Transfer Pricing in India: A Snapshot

Transfer Pricing in India – A
snapshot

Background
 Indian Transfer Pricing (‘TP”) regulations were introduced in 2001 with an
intent to protect revenue leakage in international transactions with related
parties by shifting profits from India to overseas jurisdictions.

 The Finance Act, 2012 has further extended the scope of TP provisions to
specified domestic transactions.

 The amendment is in accordance with the suggestion made by the Supreme
Court in case of Glaxo Smithkline Asia (P) Ltd. wherein the intent is to curb
tax arbitrage possible in cases where companies tend to shift profits from one
tax paying entity to another tax exempt or loss making entity within India.

© DNS Advisors. All rights reserved.

Basic Understanding
 Transfer Pricing refers to the pricing of International Transactions between two
Associated Enterprises

 A price between unrelated parties is known as the Arm’s Length Price (“ALP”)

 Due to the special relationship between related parties, the transfer price may
be different than the price that would have been agreed between unrelated
parties

 The provisions relating to TP require that all ‘International Transactions’
with ‘Associated Enterprises’ should be at Arm’s Length Price


Legal Framework
 International Transfer Pricing provisions are covered under
 Section 92 to 92F in the Indian Income Tax Act, 1961;
 Rule 10A to Rule 10E of the Income Tax Rules; and
 Sections 271(1)(c), 271 AA, 271 BA and 271 G.

 Provisions are not applicable if the application of transfer pricing
provisions lead to a
 reduction in the income chargeable to tax or
 increasing the loss


International Transaction
“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 provisions 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.

 A transaction entered into by an enterprise with a person other than an associated
enterprise shall, 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


Associated Enterprise
“Associated Enterprise” means an enterprise

 Which participates, directly or indirectly, or through one or more
intermediaries, in the management or control or capital of the other
enterprise; or

 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 person who participate, directly or indirectly
or through one or more intermediaries in the management or control or
capital of the other enterprise


Arm’s Length Price (‘ALP’)
 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:
 Comparable uncontrolled price method (CUP)
 Resale price method (RPM)
 Cost plus method (CPM)
 Profit split method (PSM)
 Transactional net margin method (TNMM)
 Such other method as may be prescribed by the board

For the 1st time, CBDT has introduced the 6th method by way of Notification no. 18/2012, dated May 23, 2012, thereby
inserting Rule 10AB. The new method states that “any method which takes into account the price which has been charged or
paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated
enterprises, under similar circumstances, considering all relevant facts”. This Rule is applicable from FY 2011-12 onwards.


Documentation
 Taxpayer has to maintain extensive documentation (specified under Rule 10D)
incase aggregate value of international transactions exceeds INR 1crore

 Rule 10D emphasizes on description of the Group, International Transaction,
Functional Analysis, Risk Analysis, Selection and Application of Most
Appropriate Method, Search Process, etc.

 The documentation is to be kept and maintained for a prescribed time i.e. 8
years

 The documentation is to be furnished within 30 (extendable up to 60 ) days of
Revenue’s request


Accountant’s Report
 Mandatory filing of Accountants Report u/s 92E (in Form 3CEB) irrespective of
value of international transactions
 The Accountant’s report should be filed on or before the due date for filing the
corporate income tax return, i.e. on or before November 30th every year in respect of the tax
year.
 The Accountant’s report essentially comments on the following:
 Whether the tax payer has maintained the prescribed TP documentation as
required by the legislation;
 Whether as per the TP documentation the prices of international transactions are
at arm’s length; and
 Certifies the value of the international transactions as per the books of accounts
and as per the TP documentation are “true and correct”.


Penalties
Default Penalty
Failure to maintain documents 2% of the transaction value
Failure to report transaction in report
2% of the transaction value
from Chartered Accountant *
Maintain or furnish incorrect 2% of the transaction value
information or documents *

Failure to furnish documents 2% of the transaction value

Failure to furnish accountants report Rs 100,000

If adjustment is treated as concealment 100% to 300% of the tax on
of income adjustment

* Introduced by Finance Act, 2012

Introduced by Finance Act 2012


Basic Understanding
 In domestic transactions, the under-invoicing of sales and over-invoicing of
expenses ordinarily will be revenue neutral in nature, except in two
circumstances having tax arbitrage such as where one of the related entities is
 loss making or
 liable to pay tax at a lower rate and the profits are shifted to such entity

 The Finance Bill 2012 has introduced the transfer pricing provisions in respect
of specified domestic transactions as well.

 Meaning of Specified Domestic Transactions (‘SDT”) is contained under
section 92BA


Specified Domestic Transactions
 Scope of transfer pricing has expanded to cover Specified domestic transactions
(“SDT”) between related parties w.e.f. AY 2013-14

 SDT means -
 any expenditure in favour of a person referred to in clause (b) of sub-section (2) of section
40A;
 any transaction referred to in section 80A;
 any transfer of goods or services referred in S. 80-IA (8);
 any business transacted as referred in S. 80-IA(10);
 any transaction, referred to in any other section under Chapter VI-A or section 10AA, to
which provisions of sub-section (8) or sub-section (10) of section 80-IA are applicable (Refer
separate slide); or

 any other transaction as may be prescribed,


Provisions
 SDT will be subject to transfer pricing compliances at par with the norms applicable
to international transactions only where the aggregate of such transactions entered
in the previous year exceeds a sum of five crore rupees.

 This provision shall not apply if it results in reduction of taxable
income/increase in loss

 The arm’s length price (ALP) in relation to specified domestic transaction
would be determined by any of the methods as prescribed u/s 92 C as
applicable in case of International Transactions.


Documentation and Accountants Report

 Taxpayers meeting the threshold criteria, have to mandatorily maintain
detailed transfer pricing documents for all Specified Domestic Transactions

 Taxpayer needs to obtain an Accountant’s Report in form 3CEB from a
Chartered Accountant and furnish the same with the Revenue authorities
before the due date of filing the tax return, i.e on or before 30th November of the
tax year.


Other Amendments


Definition of International Transaction
 The definition of international transaction amended to provide clarity
 The amendment would have a retrospective effect & would apply w.e.f AY 2002-
03 and later

 Tangible property transactions:
“the purchase, sale, transfer, lease or use of tangible property including building,
transportation vehicle, machinery, etc, or any other article, product or thing”

 Intangible property transactions:
“the purchase, sale, transfer, lease or use of intangible property, including the transfer of
ownership or the provision of use of rights regarding land use, copyrights, patents,
trademarks, licenses, franchises, customer list, marketing channel, brand, commercial
secret, know-how, industrial property right, exterior design or practical and new design or
any other business or commercial rights of similar nature”


Definition of International Transaction

 Financial transactions:
“capital financing, including any type of long-term or short-term borrowing, lending
or guarantee, etc”

 Provision of services:
“Provision of market research, market development, scientific research, legal or
accounting service, etc Tangible property transactions”

 Business restructuring:
“a transaction of business restructuring or reorganization, entered into by an
enterprise with an associated enterprise, irrespective of the fact that it has bearing on
the profit, income, losses or assets of such enterprises at the time of the transaction or
at any future date”


Arm’s Length Range (“ALP”)
• Income Tax Act provided the taxpayer with the option to adopt a
price that may vary from the ALP by an amount not exceeding 5%
Initial of the ALP.
Law

• Taxpayer would be within the range if the ALP is within +/- 5% of
Finance the transfer price.
Act 2009

• Arm’s length range has been reduced further and would be limited
Finance to 3% w.e.f. AY 2013-14 - actual range not yet specified
Act 2012

The CBDT, vide notification no. 31/2012 dated August 17, 2012, has retained the 5% tolerance band for AY
2012-13


Penalty provisions
 In addition to existing penalties prescribed for non compliance of TP
provisions in respect of international transactions or specified domestic
transaction, failing to report a transaction and furnishing incorrect
information will attract a penalty of 2% of the value of each such
transaction.

 This amendment will take effect from 1st July 2012.


About DNS
DNS Advisors is a specialized
corporate advisory firm promoted
by young and dynamic professionals
having rich experience in the
field of assurance, taxation, financial and
Management consultancy.

Our team members, while sharing a common vision, belong to diverse technical
business and financial background. We deploy specialize and multi disciplinary
teams to serve assignments requiring specific skills.


What we offer
In relation to transfer pricing, we offer the following services:

 Transfer pricing documentation for AY 2012-13

 Transfer pricing benchmarking analysis for AY 2013-14

 Preparation and filing of Form 3CEB


Other Service Offerings
Besides these and other traditional services, we at DNS Advisors specializes in
following domains:

 XBRL Conversion Services

 Business Valuations

 Deal Structuring and International Taxation

 FEMA Compliances for Inbound/Outbound Investments

 Business setup services in and outside India including Tax havens


Contact us

DNS Advisors Pvt Ltd Contact Persons

Delhi Naveen Goyal
W 123, M +91 99110 95297
Greater Kailash Part II E naveen@dnsadvisors.com
New Delhi – 110048
Tel: 011 40535910 Neha Bansal
M +91 98109 04228
E neha@dnsadvisors.com


Transfer Pricing in India: A Snapshot

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Viewers also liked

Viewers also liked (19)

Similar to Transfer Pricing in India: A Snapshot

Similar to Transfer Pricing in India: A Snapshot (20)

Recently uploaded

Recently uploaded (20)

Transfer Pricing in India: A Snapshot