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TRANSFER PRICING



INTRODUCTION:
The increasing participation of multinational groups in economic activities in the country has given rise to new and complex issues emerging from transactions entered into between two or more enterprises belonging to the same multinational group. The profits derived by such enterprises carrying on business in India can be controlled by the multi – national group, by manipulating the prices charged and paid in such intra – group transactions, thereby, leading to erosion to tax revenues.

With a view to provide a detailed statutory framework which can lead to computation of reasonable, fair and equitable profits and tax in India, in the case of such multi – national enterprises, chapter of Transfer pricing consisting of section 92 to 92F of Income Tax Act has been introduced.

WHAT IS TRANSFER PRICING

Transfer pricing is the setting of the price for goods and services sold between controlled (or related) legal entities within an enterprise. For example, if a subsidiary company sells goods to a parent company, the cost of those goods paid by the parent to the subsidiary is the transfer price. Legal entities considered under the control of a single corporation include branches and companies that are wholly or majority owned ultimately by the parent corporation.

COMPUTATION OF INCOME FROM INTERNATIONAL TRANSACTION HAVING REGARD TO ARM’S LENGTH PRICE (Section 92):

1. Any income arising from an international transaction shall be computed having regard to the arm's length price.

2. In computing income under sub-section (1), the allowance for any expense or interest shall also be determined having regard to the arm's length price.

3. Where in an international transaction, two or more associated enterprises enter into a mutual agreement or arrangement for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises, the cost or expense allocated or apportioned to, or, as the case may be, contributed by, any such enterprise shall be determined having regard to the arm's length price of such benefit, service or facility, as the case may be.

MEANING OF ASSOCIATED ENTERPRISE (Section 92A):

1. For the purposes of this section and sections 92, 92B, 92C, 92D, 92E and 92F, "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.

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 twenty-six per cent. of the voting power in the other enterprise ; or

b. any person or enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent. of the voting power in each of such enterprises ; or

c. a loan advanced by one enterprise to the other enterprise constitutes not less than fifty-one per cent. of the book value of the total assets of the other enterprise ; or

d. one enterprise guarantees not less than ten per cent. 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

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, licences, 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

h. ninety percent 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

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.

MEANING OF INTERNATIONAL TRANSACTION (Section 92B)

1. For the purposes of this section and sections 92, 92C, 92D and 92E, "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 and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises.

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; or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise.

COMPUTATION OF ARM’S LENGTH PRICE (Section 92C):

1. The arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :-

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.

2. The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed.

Provided that where more than one price may be determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices.

3. Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that-

a. the price charged or paid in an international transaction has not been determined in accordance with sub-sections (1) and (2) ; or

b. any information and document relating to an international transaction have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf ; or

c. the information or data used in computation of the arm's length price is not reliable or correct ; or

d. the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D,

e. Provided that an opportunity shall be given by the Assessing Officer by serving a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the arm's length price should not be so determined on the basis of material or information or document in the possession of the Assessing Officer.

4. Where an arm's length price is determined by the Assessing Officer under sub-section (3), the Assessing Officer may compute the total income of the assessee having regard to the arm's length price so determined:

Provided that no deduction under section 10A or section 10B or under Chapter VI-A shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under this sub-section:

Provided further that where the total income of an associated enterprise is computed under this sub-section on determination of the arm's length price paid to another associated enterprise from which tax has been deducted under the provisions of Chapter XVIIB, the income of the other associated enterprise shall not be recomputed by reason of such determination of arm's length price in the case of the first mentioned enterprise.

MAINTENANCE AND KEEPING OF INFORMATION AND DOCUMENT BY PERSONS ENTERING INTO INTERNATIONAL TRANSACTION OR SPECIFIED DOMESTIC TRANSACTION (Section 92D):

1. Every person who has entered into an international transaction shall keep and maintain such information and document in respect thereof, as may be prescribed.

2. Without prejudice to the provisions contained in sub-section
(1), the Board may prescribe the period for which the information and document shall be kept and maintained under that sub-section.

3. The Assessing Officer or the Commissioner (Appeals) may, in the course of any proceeding under this Act, require any person who has entered into an international transaction to furnish any information or document in respect thereof, as may be prescribed under sub-section (1), within a period of thirty days from the date of receipt of a notice issued in this regard: Provided that the Assessing Officer or the Commissioner (Appeals) may, on an application made by such person, extend the period of thirty days by a further period not exceeding thirty days.

REPORT FROM AN ACCOUNTANT TO BE FURNISHED BY PERSONS ENTERING INTO INTERNATIONAL TRANSACTION (Section 92E):

Every person who has entered into an international transaction during a previous year shall obtain a report from an Chartered Accountant and furnish such report on or before the specified date in the prescribed Form 3CEB duly signed and verified in the prescribed manner by such accountant and setting forth such particulars as may be prescribed. CA shall give in his report declaration about: Examination of accounts & records, Maintenance of prescribed information & documents and Factual accuracy of contents mentioned in annexure to form 3CEB

DEFINITION OF CERTAIN TERMS RELEVANT TO COMPUTATION OF ARM’S LENGTH PRICE (Section 92F):

In sections 92, 92A, 92B, 92C, 92D and 92E, unless the context otherwise requires-

i. "accountant" shall have the same meaning as in the Explanation below sub-section (2) of section 288.
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.

iii. "enterprise" means a person (including a permanent establishment of such person) who is, or has been, or is proposed to be, engaged in any activity, relating to the production, storage, supply, distribution, acquisition or control of articles or goods, or know-how, patents, copyrights, trade-marks, licences, 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 the provision of services of any kind, or in investment, or providing loan or in the business of acquiring, holding, underwriting or dealing with shares, debentures or other securities of any other body corporate, whether such activity or business is carried on, directly or through one or more of its units or divisions or subsidiaries, or whether such unit or division or subsidiary is located at the same place where the enterprise is located or at a different place(s).

iv. "specified date" means,-

a. where the assessee is a company, the 31st day of October of the relevant assessment year;

b. in any other case, the 31st day of July of the relevant assessment year.

v. "transaction" includes an arrangement, understanding or action in concert,-

A. whether or not such arrangement, understanding or action is formal or in writing; or

B. whether or not such arrangement, understanding or action is intended to be enforceable by legal proceeding.

DETERMINATION OF ARM’S LENGTH PRICE (Section 92C):

(a) Comparable Uncontrolled Price Method:

Step-1: Determine the price charged or paid for the property transferred or services provided in a comparable uncontrolled transaction.

Step-2: Such price is then adjusted to account for the functional differences between the international transaction & the comparable uncontrolled transaction, which could materially affect the price in the open market.

Step-3: Such adjusted price is the arm’s length price.

(b) Resale Price Method:

Step-1: The price at which the property purchased or services obtained by the enterprise from an associated enterprise are sold to an unrelated enterprise is first determined.

Step-2: Such resale price is reduced by normal gross profit margin accruing to the enterprise from the purchase and resale of similar goods in a comparable uncontrolled transaction, if there is no comparable uncontrolled transaction, then take the Gross Profit of an unrelated person from purchase and resale of similar goods.

Step-3: Then reduce the expenses incurred by the enterprise in connection with purchase of property.

Step-4: The price so arrived at in step-3 is adjusted to account for the functional differences in the international transaction & the comparable uncontrolled transaction which could materially affect the Gross Profit margin the open market.

Step-5: The adjusted price arrived at in step -4 is the arm’s length price.

(c) Profit Split Method:

Step-1: Compute the Net Profit of the Associated Enterprise arising from the International Transaction.

Step-2: Compute the Relative Contribution made by each of the associated enterprise to the earning of the combined Net Profit.

Step-3: Split the Combined Net Profit in proportion to their Contributions.

Step-4: The Sum so arrived at is the Arms Length Price.

(d) Cost Plus Method:

Step-1: Determine the Direct and Indirect Costs of production in respect of Property transferred or services provided to an associated enterprise.

Step-2: Determine the normal gross profit mark up to such costs which will arise from transfer of similar goods or services to an unrelated enterprise or in a comparable uncontrolled transaction.

Step-3: The normal gross profit mark up determined in Step 2 should be adjusted to account for the functional differences if any between the international transaction and comparable uncontrolled transaction which could materially affect such profit mark up in the open market.

Step-4: The cost referred to in Step 1 shall be increased by the adjusted profit mark-up arrived in Step 3.

Step-5: The sum so arrived at is the arm’s length price.

(e) Transactional Net Margin Method:

Step-1: Compute the net margin realised by the Enterprise from an international transaction entered into with an associated enterprise.

Step-2: Compute the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction.

Step-3: Adjust the net profit margin computed in Step 2 to account for differences.

Step-4: The net profit margin computed in Step 1 is established to be the same as the net profit margin referred to in Step 3.

Step-5: The net profit margin thus established is then taken into account to arrive at an arm’s length price in relation to the International transaction.

TRANSFER PRICING PLANNING

Determination of transfer pricing policy is an ex-ante approach which brings certainty to the inter-company transfer pricing and mitigates transfer pricing exposure in advance. Therefore, prior taking on any international transactions or specified domestic transactions with its associated enterprise it is essential that the transaction is evaluated, structured and planned specifically considering the transfer pricing impact.

ADVANCE PRICING AGREEMENT

An Advance Pricing Agreement is an agreement between the taxpayer and the tax authority on the pricing of future intercompany transactions in case of a roll-back, it would also include past years. The taxpayer and tax authority mutually agree on the transfer pricing methodology (TPM) to be applied and its application for a certain period of time for covered transactions (subject to fulfillment of critical assumptions). Advance Pricing Agreement is an effective tool used in several countries with established transfer pricing regimes to avoid potential disputes in a cooperative manner.

Different Types of Advance Pricing Agreement:

An Advance Pricing Agreement may be unilateral, bilateral or multilateral, as explained below:

• Unilateral: Advance Pricing Agreement entered into between a taxpayer and the tax administration of the country where it is subject to taxation.

• Bilateral: Advance Pricing Agreement entered into between the taxpayers, the tax administration of the host country and the foreign tax administration.

• Multilateral: Advance Pricing Agreement entered into between the taxpayers, the tax administration of the host country and more than one foreign tax administrations.

The Indian Advance Pricing Agreements rules allow for all the three types of Advance Pricing Agreements.

Key Benefits of an Advance Pricing Agreement:

The key advantages of Advance Pricing Agreement can be summarised as:

• Certainty with respect to the outcome of covered transactions during the Advance Pricing Agreement term.

• Agreement as to information to be kept for annual report, low annual reporting cost.

• Reduction in risk and cost associated with audits and appeals over the APA term.

• Imparts flexibility in developing practical approaches for complex transfer pricing issues.

• Advance Pricing Agreement renewal provides an excellent leverage of time and efforts expended during negotiating the original Advance Pricing Agreement.

Who is eligible to apply for an Advance Pricing Agreement?

There are no monetary or other conditions prescribed under the Indian Advance Pricing Agreement rules for a taxpayer to be eligible to apply.

However, the Advance Pricing Agreement mechanism is not available for domestic controlled transactions.

As Per the Indian Advance Pricing Agreement rules, the Advance Pricing Agreement filing fees are set at relatively high amounts. Also, one of the objectives of pre-filing consultation is stated as ‘to determine the suitability of international transaction for the agreement’. Therefore, it appears that while there is no express limitation on eligibility, the government is possibly looking for taxpayers to use the programme for complex and high stake transactions.

What are the transactions that can be covered under an Advance Pricing Agreement?

Any type of international transaction can be covered under an Advance Pricing Agreement, e.g., transactions involving transfer of tangible and intangible properties, cost sharing, provision and receipt of services, etc. Advance Pricing Agreements are also possible for international transactions with permanent establishments. Further, similar to Advance Pricing Agreement programmes in other countries, the Indian rules allow the taxpayer to selectively apply for an Advance Pricing Agreement only for certain international transactions. In such cases, the taxpayer is required to disclose all other international transactions to the Advance Pricing Agreement team.
It is also pertinent to note that an Advance Pricing Agreement can be applied for both continuing as well as proposed transactions.

For how long would an Advance Pricing Agreement remain valid? Is renewal possible after expiry of the Advance Pricing Agreement term?

The Indian Advance Pricing Agreement rules provide for an Advance Pricing Agreement term up to five years in addition it can also cover up to four proceeding years in case of a roll-back. Unilateral, bilateral or multilateral Advance Pricing Agreements may be renewed with the consent of all the parties to it, including the tax treaty partner who is a party to a bilateral or multilateral Advance Pricing Agreement. A request for renewal of the Advance Pricing Agreement would follow the same procedures that apply to an initial Advance Pricing Agreement request.

It is essential for taxpayers to seek renewal early enough to allow the renewal to be negotiated and put in place prior to the expiration of the earlier Advance Pricing Agreement. If the facts and circumstances are largely similar, a renewal can be completed in a relatively shorter time frame.

DOMESTIC TRANSFER PRICING

With effect from 01.04.2013, the scope of Transfer Pricing provisions has been extended to “Specified Domestic Transactions” and is accordingly applicable from A.Y. 2013-14.With the applicability of Transfer Pricing provisions on Specified Domestic Transactions, now it is the obligation on the taxpayer to report / document & substantiate the Arm’s Length nature of such transaction.

OBJECTIVE OF DOMESTIC TRANSFER PRICING

There are two counts where tax arbitrage happen in India.
a. Tax Holidays or Differential Tax
b. Accumulated Losses or loss making concerns

PROVISION OF SECTION 92BA:

As per the section 92BA of the IT Act, “Specified Domestic Transaction” in case of an assessee means any of the following transactions (the aggregate of which exceeds INR 5 crore in previous year and which is not an international transaction), namely:

1.any expenditure incurred between related parties referred to in section 40A(2)(b);

2.any transaction referred to in section 80A;

3.any transfer of goods or services referred to in section 80-IA(8);

4.any business transacted between the assessee and other person as referred to in section 80-IA(10);

5.any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which section 80-IA(8) or section 80-IA(10) are applicable; or6. Any other transaction as may be prescribed.

If a transaction is an International Transaction, then the same will not be a Specified Domestic Transaction. From the Assessment year 2016-17 threshold limit is now increased from 5 crore to 20 crore.


1. ANY ‘EXPENDITURE’ INCURRED BETWEEN RELATED PARTIES REFERRED IN SECTION 40A(2)(b)Section 40A(2) provides power to the Income Tax Officer that in case any expenditure has been incurred and the payment has been made or is to be made to certain specified persons and he is of the opinion that such expenditure is excessive or unreasonable with regard to the fair market value of the goods, services or facilities provided, he may disallow such expense as he considers to be excessive or unreasonable.

The specified persons for different categories of taxpayers for the purpose of Section 40A(2) are as under:-

Category of Taxpayer
Specified Persons
1. Individual
a. Any Relative (i.e. Spouse, Brother, Sister, Lineal Ascendant or Descendant) of such individual;

 
b. Any person in whose business or profession, the individual himself or his relative has substancial interest
2.Company, Firm, AOP or HUF

 
a. Any Director of the Company, Partner of the firm, or member of the association, or family or any relative of such director, partner or member;

 
b. Any Person in whose business or profession the assessee or director or partner or member of the assessee or any relative of such person has a substantial interest

 

 

 

 3. All Assessees

 


 


 

 
a. Any Individual who has substantial interest in the business or profession of the Assessee

 
b. A Company, Firm, AOP, or HUF having a substantial interest in business or profession of the assessee or any director, partner or member of any such person or any relative of any such director, partner or member

 
c. A Company, firm, AOP or HUF of which a director, partner or member has a substantial interest in the business or profession of the assessee or any director, partner, or member of any such person or any relative of any such director partner or member

However, no disallowance shall be made if the transaction (Specified Domestic Transaction) has been made at arm’s length price. Sub clause (b) of sub section (2) covers the various situations mentioned below wherein the two persons are related parties.

 2. ANY TRANSACTION REFERRED TO IN SECTION 80A:


 Section 80A (6) refers to internal transactions between various units / undertakings of the assessee in respect of goods or services. This clause covers any transactions of goods or services and hence this transaction will be applicable to income as well as expenditure.

 3. TRANSACTIONS OF TAX HOLIDAY UNDERTAKINGS: 


 Any transfer of goods or services referred to in section 80-IA(8). Any business transacted between the assessee and other person as referred to in section 80-IA(10). Any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which section 80-IA(8) or section 80-IA(10) are applicable;

 It is a common practice among corporates, enjoying tax holiday period, to park excess profits in tax-exempt units / businesses. To curb this loophole, given clauses has inserted in the DTP law. Now TPO (Transfer Pricing Officer) is empowered to make adjustments if it appears that ‘more than ordinary profits’ are earned by tax exempt businesses/units owing to its ‘close connection’ with transacting parties.

 Section 80IA (8): Section 80IA-(8) deals with the internal transactions with more than one undertaking / units of the assessee, out of which one or more undertaking is enjoying the tax holiday. Normally units enjoying tax holiday, charge more than the market value for goods or services used by non-eligible units. Due to this practice, there is no effect on the health of the tax holiday unit as there are no taxes at all and the non-eligible unit gets higher deduction from taxable income. As per Section 80IA-(8), if the internal transfer of goods or services is not at market value, then profits or gains of transacting units shall be computed, as if, transfer, in either case, had been made at market value of such goods or services. Duty is on the taxpayer to prove that the internal transfer is at ALP (Arm’s Length Price).

 Section 80IA (10): As per this clause, when due to close connection between assessee and ‘any other person’ or for any other reason, the eligible business of the assessee produces ‘more than the ordinary profit’, then for the purpose of deduction under this section, profit of the eligible business shall be determined by taking ALP of the transaction. Primary duty is on the taxpayer to prove that the internal transfer is at ALP. However, the department has to prove that the transaction is not at ALP.

 Section 10AA: As per this section, profits of the units located in SEZ, engaged in the manufacturing of any article or thing or providing any services, is exempt subject to conditions.

 Non Allocation of Indirect Costs / Services to Tax Holiday Units: Many a times indirect expenses / head office expenses / administrative expenses have not been charged to the undertaking enjoying tax holiday, due to which more than ordinary profits arises to the tax-holiday undertaking.

 4. ANY OTHER TRANSACTION AS MAY BE PRESCRIBED:


 CBDT has the power to notify any other transaction, which they feel it necessary, to include in the definition of “Specified Domestic Transaction.”

ARM’S LENGTH PRICE METHODS

As per Section 92C, the Arm’s Length Price in relation to “Specified Domestic Transaction” shall be calculated by the any of the following methods, being the ‘most appropriate method’

Methods
Comparability
Comparable Uncontrolled Price
'Price' of the transaction
Resale Price Method
'Gross Margin' of Company reselling the product / services to the unrelated parties
Cost Plus Method
'Gross Margin' of Company selling manufactured product / services to the unrelated parties
Profit Split Method
'Split Profit' between the parties to the transactional based on economic parameters
Transactional Net Margin Method
'Net Profit Margin' of the tested party
Other Method
Prescribed by the board

As per Rule 10C of the Income Tax Rules, most appropriate method shall be the method which is best suited to the facts and circumstances of each particular transaction and gives most reasonable measure of the transaction. Following factors should be taken into account while choosing the most appropriate method namely:

1. the nature and class of the international transaction;

2. the class or classes of associated enterprises entering into the transaction and the functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprises;

3. the availability, coverage and reliability of data necessary for application of the method;

4. the degree of comparability existing between the international transaction and the uncontrolled transaction and between the enterprises entering into such transactions.

5. the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction and the comparable uncontrolled transaction or between the enterprises entering into such transactions;

6. the nature, extent and reliability of assumptions required to be made in application of a method.

DOCUMENTATION REQUIRED:

As per section 92D, every person who has entered into Specified Domestic Transaction shall keep and maintain such information and documents in respect thereof, as prescribed in Rule 10D of the Income Tax Rules. As per Section 92E, the assessee has to take an accountant’s report, in Form 3CEB, duly signed and verified as per the provisions of the Act. The Transfer Pricing Audit Report is required to filed electronically on or before the due date of filing of Income Tax Return i.e. on or before 30th November of the respective assessment year.

PENALTY PROVISIONS

Default
Nature of penalty
·Failure to maintain documents; or

·Failure to report a transaction in the accountant’s report; or
·Maintaining or furnishing incorrect information or documents

 

 
2% of the value of transaction
·Failure to furnish documents
2% of the value of transaction
·Failure to furnish Form 3CEB by the due date
100,000 INR
·In case of a transfer pricing adjustment, in absence of good faith and due diligence by the taxpayer in applying the provisions and maintaining adequate documentation.

 
100%-300% of tax on the adjusted amount

OTHER DEFINITIONS: Transfer Pricing Officer means a Joint Commissioner or Deputy Commissioner or Assistant Commissioner authorised by the Board to perform all or any of the functions of an Assessing Officer specified in sections 92C and 92D in respect of any person or class of persons.

Appellate Procedure:

A comprehensive dispute resolution mechanism is available to taxpayer in India that faces transfer pricing adjustments. As a part of legal process in all cases, Assessing Officer (AO) incorporates the order of the TPO in his order and issues a draft order to the taxpayer. The taxpayer has an option to file objection 46 against the draft order before DRP which is a collegium comprising of three Commissioners of Income Tax. In the cases referred to DRP, AO issues final order in compliance to the directions of DRP. In cases where taxpayer chose not to file objection before DRP, the draft order by Assessing Officer incorporating the order of TPO becomes final order and taxpayer can file appeal before CIT (Appeals). The normal appeal process in India starts at the level of a Commissioner of Income Tax (Appeals) and charts its course upwards towards the Income Tax Appellate Tribunal (Tax Tribunal) and, subsequently, to the Courts. The Tribunal is the last fact finding authority and only matters of law are taken up and adjudicated upon by the Courts. Both, the taxpayer and the Revenue can challenge orders passed by any of the appellate authorities.

Under the Income Tax Law, the Tax Authorities as well as the taxpayer have a right to appeal the directions of the DRP before the ITAT. The Finance Act, Assessing Officer Tax Tribunal Draft order CIT (A) Final order Final order DRP No reference to DRP High Court Supreme Court 47 2012 provided the right for Tax Officer to file an appeal before the ITAT against the directions of DRP.

Scrutiny Procedure:

CBDT has laid down following procedure and criteria for manual selection of returns/cases for scrutiny during for Transfer pricing matters:

CBDT has dropped the Rs 15-crore threshold for referring cases for compulsory scrutiny. Instead, a risk based approach is adopted to identify international transactions. Cases involving addition in an earlier Cases involving addition in an earlier assessment year on the issue of transfer pricing in excess year on the issue of transfer pricing in excess of Rs. 10 Crores or more which is confirmed in appeal or is pending before an appellate authority. Either AO can do the transfer pricing assessment or can refer the computation to the TPO.

Reference to Transfer Pricing Officer:

• S 92CA (1) – if AO considers it necessary or expedient so to do, he may refer the computation of arm's length price to the TPO with the previous approval of the Commissioner – prima facia view.

• S. 92CA (2) TPO to serve notice on the Assessee requiring him to produce evidence in relation to arm’s length price computed.

• S. 92CA(2A) and (2B) – TPO can suo motto take cognizance of the transaction not reported by the Assessee or nor referred by the AO.

• S 92CA(3) provides that the TPO after taking into account the material available with him shall, by an order in writing, determine the arm's length price in accordance with s 92C(3).

• S 92CA(3A) Time limit for passing an order - 60 days prior to the date of limitation referred in S. 153.

• S. 92CA (4) Provides that on receipt of the order of the TPO, the AO shall proceed to compute the total income of the assessee in conformity with the ARMED LENGTH PRICE as determined by the TPO.

• S. 92CA(5) and (6) refers to rectification for mistake apparent from record in TPO’s Order.

• S. 92CA(7) exercise of power specified under

– 131(1) - Power regarding discovery, production of evidence, etc.

– 133(6) - May require any person to furnish information or

– 133A - Power of Survey.


Scope of Transfer Pricing Officer’s Powers:

The powers of Transfer Pricing Officer can be divided into three parts, where the first Part deals with its powers to determine the Armed Length Price of an international transaction; Part 2 deals with powers to seek information, documents and records; the last part of the Transfer Pricing Officer powers involve ancillary powers like levy of penalty, passing rectification orders etc. The primary powers of Transfer Pricing Officer involve determination of arm’s length price of an international transaction or a specified domestic transaction (“SDT”). In this regard, section 92CA of the Income-tax Act, 1961 (“the Act”) lists out the powers of the Transfer Pricing Officer once a matter is referred to him by the assessing officer (“AO”) for computation of the arm’s length price in relation to the said international transaction. It is highlighted that primarily the computation of the arm’s length price by the Transfer Pricing Officer under section 92CA draws force from powers bestowed upon the Assessing Officer under Section 92C(3) of the Act. Section 92C(3) of the Act, lists out situations under which the Armed Length Price determined by the taxpayer can be rejected by a Transfer Pricing Officer after categorically stating reasons for such rejection and subsequently proceed to undertake a fresh bench marking analysis to arrive at the Armed Length Price of the covered transaction.

The powers of determining Armed Length Price of covered transactions was earlier limited to only transaction referred to the Transfer Pricing Officer. However, vide Finance Act 2011, section 92CA(2A) and 92CA(2B) were inserted, which widened the powers of the Transfer Pricing Officer to adjudicate the covered transactions whether or not the same has been referred to by the Assessing Officer and even if the taxpayer has not disclosed the same in its Accountant’s Report i.e. Form 3CEB. Essentially, this amendment in Transfer Pricing Officer powers was made to nullify the decision of the Tribunal in the case of Amadeus India Private Limited.

The second set of Transfer Pricing Officer powers involves calling for information / records and undertaking survey at taxpayer premises. Notably, the extent of the Transfer Pricing Officer’s powers under this context is specifically limited to the powers referred in clauses (a) to (d) of sub-section (1) of section 131 or sub-section (6) of section 133 or section 133A of the Act. Thus, while exercising its information seeking powers, the Transfer Pricing Officer is expected to operate under the strict realms of his powers and should not function as an Assessing Officer or a search officer for that matter.

The third category of Transfer Pricing Officer powers are miscellaneous in nature and have not changed much since the enactment of transfer pricing regulations. Having provided an overview of the Transfer Pricing Officer’s powers, we have discussed below some practical insights on exercise of Transfer Pricing Officer powers, some of which is can be termed as excessive and unreasonable.

Powers of transfer pricing officers – practical insights
Even after completion of almost a decade since the first audit cycle, practically, the scenario in tax offices (with respect to exercise of Transfer Pricing Officer’s powers) is quite different from the laid down the law and many practitioners and taxpayers could relate to this. We would like to highlight a few scenarios which occur more often than not and leaves the taxpayers and their representatives muddled as to whether the Transfer Pricing Officer is actually authorised to adopt the said course of action:

Rejection of the transfer pricing study report (“TPSR”) maintained and furnished by the taxpayer: It will not be out of place to mention the findings of the Hon’ble Bangalore Tribunal in one of its initial and landmark decision pertaining to TP regulations when the TP regime was in its nascent stages. The Tribunal in the case of Philips Software Centre (P.) Ltd. had observed that:

“The intention of section 92C(3) has always been that scrutiny of the international transactions of an assessee can only be done if the Assessing Officer/Transfer Pricing Officer can prove that the circumstances enumerated in clauses (a ) to (d) are satisfied. Even where any infirmity is identified by the Assessing Officer/Transfer Pricing Officer, the action of the Assessing Officer/Transfer Pricing Officer would be restricted to taking remedial action commensurate with the infirmity identified by him, and not beyond…”

The aforesaid judgment has still not attained finality and is still under litigation. There are various jurisprudence on the subject enforcing the need to state reasons for rejection under section 92C(3) before proceeding with fresh analysis but are often ignored at field levels. Typically, in most cases, the Transfer Pricing Officers proceed with altering / rejecting the bench marking analysis of the taxpayer or proceed to change the comparable set based on search sets available with the Transfer Pricing Officer, without adhering to the provisions of Section 92C(3) of the Act read with Section 92CA of the Act. Such action of the Transfer Pricing Officer is clearly not in accordance with provisions of Section 92C(3) read with Section 92CA of the Act. However, both the courts and the tribunals have failed to find significant merit in this legal ground of the taxpayer and have often failed to conclusively adjudicate on the issue of beyond jurisdiction exercise of powers by Transfer Pricing Officer and consequent quashing of the Transfer Pricing Officer order on this ground alone.

In absence of strong will of taxpayers to contest on this ground and lack of strong judicial guidance on this issue, the Transfer Pricing Officer’s are freely extending their jurisdiction by making transfer pricing additions without diligently following the mandate of Section 92C(3) of the Act.

These questions have been revolving around for quite some time now without an appropriate solution supported by legislation.

Seeking fresh economic analysis from the taxpayer:
Let us take a practical situation, where the taxpayer (a provider of logistic services) has justified its international transaction using transaction net margin method, as the most appropriate method, and by considering a comparable set of independent logistic service providers. During the course of transfer pricing assessments, the Transfer Pricing Officer does not agree with the entity characterization and issues a notice to the taxpayer instructing to identify comparable companies undertaking business support services.

At first glance, such a request by the Transfer Pricing Officer may look legitimate. However, let us now evaluate the legitimacy of the Transfer Pricing Officer’s request in light of the provisions of Section 92CA of the Act read with 92C(3) of the Act.

The request of the Transfer Pricing Officer clearly does not fall within any of the limbs laid down in Section 92C(3) of the Act as neither the documentation of the taxpayer was unreliable nor incorrect.

The same cannot be considered to fall under provisions of Section 92CA(2), as the said sub-section provides for furnishing of information by the taxpayer, which the taxpayer may rely in support of his determination of the arm's length price. This section does not empower the Transfer Pricing Officer to seek additional analysis to satisfy him self about the arm’s length pricing of the covered transactions;

Even the provisions of Section 92CA(7) which bestow significant powers to the Transfer Pricing Officer, and allow him to exercise the powers referred in Section 131, 133 or Section 133A do not contemplate or empower seeking of additional economic analysis by the Transfer Pricing Officer. In this regard, attention is drawn to Section 131 (Clause (a) to (d)), which merely empower the Transfer Pricing Officer to seek information that is existent with the taxpayer and does not cause or empower him to seek any analytical data from the taxpayer. Similarly Section 133(6) only empowers the Transfer Pricing Officer to seek any data statutorily or internally maintained by the taxpayer. Similarly, Section 133A of the Act allow the Transfer Pricing Officer to undertake survey and take possession of already existent information. Thus, in view thereof, none of the above provisions empower the Transfer Pricing Officer to seek additional economic analysis from the taxpayer.

Basis aforesaid, one can reasonably conclude that the information request of the Transfer Pricing Officer is beyond his jurisdiction and the taxpayer cannot be forced upon to furnish such additional analysis, as it has already discharged its burden by preparing and furnishing a complete transfer pricing documentation under Rule 10D of the Rules. Having said so, in most cases, the taxpayers or representatives seldom take a strong stand to rebut the Transfer Pricing Officer’s request and generally furnish the requisite analysis on a without prejudice basis. Another question that is worth deliberating is whether failure to furnish such an analysis could have empowered the Transfer Pricing Officer to impose penalty for non furnishing information / documents under Section 271G. The answer to this is a emphatic NO, since the power to impose penalty under section 271G is only in a situation where the taxpayer fails to furnish the Transfer Pricing documentation maintained by the taxpayer under Rule 10D of the Rules.

Calling upon the taxpayers to furnish financial and commercial details of its overseas associated enterprises (“AEs”):

Yet another scenario where most of the taxpayers and their consultants find themselves engulfed is the never ending list of requirements of the Transfer Pricing Officer pertaining to financial and commercial information of the Associated Enterprises viz. financial statements, agreements entered into by Associated Enterprises with its customers, invoices raised by the Associated Enterprises on their end customers, credit period extended by the Associated Enterprises to their customers and vice-a-versa etc. As discussed above, the taxpayer is under no legal obligation to obtain and furnish such information to the Transfer Pricing Officer, especially in situation where the taxpayer is not in possession of such information and neither has the ability to force the overseas Associated Enterprises to provide such information.

In practical experience, on failure or inability of the taxpayer to furnish such information, the Transfer Pricing Officer’s often resort to strong notices and pressurize the taxpayer to seek such information from their Associated Enterprises. Be that as it may, most of the times, it is practically difficult for the taxpayer and their consultants to convince the Transfer Pricing Officers that they are not privy to such information. Disregarding the genuine hardship of the taxpayers, Transfer Pricing Officers often propose ad-hoc adjustments and expect the taxpayers to seek relief by litigating the matter further up the appellate chain even under most obvious situations. There are also situations wherein the relationship exists due to a deeming provision and the Associated Enterprises are either not bound or unwilling to share their information with the taxpayer. Should such non furnishing of information be a reason for an adjustment to the transfer price?

GUIDANCE NOTE BY INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
ON
REPORT UNDER SECTION 92E OF THE INCOME TAX ACT

The note specifies details regarding reporting to be done under this section which in crux focuses on restricted examination of books related to international transaction only, is not an audit for expression of opinion and reconciliation between figure mentioned in 3CEB & general purpose financial statements.

FORM 3CEB HAS BEEN ATTACHED HEREIN BELOW
FORM NO. 3CEB
[See rule 10E]
Report from an accountant to be furnished under section 92E relating to international transaction(s) and specified domestic transaction(s)

 
*I/We have examined the accounts and records of___________________________(name and address of the assessee with PAN) relating to the international transaction (s) and the specified domestic transaction(s) entered into by the assessee during the previous year ending on 31st March,_____________________________

 
1.         In*my/our opinion proper information and documents as are prescribed have been kept by the assessee in respect of the international transaction(s) and the specified domestic transactions entered into so far as appears from *my/our examination of the records of the assessee.

 
2.         The particulars required to be furnished under section 92E are given in the Annexure to this Form. In*my/our opinion and to the best of my/our information and according to the explanations given to *me/us, the particulars given in the Annexure are true and correct.

 
**Signed          _________________
Name               _________________
Address : Membership No. : ______
Place : _________________
Date : _________________
Notes :

 
1. *Delete whichever is not applicable.
2. **This report has to be signed by—

(i) a chartered accountant within the meaning of the Chartered Accountants Act, 1949 (38 of 1949); or

(ii) any person who, in relation to any State, is, by virtue of the provisions in sub-section

(2) of section 226 of the Companies Act, 1956 (1 of 1956), entitled to be appointed to act as an auditor of companies registered in that State.

ANNEXURE TO FORM NO. 3CEB

Particulars relating to international transactions and specified domestic transactions required to be furnished under section 92E of the Income-tax Act, 1961

PART A
1.   Name of the assessee ________________________________
2.   Address __________________________________________
3.   Permanent account number ___________________________
4.   Nature of business or activities of the assessee* ____________
5.   Status _____________________________________________
6.   Previous year ended _________________________________
7.   Assessment year _____________________________________
8.   Aggregate value of international transactions as per books of accounts ______________________________________
9.   Aggregate value of specified domestic transactions as per books of accounts__________________________________________

 
*  Code for nature of business to be filled in as per instructions for filling Form ITR 6
PART B
(International Transactions)

 
10.
List of associated enterprises with whom the assessee has entered into international transactions, with the following details :
(a) Name of the associated enterprise
(b) Nature  of  the  relationship  with  the  associated enterprise as referred to in section 92A(2).
(c) Brief description of the business carried on by the associated enterprise



________________

________________

________________
11.
Particulars in respect of transactions in tangible property.

A. Has the assessee entered into any international transaction(s) in respect of purchase/sale of raw material, consumables or any other supplies for assembling or processing/manufacturing of goods or articles from/to associated enterprises?
If ‘yes’, provide the following details in respect of each associated enterprise and each transaction or class of transaction :

(a) Name and address of the associated enterprise with whom the international transaction has been entered into.

(b) Description   of   transaction and quantity purchased/sold.


(c)Total amount paid/received or payable/receivable in the transaction

(i) as per books of account;

(ii) as computed by the assessee having regard to the arm’s length price.

(d) Method used for determining the arm’s length price [See section 92C(1)]
B. Has the assessee entered into any international transaction(s) in respect of purchase/sale of traded/finished goods?
If ‘yes’ provide the following details in respect of each associated enterprise and each transaction or class of transaction : Yes/No

(a) Name and address of the associated enterprise with whom the international transaction has been entered into.

(b)Description of transaction and quantity purchased/sold.

(c) Total  amount  paid/  received  or  payable / receivable in the transaction

(i)  as per books of accounts;

(ii) as computed by the assessee having regard to the arm’s length price.

 
(d) Method used for determining the arm’s length price [See section 92C(1)]

C. Has the assessee entered into any international transaction(s) in respect of purchase, sale, transfer, lease or use of any other tangible property including transactions specified in Explanation (i)(a) below section 92B(2)?  If ‘yes’ provide the following details in respect of each associated enterprise and each transaction or class of transaction:

(a) Name and address of the associate enterprise with whom the international transaction has been entered into.

(b) Description of the property and nature of transaction.

(c) Number of units of each category of tangible property involved in the transaction.

(d) Amount paid/received or payable/receivable in each transaction of purchase/sale/transfer /use, or lease rent paid/received or payable/receivable in respect of each lease provided/entered into-

(i) as per books of account;

(ii) as computed by the assessee having regard to the arm’s length price.

(e) Method used for determining the arm’s length price [See section 92C(1)]







 

 
____






Yes/No.____

____


____


 
___________________

 

 
___________________

 

 
___________________



___________________
 

 
___________________

 

 
___________________

 

 

 
___________________


___________________

 
___________________

 

 
___________________

 

 

 
Yes/No.____

 

 

 

___________________

 
12
Particulars in respect of transactions in intangible property :
Has the assessee entered into any international transaction(s) in respect of purchase, sale, transfer, lease or use of intangible property including transactions specified in Explanation (i)

(b) below section 92B(2)? If ‘yes’ provide the following details in respect of each associated enterprise and each category of intangible property :


(a) Name and address of the associated enterprise with whom the international transaction has been entered into.
(b) Description of intangible property and nature of transaction.

(c) Amount  paid/received  or  payable/receivable for purchase/sale/transfer/lease/use of each category of intangible property-
(i) as per books of account;

(ii) as computed by the assessee having regard to the arm’s length price.
(d) Method used for determining the arm’s length price [See section 92C(1)]

 

 

 
Yes/No.____

 

 

 

___________________

 

 

 

 
___________________
13
Particulars in respect of providing of services :
Has the assessee entered into any international transaction(s) in respect of Services including transactions as specified in Explanation (i)(d) below section 92B(2)?

If ‘yes’ provide the following details in respect of each associated enterprise and each category of service :

(a) Name and address of the associated enterprise with whom the international transaction has been entered into.

(b) Description of services provided/availed to/from the associated enterprise.

(c) Amount paid/received or payable/receivable for the services provided/taken—

(i) as per books of account;

(ii) as computed by the assessee having regard to the arm’s length price.


(d) Method used for determining the arm’s length price [See section 92C(1)]

 

 

 

 

   


 

 
Yes/No.____
 
___________________

 

 
___________________

 


___________________
14
Particulars in respect of lending or borrowing of money :
Has the assessee entered into any international transaction(s) in respect of lending or borrowing of money including any  type  of  advance, payments, deferred payments, receivable, non-convertible preference shares/debentures or any other debt arising during the course of business as specified in Explanation (i)(c ) below section 92B (2)?

(a) Name and address of the associated enterprise with whom the international transaction has been entered into.

(b) Nature of financing agreement.

(c) Currency in which transaction has taken place


(d) Interest rate charged/paid in respect of each lending/borrowing.

(e) Amount paid/received or payable/receivable in the transaction-

(i) as per books of account;

(ii) as computed by the assessee having regard to the arm’s length price.

(f) Method used for determining the arm’s length price [See section 92C(1)]



 

 
 

 

 
Yes/No.____

    
   
 
___________________








___________________






___________________






___________________



15
Particulars in respect of transactions in the nature of guarantee:

Has the assessee entered into any international transaction(s) in the nature of guarantee?

If yes, provide the following details:

(a) Name and address of the associated enterprise with whom the international transaction has been entered into.

(b) Nature of guarantee agreement


(c) Currency  in  which  the  guarantee  transaction  was undertaken

(d) Compensation/ fees charged/ paid in respect of the transaction

(e) Method used for determining the arm’s length price [See section 92C(1)]






Yes/No.____







___________________





___________________






___________________



16
Particulars in respect of international transactions of purchase or sale of marketable securities, issue and buyback of equity shares, optionally convertible/ partially convertible/ compulsorily convertible debentures/preference shares:
Has the assessee entered into any international transaction(s) in respect of purchase or sale of marketable securities or issue of equity shares including transactions specified in Explanation (i)

(c) below section 92B (2)?

If yes, provide the following details:

(a) Name and address of the associated enterprise with whom the international transaction has been entered into.

(b) Nature of transaction

(c)Currency in which the transaction was undertaken

(d) Consideration charged/paid in respect of the transaction.

(e) Method used for determining the arm’s length price [See section 92C(1)]

 













Yes/No.____





___________________





___________________




___________________

17
Particulars in respect of mutual agreement or arrangement :
Has the assessee entered into any international transaction with an associated enterprise or enterprises by way of a mutual agreement or arrangement for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises?
If ‘yes’ provide the following details in respect of each agreement/arrangement:

(a) Name and address of the associated enterprise with whom the international transaction has been entered into.

(b)Description of such mutual agreement or arrangement.


(c)Amount paid/received or payable/receivable in each such transaction-

(i) as per books of account;

(ii) as computed by the assessee having regard to the arm’s length price.

(d) Method used for determining the arm’s length price [See section 92C(1)].







Yes/No.____




___________________


___________________





___________________







___________________
18
Particulars in respect of international transactions arising out/ being part of business restructuring or reorganizations:

Has the assessee entered into any international transaction(s) arising out/being part of any business restructuring or reorganization entered into by it with the associated enterprise or enterprises as specified in Explanation (i) (e) below section 92B (2) and which has not been specifically referred to above?

If ‘yes’, provide the following details:

(a) Name and address of the associated enterprise with whom the international transaction has been entered into.     

(b) Nature of transaction

(c)Agreement in relation to such business restructuring / reorganization.

(d)Termsof business restructuring/reorganization.

(e) Method used for determining the arm’s length price [See section 92C(1)].

 

 

 

 

 

 


Yes/No.____

 






___________________

 
___________________

 
___________________
19.
Particulars in respect of any other transaction including the transaction having a bearing on the profits, income, losses or assets of the assessee:
Has the assessee entered into any other international transaction(s) including a transaction having a bearing on the profits, income, losses or asset , but not specifically referred to above, with associated enterprise?

If ‘yes’ provide the following details in respect of each associated enterprise and each transaction :
(a)Name and address of the associated enterprise with whom the international transaction has been entered into.

(b)Description of the transaction.

(c)mount paid/received or payable/receivable in the transaction-

(i) as per books of account;

(ii) as computed by the assessee having regard to the arm’s length price.

(d) Method used for determining the arm’s length price [See section 92C(1)].


 

 

 

 

Yes/No.____

 

___________________

 

 
___________________

 
___________________

 
___________________
20
Particulars of deemed international transactions:
Has the assessee entered into any transaction with a person other than an AE in pursuance of a prior agreement in relation to the relevant transaction between such other person and the associated enterprise?

If yes, provide the following details in respect of each of such agreement


(a)Name  and  address  of  the  person  other  than  the associated  enterprise  with  whom  the  deemed international transaction has been entered into.

(b)Description of the transaction.

(c)Amount paid/received or payable/receivable in the transaction-

(i)as per books of account;


(ii)as computed by the assessee having regard to the arm’s length price.

(iii)Method used for determining the arm’s length price [See section 92C(1)].

 

 

 

Yes/No.____

 

___________________




___________________

 

 

 
___________________
PART C (Specified domestic transaction)
21
List of associated enterprises with whom the assessee has entered into specified domestic transactions, with the following details:
(a)Name, address and PAN of the associated enterprise.
(b)Nature of the relationship  with the associated enterprise

(c)Brief description of the business carried on by the said associated enterprise.



 

___________________

 
___________________


___________________
22.
Particulars in respect of transactions in the nature of any expenditure:

 

 
Has the assessee entered into any specified domestic transaction (s) being any expenditure in respect of which payment has been made or is to be made to any person referred to in section 40A(2)(b)?
If “yes”, provide the following details in respect of each of such person and each transaction or class of transaction:
(a)Name of person with whom the specified domestic transaction has been entered into.

(b)Description of transaction along with quantitative details, if any


(c)Total amount paid or payable in the transaction-

(i) as per books of account;

(ii) as computed by the assessee having regard to the arm’s length price.
(d)Method used for determining the arm’s length price [See section 92C(1)]

 

 

 
Yes/No.____

 

 
___________________

 
___________________

 

___________________

___________________
23
Particulars in respect of transactions in the nature of transfer or acquisition of any goods or services:
A.Has any undertaking or unit or enterprise or eligible business of the assessee [as referred to in section 80A(6), 80IA(8) or section 10AA)]transferred any goods or services to any other business carried on by the assessee?

If yes, provide the following details in respect of each unit or enterprise or eligible business:

(a) Name and details of business to which goods or services have been transferred

(b)Description of goods or services transferred


(c)Amount received/receivable for transferring of such goods or services –

(i)as per the books of account;

(ii)as computed by the assessee having regard to the arm’s length price.

(d) Method used for determining the arm’s length price [See section 92C(1)].

B.Has any undertaking or unit or enterprise or eligible business of the assessee [as referred to in section 80A(6), 80IA(8) or section 10AA] acquired any goods or services from another business of the assessee? If yes, provide the following details in respect of each unit or enterprise or eligible business:
 
(a)Name and details of business from which goods or services have been acquired

(b)Description of goods or services acquired

(c)Amount  paid/payable  for  acquiring  of  such goods or services–

(i)as per the books of account;

(ii)as computed by the assessee having regard to the arm’s length price

(d)Method used for determining the arm’s length price [See section 92C(1)].

 

 

 

 
Yes/No.____

 
___________________

 
___________________

 

 
___________________

 

 
___________________

 

 
___________________

 

 

 

 



Yes/No.____

 

  
24.
Particulars in respect of specified domestic transaction in the nature of any business transacted:

Has the assessee entered into any specified domestic transaction(s) with any associated enterprise which has resulted in more than ordinary profits to an eligible business to which section 80IA(10) or section 10AA
applies?

If “yes”, provide the following details:

(a)Name of the person with whom the specified domestic transaction has been entered into.

(b)Description of the transaction including quantitative details, if any.
(c)Total amount received/receivable or paid/ payable in the transaction –

(i)as per books of account;

(ii)as computed by the assessee having regard to the arm’s length price.

(d) Method used for determining the arm’s length price [See section 92C(1)].

 
Yes/No.____

 

 

 

 

 
___________________

 

 
__________________

 
___________________

 

25
Particulars in respect of any other transactions :

Has the assessee entered into any other specified domestic transaction(s) not specifically referred to above, with an associated enterprise?

If ‘yes’ provide the following details in respect of each associated enterprise and each transaction :

(a)Name of the associated enterprise with whom the specified domestic transaction has been entered into.

(b)Description of the transaction.

(c)Amount paid/received or payable/receivable in the transaction-

(i) as per books of account;

(ii)as computed by the assessee having regard to the arm’s length price.


(d)Method used for determining the arm’s length price [See section 92C(1)].


 

 

 
Yes/No.____

 
___________________

 

 
___________________

 

 

 





 
**Signed ____________________
Name: _______________________
Address:______________________
Place : ______________________
Date : _____________________

 
Notes :**This annexure has to be signed by -

(i) a chartered accountant within the meaning of the Chartered Accountants Act, 1949 (38 of 1949); or

(ii) any person who, in relation to any State, is, by virtue of the provisions in sub-section (2) of section 226 of the Companies Act, 1956 (1 of 1956), entitled to be appointed to act as”.

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UPDATES
 
Transfer Pricing Rules with Wider Ambit Soon

January 11, 2016: The Government might change transfer pricing provisions in Budget 2016-17 to ensure companies with overseas presence and consolidated revenue of more than Rs 5,000 crore comply with extensive data reporting and documentation. Legislative changes in the Income Tax Act would be in line with the Base Erosion and Profit Shifting (BEPS) measures unveiled by the Paris-based think-tank, the Organisation for Economic Co-operation and Development (OECD), in October last year to curb tax evasion by multinational companies. Called the new world order in taxation, BEPS will require Indian companies with overseas presence and consolidated annual revenue of more than Rs 5,000 crore in the previous financial year to furnish country-by-country reports (CBCR) to the Indian tax department as well as a master file and local file directly to the tax authorities of each country of operation. The Indian tax department would have to share the CBCR documents with tax authorities of other jurisdictions. The three-tiered standardised approach is among the 15 action points listed by BEPS to plug loopholes that allow companies to shift their profits to low-tax countries and debt to high-tax countries.

"Country-by-country reporting is a minimum standard under BEPS," said a government official. "We will introduce it by making amendments in the I-T Act through the Finance Bill, 2016. Rules will follow that. It will mainly list the reporting requirements and those covered under these."

The increased data reporting legislation will cover close to 200 companies in India. These companies will have to furnish details related to revenue, capital and taxes paid on a country-by-country basis. It is expected that with CBCR set to be introduced in the Budget this year compliance requirements will go up. Companies will need to start re mediating their structures to make sure they fall within the global system."The government is also working to put in place procedures and practices to enable speedy resolution of tax disputes through the mutual alternate procedure (MAP) route, via legislative and administrative changes in compliance with BEPS. India could also look at implementing best practices that facilitate effective MAP implementation, including suspension of collection of taxes during pendency of MAP proceedings, already covered under in tax treaties with the US, the UK, Canada and Denmark. "We are committed to a dispute-resolution mechanism. We will put in place procedures and practices to enable speedy resolution of tax disputes through MAP. If administrative or legislative changes are needed, we will implement those as well," said the official.
BEPS action recommends resolution through MAP in two years or more under bilateral tax treaties. On the controlled foreign company (CFC) provision, which was also in the Direct Taxes Code, the government would tread carefully and might not carry out policy changes that would drastically affect Indian companies.

CFC regulations pertain to taxing undistributed incomes of foreign entities, which are tax resident of low-tax jurisdiction but controlled by Indians (distributed income is already taxed). It is one of the few Direct Taxes Code Bill provisions not yet introduced by the government. BEPS THRUST IN BUDGET 2016-17: Government likely to amend the IT-Act for country-by-country reporting requirement for multinational enterprises with annual consolidated revenue of Rs 5,000 crore or more. Government working on simplified and speedy resolution of tax disputes through mutual alternate procedure. Controlled foreign company provisions unlikely to be introduced any time soon as it could drastically affect Indian companies.

Govt Resolves Transfer Pricing Disputes Covering a Decade Through APA

It seems, following a directive from PM Narendra Modi and Arun Jaitley, the Central Board of Direct Taxes (CBDT) is leaving no stones unturned to change the image of India from being too aggressive on taxation to being strict but friendly on corporate taxation. The CBDT, which has been on a fast track to solve the transfer pricing disputes, has recently signed yet another advance pricing agreement (APA) with an animation services company. The CBDT is taking a close look at 120 transfer pricing disputes with a view to settle them as the Modi government tries to rid India of the label of an overtly aggressive country for taxation. The APA team has already signed more than 30 agreements in last few months and could end up settling anywhere about 60 by the end of March next year. Of 550 APA applications pending with the government, about 35% are from the IT/ITeS sector. ET had reported on May 21 that the first agreement in the IT/ITeS space would be signed in three months. Transfer pricing disputes in this sector are mainly related to outsourcing and the calculation of profit made by companies. Many firms have gone to court challenging the government's transfer pricing adjustments. In July 2012, the government introduced the APA programme, which allows companies and the revenue authorities to negotiate the rate at which tax is to be paid and avoid disputes. Industry officials say the Modi government is pushing tax authorities to resolve about 120 transfer pricing disputes by the end of the financial year .This APA signed with the animation company is quite different from the others as the efforts that were put in to arrive at an appropriate mark-up for a niche industry going through a tough phase globally. While the Safe Harbour rules pegged a much higher percentage of 25% for the animation industry, the APA authorities deep dived into the various functional and economic analysis and the propositions put forth by the Company to understand the specific nuances of the business and the problems faced by the Company. Based on this analysis, the APA authorities and the Company agreed to a realistic and win-win mark-up, which till date is the lowest in the services sector. It was the receptiveness of the APA team that allowed the Company to distinguish itself from being cast under the IT/ITeS/KPO sector and understand the animation Industry separately, say industry trackers.

NOTIFICATIONS:
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes

PRESS RELEASE
New Delhi, 20th October, 2015

Subject:   Notification of Transfer Pricing Rules to incorporate “range concept” and “use of multi-year data” to reduce litigation on transfer pricing issues.

The Income-tax Act provides for determination of income having regard to Arm’s Length Price (ALP) in case of international transactions and specified domestic transactions. The provisions of the Income-tax Act were amended through the Finance (No.2) Act, 2014 to facilitate alignment of Indian transfer regime with international best practices. The manner of computation of ALP is laid down Income-tax Rules.

The Government has notified the amended Rules for determining ALP vide S.O. No. 2860 (E) dated 19/10/2015. The amended regime will be applicable for computation of ALP of international transactions and specified domestic transactions undertaken on or after 1/04/2014.

The amended rules allow for introduction of a “range concept” for determination of ALP and “use of multiple year data” for undertaking comparability analysis in transfer pricing cases. The use of range concept, being a statistical tool, enhances the reliability of analysis undertaken for computation of ALP. The range concept will be applicable in certain cases for determining the price and will begin with the 35th percentile and end with the 65th percentile of the comparable prices. Transaction price shown by the taxpayers falling within the range will be accepted and no adjustment will be made. The use of multiple year data allows for yearly variations to be averaged out and would therefore add value to transfer pricing analysis.

The amended rules would therefore provide clarity in determination of price in transfer pricing cases and reduce disputes on transfer pricing issues. It is a part of the Government’s continuing initiative of providing a stable and certain direct tax regime.

(Shefali Shah)
Pr. Commissioner of Income Tax (OSD)
Official Spokesperson, CBDT
MINISTRY OF FINANCE
(Department of Revenue)
NOTIFICATION
New Delhi, the 29th October, 2015
S.O. 2942(E).— In exercise of the powers conferred by the third proviso to sub-section (2) of section 92C of the Income-tax Act, 1961 (43 of 1961) read with proviso to sub-rule (7) of rule 10CA of the Income-tax Rules, 1962, the Central Government hereby notifies that where the variation between the arm’s length price determined under section 92C and the price at which the international transaction or specified domestic transaction has actually been undertaken does not exceed one percent. of the latter in respect of wholesale trading and three percent. of the latter in all other cases, the price at which the international transaction or specified domestic transaction has actually been undertaken shall be deemed to be the arm’s length price for Assessment Year 2015-2016.

Explanation.- For the purposes of this notification, “wholesale trading” means an international transaction or specified domestic transaction of trading in goods, which fulfils the following conditions, namely:-


(i) purchase cost of finished goods is eighty percent. or more of the total cost pertaining to such trading activities; and
(ii) average monthly closing inventory of such goods is ten percent. or less of sales pertaining to such trading activities.
[Notification No. 86 /2015/F. No. 500/1/2014-APA-II]
ANCHAL KHANDELWAL, Under Secy.


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Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes

PRESS RELEASE



New Delhi, 22 January, 2016

Sub: Signing of 7 unilateral Advance Pricing Agreements on 22 January 2016-Regarding

The Central Board of Direct Taxes (CBDT) entered into 7 more unilateral Advance Pricing Agreements (APAs) with taxpayers today (22nd January, 2016). This takes the tally of APAs signed so far to 39 (38 unilateral and one bilateral). In the current fiscal year, which is the third year of APA programme, 30 agreements have been signed so far. Before the end of the financial year, more such agreements are expected to be signed. The 7 APAs signed today pertain to various sectors of the economy like investment advisory services, software development services and IT enabled Services.
 The agreements signed today also include one of the few agreements to be reached in the manufacturing sector.

 The APA Scheme was introduced in the Income-tax Act in 2012 and the “Rollback” provisions were introduced in 2014. The scheme endeavours to provide certainty to taxpayers in the domain of transfer pricing by specifying the methods of pricing and setting the prices of international transactions in advance. Since its inception, the APA scheme has attracted tremendous interest from taxpayers for using this mechanism to achieve tax certainty upto nine years.

 The approach of the Income Tax Department to the APAs has been appreciated and acknowledged by the industry in India and abroad. The Income Tax Department is committed to providing a stable and predictable taxation regime and improving the ease of doing business.






(Shefali Shah)
Pr. Commissioner of Income Tax (OSD)
Official Spokesperson, CBDT

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UNDERSTANDING TRANSFER PRICING WITH LATEST CASE LAWS & AMMENDMENTS


Over a period of time, there are number of judgements comes from various levels of courts from different locations of India and hence it is very important to know the same for the correct treatment of Transfer Pricing:

VODAFONE WINS Rs 3,200-cr Transfer Pricing case in Bombay High Court

Sat, 11 Oct 2014-12:06am , Mumbai , PTI
The Bombay High Court on Friday ruled Vodafone is not liable to pay an income tax demand of Rs 3,200 crore in a case relating to transfer pricing, a verdict which comes as a big relief for the UK-based mobile service provider already locked in a big tax dispute with the Government.

The I-T Department had asked the company to pay additional income tax alleging that it had undervalued its shares in the subsidiary Vodafone India Services while transferring them to the parent company in Britain. The transaction took place in FY10. Transfer pricing is the practice of arm's length pricing for transactions between Group companies based in different countries to ensure a fair price — one that would have been charged to an unrelated party — is levied.

A Division Bench headed by Chief Justice Mohit Shah and Justice M Sanklecha said "in our opinion there is no taxable income on share premium received on the issue of shares." The order in favour of Vodafone is being considered significant because some domestic companies too are involved in similar transfer pricing cases.

The tax authority had issued a show cause notice to Vodafone India on January 17, 2014 and later passed an order asking it to pay additional Rs 3,200-crore tax for allegedly undervaluing the shares of its Pune BPO. On January 27, Vodafone moved the High Court challenging the I-T order and contended that its transaction on transfer of shares was not taxable under the Indian tax laws.

Its counsel Haresh Salve argued that the share premium received on the issue of such shares was not taxable. He said the department's order amounted to levying tax on a "non- -existent income". It may be noted that many multinationals, including Shell India and Leighton India Contractors, are also fighting transfer pricing cases in various courts.

This is not the first time Vodafone has questioned a transfer pricing tax order. It has in the past dragged I-T Department to High Court over two other transfer pricing tax orders that raised a demand of Rs 3,700 crore and Rs 400 crore on Vodafone India. Both these cases are pending.
Vodafone is locked in a separate USD 2 billion dispute with the Government over its buying of Hong Kong-based Hutchison's stake in Hutchison-Essar. Welcoming the verdict, Vodafone, in a statement here said, "we have maintained consistently throughout the legal proceedings that this transaction was not taxable."

Allowing the petition filed by Vodafone, the High Court quashed the I-T Department's tax order as null and void and being without jurisdiction.

The orders include a reference dated July 11, 2011 by the Assessing Officer to Transfer Pricing Officer to determine the arms-length price (ALP) of issue of shares at a premium by the petitioner to its holding company, a non-resident entity. The HC also set aside another I-T order dated February 11, 2014 on the preliminary issue of jurisdiction to tax issues of shares at a premium to its holding company.

The judges opined, "We find that in the present facts, issue of shares at a premium by the petitioner to its non- resident holding company does not give rise to any income from an admitted international transaction." The issue arose as Vodafone India, a wholly owned subsidiary of Vodafone Tele-Services (India) Holdings Ltd, needed funds for its telecommunication services project in India from its holding company during FY 2008-09 (AY 2009-10).

On August 21, 2008, the petitioner (Vodafone India) issued 2,89,224 equity shares of the face value of Rs 10 each at a premium of Rs 8,509 per share to its holding company.

This resulted in the petitioner receiving Rs 246.38 crore from its holding company on issue of shares between August and November 2008. The fair market value of the issue of equity shares at Rs 8,519 per share was determined by the petitioner in accordance with the methodology prescribed under the Capital Issues (Control) Act, 1947. However, according to Assessing Officer and Transfer Pricing Officer, the petitioner ought to have valued each share at Rs 53,775, as against Rs 8,519 under the Act, and on that basis shortfall in premium to the extent of Rs 45,256 per share resulted in shortfall of Rs 1,308.91 crore.

Both AO and TPO held this amount of Rs 1,308.91 crore as income. Further, they said Rs 1,308.91 crore is required to be treated as deemed loan given by Vodafone to its holding company and periodical interest thereon is to be charged to tax as interest income of Rs 88.35 crore in FY 2008-09 (AY 2009-10).

Vodafone argued the Act does not tax the inflow of capital into the country. Nor does the Act create any legal fiction to treat such alleged shortfall in capital receipt on issue of equity shares by an Indian company to its non-resident holding company as income.

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CIT v. Thysseen Krupp (Bombay High Court)


An adjustment with respect to transfer pricing has to be confined to transactions with Associated Enterprises and cannot be made with respect to transactions with unrelated third parties.

A) Facts of the case:

1. The Respondent is in the business of execution of turnkey contracts involving design, manufacture, supply, erection and commissioning of sugar plants, cement plants, etc.

2. During the subject Assessment Year, the Respondent Assessee had International Transaction with its Associated Enterprises (AE) in respect of import of spares and equipments, royalty and project engineering, manufacturing drawings, settlement for liquidated damages and interest on delayed payments.

3. The TPO on selection of comparables arrived at the margin at 6.29% as against 5.19% arrived at by the Respondent Assessee in its Form 3CEB.

4. However, the TPO proposed to make adjustment on account of enhancement of profit margin on all transactions of the Respondent Assessee.

5. This in spite of the Respondent Assessee objection to the application of the margin applicable to arrive at ALP at 6.29% on transactions with third party i.e. non AE transactions. 

6. The Tribunal by the impugned order held that only transactions entered into by an assessee with its AE are subject to transfer pricing adjustment and not otherwise. Thus, allowing the Assessee appeal before it.

B) Issue put before Bombay High Court:

Whether on the facts and the circumstance of the case and law, the Tribunal was justified in law in restricting the Transfer Pricing (TP) adjustment only to the transaction between the Associated Enterprises (Aes.)?

C) Ruling of Honorable Bombay High Court:

1. In terms of Chapter X of the Act,
Redetermination of tile consideration is to be done only with regard to income arising from International Transactions on determination of ALP.

2. The adjustment which is mandated is only in respect of International Transaction and not transactions entered into by assessee with independent unrelated third parties.

3. This is particularly so as there is no issue of avoidance of tax requiring adjustment in the valuation in respect of transactions entered into with independent third parties. The adjustment as proposed by the Revenue if allowed would result in increasing the profit in respect of transactions entered into with non AE. This adjustment is beyond the scope and ambit of Chapter X of the Act.

D) Key Take Away

An adjustment with respect to transfer pricing has to be confined to transactions with Associated Enterprises and cannot be made with respect to transactions with unrelated third parties.

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• The High Court had to consider the issue of determination of arm’s length price of the advertisement, marketing and sales promotion (‘AMP’) expenses incurred by the Assessee, Maruti Suzuki India Ltd. The Tribunal followed its decision in LG Electronics India Pvt. Ltd. v. ACIT 2013 22 ITR (Trib) 1 and held that the Assessing Officer (‘AO’) was entitled to make a transfer pricing adjustment under Chapter X of the Act in respect of the AMP expenditure incurred by MSIL on the ground that such expenditure created brand value and marketing intangibles in respect of the brands/trademarks belonging to MSIL’s Associated Enterprise (‘AE’), Suzuki Motor Corporation, Japan held by the High Court.

• The High Court had to consider the issue of determination of arm’s length price of the advertisement, marketing and sales promotion (‘AMP’) expenses incurred by the Assessee, Maruti Suzuki India Ltd. The Tribunal followed its decision in LG Electronics India Pvt. Ltd. v. ACIT 2013 22 ITR (Trib) 1 and held that the Assessing Officer (‘AO’) was entitled to make a transfer pricing adjustment under Chapter X of the Act in respect of the AMP expenditure incurred by MSIL on the ground that such expenditure created brand value and marketing intangibles in respect of the brands/trademarks belonging to MSIL’s Associated Enterprise (‘AE’), Suzuki Motor Corporation, Japan held by the High Court.

 
• In the case of Delphi TVS Diesel Systems Ltd. v. Assistant CIT, it was held that Transactional Net Margin Method is not applicable when comparison of transaction is possible.

 • In the case of Hindustan Unilever Ltd. v. Additional CIT (Mumbai) it was held that benchmarking is required to be done only for transactions with international related parties and not on entire turnover.

 • In the case of Deputy CIT v. Hellosoft India Pvt.Ltd, it was held that Loss-making companies and companies having super normal profits not to be considered as comparables for Transactional Net Margin Method.

 • Net Profit Margin realised from transaction with associated enterprises cannot be taken as comparable. Refer, Technimont ICB P. Ltd. v. Additional CIT.

 • Difference arose in calculation of cost due to the fact that TPO took the cost relating to charter hire activity as 50 percent of total cost whereas the assessee took the actual cost relating to the charter hire activity. Cost plus method can be applied only by taking the actual cost of the activity. Once the figures used in the calculation made by the TPO are replaced by actual figures, the payment made by the assessee is at ALP and, therefore, no adjustment is called for. Refer, Reliance Industries Ltd. v. Addl. CIT.

 • Bangalore ITAT in the case of Trilogy E-Business Software India v. DCIT, held that TPO is entitled to collect information under section 133(6), however if it is used against the assessee, assessee should be given an opportunity, since comparables cannot be ignored on ground of abnormal profits/losses if they are functionally comparable.

 • Chennai ITAT in the case of Ascendas (India) Pvt. Ltd v. DCIT (Chennai), explains the Law on valuation of shares of a closely held company.

 • In the case of CIT v .CA Computer Associates India P. Ltd, it was held that No reduction to be made because of failure of customers to pay for product.

 • List of comparable companies relied on by assessee rejected by Transfer Pricing Officer without stating any reason is not allowed. Refer, Assistant CIT v. SRA Systems Ltd.

 • The “Bright Line test” can be applied to determine whether AMP expenses incurred by assessee are excessive and for the benefit of the brand owner- Adjustment in relation to advertisement, marketing, and sale promotion expenses incurred by assessee for creating or improving, marketing intangible for and on behalf of foreign AE is permissible. Expenses in connection with sales which do not lead to brand promotion cannot be brought within ambit of ‘advertisement, marketing and promotion expenses’. Correct approach under TNMM is to consider operating profit from each international transaction in relation to total cost or sales or capital employed ,etc of such international transaction and not net profit , total costs sales , capital employed of assessee as a whole on entity level. (S. 92B , Rule 10A, 10B ). Refer, L.G. Electronics India Pvt. Ltd v. ACIT.

 • Chennai ITAT in the case of ACIT v. Handy Waterbase India (P.) Ltd held that the Assessee is engaged in sale and export of pasteurized crab meat. The Assessee entered in to international transactions with its associated enterprise and showed sale price at Rs 24 Crores. TPO on reference made by the Assessing Officer,fixed arm’s length price of goods at Rs 18 Crores. Assessing Officer opined that receipts of assessee from sales to AE was in excess of arm’s length price and such excess was nothing but income from other sources .The Assessing Officer relying on provisions of section 10B(7) read with section 80IA (8) and 80(IA)(10) added excessive receipts to income of assessee. On appeal Commissioner (Appeals) deleted the addition. On appeal by revenue, the Tribunal held that, where sale price realised from AE was much higher than ALP fixed by TPO and there was no recommendation by TPO for making any adjustment, Assessing Officer was not at all required to make any adjustment in ALP. Accordingly the appeal of revenue was dismissed.

 • Chennai ITAT in the case of SL Lumax Ltd. v. ACIT, held that Assessee, engaged in auto components manufacturing and sale, had international transactions with four Associated Enterprises (AE). International transactions comprised of import of raw materials, import of machinery and payment for royalty and technical assistance. The Assessing officer divided total operating cost between material cost relatable to AEs and cost relatable to non-AEs, which included both material cost as well as other costs. Thus, Assessing officer deducted from operating cost, only material cost relatable to purchases from AEs and not operating cost attributable to such material cost. It was held that if along with material cost paid to AEs, operational cost attributable to such cost was also considered, then amount considered by TPO as ALP of AE purchases, would have gone up significantly, and hence work out of ALP of purchases from non-AEs had been erroneously done. Matter remanded back.

 • Bangalore ITAT in the case of Lenovo India P. Ltd. v. ACIT, held that Where similar transactions with associated enterprises for subsequent years have been accepted by TPO without any ALP adjustment, he should adopt TP analysis conducted by assessee for relevant assessment year also to be at ALP. Revenue could not be permitted to take a different approach in the relevant assessment year. Matter Remanded back.

 • In the case of Wills Processing Services (India) P. Ltd. It was held that Information relied upon by Transfer Pricing Officer is not available in public domain. Secret information not to be used against assessee. No uniformity in rejection of assessee’s comparables and selection of comparables by Transfer Pricing Officer. Proper and appropriate functions, assets and risk analysis required to be done. Transfer Pricing Officer and Dispute Resolution Panel to deal with assessee’s objections and discuss them in order. Matter remanded.

 • Mumbai ITAT in the case of Dresser- Rand India (P.) v. Addl.CIT, held that assessee rendered similar service to both domestic customers and AEs abroad, but granted discount of 10% only to AE abroad. According to TPO price of services rendered was not at ALP and thus, he made upward adjustment in ALP to the extent of discount allowed. It was held that in independent business situation granting of discount is a normal occurrence and unless AO demonstrates that discount so allowed would not have been allowed in an arm’s length situation, ALP adjustment could not be made in respect of the same. It was therefore held that since there was nothing on record to show to even suggest that discount in question was not arm’s length discount, or that discount had not been allowed under any other situations, adjustment made by revenue was set aside.

 • Petitioner participated in the proceedings before TPO and has remedy to move before the DRP as well as appeal before the Tribunal hence writ petition was held to be not maintainable .(Art 226, Constitution of India). Refer, Hindalco Industries Ltd v. Add.CIT.

 • While computing Arms length price profit should be considered without deduction of depreciation. Refer, Qual Core Logic Ltd v. Dy.CIT

 • Mumbai ITAT held that A “controlled transaction” can never be regarded as “comparable” even if at ALP. Refer, Tecnimont ICB Private Limited v. ACIT.

 • Mumbai ITAT in the case of Deloitte Consulting India (P.) Ltd.v. DCIT held that reference to TPO does not give presumption that the payment is allowable under section 37.

 • Average of percentage of expenditure incurred by 17 pharmaceutical companies on advertisement and marketing and no analysis as to type of drug, nature of market, period of advertisement. Mumbai ITAT held not to be TNMM as per provisions of the Act. Refer, ACIT v. Genom Biotech (P.)Ltd.

 • In the case of Tata Autocomp Systems Ltd v. ACIT, it was held that interest free loan to international sister concern comes under the ambit of transfer pricing.

 • Mumbai High court in the case of CIT v. CA Computer Associates India Pvt. Ltd, held that Royalty allowable even in respect of unpaid sales.

 • Operating margin being within the range of 5% of the arithmetic mean of the operating margin of such comparable companies, same has to be accepted as ALP. Refer, Caryle India Advisors (P) Ltd. v. ACIT.

 • TPO has no authority to disallow the payment for the purpose of business, on the ground that the assessee has suffered continuous losses. [S. 37(I)]. Refer, CIT v. EKL Appliances Ltd.

 • Bangalore ITAT held that Expression “shall” used in Rule 10B(4), makes it clear that only current year’s data is to be used. Refer, Dy. CIT v. Deloitte Consulting India P. Ltd.

 • Bangalore ITAT in the case of Kodiak Networks (India) Pvt. Ltd v. ACIT, held that Information cannot be used against the assessee without giving an opportunity.

 • AO has made a reference to the TPO for determination of ALP, adoption of ALP suggested is sufficient compliance. Refer, Tevapharm Pvt. Ltd. v. Addl. CIT.

 • While Computing of Arm’s Length Price the data is to be restricted to AEP. Refer, Genesys Intergrating Systems (I) Pvt. Ltd. v. Dy. CIT.

 • Arm’s length price is to be done in accordance with Rule 10B. Refer, Trigent Software Ltd. v. Asst. CIT.

 • ITAT Kolkata held that Law on taxability of “turnkey contracts” for offshore & onshore supply explained and matter set aside for redetermination. Refer, Dongfang Electric Corporation v. DDIT.

 • Chandigarh ITAT in the case of GlaxoSmithkline Consumer Healthcare Ltd v. Addl. CIT, held that reference by the AO under section 92CA(1) is transaction based and not entity based. There may be several international transactions with the same entity, but reference made by the AO is each transaction specific i.e. only the international transaction which have been referred to by the AO after taking the approval of the Commissioner can be looked into by the TPO.

 • In the case of Nimbus Communications Ltd. v. Asst. CIT (Mumbai), it was held that AO cannot make addition of notional interest on overdue payments from AE.

 • The assessee has followed a scientific system of providing for depreciation on a more real time basis. The assessee is not providing technical depreciation influenced by Income Tax Rules. The assessee provides for more or less actual depreciation. This actual depreciation is more relevant in working out the operating profit of the assessee. Thus, no adjustment is called for in the quantum of depreciation provided by the assessee in its operating account so as to work out its operating profit for the purpose of determining the Arm’s Length Price. Refer, Lason India (P.) Ltd. v. Asst.CIT.

 • Where TPO rejected the filters adopted by the assessee and adopted untenable filters for arriving at the comparables. The assessee in his detailed submissions before the TPO as well as the Tribunal, brought out various factors that would justify adopting of comparables by the assessee. On appeal, the Tribunal following the decision of Genesis Integrating System India P. Ltd. (Bangalore) set- aside the matter back to the file of AO directing the TPO to allow assessee to cross examine the comparables whose replies were sought to be used against the assessee if the assessee so desires. Refer, Genesis Microchip (I) (P.) Ltd. v. Dy.CIT.

 • The extension of credit to the AE beyond a stipulated credit period cannot be construed as an ‘international transaction’ for the purpose of section 92B(1) so as to require adjustment for ascertaining the ALP. Therefore, the consequential addition is untenable and liable to be deleted. Refer, Patni Computer Systems Ltd. v. Dy.CIT.

 • ITAT Delhi in the case of Ericsson India Pvt. Ltd v. DCIT held that TPO has no power to question business purpose of transaction, rule 10B(1)(a), does not authorize disallowance of any expenditure on the ground that it was not necessary.

 • Chennai ITAT in the case of Siva Industries & Holdings Ltd. v. Asst. CIT held that in case of grant of loan by the assessee to its foreign subsidiary in foreign currency out of its own funds, for determining ALP, it is the international LIBOR rate that
 would apply and not the domestic prime lending rate, and assessee charging interest at a rate higher than the LIBOR rate, no addition can be made on this account.

 • Corporate guarantee provided by assessee to subsidiary does not fall within international transaction. Refer, Four Soft Ltd. v. Deputy CIT.

 • The Assessee in its TP study observed that as no external CUP was available for bench marking the transaction applied the TNMM and concluded that transaction was at arms’s length .The TPO rejected the assessee’s method considered a risk free return from the subsidiary, a notional interest at 10 percent on loan as ALP amounting to Rs 31, 51, 259. On appeal Commissioner (Appeals) also confirmed the addition. On appeal to the Tribunal , the tribunal held that neither the assessee nor TPO having examined applicability of CUP method in order to determine the ALP of the international transaction of interest –free currency loan to its subsidiary by assessee , the Tribunal restored the matter to Assessing Officer for fresh adjudication following CUP method. Refer, Aithent Technologies (P) Ltd v. ITO.

 • The assessee had international transactions with related and unrelated parties . The TPO has selected only four comparables and also denied the benefit of+ 5 percent sought by assessee. The adjustment made by the TPO was confirmed by the DRP. On appeal to the Tribunal , it was contended that the (1) Party having substantial related party transactions should be excluded as comparable .(2) Allocation of advertisement and sale promotion expenses based on turn over of manufacturing and trading is held to be not proper. (3) The benefit of standard deduction of plus or minus 5 percent is not taken in to consideration. (4)The adjustment can be made only in respect of transaction with Associated Enterprises instead of entire turn over ,(5) While working out the operating profit to sales margin , accurate figures as per the annual accounts of the concerned comparables should be taken .The Tribunal held that the TPO having flawed on five issues as contended by the assessee matter remanded to the Assessing Officer for deciding the matter afresh after taking in to consideration the propositions put forth by the assessee. Refer, Huntman Adavnced Materials (India) (P) Ltd v. DY.CIT.

 • The assessee is engaged in the business of manufacturing of several products . It had three overseas subsidiaries , namely Vega UK, Vega US and Vega UAE. The assessee sold its products to domestic market where as marketing and distribution of its products in international markets was undertaken by Vega entities of in their specified jurisdiction. The TPO made adjustment in respect of sales made to Vega UAE on ground that Vega UAE was neither bearing any inventory risk nor credit risk and therefore it was not a distributor but only market service provider .The TPO adopted the transfer pricing on basis of operating cost /operating profit percentage of Vega UAE, Vega UK and Vega US as base. The Tribunal held that operating cost /operating profit margin depend on level of operating expenses incurred by respective Vega entities and also making business earning by respective Vega entities, if operating cost is higher in US it could not be said that profit margin of other Vega entities in different countries should be at par with profit margin of Vega US . Accordingly once the it was accepted that Vega UAE as distributor and carrying on both inventory or credit risk , TP adjustment made of the TP officer was deleted .Refer, AIA Engineering Ltd v. Addl. CIT.

 • The assessee is 100 % subsidiary of a foreign company and is engaged in the business of BPO/ITES. The assessee has adopted TNMM method as the most appropriate method and computed the PLI(OP/TC) at the rate of 15.76 percent on the operating cost . The TPO has determined PLI at 25.78 percent on the basis of eight comparable. Before Commissioner (Appeals) the assessee has furnished eight additional comparables. On the basis of 16 comparables the average PLI was computed at 11.01percentage which was less than PLI shown by assessee. The Commissioner (Appeals) had excluded the results of loss making companies for the purpose of determining the average profit margin. On appeal to Tribunal,by assessee the Tribunal held that order of Commissioner (Appeals), held to be justified . Refer, Knooh Solutions (P) Ltd v. ITO.

 • Price paid by assessee to its associated enterprise was higher than price paid by unrelated parties for purchase of similar goods hence adjustment made by TPO held to be justified. Refer, Vipin Enterprises v. Addl.CIT.

 • Assessee company which is in the business of providing buying services to associated enterprises for sourcing of garments, handicrafts, leather products etc. in India. Assessee determined ALP on ‘transaction by transaction’ basis using most appropriate method having regard to functional analysis and availability of comparable uncontrolled bench mark. TPO determined ALP by combining all transactions undertaken by assessee. Tribunal held that in assessee’s case, there were different segmental activities, which were independent of each other, they are required to be analyzed on transaction to transaction basis and not by combining all activities, hence the method adopted by the assessee is correct and up held the computation of assessee. Refer, Benetton India (P) Ltd. v. ITO.

 • Assessee has reimbursed only cost of one employee who is sitting in Singapore. Assessee has produced evidence in the form of emails to substantiate its case that it has actually obtained services from its group companies and justified the commercial expediency of reimbursement of cost to said concerns by relating the payment to revenue earned by it from such services, the Tribunal held that there is no justification for adjustment to the ALP in respect of the payments made by the assessee to its group concerns. The Tribunal also held that once an international transaction has been made subject of determination of ALP by the TPO, and he has found that transaction is at arm’s length, then it is not permissible for the Assessing Officer to reâ€examine that transaction and make disallowance under the normal provisions of the Act. Refer, Cushman & Wakefield India (P) Ltd v. ACIT.

 • Assessee has paid 3% of the net sales price, which was approved by RBI. The Tribunal has found that the assessee had sold only part of goods manufactured to its Associated enterprise and bulk sales were made to uncontrolled parties, and the Assessing Officer had failed to bring any material on record to show that payment of royalty @ 3% was not at arm’s length, hence disallowance of royalty was not justified. Refer, SonaOkegawa Precision Forgings Ltd. v. Addl. CIT.

 • Pune ITAT in the case of Demag Cranes & Components (India) v. Dy. CIT held that In a Transfer Pricing matter, the Tribunal had to consider whether for purposes of making adjustment under Rule 10B(1)(e)(iii) ‘working capital’ constituted a ‘difference between the international transactions and the comparable uncontrolled transactions of between the nterprises entering into such transactions’ and if so whether the said difference ‘could materially affect’ the amount of net profit margin of relevant transactions in the open market. Held by the Tribunal: Rule 10B(1)(e)(iii) provides that “the profit margin arising in comparable uncontrolled transactions has to be adjusted to take into account the differences, if any between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market“. While the “differences” are not specified, it covers “any differences” which could materially affect the amount of net profit margin. The litmus test to be applied is if the ‘difference, if any, is capable of affecting the NPM in open market? If yes, then the TPO is under statutory obligation to eliminate such differences. The revenue cannot say that difference is likely to exist in all accounts and so the demands of the assessee should be ignored. The revenue’s stand that the assessee is ineligible for any adjustments if he provides the set of comparable is not correct because under Rule 10(3) it is the duty of the AO/TPO/DRP to minimize/eliminate the difference which is likely to materially affect the price. It is the settled proposition that ‘working capital’ adjustment is an adjustment that is required to be made in TNMM. The revenue’s contention that the ‘differences’ specified should refer to only (i) the factor of demand and supply; (ii) existence of marketable intangibles i.e. brand name etc; (iii) geographical location and the like is not acceptable. Further, as the difference in the Arm’s length Operating Margin of the Comparables before and after making the adjustment for working capital was up to 3.77%, it was “material” and had to be eliminated (Mentor Graphics(2007) 109 ITD 101 (Delhi), E-gain Communication(2008) 118 ITD 243 (Pune) Sony India( 2008) 114 ITD 448 (Delhi) &TNT India followed).

 • In a transfer pricing appeal, the Tribunal had to consider two issues: (a) what is the data to be considered by the TPO at the time of determining ALP? & (b) whether the assessee should be given an opportunity to refute the material sought to be utilized by the TPO? HELD by the Tribunal:

 (i) Under Rule 10D(4) the information and documents should as far as possible be contemporaneous and should exists latest by the ‘specified date’ specified in section 92F(4) i.e. the due date for filing the ROI. There is no cut-off date upto which only the information available in public domain can be taken into consideration by the TPO while making the transfer pricing adjustments and arriving at the ALP. The assessee’s argument that section 92D and Rule 10D is defeated if the TPO takes the data which is available in the public domain after the specified date is not acceptable.

 (ii) While the TPO is empowered by section 131(1) & 133(6) to call for information without informing the assessee about the process, he cannot use such information against the assessee without giving the assessee a reasonable opportunity of hearing. If the assessee seeks an opportunity to cross-examine third parties, it has to be given the opportunity (Genisys Integrating Systems followed). Refer, Kodiak Networks (India) Pvt. Ltd. v. ACIT.

 • Assessee was a wholly owned subsidiary of U.S. based company MTC. It entered into a support agreement with assessee for research services and corporate support services which was an international transaction. For bench marking assessee’s international transactions TPO took various companies and made additions. Before Commissioner (Appeals) the assessee submitted that comparable cases identified by TPO were not engaged in similar activities as that of assessee. It was also contended that the TPO has ignored the comparable of another subsidiary where in the business is identical. The Commissioner(Appeals) held that the TPO arbitrarily selected ‘S’ Ltd. as comparable and ignored ‘C’ Ltd as comparable. Commissioner (Appeals) further held that had ‘C’ had been considered as comparable then arithmetic mean all comparable selected by TPO and assessee would be only 11.71 percentage and applying safe harbor rules in terms of second proviso below section 92C(2), difference in price between one adopted by TPO and ALP determined by including ‘C’ Ltd would be within + or â€5 percent range calling for no adjustment to price adopted by assessee in respect of international transaction, accordingly the Commissioner (Appeals) deleted the addition made by the TPO. Tribunal confirmed the view of Commissioner . Refer, Dy. CIT v. Monsanto Holdings (P) Ltd.

 • Assessee was a British company and was part of BBC group. It had appointed an Indian company, BWIPL as its authorized agent in India under an airtime sales agreement to solicit orders for sale of advertisement airtime on channel at rates and on terms and advertising provided by assessee and pass on such orders to assessee for acceptance and confirmation. In consideration of service provided by BWIPL, it was to receive 15 percent marketing commission of advertisement revenues received by assessee from Indian advertisers. Assessee claimed that since BWIPL had been remunerated from arm’s length price no further income was taxable in India. Tribunal has accepted the contention of assessee and allowed the appeal. On appeal the High Court upheld the order of Tribunal. Refer, Director of Income Tax v. BBC World wide.



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1 comment:

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