2.  Backdrop  Transfer Price and Transfer Pricing  Indian TPR  Associated/Deemed Enterprises  International Transactions  Specified Domestic Transactions  Arm’s Length Price  Various Methods To Compute ALP  FAR Analysis  Transfer Pricing Process  Penalties  Amendments by various Finance Acts  Safe Harbor Rules 2

3. Liberalization of trade and foreign exchange policy started in India in the year 1991 This created huge increase in interest of MNEs in India The Standing Committee in March 1991 observed that provisions of Income Tax Act, 1961(Act) were inadequate to curb transfer pricing among MNEs The Expert Group constituted by Central Board Of Direct Taxes (CBDT) recommended complete revision of existing section 92 of the Act The Finance Act, 2001 introduced TPR in India by substituting existing Section 92 of the Act and introducing new sections 92A to 92F w.e.f April, 2001 3

4. 4

5. OECD TP Guidelines lays the foundation of the Transfer Pricing Regulation in India Section 92 - Income arising to “Associated Enterprises” from “International Transactions” (or Specified Domestic Transactions w.e.f AY 2013-14) shall be computed having regard to the “Arm’s Length Price” Preconditions:  Two or more associated enterprises  Enter into an international transactions  Specified Domestic Transaction (w.e.f. AY 2013-14) Consequence:  Income to be computed having regard to the arm’s length price 5

7. Section 92A AE means direct or indirect participation in management control or capital:  by one enterprise into another enterprise; or  by the same person in both the enterprises Equity holding, Control of Board of Directors/ Appointment of one or more Executive Director, mutual interest will also constitute Associated Enterprise Either or both of Associated Enterprises should be non-residents 7

8. 8

10. Section 92B Means “transaction” between 2 or more Associated Enterprises:  Transaction between two or more associated enterprises (at least one of which will be non-resident) of purchase, sale or lease of tangible and intangible property, provision of services, capital financing, cost sharing/cost contribution arrangements, or  affecting profits, losses, income, assets or liability of the enterprise The expression “International Transaction” has been amended by Finance Act, 2012 w.e.f 1.04.2002 and specifically includes:  Inter-company Guarantees,  Advance payments, deferred payments, receivables,  Business restructuring / reorganisation,  Purchase / sale/ use of intangibles such as customer lists, customer contracts, customer relationships,  Transfer / secondment of trained employees, etc. 10

12. Specified Domestic Transactions to include :  Expenditure in relation to which payment has been made to related party  Transfer of goods or services between two units, undertakings or companies which are related and one of them is eligible to avail deduction under Chapter VI-A, 80IA  Any transaction in Chapter VI-A or Section 10AA to which the transfer pricing clause under section 80IA are specifically made applicable  Any other transaction as may be prescribed 12

13. Assessees have to file Form 3CEB in respect of Specified Domestic Transactions entered into with their related parties Minimum Threshold: INR 5 crores (This Threshold Limit will be 20 crores w.e.f. AY 2016-17) May amount to double taxation in certain cases All existing TP compliance requirements, mandatory documentation, TP audits (assessments) and penalty provisions will be applicable 13

15. Section 92F(ii) Arm’s Length Price means a “price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions” Arm’s length price can be determined by selection of most appropriate method from any of the following methods (Sec. 92C): – Comparable Uncontrolled Price Method – Resale Price Method – Cost Plus Method – Profit Split Method – Transactional Net Margin Method – Other Method as prescribed under Rule 10AB Where arms length price is within 3% range of the transaction price, no adjustment is warranted and the transaction price will be deemed to be the Arm’s Length Price. (5% range was applicable till A.Y.2012-13). 15

18. CUP method can be applied where reliable data of similar uncontrolled transaction between two unrelated parties or between related party and third party is available. Here, Prices are to be compared. Internal CUP External CUP Adjustments permitted for volume discount, geographical differences, etc. Manufacturer A Sale to related party B Sale to non-related party C Non-related party P Non-related party Q 18

20. Compares the resale gross margin earned by AE, with gross margin of comparable independent distributors Comparable need not be in very same product Software distributor compared with FMCG distributor Difficult to use when processing is carried out before resale Group Manufacturer (Eligible Unit) Related Distributor (India) Unrelated Wholesalers INR 75INR 100 20

22. Used predominantly when AE works for another AE as contract manufactures Typically applied to a contract manufacturer who:  Does not bear risk of marketing  Does not “normally” undertake high skill work May apply to contract manufacture, BPO, call centre, software developers, etc Direct & Indirect Cost of Production / service ALP = Comparable Margin + 22

24. Generally applicable in case of transaction involving  Transfer of unique intangibles OR  Multiple transactions which are interrelated not permitting separate evaluation Split global profit according to contribution of each AE. There are two approaches to this method  Total Profits Split  Residual Profit Split US Co A – Technology intangibles Mfg. Co B Mkt Co C Marketing intangibles Outside IndiaIndia 24

26. Comparable Net profit adopted in relation to :  Costs incurred, or  Sales effected, or  Assets employed, or  Any other relevant base. Ideally, operating margin should be compared to operating margin earned by same enterprise on uncontrolled transaction – Internal TNMM Parent A Unrelated Cos. Subsidiary B Net margin 5% Unrelated Cos. Net margin 3% Outside India India 26

28. CBDT has notified the “other method” vide a Notification and Rule 10AB has now been inserted in the Income-tax Rules, 1962 (the Rules). Applicable from FY 2011-12. Rule 10AB describes the other method as “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.“ “Other Method” refers to “price which has been charged or paid, or would have been charged or paid”. Effectively, this implies that under this “other method” “quotations” rather than prices “actually” charged or paid can also be used by the taxpayers. 28

29. Functions: Analysis of critical functions performed in controlled environment with function performed in uncontrolled transactions that add value to transactions hence fetch higher returns. Assets: Analyzing assets employed in transaction in controlled environment by identifying the assets.  Type of assets – Capital – Tangibles – Intangibles Risks: Analysis involve identification of various risk assumed by each party in controlled transaction.  Nature of Risk — Market Risk —Manpower Risk —Credit Risk —Technology Risk 29

30. Identification of intragroup transactions FAR Analysis Identification of comparable transactions Establishing comparability, adjustment for material differences Selection of most appropriate method Determination of ALP TP AdjustmentsDocumentationTax return filingTP Assessment 30

31. DefaultPenalty In case of a post-inquiry adjustment, there is deemed to be a concealment of income 100-300% of tax on the adjusted amount Failure to maintain documents2% of the value of transaction Failure to furnish documents2% of the value of transaction Failure to furnish accountant’s reportINR 100,000 (US $ 2000) Failure to report a transaction in accountant’s report 2% of the value of transaction Maintaining or furnishing incorrect information or documents 2% of the value of transaction 31

33. FINANCE ACT, 2002 Before AmendmentAfter Amendment Section 92A(2)Mere fact of participation by one enterprise in the management or control or capital of the other Enterprise, or the participation of one or more persons in the management or control or capital of both the enterprises shall make them associated enterprises For the purposes of sub-section (1) of Section 92A, two Enterprises shall be deemed to be associated enterprises if, at any time during the previous year any of the conditions mentioned in clauses (a) to (m) are satisfied. Section 92C(2)Arithmetical mean of all prices computed shall be taken to be the arm’s length price The price which differs from the arithmetical mean by an amount not exceeding five per cent of such mean may be taken to be the arm’s length price, at the option of the assessee. Section 92FThe definition of Enterprise does not included business of construction Include the business of construction as one of the activities in the definition of ‘enterprise’ and to provide a separate definition of permanent establishment 33

34. FINANCE ACT, 2007Before AmendmentAfter Amendment Section 92CANo extra time available to the AO for competing the assessment or reassessment in cases where a reference is made by him to the TPO Extra time limit of 12 months is made available to AO. Section 92CA(4)Assessing Officer shall proceed to compute the total income of the Assessee having regard to the Arm’s length price determined under sub- section (3) by the Transfer Pricing Officer. Assessing Officer shall proceed to compute the total income of the assessee in conformity with the Arm’s length price determine under sub-section (3) of section 92CA by the Transfer Pricing Officer. FINANCE ACT, 2006Before AmendmentAfter Amendment First Proviso to Section 92C(4) Section 10AA not included along with Section 10A Section 10AA included along with Section 10A 34

35. FINANCE ACT, 2009Before AmendmentAfter Amendment Proviso to Section 92C The arm’s length price shall be taken to be the arithmetical mean of such prices, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean. The arm’s length price shall be taken to be the arithmetical mean of such price. However, if the arithmetical mean, so determined, is within five per cent of the transfer price, then the transfer price shall be treated as the arm's length price and no adjustment is required to be made Safe Harbor RulesProposed to empower the Board to formulate safe harbor rules 35

36. FINANCE ACT, 2011Before AmendmentAfter Amendment Second Proviso to Section 92C(2) If the variation between the actual price of the transaction and the ALP does not exceed 5% of the actual price, then, no adjustment will be made and the actual price shall be treated as the ALP. Proposed to amend section 92C of the Act to provide that instead of a variation of 5%, the allowable variation will be such percentage as may be notified by Central Government in this behalf. Section 92CATPO can determine the ALP in relation to an international transaction, which has been referred to the TPO by the Assessing Officer. Jurisdiction of the TPO shall extend to the determination of the ALP in respect of other international transactions Section 92CA(7)TPO can exercise powers available to an assessing officer under section 131(1) and section 133(6) Enable the TPO to also exercise the power of survey conferred upon an income-tax authority under section 133A of the Act. 36

37. FINANCE ACT, 2012Before AmendmentAfter Amendment Section 92BThe term “intangible property” was not included The term “intangible property” is included Section 92BATransfer Pricing Regulations were not applicable to domestic transactions Transfer Pricing Regulations became applicable to specified domestic transactions Section 92CInstead of a variation of 5%, the allowable variation will be such percentage as may be notified by Central Government in this behalf. To provide an upper ceiling of 3% in respect of power of Central Government to notify the tolerance range for determination of arms length price. Section 92CCIntroduction of these Sections to provide a framework for Advance Pricing Agreements Section 92CD Section 271AAno penalty for non- reporting of an international transaction in report filed under section 92E or maintenance or furnishing of incorrect information or documents. to provide levy of a penalty at the rate of 2% of the value of the international transaction, in addition to penalties in section 271BA and 271G 37

38. Section 92BA -Insertion By Finance Act, 2012 Transfer Pricing Regulations to apply to certain domestic transactions Transfer pricing regulations have been extended vide Finance Act, 2012 to include transactions entered into with domestic related parties or by an undertaking with other undertakings of the same entity for the purposes of section 40A, Chapter VI-A and section 10AA. Domestic transfer pricing provisions are applicable from Assessment Year 2013-14 onwards. All of the compliance requirements relating to transfer pricing documentation, accountant’s report, etc shall equally apply to specified domestic transactions as they do for international transactions amongst associated enterprises. 38

39. Advance Pricing Agreement It is an agreement between a taxpayer and a taxing authority on an appropriate transfer pricing methodology for a set of transactions over a fixed period of time in future. Salient Features – Seeks to provide assurance of certainty and unanimity in transfer pricing approach followed by the tax authorities and taxpayers Validity: Upto 5 years Binding on tax authorities as well as taxpayers Pre – Consultation process (with anonymous application option) Section 92CC and 92CD -Insertion By Finance Act, 2012 39

40. FINANCE ACT, 2014Before AmendmentAfter Amendment Section 271GAO or the Commissioner (Appeals) may direct that such person shall pay, by way of penalty, a sum equal to two percent, of the value of the international transaction or specified domestic transaction for each such failure. AO or TPO or the Commissioner (Appeals) may direct that such person shall pay, by way of penalty, a sum equal to two percent, of the value of the international transaction or specified domestic transaction for each such failure FINANCE ACT, 2015Before AmendmentAfter Amendment Section 92BAThreshold Limit for SDT is 5 crores Threshold Limit for SDT is 20 crores 40

42. Safe Harbour (“SH”) Rules shall be applicable for a period of five fiscal years (i.e., tax AY 2013-14 onwards) and SH do not apply to specified domestic transactions Safe Harbour Rules are the circumstances under which tax authorities automatically accept the transfer prices declared by the taxpayer Provides certainty and compliance relief Could be in the form margin threshold or exclusion of certain classes of transactions from TP regulations Safe Harbour and Presumptive Taxation provisions (Similar in nature) Taxpayer would still be required to maintain TP documentation and Form 3CEB 42

43. S. No.International TransactionCondition 1ITS and ITeS – Max INR 500 crores (Insignificant risk bearer)OP/ OC >= 20% 2ITS and ITeS – Above INR 500 crores (Insignificant risk bearer)OP/ OC >= 22% 3ITES – KPO services - Max INR 100 crores (Insignificant risk bearer) OP/ OC >= 25% 4Intra Group Loan to WOS <= INR 50 croresBase rate on 30 June of PY (SBI) + 150 bsp 5Intra Group Loan to WOS > INR 50 croresBase rate on 30 June of PY (SBI) + 300 bsp 6Explicit Corporate Guarantee to WOS <= INR 100 crores2% or more P.A on amount guaranteed 7Explicit Corporate Guarantee to WOS > INR 100 crores (WOS rated to be of adequate to highest safety) 1.75% or more P.A on amount guaranteed 8Contract R&D for software development (Insignificant risk bearer)OP/ OC >= 30% 9Contract R&D for generic pharmaceutical drugs (Insignificant risk bearer) OP/ OC >= 29% 10Manufacture and export of core auto componentsOP/ OC >= 12% 43

44. 44