The entire concept of Transfer Pricing revolves
around the following Three Key Concepts
1. International Transaction (including Specified
2. Associated Enterprise
3. Arm’s Length Price
The Basic Principle of Transfer Pricing
• An international transaction between
Associated entities needs to be at an Arm’s
So what do the Tax Authorities do
• They ask you to report all international
transactions between Associated entities and
to maintain support documentation to
• There is a threshold limit of the aggregate of
such transactions being Rs 5 Crore.
• They also conduct Transfer Pricing Audits to
scrutinize your documentation and the
method you have adopted to establish this.
International Transfer Pricing
provisions are covered under
• Section 92 to 92F in the Indian Income Tax
• Rule 10A to Rule 10T of the Income Tax Rules;
• Sections 271(1)(c), 271 AA, 271 BA and 271 G.
• Computation of income from international transaction having
regard to arm’s length price - Section 92 of the Income tax Act, 1961
• Meaning of associated enterprises - Section 92A of the Act
• Meaning of international transaction - Section 92B of the Act
• Computation of arm’s length price - Section 92C of the Act
• Reference to transfer pricing officer - Section 92CA of the Act
• Power of Board to make safe harbour rules - Section 92CB of the
• Maintenance and keeping of information and document by person
entering into an international transaction - Section 92D of the Act
Provision Section of the IT Act
Report from an accountant to be furnished by person
entering into international transaction
Section 92E of the Act
Definitions of various terms Section 92F of the Act
Penalty consequent to re-determination of arm’s
Explanation 7, Section
271(1)(c) of the Act
Penalty for failure to keep and maintain information
and document in respect of international transaction
Section 271AA of the Act
Penalty for failure to furnish report under section 92E Section 271BA
Penalty for failure to furnish information or
document under section 92D
Provision Section of the IT Rules
Meaning of certain expressions Rule 10A of the Income tax
Rules, 1962 (‘the Rules’)
Determination of arm’s length price under section 92C Rule 10B of the Rules
Most appropriate method Rule 10C of the Rules
Information and documents to be kept and maintained
under section 92D
Rule 10D of the Rules
Report from an accountant to be furnished under
Rule 10E of the Rules
Advance Pricing Agreements Rule 10F to 10S of the Rules
Safe Harbour Rules Rule 10T of the Rules
The Economics of Transfer Pricing
• Where tax rates are different between tax
• there is a strong incentive to shift
• income to a lower tax jurisdiction
• and deductions to a higher tax jurisdiction
• so that the overall Tax Rate is minimized.
What it means to the Jurisdiction
• As the aggregate tax payable by MNCs is
reduced, tax authorities across the world incur
• To guard against such losses, many countries
have introduced transfer pricing legislation to
govern the pricing of cross border transactions
between related parties.
• India introduced rules and regulations on
transfer pricing as of 2001 through sections
92A to 92F of the Indian Income tax Act, 1961
which guides computation of the transfer
price and suggests detailed documentation
On Whom does TP Apply
• Transfer Pricing Regulations ("TPR") are
applicable to the all enterprises that enter into
an 'International Transaction' with an
• Therefore, generally it applies to all cross
border transactions entered into between
What is the Purpose
• The aim is to arrive at the comparable price as
available to any unrelated party in open
market conditions and is known as the Arm's
Length Price ('ALP').
Associated Enterprises ('AEs')- How
• The basic criterion to determine an AE is the
participation in management, control or
capital (ownership) of one enterprise by
• The participation may be direct or indirect or
through one or more intermediaries.
Participation in management
• Appointment of more than half of Board of
Directors/ Board of Members/ one or more
Executive Directors/ Executive Members by :
• ● - The other Enterprise
• ● - The same person(s) in both the
Participation through Capital
Holding not less than 26% of the voting power
directly or indirectly
– - in the other enterprise
– - in each of such enterprise
Participation through Control
• Loan not less than 51% of Book value of Total Assets
• Guarantee not less than 10% of Total borrowings
• Use of Know how, patents, copy right, etc., of which
other enterprise is owner or has exclusive rights
• Purchase of 90% or more Raw Materials and
Consumables for which prices and other conditions are
• Sale of goods manufactured or processed to other
enterprise or person specified by it for which prices
and other conditions are influenced or Controlled by
• Apart from these, any relationship of mutual
interest, as may be prescribed shall also be
considered as Associated enterprise.
What is an International
• ‘International transaction’ means any of the following nature of
• transactions between two or more “Associated enterprise” where,
either or both of whom are non-residents
• ● (a) purchase,
• ● (b) sale,
• ● (c) lease of tangible or intangible property,
• ● (d) provision of services,
• ● (e) lending or borrowing money, or
• ● (f) any other transaction having a bearing on the profits, income,
• losses or assets of such enterprise.
• ● (e) Mutual agreement between AEs for allocation/apportionment
• of any cost, contribution or expense.
Deemed International Transaction [Sec 92B]
• Further section 92B provides that, where a
transaction entered into by an enterprise with a
person other than an associated enterprises and
there exist a prior agreement in relation to the
relevant transaction between such other person
and associated enterprise, or the terms of the
relevant transaction are determined in substance
between such other person and the associated
enterprises then such transaction shall also be
treated as an international transaction.
Specified Domestic Transactions if the
aggregate value exceeds Rs 5 Crores
• The Finance Act 2012 extended the scope of Transfer
Pricing provision to ‘Specified Domestic Transactions
• The SDT would include the following:
– Expenditure for which payment is made or to be made to
domestic related parties-40A 2(b) payment
• Tax Holiday/ Deductions claimed by the taxpayer,
– Transfer of goods or services between various
– businesses of same taxpayer
– More than ordinary profits derived from transactions
– with closely connected persons
• The amendment is in accordance with the
suggestion made by the Supreme Court in
case of Glaxo Smithkline Asia (P) Ltd.
Arms length price
• ‘Arms length price ‘ means a price which is
applied or proposed to be applied in a
transaction between persons other than
associated enterprises, in uncontrolled
● (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
Comparable uncontrolled price
● In this method, price charged in an
uncontrolled deal between comparable
entities is recognized and evaluated with the
verified entity price to determine the Arm’s
● The CUP method offer the finest evidence of
• Comparable uncontrolled price method is
relevant in case of
• ● transaction of loans,
• ● royalties,
• ● services,
• ● transfer of tangibles.
Resale price method
● This method is used where the vendor adds
similarly little value to goods owned from
associate enterprises. Here, Arm’s Length Price
is determined by reducing the relevant gross
profit mark-up from the sale price charged to
● Resale price method is relevant in case of
marketing operations of finished products
more particularly in case of distribution of
products not involving significant value
● In this method the vendor adds comparatively
small or no value to goods taken from
Cost plus method
● In CP method first the cost incurred is
● An appropriate cost plus mark up is then
added to the cost to arrive at an appropriate
● The resultant is the ALP
● Cost plus method is more relevant where
raw materials or semi finished products are
● Similarly, it can also be used where joint
facility agreements or long term buy and
supply arrangements or provisions of
services are involved
Profit Split method
● PSM is used when transaction are inter related
and is not possible to evaluate separately.
● PSM first identifies the profit to be split for AE.
The profit so determined is split between the AE
on the basis of the function performed
● Profit split method is relevant where the
transactions involved provision of integrated
services by more than one enterprise.
● PSM method is used when associate
enterprises are so combined that it turns into
difficult to make transfer pricing analysis on
transactional methods basis.
Transaction Net Margin Method
● Compares the net profit margin of a taxpayer
arising from a non-arm's length transaction with
the net profit margins realized by arm's length
parties from similar transactions; and
● Examines the net profit margin relative to an
appropriate base such as costs, sales or
● Transactional net marginal method is used in
most of the cases including transfer of semi
finished goods, distribution of products where
resale price method appears to be
inappropriate and also in case involving
provision of services.
● Arithmetical mean of prices obtained by most
appropriate method to be taken as Arm’s
● Tolerance zone of 3 percent allowed at
The obligations of an assessee
having international transactions:
● (1) The income from the international transaction should
be computed as per arm’s length price
● (2) Every person who has entered into an international
transaction shall keep and maintain such information and
document in respect thereof and for such period, as may
be prescribed by the board and produce before the A.O or
commissioner (Appeals) as and when required in the
cource of proceedings under Income Tax Act within a
period of 30 days from the date of receipt of notice. (3) The
assessee entering into an international transaction is also
required to firnish an audit report in the form 3CEB by a
chartered accountant by 31st of October of relevant A.Y
where the assessee is a company and by 31st day of july
in other cases.
● The provisions contained in the TPR are exhaustive as far as
the maintenance of documentation is concerned.
● This includes
– Enterprise wide information
– Transaction Specific Information
– Computation of the Arm’s Length Price.
● This also includes report of an accountant certifying that the
ALP has been determined in accordance with the TPR and that
prescribed documentation has been maintained.
● This documentation should be retained for a minimum
period of 8 years.
● In case the value of the international transaction
is below INR 10 million, it would be sufficient for
the taxpayer to maintain documentation and
information which substantiates his claim for the
ALP adopted by him.
● In effect, they need not maintain the prescribed
• For assessment year 2011-12 and onwards,
due date would be 30 November.
• Tax payer must submit the transfer pricing
document to the tax authorities, within 30
days of the receipt of notice from the
EFFECTS OF ADJUSTMENT TO
In case the ALP determined by the TPO indicates
understatement of income by the taxpayer,
it could result into the following
(a) Adjustment to reported income of the
(b) Levy of penalty
Adjustment to the Reported Income
● The tax officer is bound to adjust the reported income of the
taxpayer with the amount of adjustment proposed by the TPO.
● This would have an effect of increasing the assessed income or
alternatively decreasing the assessed loss.
● Furthermore, the eligible deductions available to the taxpayer
under section 80 could not be availed on the enhanced income.
● However, those taxpayers who are eligible for deductions under
section 10A and 10B remain unaffected as these deductions
remain available on the enhanced income.
• Section 92 also provides that its provisions shall not apply where it
has effect of reducing the income chargeable to tax or increasing
(a) Penalty for Concealment of Income - 100 to 300
percent on tax evaded
(b) Failure to Maintain/Furnish Prescribed
Documentation – 2 percent of the value of the
(c) Penalty for non-furnishing of accountants report
– INR 100,000 (fixed)
● The above penalties can be avoided if the
taxpayer proves that there was reasonable cause
for such failures.
Time limit for passing orders
• The time limit for passing orders by the
Assessing Officer where a reference is made to
the TPO for determining the arm’s length price
in an international transaction is 33 months
from the end of the assessment year in which
the income was first assessable
Latest Developments 2013
• In the new Circular No. 6 dated 29.06.2013,
the CBDT has laid down guidelines for
identifying Development Centres as a contract
R&D service provider with insignificant risk for
transfer pricing purposes.
The gist of these guidelines are:
1. Conceptualization and design of the product and providing the
strategic direction and framework should be carried out by the
2. Funding for assets should be by the foreign principal and the
foreign principal provides the remuneration to the Indian
Development Centre for the work carried out by the latter.
3. Strategic Decisions should be taken by the foreign principal
4. Direct Control and Supervision should be by the foreign principal
5. The Indian Development Centre should not have economically
6. In the case of a foreign principal being located in a country/
territory (to be notified in this behalf under section 94A of the Act
as a low or no tax jurisdiction), it will be presumed that the foreign
principal is not controlling the risk.
Income-tax (16th Amendment), Rules,
1. Software Development and ITES – 20/22%
2. KPOs – 25%
3. Interest on Intra group Loans – Base Rate of SBI + 150/300
4. Corporate Guarantees – 1.75/2% pa.
5. Contract research related to Software Development – 30%
6. Contract research related to Pharmaceuticals– 30%
7. Manufacture and Export of Core Auto Components – 12%
8. Manufacture and Export of Non Core Auto Components –
For identifying an Assessee with Insignificant Risk,
the foreign principal must perform/provide:
1. Most of the economically significant functions
2. Capital and funds and other economically
3. eligible assessee works under the direct
4. eligible assessee does not assume or has no
economically significant realised risks
5. eligible assessee has no ownership right, legal or
economic, on any intangible generated
Income-tax (16th Amendment), Rules,
• The safe harbour rules shall be applicable for 5 assessment years
beginning from and including assessment year 2013-14.
• AO can make reference to TPO within 2 Months of receipt of Form
3CEFA and the TPO has to pass an order within 2 Months of receipt
of reference from AO on the validity of the option.
• The assessee can appeal against the order to the commissioner,
who will be required to file an order within 2 Months of the appeal.
• Provisions relating to Documentation (sections 92D and 92E) will
• This option can be exercised by filing of Form 3CEFA which has been
prescribed in the rules.
Income-tax (16th Amendment), Rules,
• Shall not apply to transaction entered into
with an associated enterprise located in any
country or territory notified under section 94A
or in a no tax or low tax country or territory.
• Notification No. 41/2013/F. No. 142/42/2012 (10
June 2013) revises the rules applicable to the
Accountant’s Report in Form No. 3CEB, to align
those reporting requirements with the definition
of international transactions and to extend
transfer pricing provisions for certain specified
domestic transactions. All international
transactions and specified domestic transactions
must be appropriately disclosed in Form No.
3CEB on or before the 30 November due date.
Notification No. 47/2013
• Applicable when international transaction
with a party located in a “notified
• Form No. 10FC to be filled.
Additional Documentation to be
maintained vide Notification 47/2013
• (a) a description of the ownership structure of the specified
person, including name and address of individuals or other entities,
whether located in the notified jurisdictional area or outside, having
directly or indirectly more than ten per cent, shareholding or
• (b) a profile of the multinational group of which the specified
person is a part along with the name, address, legal status and
country of tax residence of each of the enterprises comprised in the
group with whom the assessee has entered into a transaction, and
ownership linkage among them;
• (c) a broad description of the business of the specified person
and the industry it operates in;
• (d) any other information, data or document, which may be
relevant for the transaction with the specified person.
• India’s APA Guidance Booklet with FAQs
addresses the procedures to be followed by
taxpayers and the tax authorities before a
taxpayer can enter into an APA.
• An Addition of Rs 8500 Crore was made by the
TPO on account of two unreported
• The two unreported transactions are the sale
of the call centre business by the petitioner to
Hutchison Whampoa Properties (India) Pvt.
Ltd. and an alleged assignment of call options
by the petitioner to Vodafone International
• The petition was dismissed on the Grounds
that an alternate remedy is available before
• Vodafone had an alternate remedy of
challenging the notices before the CIT
Advertising, Marketing and Promotion
• The Maruti Suzuki judgement was set aside by
the Supreme court. The LG Case, the BMW
Case and the Ford(India) Case are two
important cases on this issue.
LG Electronics Case – Delhi ITAT
• Transfer pricing adjustment in relation to
advertisement, marketing and sales
promotion expenses incurred?
• Whether the assessee should have earned a
mark up from the Associated Enterprise in
respect of AMP expenses alleged to have been
incurred for and on behalf of the AE?”
1. advertising, marketing and promotion
(“AMP”) expenses incurred by a taxpayer
constitute an “international transaction”.
2. The “Bright Line test” can be applied to
determine whether Advertising, Marketing
and Promotion expenses incurred by
assessee are excessive and for the benefit of
the brand owner
What is the bright line test
• The bright line test looks at the average
advertising and promotional spend of
comparable companies, with any expenditure
above this potentially treated as either non-
deductible or as creating a local marketing
• The test was laid down in a US court in the
case of DHL incorporated and its subsidiary.
• It was held that no separate compensation is
required for excessive advertisement,
marketing and sales promotion (AMP) Expen
diture as the same has been received by way
of the premium profits earned by the taxpayer
at the gross level as well as the net level vis-à-
vis comparable companies.
Ford India Private Ltd. v. DCIT (ITA No.
• The Chennai Bench of the Income-tax
Appellate Tribunal applied a “bright-line test”
with respect to the taxpayer’s “excessive”
advertising, marketing, and brand promotion
expenditure to uphold the transfer pricing
adjustment, but concluded that companies
using a foreign brand could not be considered
comparable companies for purposes of
applying the “bright-line test.”
Ariston Thermo India Ltd. v. DCIT
• Held that adjustments by the taxpayer due to
under utilization of capacity could be made.
• The tribunal rejected the department’s
contention that economic adjustments can
only be made on the basis of comparables.
Micro Inks Ltd. v. ACIT
• The Ahmedabad Bench of the Income Tax
Appellate Tribunal ruled that in applying the
CUP method, an adjustment can be made
under Rule 10B(1) “to account for differences
…. which could materially affect the price in
the open market”.. Micro Inks Ltd. v. ACIT
, Ahemedabad ITAT, Bench.
Hinduja Global Solutions Ltd. v. ACIT (ITA No.
• The Mumbai Bench of the Income-tax
Appellate Tribunal held that, where the
lending of money was in foreign currency to
its AE the domestic prime lending rate would
have no applicability and the interbank rate
fixed should be taken as benchmark rate for
• It, therefore held that LIBOR rate has to be
adopted in the instant case
Vijai Electricals Ltd Vs ACIT
• The Hyderabad Bench of the Income-tax
Appellate Tribunal held Transfer pricing
provisions do not apply
• (i) to an investment in share capital of
overseas companies and
• (ii) to transactions where no “income” has
Redington (India) Ltd. v. ACIT (ITA No.
• Prices are negotiated between parties according
to quantity, value and other aspects which are
determinant of market forces. For making a
comparative study under CUP method also, what
is required is a comparison with actual sale and
purchase with unassociated enterprise or
transaction between unassociated enterprises.
• It cannot solely be based on list prices, which at
the best can be considered only as a reference
CIT v. Indo American Jewellery Ltd. (ITA No. 1053
• If the ALP in respect of an international
transaction of `sale' is determined, then there
can be no question of treating the non-receipt
of interest in such sale transaction as a
separate international transaction warranting
any further adjustment.
Ascendas (India) Private Ltd. v. DCIT, (ITA NO.
• The Chennai Bench of the Income-tax
Appellate Tribunal held that the discounted-
cash-flow method is preferable in determining
the arm’s length price for the sales of shares.
Vodafone and Shell Transfer Pricing
• Here the two companies had transferred
shares to Associated entities at Book Value.
• The TPO made an adjustment valuing the
shares as underpriced.
• The hearings before the court are in progress.