1. INTERNATIONAL AND DOMESTIC TRANSFER PRICING

2. HISTORY  Chapter X of the Income Tax Act, 1961 was amended by the Finance Act, 2001 for introducing the elaborate transfer pricing regime to the tax laws.  The provisions introduced the concepts of: Associated Enterprises. Arm’s Length Pricing [original concepts used, “fair market value” –40 A (2), market value –80 IA (7), “more than ordinary profits” –80 IA (11)]. International Transaction. Uncontrolled Transaction.

3. Meaning of transfer pricing Transfer priceArm’s length price  Associated Enterprises  International Transactions:  Goods  Services  Intangibles  Loans  Resident  Independent Entity  Resident

4. APPLICABILITY International Transaction By virtue of Finance Act, 2012 – Also applicable to Specified Domestic Transactions. Between 2 or more AEs. Deeming Provision of AE.

5. ASSOCIATED ENTERPRISES Management related: Appointment of one or more EDs, >1/2 of the BOD. Control: Wholly dependent know-how etc., 90% or more of raw materials supplied etc. Capital related: 26% or more equity holding. Common control. Loan advanced by one enterprise => 51% of the BV of total assets of the other enterprise. One enterprise guarantees => 10% of the total borrowings of the other enterprise.

6. INTERNATIONAL TRANSACTION "transaction" includes an arrangement, understanding or action in concert,— whether or not such arrangement, understanding or action is formal or in writing; or whether or not such arrangement, understanding or action is intended to be enforceable by legal proceeding. Transaction relates to: ▫Purchase, sale or lease; ▫Provision of services; ▫Lending or borrowing of money; ▫Any other transaction having a bearing on the profits, income, losses or assets of such enterprises; ▫Cost sharing agreements or arrangements.

7. DEEMED INTERNATIONAL TRANSACTION

8. KEY DEFINITIONS Arm’s Length Price: The price which is applied or proposed to be applied in a transaction between persons other than AEs, in uncontrolled conditions. Uncontrolled transaction: Uncontrolled transaction means a transaction between enterprises other than AEs, whether resident or non-resident.

9. MOST APPROPRIATE METHOD The arm's length price in relation to an international transaction [or specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method: (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board.

10. CUP METHOD COMPARABILITY FACTORS: Strong similarity of products and services; Functions; Volume; Contractual terms; Economic conditions; Geography of markets.

11. TYPES OF CUP METHOD

12. CUP METHOD: Examples

13. RESALE PRICE METHOD (RPM) Used in case of purchase of goods or services from related parties for resale to unrelated parties without substantial value addition. Price reduced by normal gross margin earned by unrelated party for same or similar products or services. Need for similarity of functions performed and risks undertaken. Gross margin used as the PLI. Generally used for marketing operations of finished products, where distributor does not perform significant value addition to the product.

14. RPM : EXAMPLES Internal RPM Taxpayer in India imports shirts from AEs in USA and also from non-AE's for further sales in India. For F.Y. 2010-11 the details of imports made by the taxpayer are as follows: Sale price to third party customers in India is at ` 250 per shirt. If RPM is considered the MAM then ALP is determined as follows: Imports from AEImports from Non-AE Number of units - 200Number of units - 100 Price per unit ( ` ) – 200Price per unit ( ` ) – 180 Total Price ( ` ) – 40,000Total Price ( ` ) – 18,000

15. RESALE PRICE METHOD (RPM)

16. COST PLUS METHOD (CPM) Method using the costs incurred in a controlled transaction for property or services provided to an associate purchaser. An appropriate cost plus mark-up is added to the above cost in light of the FAR. More appropriate to transactions like provision of services, transfer of semi-finished goods, long-term buy/sell arrangement. Tolerant to product differences as compared to CUP method: ALP = Direct + Indirect cost of production + GP mark-up of entity selling goods to AE.

17. COST PLUS METHOD (CPM)

18. CPM: Practical issues and challenges Focuses on GP margins, which are heavily influenced by the scope, intensity of functions and accounting methods. Requires high level of comparability between the tested party and the comparables in terms of functions performed. Relatively difficult to apply in loss situation. Difference in the cost base may require adjustment for proper comparability. Inadequate data to compute the gross margins accurately. This is because under Indian GAAP, companies reporting financial statements are not required to compute the gross margin separately.

19. Profit Split Method (PSM) Only method for which Rules have prescribed the types of transaction to which it may be applicable: ▫Integrated services provided by more than one enterprise. ▫Multiple inter-related transactions, which cannot be separately evaluated. ▫Transfer of unique intangibles. ▫Applied in cases where:  Both entities have unique intangibles.  Operations of both the entities are so integrated that identifying the tested party is very difficult.

20. PSM: Example Particulars ` Determine combined net profit of AEs100 Assign routine return to each entity for its day to day functions Entity A30 Entity B20 Entity C10 Residual profit then divided among entities according to a measure of their contribution to the business driver of that profit 40 Entity A30 Entity B10

21. Transactional Net Margin Method (TNMM) ▫Most frequently used and practical method. ▫Comparison at operating margin level. ▫Broad level of similarity of functions, assets and risks. ▫Selection of the right comparables and PLI are critical factors.

22. TNMM: Examples

23. TNMM: Practical issues and challenges ▫Aggregations v/s Transactional analysis. ▫Segmental v/s Entity. ▫Internal TNMM v/s External TNMM. ▫Lack of availability of data at the time of undertaking transaction / documentation.

24. 6 th Method ▫Rule 10AB. ▫For the purposes of clause (f) of sub-section (1) of section 92C, the other method for determination of the arms' length price in relation to an international transaction shall be 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 the relevant facts.

25. 6 th Method - Observation ▫Other method can be used for following transactions:  Valuation of intangible property.  Valuation of shares.  Reimbursements.

26. Most Appropriate Method: General Applicability MethodTransaction Type CUPLoans, royalties, transfer of tangibles, guarantee fees. RPMMarketing operations of finished products, where distributor does not perform significant value addition to product. CPMSale of finished/semi-finished goods or services. PSMTransactions involving provision of integrated services by more than one enterprise or involving unique intangibles. TNMMProvision of services, manufacture / distribution of finished goods and guarantee fees. Any other method Valuation of shares, intangibles, reimbursement of expenses etc.

27. Documentation

28. Penalties DefaultPenalty Concealment of income100% to 300% of tax on adjustment amount. Failure to maintain documents2% of the value of each international transaction or SDT Failure to furnish documents2% of the value of each international transaction or SDT Failure to report a transaction in accountant’s report 2% of the value of each international transaction or SDT Maintaining of furnishing incorrect information or documents 2% of the value of each international transaction or SDT Failure to furnish Accountants Report ` 100,000

29. TRANSFER PRICING SPECIFIED DOMESTIC TRANSACTIONS

30. Intent of Domestic TP - DTA

31. Intent of Domestic TP – DTA & Tax Holiday Unit

32. Related Parties – Sec. 40A (2)(b) TaxpayerRelated Party IndividualAny relative CompanyAny director or his relative FirmAny partner or his relative AOPAny member or his relative HUFAny member or his relative Any TaxpayerAny individual having substantial interest in the taxpayer’s business or his relative Any TaxpayerA company, firm, AOP, HUF having substantial interest in the taxpayer or any director, partner, member, of such company, firm, AOP, HUF or relative of such director, partner or member

33. SDT: Issues which may arise… Whether provisions will be applicable if both assessee are falling under same tax bracket? In case of upward adjustment – whether benefit of corresponding adjustment is available? If TPO accepts the ALP of the domestic transaction whether AO can still trigger business expediency and benefit test? Can AO step into shoes of businessman? What is the impact of capital expenditure transactions?

34. Transfer Pricing Process

35. Litigation Issues