - patents, inventions, formulae, Processes, Designs, Patterns, Know-how, Trademark, Franchises, Licenses and other similar other property.
As per OECD guidelines, the intangibles may be
Trade Intangibles - Result of research and development activities and include patents, design and know-how
Market Intangibles It includes trademark and trade names, - helps commercial exploitation of product or service.
Application of ALP to intangibles – Following to be considered
Limitation on geographical area
Export restriction on goods produced
Exclusive or non-exclusive on rights transferred
Capital Investment (for example new plant, special machinery
Start-up expanses/development work required in the market
The possibility of the sub licensing i.e. licensee's distribution network
Licensees right to participate in further development of the property by licensor
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62. Transfer pricing of intangibles & cca
INDIAN POSITION FOR INTANGIBLES
Royalty – as per section-9 (1) (vi) of the Income Tax Act,
Fees for technical service - 9 (1) (vii)
Other provisions
TAX TREATIE’S – Provision of double taxation agreement
Provision of Section-92, 92C – Where total income of an AE is determined at ALP and tax is deducted accordingly, the income of the foreign party shall not be re-computed in terms of such ALP
COST CONTRIBUTION ARRANGEMENTS (CCA)
CCA is an arrangement among business enterprises to share the cost and risk of developing, producing or obtaining assets, services or rights.
Legal ownership of the assets produced or developed or vested and other will have effective ownership
Participants being co-owners are not required to pay royalty or any other consideration to any party for their interest
Contribution to the cost by a participants should be in proportion to be benefits expected by the participants from the arrangement.
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63. DISCUSSIONS ON RECENT TRENDS & CASE STUDIES
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64. RECENT TRENDS IN TRANSFER PRICING
A. INDIAN APPROACH - The Indian revenue authorities are seen to be adopting an increasingly aggressive approach on TP-related issues, and a significant brunt of the TP audits has been targeted on captive information technology (IT) companies in India, specifically in the software services and the IT-enabled services/ BPO industry
B. Increased Litigations –
Economic Downturn
Aggressive position by Revenue Authorities
Absence of APAs (advance pricing agreements)
The lack of adequate guidelines on the practical application of TP law 64
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65. RECENT TRENDS IN TRANSFER PRICING
C. TP AUDIT - Factors contributing to the rise in TP audits
Mounting fiscal demands on governments,
compelling need to conserve tax base
constant competitive pressures to structure the business operations efficiently
increased collaboration between revenue authorities
D. TP in times of Recession
Low Return on investments,
Interest rates have been pushed down to spur demand, and
The pricing of goods and services is driven by survival rather than profit 65
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66. RECENT TRENDS IN TRANSFER PRICING
E. Impact of TP on the lure of India as an offshore destination
The emerging issue relating to greater share of allocation by revenue authorities of locational savings (that is, benefits generated by moving functions from a high-cost country to a low-cost country) is being faced by taxpayers in India.
F. MNCs – To increase Business Efficiency
Centralised certain business processes/ functions and sought for cost-sharing arrangement with the affiliates – leading to TP litigations – RA insists on ‘Cost-Benefit Analysis’ – difficult due to benefit from intangibles.
India ‘offshoring’ advantage is typically passed to the end-customer and the intangible being sought to be taxed has diminished over the years, with increasing wage costs, fluctuations in exchange rates and overall inflation. 66
FMS, Delhi University 66

67. RECENT TRENDS IN TRANSFER PRICING
G. CASES
1. CASE – Applicability of TP Provisions on Interest Free Loans advanced to Associated Enterprises
PEROT SYSTEMS TSI vs. DCIT (2005)
GRANT OF AN INTEREST FREE LOAN TO AN ASSOCIATED ENTERPRISES WOULD NOT BE CONSISTENT WITH THE ARMS’ LENGTH PRINCIPLE OF THE TP PROVISIONS AND A NOTIONAL ARM’S LENGTH INTEREST CAN BE IMPUTED ON THE LOAN AND TAXED IN THE HANDS OF THE TAXPAYER UNDER IT ACT, 1961. 67
FMS, Delhi University 67

68. RECENT TRENDS IN TRANSFER PRICING
2. CASE – SHOWING LOSS DUE TO EXTRA- ORDINARY ITEM
DCIT vs. Vertex Customer Services (ITAT Delhi)
The assessee, a call centre, adopted the Transactional Net Margin Method (”TNNM”) and showed an operating profit to operating cost at 10.12% on the basis of comparables. The assessee, however, showed a loss of Rs crores from the international transaction after making adjustment for provision for doubtful debts towards sums due from the parent company.
The TPO rejected the third adjustment on the ground that it being an ordinary item of expenditure did not qualify for adjustment. – falling in the ordinary course of trade.
3. CASE – PENALTY CANNOT BE LEVIED JUST DUE TO DIFFERENCE OF OPINION
Hindustan Steel 83 ITR 26 (SC) and Nath Bros
penalty u/s 271 (1) (c) cannot be imposed where there is merely a difference of opinion and unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation; 68
FMS, Delhi University 68

69. RECENT TRENDS IN TRANSFER PRICING
4. CASE – VARIATION FROM ARM’S LENGTH PRICE
An existing proviso to section 92C(2) of the Income-tax Act mandates that in determining the arm’s length price, the arithmetical mean of the comparable uncontrolled transactions must be considered to be the arm’s length price. The proviso also affords taxpayers an option to adopt a price that varies by not more than 5% of the arithmetical mean, to be the arm’s length price.
In certain recent judicial actions, the Indian tax tribunals have upheld the interpretation by taxpayers that the proviso to section 92C(2) provides a standard deduction of 5%.
With a view to resolving this controversy, it has been proposed that the proviso be amended so that if the variation between the “price of the controlled transaction of the taxpayer” and “the arm’s length price” is not more than 5% (of the controlled transaction of the taxpayer), the former would be deemed to be at arm’s length. 69
FMS, Delhi University 69

70. RECENT TRENDS IN TRANSFER PRICING
H. RECENT TRENDS – REQUIREMENTS
Macro changes are needed in the TP regulations
Provision for APAs,
introduction of a transaction safe-harbour (PROPOSAL – sec.92CB),
Introduction of dispute resolution mechanism
clarification or illustration on the practical implementation of law,
focused set of guidelines on valuing benefits received from intangibles,
clarity on the subject of attribution of profits to permanent establishment,
a suitable method for valuation of imported goods which is acceptable to both customs and TP authorities
recognition of business and commercial realities, and economic substance, to cope with the changing pattern of MNC enterprises across the world 70
FMS, Delhi University 70

71. CONCLUSION
TP is a Management tool in optimizing efficiency and hence profits
TP needs to be used carefully to avoid litigations and penalties
In-tangibility, services, risk bearing are means by which TP can be controlled
Proper Documentation is essential
20-Apr-17
TRANSFER PRICING

72. THANK YOU

73. Backup Slides

74. Transfer pricing of intangibles & cca
COST CONTRIBUTION ARRANGEMENTS (CCA)
As per OECD Guidelines
Expectation of the benefits by each participants should be determined
Contribution by each participants should be determined
It should be seen whether contribution by the tax payer (who is a participants in the arrangement) is proportional to the expected benefit.
If any difference observed in the previous steps then corresponding adjustment be made.
INDIAN PERSPECTIVE
CCA should be in regard to an international transaction
They should be mutual agreement or arrangement
Parties should agree for contribution to cost
Cost should be in connection with benefit or service or facility
Cost shall be determined having regard to arms length principle
TYPES OF CCA
Arrangement for the joint development of intangible property
Arrangement for joint funding ensuring of cost
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