Key Learning's from Recent ConcludedTransfer Pricing Audit 2nd Annual International Tax & Transfer Pricing Conference Feb 13, 2010, New Delhi By: CA.Gaurav Garg JGarg Economic Advisors
After Effect of TPO’s Order 2 JGarg Economic Advisors Pvt. Ltd.
Transfer Pricing Additions 3 JGarg Economic Advisors Pvt. Ltd.
As per estimate, in past 5 years Government is able to mom-up around 23,000 cr. through transfer pricing additions. For FY 2005-06, out of the companies selected for scrutiny, 60% received transfer pricing bill. Reason for transfer pricing addition Recommendation of higher margin at net operating level. Disallowance of fees paid to associated enterprises for use of intangibles. Transfer Pricing Addition 4 JGarg Economic Advisors Pvt. Ltd.
Payment for intercompany services to associated enterprises disallowed. Indian company treated as creator of intangibles asset owned by associated enterprises, thereby addition on account of notional income. Transfer Pricing Addition 5 JGarg Economic Advisors Pvt. Ltd.
Case Study 1 Facts of the Case NR Parent Co. provided know how to manufacture particular finished product to its Indian Subsidiary, The Assessee. The Assessee, manufactured the finished goods and sold the same in India and Outside India. As per “Technical Know-how” agreement between the Assessee and NR Parent Co., the Assessee needs to pay royalty of 5% on sales. All the exports were made to NR Group Companies. NR Parent Co. The Assessee NR Group Company 7 JGarg Economic Advisors Pvt. Ltd.
Case Study 1 Revenue’s Stand The Assessee is acting as a contract manufacturer. Royalty on sales made to NR Group Companies amounts to collecting royalty on sales to itself. Such payment of royalty is not at arm’s length and hence disallowed in full. NR Parent Co. The Assessee NR Group Company 8 JGarg Economic Advisors Pvt. Ltd.
Case Study 2 NR Parent Co. Facts of the Case The Assessee is the subsidiary company of NR Parent Co. The Assessee uses trade mark of NR Parent Co. TNMM is used to justify the transaction. The Assessee 9 JGarg Economic Advisors Pvt. Ltd.
Case Study 2 NR Parent Co. Revenue’s Stand Trademark owned by NR Parent Co. is not valuable. All the royalty paid to NR Parent Co., accordingly disallowed. The Assessee 10 JGarg Economic Advisors Pvt. Ltd.
Steps to be Followed Identify the IP Define Ownership Find value/ price Document it 11 JGarg Economic Advisors Pvt. Ltd.
Four vital, somewhat interrelated questions; Is there actually any intangible property needing to be considered ? If there is, who owns it ? If there is, would the property have any value at at arm’s length ? If so, what would an independent pay to use it ? To Put the Same in Q 12 JGarg Economic Advisors Pvt. Ltd.
Meaning of Intangible Asset Non physical asset of an enterprise i.e. non-financial or non-physical source of value resulting from claims of future benefit. As per OECD guidelines, Intangible Property are of two types Trade intangible (also referred technical or manufacturing) intangibles Patents, know-how, designs etc. Marketing Intangible Trade-marks, trade-names, customer lists, distribution channel etc. Meaning 13 JGarg Economic Advisors Pvt. Ltd.
Legal ownership Control over IP Economic ownership Ownership 14 JGarg Economic Advisors Pvt. Ltd.
CUP Comparable agreement between independent party RPM Where intangible is embedded in the goods transferred PSM Where no CUP is available and intangibles owned by both the AEs TNMM Tested party does not own intangible TP Methods 15 JGarg Economic Advisors Pvt. Ltd.
Cost Approach Cost of creating and transferring Higher the development cost, higher the value of intangible Several approaches to measure cost – historical cost, replacement cost and inflation adjusted cost Can any one tell me historical cost for creating brands like Dell, Nokia, Coca-Cola, Pepsi, Microsoft, Toyota, Sony etc ? Valuation 16 JGarg Economic Advisors Pvt. Ltd.
Market Approach Price paid for same or similar intangibles in comparable transactions among unrelated parties. Existence of market, comparable transaction, timings of the transaction etc. Valuation 17 JGarg Economic Advisors Pvt. Ltd.
Income Approach Value of an intangible with reference to future economic benefits of buyer or lessee Economic benefit should only include benefits generating directly from the use of intangible Present value of economic rent Example: Expected benefits Rs.100,000 Expected growth rate 10% Estimated discount rate 20% Effective I.Tax 30% Valuation 18 JGarg Economic Advisors Pvt. Ltd.
Income Approach Valuation 19 JGarg Economic Advisors Pvt. Ltd.
Case Study 1 Facts of the Case NR Parent Co. provided management services to its Indian Subsidiary, The Assessee. Pricing policy on Cost plus basis. NR Parent Co. The Assessee 21 JGarg Economic Advisors Pvt. Ltd.
Case Study 1 Revenue’s Contention Inadequate documentation to prove receipt of services and benefits from the same. Officer disallowed 100% of the management fee paid to NR Parent Co. NR Parent Co. The Assessee 22 JGarg Economic Advisors Pvt. Ltd.
Have intra-group services been provided ? Would an independent company pay for the services ? Are the services, shareholder services ? What is the arm’s length price of a service ? “Q” which require “A” 23 JGarg Economic Advisors Pvt. Ltd.