1. Case Studies PwC

2. Case Study I Holding company receives service fees from : F Co. (WOS) overseas - INR 6 crores from ICo 1 - INR 4 crores from ICo 2 India - INR 8 crores from F Co. Holding Co. Implications Applicability of domestic TP provisions to a) Holding Co I Co. 1I Co. 2 b) I Co. 1 c) I Co. 2 d) F Co. Tax Free Entity Taxable EntityTax Free Entity Expense Income

3. Transactions Between CoverageCheck PointConclusion Holding Co. to ICo1. Two Different Entity Taxable to Tax free 80 IA(8) – N.A. 80 IA (10) - Applicable Close Connection Ordinary Profit Threshold Limit H Co. SDT N.A. because income is not covered in SDT ICo.1 SDT is applicable Holding Co. to ICo2. Two Different Entity Taxable to Taxable 80 IA(8) – N.A. 80 IA (10) – N.A. 40A(2)(b) - Applicable Income/Expense Threshold Limit H Co. SDT N.A. because income is not covered in SDT ICo.2 SDT is N.A. as threshold limit does not exceeds. Implication

4. Case Study II Holding company makes payment for services to: F Co. (WOS) overseas - INR 2 crores - ICo 1 - INR 2 crores - ICo 2 India - INR 2 crores - F Co. Holding Co. Total services payment – 6 crores Implications Whether Domestic TP would apply to the Holding Company I Co. 1I Co. 2 Taxable EntityTax Free Entity Expense Income

5. Transactions Between CoverageCheck PointConclusion Holding Co. to ICo1. Two Different Entity Taxable to Tax free 80 IA(8) – N.A. 80 IA (10) - Applicable Close Connection Ordinary Profit H Co. SDT is applicable ICo.1 SDT is N.A. Holding Co. to ICo2. Two Different Entity Taxable to Taxable 80 IA(8) – N.A. 80 IA (10) – N.A. 40A(2)(b) - Applicable Income/ExpenseH Co. SDT is applicable ICo.2 SDT is N.A. However, SDT is not applicable to even Holding Co. because aggregate value of transaction to Holding Co. is below threshold limit. Implication

6. Case Study III Market price v/s Arm ‟ s length price ICo 2 acts as a contract manufacturer for ICo 1 ICo 1 purchases a fixed quantity of goods from ICo 2 every year – assured commitment In order to utilise entire manufacturing capacity, ICo 2 also manufactures, and sells goods to third parties ICo 2 charges same rate for the products sold to third parties and to ICo 1 Prior to the amendment: Price charged to third parties arguably was considered as market price and since the price paid by ICo 1 correspond to market price, there has been no 40A(2)(b) challenge Post amendment, whether INR 100 would be the right arm ‟ s length price for the purchases made by ICo 1? Can sale price by ICo 2 to ICo 1 be compared with sale price by ICo 2 to Third Parties on account of certain differences viz. difference in functional profile? FCo 100% INR 100 p.u Sale of goods 100% ICo 1ICo 2 Sale of goods INR 100 p.u Third Parties

7. Terms Of Agreement Particulars [AE] [ Non AE] SaleFOB Free Warranty OfferedNA6 months [cost ofRs 150] Free Gift Benefits offered due to large volume of orders placed 10---- Quantity Discount20---- Cash/Credit1 month. [Cost of credit 1.5% pm] Cash basis Even though price charged to related party & unrelated party are same, question of determination of Arm’s Length must have to be established. Terms of Agreement must have to be seen. For e.g. Implication

8. Case Study IV Deduction under section 80IC Company A Overall Profit margin 15% Company A has three units: Unit A and Unit B (Manufacturing units) and Head Office unit Head Office performs functions of R&D, marketing and distribution of goods produced by the manufacturing units HO Unit - A Tax Holiday u/s 80IC Unit - B Non- Tax Holiday Profitability is ascertained by allocating the expenses incurred by the Head Office in an appropriate ratio between Unit A and Unit B Whether the reported profitability of the tax holiday undertaking can be varied by the tax authorities on the grounds that: ― HO is separate undertaking; and Owns Brands, performs R&D and marketing activities, etc ― Costs allocable to Unit A should be charged using mark up or alternatively imputing a royalty cost?

9. Case Study VI Unit A Unit B (Power Generation Unit) Expenses incurred of Rs. 7 Crore  Expenses incurred for F.Y. 12-13 for which Unit A raised Debit Note to Unit B.  Unit B has not yet commenced the operation.  Hence, no profit is generated for F.Y. 2012-13.  It may or may not start operation in F.Y. 2013-14.  Whether the nature of transaction covered under the purview of Domestic Transfer Pricing?  If yes then still it be applicable under Domestic Transfer Pricing as no profit is generated by Unit B in that year to take exemption u/s 80IA(8)? FACTS

10. Case Study VII : Specified Domestic Transactions A Ltd. B Ltd.C Ltd. X Inc.Y Inc.Z Inc. 35% 22% 23% 60% 40% A, B, C ltd are Indian companies X,Y, Z Inc. are foreign companies Value of each transaction exceeds 5 crore. They are as under: 1.A ltd sells goods to Z Inc. 2.A ltd has borrowed interest bearing loan from X Inc. 3.B ltd pays royalty to A ltd for use of brand 4.B ltd purchases goods from C ltd 5.Y Inc. provides managerial services to A ltd 6.C ltd received technical services from X Inc. Which of the above transactions are regarded as SDT???

11. A Ltd. Z Inc. 23% holding 1.A ltd sells goods to Z Inc. Sells goods Income Expense Transactions Between CoverageCheck PointConclusion A Ltd. & Z Inc. Two Different Entity Taxable to Taxable 80 IA(8) – N.A. 80 IA (10) – N.A. 40A(2)(b) - Applicable Income / Expenses Threshold A Ltd. SDT is N.A. Z Inc. SDT is N.A. Neither Domestic nor International Transfer Pricing will apply.

12. 2.A ltd has borrowed interest bearing loan from X Inc. A Ltd. X Inc. 35% holding Expense Income International Transfer Pricing will apply & hence Domestic Transfer Pricing will not applicable. Transaction s Between CoverageCheck PointConclusion A Ltd. & X Inc. Two Different Entity Taxable to Taxable 80 IA(8) – N.A. 80 IA (10) – N.A. 40A(2)(b) - Applicable Income / Expenses Threshold A Ltd. SDT is N.A. X Inc. SDT is N.A.

13. A Ltd. B Ltd. 40% holding 3.B ltd pays royalty to A ltd for use of brand Royalty Income Expense Transaction s Between CoverageCheck PointConclusion A Ltd. & B Ltd. Two Different Entity Taxable to Taxable 80 IA(8) – N.A. 80 IA (10) – N.A. 40A(2)(b) - Applicable Income / Expenses Threshold A Ltd. SDT is N.A. B Ltd. SDT is Applicable Domestic Transfer Pricing will apply.

14. 4.B ltd purchases goods from C ltd A Ltd. B Ltd.C Ltd. 60% Holding 40% Holding Income Expense Transactions Between CoverageCheck PointConclusion B Ltd. & C Ltd. Two Different Entity Taxable to Taxable 80 IA(8) – N.A. 80 IA (10) – N.A. 40A(2)(b) - Applicable Income / Expenses Threshold B Ltd. SDT is Applicable C Ltd. SDT is N.A. Common Holding Domestic Transfer Pricing will apply.

15. A Ltd. Y Inc. 22% Holding 5.Y Inc. provides managerial services to A ltd Income Expense Transactions Between CoverageCheck PointConclusion Y Inc. & A Ltd. Two Different Entity Taxable to Taxable 80 IA(8) – N.A. 80 IA (10) – N.A. 40A(2)(b) - Applicable Income / Expenses Threshold Y Inc. SDT is N.A. A Ltd. SDT is Applicable International Transfer Pricing will not apply. However, Domestic Transfer Pricing will apply

16. A Ltd. C Ltd. X Inc. 35% Holding 60% Holding 6.C ltd received technical services from X Inc. Transactions Between CoverageCheck PointConclusion C Ltd. & X Inc. Two Different Entity Taxable to Taxable 80 IA(8) – N.A. 80 IA (10) – N.A. 40A(2)(b) - Applicable Income / Expenses Threshold C Ltd. SDT is Applicable X Inc. SDT is N.A. Income Expense Domestic Transfer Pricing will apply.

17. Case Study VIII : Aggregation for the purpose of determining SDT X Ltd. Sister Concern 1 Eligible for 80IC Sold goods of Rs 1 Crore Unit A of X Ltd. (Power Generation Unit) Eligible for 80IA Unit B of X Ltd. (Manufacturing steel in Himachal Pradesh) Eligible for 80IC Power generated by unit A is used by Unit B Sister Concern 2 X Ltd. 25% holding X ltd purchases power for Unit B worth Rs. 1 Crore Whether foregoing transactions would constitute SDT u/s 92 BA? If transaction between X Ltd. & sister concern 2 is worth Rs. 2 Crore, then whether Answer would change accordingly? Whether foregoing transactions would constitute SDT u/s 92 BA? If transaction between X Ltd. & sister concern 2 is worth Rs. 2 Crore, then whether Answer would change accordingly? Transaction Value Rs. 2 Crore

18. Case Study IX : Value for the purpose of aggregation, Where no entry is made in books of account Y Ltd. Brick manufacturing Engaged in business of Generation of steam and power by use of coal Eligible for deduction u/s 80IA (Tax Free)  Fly Ash is produced during generation of steam which is used by brick manufacturing unit.  No specific cost is attached to Fly ash (being a by-product).  Hence transfer from power unit to brick unit has not been recognized in books of accounts. FACTS What value of the fly ash would be considered for purpose of determining whether the value of transaction exceeds a sum of Rs 5 crore as required under section 92BA of the Act? FLY ASH (by product generated)

19. Case Study X : Inter-unit transfer of stores and spares  Whether the stores and spares purchased by Z ltd and used by the eligible unit would e covered u/s 80-IA(8) of the Act;  If yes, what would be the ALP for the same?  Whether the stores and spares purchased by Z ltd and used by the eligible unit would e covered u/s 80-IA(8) of the Act;  If yes, what would be the ALP for the same? A Ltd. Eligible unit u/s 80IC Various other units FACTS  Z ltd engaged in manufacturing of various products through various units.  Out of various units, one is eligible unit u/s 80-IC.  Purchase of Stores/spares done at one place and then the same is used by different units as per the requirement. Purchase Centralized Purchase utilization

20. Case Study XI : DTP in case of loss making unit in SEZ I Ltd. SEZ Unit Engaged in the business of computer software development  During the year, I. Ltd. has entered into Software Development contract with its sister concerns.  The concerned financial year is the first financial year of the Unit and has resulted in an overall loss from its operations.  Accordingly, no deduction has been claimed by the company under Section 10AA for the said year.  Whether DTP provisions, relating to Section 10AA, would apply to the SEZ unit for the relevant year? FACTS

21. Case Study XII : Applicability of DTP provisions before the “initial assessment year’ of an eligible unit  Whether the DTP provisions relating to Section 80IA (8) / 80IA (10) would apply to W Ltd. for the first 5 years of the power business, when it would not be claiming any deduction under Section 80IA?  Whether the position would be different, if the power undertaking is incurring losses in these five years and the profits generated by other business undertaking of W Ltd. are adequate to absorb the losses so incurred by the power undertaking?  Whether DTP provisions would apply in the 6 th year, if even in that year, the power undertaking continues to incur losses?  Whether DTP provisions would apply if after commencement of the initial assessment year, the power undertaking incurs losses?  Commence business of generation and distribution of power  Eligible for Deduction u/s 80IA (4)(iv)  Quantum of Deduction : 100% of the profits and gain derived from such business for 10 consecutive years  As per Section 80IA (2), deduction can be claimed for any 10 consecutive assessment years out of 15 years beginning from the year in which the undertaking generates power.  W Ltd. has decided to start claiming deduction only from the 6 th assessment year. QUERY FACTS

22. Case Study XIII: Section 40A(2) and section 80-IA(10) A Pvt. Ltd. B Pvt. Ltd. Manufactures cement in the state of Uttaranchal, Profit is eligible for deduction u/s 80IC Purchases limestone of Rs. 6 Crore Group company 35% holding Whether Section 40A(2) of the Act would apply to such purchases? Whether section 80-IA (10) of the Act would apply to such purchases? Whether such transactions would be regarded as SDT’s ? If yes, what would be the implications on the assessee QUERY

23. Case Study XIV : Director’s Remuneration Unit A Mr. ABC Public limited company Ms DEF Executive Directors Remuneration Mr. XYZ Non-Executive Directors Sitting fees and commission  Which would be the most appropriate method of determining the ALP

24. Case Study XV : Allocation of head office expenses P Ltd. One of the activity is construction of housing project (Eligible for deduction u/s 80-IB(10) Head Office Pays remuneration to whole time directors and managers  Will the provision of Section 80A(6)/80-IA(8) and in turn the DTP regulations apply for the purpose of allocation of a part of the managerial remuneration to the housing project while computing the eligible profits form the housing project. QUERY

25. Whether SDT Provision will be applicable or not? If yes, which method should be adopted for determining ALP ? Y Pvt. Ltd. Raw Material X Pvt. Ltd. Further Process Supplies to Makes & send back to Directors of Both the Companies are from same family. Directors of Both the Companies are from same family. Transactions exceeds Rs. 5 Crore Case Study XVI : Further Processing of goods

26. Sold goods @ Rs. 90 Sold goods @ Rs. 100  Whether the provisions of Specified Domestic transactions are applicable to Firm ABC or not?  Now if answer is NO, how to report & what to report?  If firm ABC is able to establish that all sale are bona fide transactions with closely connected firm XYZ and results in NO tax avoidance and / or claiming higher deduction u/s 80-IC by it, can it argue that since charging provisions are not applicable, SDT provisions dealing with valuation should not apply and thus Chapter X does not apply to it? Case Study XVII : SDT between P’ship Firms

27. ISSUES Is provisions of SDT would be applicable to insurance companies whose computation of profit as per section 44 of the Act is to be computed as per first schedule?

28. Whether section 40(A)(2)(b) would be applicable on two state government companies who entirely have different business but they have transactions inter se? ISSUES

29. ISSUES Whether transaction between two related companies whereby sales is made by profit making company at a lower rate to loss making company would attract SDT provisions?

30. ISSUES Can higher profit earned by the company be considered as ‘ more than ordinary profits’ under section 80IA(10)?

31. ISSUES What is the appropriate approach for the company to demonstrate that section 80IA(10) should not apply?

32. ISSUES Can the tax authorities restrict the tax holiday claim to the extent of the average profits earned by the comparable companies in the light of amendments in Finance Act, 2012 related to domestic transactions?