Transfer Pricing - An Analysis Dr. Ravi Guptacpeshalimar.com/resource/Image/Microsoft PowerPoint -...
Transcript of Transfer Pricing - An Analysis Dr. Ravi Guptacpeshalimar.com/resource/Image/Microsoft PowerPoint -...
Transfer Pricing
Transfer Pricing
--An Analysis
An Analysis
By
By
Dr. Ravi Gupta
Dr. Ravi Gupta
CA. Avinash Gupta
CA. Avinash Gupta
Contents
Contents
��Concept
Concept
��Transfer Pricing Regulations
Transfer Pricing Regulations
��Recent Change in TP Assessment
Recent Change in TP Assessment
��Arm
Arm
’’ s length price
s length price
��Prescribed m
ethods
Prescribed m
ethods
��Recent Case Laws
Recent Case Laws
A Typical Global Supply Chain
A Typical Global Supply Chain
Global HQ
Manufacturing
Unit
Warehouse
Global
Marketing &
Advertising
Centre
Sales
Representatives
Customers
US
Korea
Japan
Singapore
India
Product Planning
&
Technical Designs
Shifting of
Manufactured Goods
from Factory to an
APAC Warehouse
Marketing
Strategy
Marketing &
Business
Development
Product Supply Agreement
Delivery of Products
Payment for products
Concept
Concept
International transactions
-goods
-services
-intangibles
-loans
Independent
entity
Resident
Associated
enterprise
Resident
Transfer
price
Arm
’s length
price
Associated Enterprises (AEs)
Associated Enterprises (AEs)
��Direct or indirect participation (through one or more
Direct or indirect participation (through one or more
interm
ediaries) in m
anagement control or capital
interm
ediaries) in m
anagement control or capital ––
Sec
Sec
92A(1
)92A(1
)
��The above section is further supplemented by 13 clauses
The above section is further supplemented by 13 clauses
which enlist
various
conditions
under
which two
which enlist
various
conditions
under
which two
enterprises
shall
be deemed to be AE
enterprises
shall
be deemed to be AE’’ s under
s under
Sec
Sec
92A(2
)92A(2
)
Associated Enterprises (AEs)
Associated Enterprises (AEs)
A B
C
D
E
Outs
ide I
ndia
India
Associated Enterprises (AEs)
Associated Enterprises (AEs)
Deemed
Deemed
Pow
er to
appoin
t m
ore
than h
alf o
fdirecto
rs
Loans in
excess o
f 51%
of to
tal assets
Com
mon
executive
directo
r(s)
Guara
nte
es
in e
xcess o
f10%
of to
tal
borr
ow
ings
Supply
of
raw
mate
rials
(90%
or m
ore
)Rela
tionship
sof m
utu
al
inte
rest
Com
ple
tedependence
on I
PRs
Exis
tence
of com
mon
contr
ol
Deemed
AEs
Arm
Arm
’’ s length price
s length price
Arm
Arm
’’ s length price
s length price
Determination of arm’s length prices using one of the Prescribed m
ethods
Whether
you arrive at
a single
price ?
The price thus determined is
the arm’s length price
The arithmetic mean of such
prices or a price is the arm’s
length price (92C(2))
Yes
Price applied or proposed to be applied in a transaction betweenpersons
other than associated enterprises, in uncontrolled conditions
No
The Arm
The Arm
’’ s Length Range
s Length Range --How it works
How it works
��Mostly not possible to identify a single arm
Mostly not possible to identify a single arm
’’ s s
length price
length price
��Overall range m
ay contain extremes
Overall range m
ay contain extremes
��Indian legislation recognizes only arithmetic
Indian legislation recognizes only arithmetic
mean
mean
��If Arm
If Arm
’’ s Length Price falls within +/
s Length Price falls within +/ --5% range
5% range
of transfer price, pricing should be defendable
of transfer price, pricing should be defendable
as arm
as arm
’’ s length
s length
Prescribed m
ethods
Prescribed m
ethods
OECD T
ransfe
r Pricin
g M
eth
ods
OECD T
ransfe
r Pricin
g M
eth
ods
��OECD prefers traditional methods over transactional methods
OECD prefers traditional methods over transactional methods
��Indian rules prescribe no guidance
Indian rules prescribe no guidance ––
legal view it to follow
legal view it to follow
chronological order of the m
ethods in the Act
chronological order of the m
ethods in the Act
��Any other method prescribed by the Central Board of Direct
Any other method prescribed by the Central Board of Direct
Taxes
Taxes --
None as of now
None as of now
Transactional
Net Margin
Method
Profit Split
Method
Cost Plus
Method
Resale
Price
Method
Comparable
Uncontrolled
Price
Traditional Transaction Methods
Transactional Profit Methods
��All methods require comparables.
All methods require comparables.
��Transfer price is set/ defended using data from comparable
Transfer price is set/ defended using data from comparable
companies which should be independent and similar to the
companies which should be independent and similar to the
entity.
entity.
��Following factors are generally used in judging comparability
Following factors are generally used in judging comparability
(Rule 10C(2)):
(Rule 10C(2)):
��nature of transactions undertaken (i.e type of good, service etc
nature of transactions undertaken (i.e type of good, service etc.).)
��company functions
company functions
��risks assumed
risks assumed
��contractual term
s (i.e similar credit term
s)contractual term
s (i.e similar credit term
s)
��economic and m
arket conditions
economic and m
arket conditions
Comparables
Comparables
��Comparable Uncontrolled Price (
Comparable Uncontrolled Price ( ““CUP
CUP”” ) method is
) method is
considered as
the most appropriate method, for
all
considered as
the most appropriate method, for
all
transactions, if inform
ation is available.
transactions, if inform
ation is available.
��CUP m
ethod compares the price charged in a controlled
CUP m
ethod compares the price charged in a controlled
transaction with the price in an uncontrolled transaction.
transaction with the price in an uncontrolled transaction.
��It requires strict comparability in products, contractual
It requires strict comparability in products, contractual
term
s, economic term
s, etc.
term
s, economic term
s, etc.
Comparable Uncontrolled Price Method
Comparable Uncontrolled Price Method --Rule
Rule
10B(1)(a)
10B(1)(a)
Comparable Uncontrolled Price Method
Comparable Uncontrolled Price Method
Identification of price charged or paid in comparable transaction(s)
Such price adjusted to account for differences if any between
international transaction and uncontrolled transaction(s)
Adjusted price arrived above taken to be arm
’s length price
Manufacturer A
Related party -Manufacturer B
Non-related party
Non-related party B
�External CUP
Non-related party A
Comparable Uncontrolled Price Method
Comparable Uncontrolled Price Method
�Internal CUP
Resale Price Method
Resale Price Method--Rule 10B(1)(b)
Rule 10B(1)(b)
�Resale Price Method (“RPM”) compares the resale gross m
argin earned
by AEs with the resale gross m
argin earned by comparable independent
distributors.
�An arm
s’length gross m
argin should be sufficient for a reseller to cover
its operating expenses and m
ake an appropriate operating profit (in light
of its functions and risks).
�Preferred m
ethod for a distributor buying purely finished goods from a
group entity (if no CUP available).
Group Manufacturer
(Outside India)
Related Distributor
(India)
Unrelated
Wholesalers
$75
$100
Resale Price Method
Resale Price Method
Identification of resale price by tested party
Such price reduced by expenses incurred (customs duty etc.) in
purchase of the product/ services.
This price m
ay be adjusted to account for functional and
other differences if any
Resale price reduced by norm
al gross profit with reference
to uncontrolled transaction(s)
Adjusted price arrived above taken to be arm
’s length price
�Cost Plus Method (“CPM”) compares the gross profit on costs the AEs
earns with the gross profit on costs earned by comparable
independent companies.
�Preferred m
ethod for:
�manufacturer supplying semi-finished goods
�entity providing services
Cost Plus Method Rule 10B(1)(c)
Cost Plus Method Rule 10B(1)(c)
Manufacturer A
(Indian)
Related
Manufacturer B
(Outside India,
say US)
Cost + 40%
US Market
Cost Plus Method
Cost Plus Method
Identification of direct and indirect costs of production incurred
in tested party transactions
Norm
al gross profit adjusted to account for functional and
other differences if any
Adjusted gross profit added to total costs identified in step 1
Identification of norm
al gross profit with reference to
uncontrolled transaction(s)
Sum arrived above is taken to be arm
’s length price
Profit Split Method
Profit Split Method-- Rule 10B(1)(d)
Rule 10B(1)(d)
�Profit Split Method (“PSM”) is appropriate for transactions which are not
capable of being evaluated separately.
�Calculates the combined operating profit resulting from the whole
inter-company transaction based on the relative value of each AE's
contribution to the operating profit.
�The contribution m
ade by each party is determ
ined on the basis of a
division of functions perform
ed, valued, if possible using external
comparable data.
�Applicable for analysing tangible, intangible or services issues.
Profit Split Method
Profit Split Method
Determ
ination of combined net profit of the AEs
arising out of international transaction
Splitting of combined net profit amongst enterprises in
proportion to their relative contributions
Profit thus apportioned to the tested party is used to
arrive at the arm
’s length price
Evaluation of relative contributions by each enterprise on the basis
of functions perform
ed, risks assumed and assets employed
Transactional Net Margin Method
Transactional Net Margin Method-- Rule 10B(1)(e)
Rule 10B(1)(e)
�Transactional Net Margin Method (“TNMM”) examines net operating
profit from transactions as a percentage of a certain base (can use
different bases i.e. costs, turnover, etc) in respect of similarparties, as
the profit level indicator.
�Ideally, operating m
argin should be compared to operating m
argin
earned by same enterprise on uncontrolled transaction –
Internal TNMM
�TNMM can also be used to compare the “comparable transactions”
between independent parties –External TNMM.
�It is applicable for any type of transaction and can also be used to
supplement analysis under other methods.
�It is the m
ost frequently used m
ethod in India, due to:
�lack of availability of data to apply other methods.
�evens out business cycles, product dissimilarities.
Transactional Net Margin Method
Transactional Net Margin Method
Net profit from uncontrolled transaction adjusted to account for
differences if any
The net profit thus established is taken into account to arrive at
an arm
’s length price for the international transaction
Computation of net profit as a percentage of a certain base
realised from theinternational transaction.
Computation of net profit realised by the tested party or an
unrelated enterprise in a comparable uncontrolled transaction
TP Study Layout
TP Study Layout
[Nam
e o
f th
e c
om
pany]
Transfer Pricing Study
Fin
ancia
l Year __________
Assessm
ent Year _______
Privileged and Confidential
Draft Report Dated ____________
_____________________
Chart
ere
d A
ccounta
nts
TP Study Layout
TP Study Layout
CO
NTEN
TS
S. No.
S. No.Particulars
Particulars
Page No.
Page No.
11Executive Summary
1.1 Introduction & Scope
1.2 Brief on INC
1.3 Brief on AE Group
1.4 Use of Comparables
1.5 Economic Analysis
22Overview
2.1 General
2.2 Profile of AE Group
2.3 Profile of the company
2.4 Relationship structure between INC & AE
TP Study Layout
TP Study Layout
S. No.
S. No.Particulars
Particulars
Page No.
Page No.
33Industry Overview
44Applicability of Transfer Pricing
Regulations
55Functional Analysis
5.1 Objective
5.2 Analysis of Transactions
5.3 Risk Analysis
66Economic Analysis
6.1 Selection of most appropriate m
ethod
6.2 Search process for comparables
6.3 Conclusions
TP Study Layout
TP Study Layout
Lis
t of Appendic
es
Appendix
A : Scope and Limitation
Appendix
B : Indian Transfer Pricing Regulations
Appendix
C : Accept Reject Matrix
Appendix
D : Results of Selected Comparable Companies
Appendix
E : Brief about the selected companies
Appendix
F :Financial Inform
ation of the company to compute its m
argins
Documentation
Documentation-- Rule 10D
Rule 10D
��Profile of
Profile of
industry
industry
��Profile of group
Profile of group
��Profile of Indian
Profile of Indian
entity
entity
��Profile of
Profile of
associated
associated
enterprises
enterprises
��Transaction term
sTransaction term
s
��Functional analysis
Functional analysis
(functions, assets and risks)
(functions, assets and risks)
��Economic analysis (m
ethod
Economic analysis (m
ethod
selection, comparable
selection, comparable
benchmarking)
benchmarking)
��Forecasts, budgets,
Forecasts, budgets,
estimates
estimates
��Agreements
Agreements
��Invoices
Invoices
��Pricing related
Pricing related
correspondence
correspondence
(letters, emails
(letters, emails
etc)
etc)
Entity related
Price related
Transaction related
•Documentation to be retained for 9 years from financial year
•Documentation is not required to be maintained if the aggregate value of all
international transactions does not exceed one crore rupees
Fact
gathering
Functional
analysis
Economic analysis
Documentation/ Accountants
report
13 24
Mapping of international
transaction
Analysis of Functions, Risks, Assets and
Intangibles
Industry Analysis
Selection of Most
Appropriate
Method
Selection of
Comparables
Calculation of arm
’s length result
TP Study Report
and Accountant’s
Report
The approach for TP documentation m
ay be summarised in the
following phases of work:
Documentation –
Rule 10D
Documentation
Documentation ––
Rule 10D
Rule 10D
Accountant
Accountant ’’s report (Form
3CEB)
s report (Form
3CEB)
--Rule 10E
Rule 10E
��Essentially comments :
Essentially comments :
��whether the tax payer has maintained the transfer
whether the tax payer has maintained the transfer
pricing documentation as required by the legislation,
pricing documentation as required by the legislation,
��whether as per the transfer pricing documentation
whether as per the transfer pricing documentation
the prices of international transactions are at arm
the prices of international transactions are at arm
’’ s s
length, and
length, and
��certifies the value of the international transactions as
certifies the value of the international transactions as
per the books of account and as per the transfer
per the books of account and as per the transfer
pricing documentation are
pricing documentation are ““true and correct
true and correct””
TP Penalties
TP Penalties-- Section 271
Section 271
Defa
ult
Defa
ult
Penalty
Penalty
Post
Post-- inquiry adjustment
inquiry adjustment
(deemed concealment of
(deemed concealment of
income)
income)
100
100-- 300% of tax on the
300% of tax on the
adjusted amount
adjusted amount
Failure to m
aintain
Failure to m
aintain
documents
documents
2% of the transaction value
2% of the transaction value
Failure to furnish
Failure to furnish
documents
documents
2% of the transaction value
2% of the transaction value
Failure to furnish
Failure to furnish
accountants report
accountants report
Rs 100,000
Rs 100,000
Recent Case Laws
Recent Case Laws
��Skoda Auto India
Skoda Auto India ––
Pune ITAT
Pune ITAT
2009
2009-- TIOL
TIOL-- 214
214-- ITAT
ITAT-- PUNE
PUNE
��Transactions between Associated Enterprises (
Transactions between Associated Enterprises ( ‘‘AEs
AEs ’’) )
cannot be considered for determ
ining the existence of
cannot be considered for determ
ining the existence of
an internal Comparable Uncontrolled Price (
an internal Comparable Uncontrolled Price (‘‘ CUP
CUP’’ ))
��Assessee cannot be expected to get details and
Assessee cannot be expected to get details and
particulars, which are not available in public domain
particulars, which are not available in public domain
��SDRC India
SDRC India ––
Delhi ITAT
Delhi ITAT
2009
2009-- TIOL
TIOL-- 185
185-- ITAT
ITAT-- DEL
DEL
��If Assessing Officer (
If Assessing Officer ( ‘‘AO
AO’’ ) was convinced that there
) was convinced that there
was an arrangement to avoid tax, he should have
was an arrangement to avoid tax, he should have
referred the case to TPO under section 92(C)
referred the case to TPO under section 92(C)
Recent Case Laws
Recent Case Laws
��Honeywell Automation
Honeywell Automation ––
Pune ITAT
Pune ITAT
2009
2009-- TIOL
TIOL-- 104
104-- ITAT
ITAT-- PUNE
PUNE
��Only current year data to be used, if the Appellant is not
Only current year data to be used, if the Appellant is not
be able to reveal any facts to bring the case to the
be able to reveal any facts to bring the case to the
proviso to Rule10B(4)
proviso to Rule10B(4)
��UCB India
UCB India ––
Mumbai ITAT
Mumbai ITAT
2009
2009-- TIOL
TIOL-- 184
184-- ITAT
ITAT-- M
UM
MUM
��Penalty not leviable for non
Penalty not leviable for non-- provision of documents
provision of documents
beyond taxpayer
beyond taxpayer ’’s control
s control
��Detailed Functions, Assets & Risks (
Detailed Functions, Assets & Risks ( ‘‘FAR
FAR’’ ) analysis
) analysis
required for application of CUP m
ethod
required for application of CUP m
ethod
Recent Case Laws
Recent Case Laws
��Moser Baer India & Others
Moser Baer India & Others ––
Delhi High Court
Delhi High Court
2008
2008-- TIOL
TIOL-- 647
647-- HC
HC-- DEL
DEL
��Provisions of section 92CA(3) casts an obligation on the TPO to
Provisions of section 92CA(3) casts an obligation on the TPO to
afford a personal hearing to the Appellant before proceeding to
afford a personal hearing to the Appellant before proceeding to
pass an order determ
ining the Arm
pass an order determ
ining the Arm’’ s Length Price (
s Length Price (‘‘ ALP
ALP’’ ))
��Coca Cola India
Coca Cola India ––
Punjab & Haryana High Court
Punjab & Haryana High Court
2008
2008-- TIOL
TIOL-- 656
656-- HC
HC-- P&H
P&H
��Perm
ission granted by the Reserve Bank of India (
Perm
ission granted by the Reserve Bank of India (‘‘ RBI
RBI ’’) under
) under
the Foreign Exchange Regulation Act (
the Foreign Exchange Regulation Act (‘‘ FERA
FERA’’ ) cannot control the
) cannot control the
provisions of the Income
provisions of the Income-- tax Act, 1961 (
tax Act, 1961 (‘‘ the Act
the Act’’ ))
Recent Case Laws
Recent Case Laws
��Philips Software
Philips Software ––
Bangalore ITAT / Karnataka
Bangalore ITAT / Karnataka
High Court
High Court
2009
2009-- TIOL
TIOL-- 123
123-- HC
HC-- KAR
KAR
��AO / TPO required to demonstrate tax avoidance
AO / TPO required to demonstrate tax avoidance
before / during assessment proceedings
before / during assessment proceedings
��TPO cannot reject taxpayer analysis without due
TPO cannot reject taxpayer analysis without due
reasons
reasons
��Recognized importance of economic adjustments
Recognized importance of economic adjustments
��Karnataka High Court has admitted revenue
Karnataka High Court has admitted revenue’’ s appeal
s appeal
against the ITAT order and stayed the order of ITAT
against the ITAT order and stayed the order of ITAT
Recent Case Laws
Recent Case Laws
��Development Consultants
Development Consultants ––
Kolkata ITAT
Kolkata ITAT
2008
2008-- TIOL
TIOL-- 150
150-- ITAT
ITAT-- KOL
KOL
��Taxpayer analysis to be accepted if not controverted by the TPO
Taxpayer analysis to be accepted if not controverted by the TPO
��Cargill India
Cargill India ––
Delhi ITAT
Delhi ITAT
2008
2008-- TIOL
TIOL-- 94
94-- ITAT
ITAT-- DEL
DEL
��Penalty not leviable for non
Penalty not leviable for non-- provision of documents beyond
provision of documents beyond
taxpayer
taxpayer ’’s control
s control
Recent Case Laws
Recent Case Laws
��Ranbaxy Laboratories
Ranbaxy Laboratories ––Delhi ITAT
Delhi ITAT
2008
2008-- TIOL
TIOL-- 75
75-- ITAT
ITAT-- DEL
DEL
��Powers to Commissioner to re
Powers to Commissioner to re-- open case if not examined
open case if not examined
properly by TPO
properly by TPO
��I Gate Global
I Gate Global ––Bangalore ITAT
Bangalore ITAT
112 TTJ 1002
112 TTJ 1002
��Voluntary TP adjustment eligible for Section 10A benefit
Voluntary TP adjustment eligible for Section 10A benefit
��Aztec Software & Technology Services Ltd.
Aztec Software & Technology Services Ltd.
--Bangalore ITAT Special Bench
Bangalore ITAT Special Bench
��AO should use current year data for comparability analysis even
AO should use current year data for comparability analysis even
if such data was not available to the assessee in public databas
if such data was not available to the assessee in public databas e
e
at the time of preparation of TP Study
at the time of preparation of TP Study
Thanks
Thanks