1. Transfer Pricing including
Domestic Transfer Pricing
and DTAA
ICSI Students’ Study Circle
Meeting - October 18, 2015
Presented by: Sandeep Jhunjhunwala

2. WHAT CAN YOU EXPECT IN THIS PRESENTATION
Overview of the Transfer Pricing provisions
Tax Treaty - Insights
Transfer Pricing & Tax Treaty
Open House & Discussions
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Transfer Pricing in the news

3. TP IN THE NEWS
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4. Overview of Transfer Pricing Regulations

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TRANSFER PRICING IN INDIA - BACKGROUND
Prior to April 1, 2001
 Basic provisions existed but were rarely applied
 Expert Group set up in November 1999 to study global transfer pricing practices
April 1, 2001 onwards
 Sections 92 to 92F of the Act read with Rules 10A to 10T referred to as framework of Indian
TP legislation
 Largely based on the OECD Transfer Pricing Guidelines
 Comprehensive legislation introduced in Union Budget 2001
 Detailed Rules providing guidance for application of the legislation framed
 One way effect - TP adjustments cannot reduce tax computed on income as in books
 Mandatory TP documentation and Form 3CEB filing
 Administrative guidelines for audit - Recent CBDT direction to field officers
 Is still in evolving stage- taxpayers seek clarity on various matters

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CONCEPT OF TRANSFER PRICING
Section 92(1) - Transfer Pricing refers to pricing of international transactions between two
associated enterprises (AEs)
A price between unrelated parties is known as the Arm’s Length Price (ALP)
Due to special relationship between related parties, transfer price may be different than the price
that would have been agreed between unrelated parties
International transactions
– Tangibles
Intangibles
– Services
– Capital Financing
– Business structuring
Independent Entity
Resident
Associated
Enterprise
Resident

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APPLICABILITY
The provisions of Sections 92 to 92F of the Act are applicable only if:
 There are two or more enterprises (defined in Sec 92F)
 The enterprises are Associated enterprises (defined in Sec 92A)
 The enterprises enter into a transaction (defined in Sec 92F)
 The transaction is an international transaction/ deemed international transaction/ specified
domestic transaction (defined in Sec 92B/ 92BA)
Consequences of these provisions:
 Computation of income/ expenses having regard to the Arm’s length price [Section 92(1)]
 Maintenance of prescribed documentation (Section 92D & Rule 10D)
 Obtaining Accountant’s report under Form 3CEB (Section 92E)
 To ensure compliance with the arm’s length principle; stiff penalties prescribed for
non-compliances (Section 271, 271AA, 271BA, 271G etc)
 The revenue/ profits generated by a company should be attributable to Functions
performed, Assets deployed and Risks assumed in its business operations

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INTERNATIONAL TRANSACTION (SEC 92B)
Transactions between two or more associated enterprises, either or both of whom are non-
residents
Transaction relates to:
 Purchase, sale or lease of tangible/ intangible property; or
 Provision of services; or
 Lending or borrowing money (capital financing); or
 Any other transaction of business restructuring or reorganization irrespective of the fact of
having a bearing on the profits, income, losses or assets of such enterprises; or
 Mutual agreements/ arrangements for allocation or apportionment of, or any contribution to,
any cost or expense incurred/ to be incurred in connection with a benefit, service or facility
provided/ to be provided to any one or more of such enterprise.
Transaction includes arrangement, understanding or action in concert:
 whether formal or in writing
 whether intended to be enforceable with legal proceedings or not
Transaction also includes number of closely linked transactions [Rule 10A(d)]

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SPECIFIED DOMESTIC TRANSACTIONS (SEC 92BA)
SDT
If aggregate exceeds
INR 20 crore in a
year
(applicable from FY
2012-13)
Inter unit transfer of goods & services by tax holiday
undertakings to which profit-linked deductions apply
Expenditure
incurred
between related
parties defined
under Section
40A of the Act
Any other
transaction that
may be
specified
Transactions between tax holiday undertakings to which
profit-linked deductions apply, having close connection
SDT provisions would impact industries which benefit from the preferential tax policies such as SEZ units,
infrastructure developers or operators, telecom services, industrial park developers, power generation etc

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DEEMED INTERNATIONAL TRANSACTION [SEC 92B(2)]
Parent Company 3rd Party
Subsidiary
Prior agreement
Parent Company 3rd Party
Subsidiary
Determination of terms
An unrelated company (3rd Party) is
deemed to be an associated enterprise of
a company (A) and subject to transfer
pricing regulations if:
– a prior agreement exists between A's
AE and 3rd party in relation to services
rendered by A to the 3rd party
An unrelated company (3rd Party) is
deemed to be an associated enterprise of
a company (A) and subject to transfer
pricing regulations if:
– terms of transaction are determined in
substance by A’s AE and 3rd party
Recently amended to clarify that third party can be a resident or non-resident India

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ASSOCIATED ENTERPRISES (SEC 92A)
Direct or indirect participation (through one or more
intermediaries) in management or control or capital
A
C
B
A
C
B E
Both A and B are
associated enterprises
of C
D and E are also
associated enterprises of
C since they have a
common ultimate parent
(A)
D

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DEEMED ASSOCIATED ENTERPRISES [SEC 92A(2)]
1. >= 26 percent direct /
indirect holding
by enterprise
OR
2. By same
person in each
enterprise
3. Loan >= 51 percent of
total assets
4. Guarantees >=
10 percent of debt
5. >10 percent interest
in Firm / AOP /
BOI
6. Appointment >
50 percent of
Directors/ one
or more
Executive
Director by an
enterprise
OR
7. Appointment
by same
person in each
enterpriseS
8. 100 percent
dependence on use
of intangibles for
manufacture/
processing/ business
9. Direct/ indirect
supply of >= 90
percent raw
materials under
influenced prices and
conditions
10. Sale under
influenced prices and
conditions
11. One enterprise
controlled by an
individual and
the other by
himself or his
relative or jointly
12. One enterprise
controlled by
HUF and the
other by itself, a
member or his
relative or jointly
Equity Holding Management Activities Control

13. ARM'S LENGTH PRICE (ALP)
Determination of ALP using one of the prescribed methods
Whether
you arrive
at a single
price?The price thus determined is
the ALP, mostly not possible
The arithmetic mean of such
prices or a price which varies
from such arithmetic mean by
+/-3 percent (tolerance band) is
the ALP
Yes
Price applied or proposed to be applied in a transaction between persons other than associated
enterprises, in uncontrolled conditions
No
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ALP - origin in the Contract Law - to arrange an equitable agreement that will stand up to legal scrutiny,
even though the parties involved may have shared interests - Based on the separate entity approach

14. PRESCRIBED METHODS
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Rule 10AB/ 10B -
Prescribed by CBDT
Transactional
Net Margin
Method (TNMM)
Profit Split
Method (PSM)
Cost Plus
Method
(CPM)
Resale Price
Method (RPM)
Comparable
Uncontrolled
Price (CUP)
Traditional Transaction Methods Transactional Profit Methods Other Method
OECD prefers traditional transaction methods over transactional methods [Chapter III, 3.49]
TNMM (and CUP) rules the roost
Indian rules prescribe no guidance/ hierarchy - legal view is to follow chronological order
Any other method prescribed by the Central Board of Direct Taxes (CBDT) - Rule 10AB
Appropriateness of the method considered based on functional analysis

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TRANSFER PRICING METHODS - IN GENERAL
CUP Method compares prices charged
or paid
RPM compares gross margins
CPM compares profit mark-ups on costs
PSM refers to the total profits from
transactions and splits them among the
parties based on the level of contribution
TNMM analyses net profit in relation to
an appropriate base such as costs,
sales or assets
Other method [Rule 10AB] - "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 the
relevant facts.”
Methods Comparability
requirements
Benchmarking Remarks
CUP Very High Prices Very difficult
to apply as
very high
degree of
comparability
required
RPM High Gross Profit
margins
Difficult to
apply as high
degree of
comparability
required
CPM High Profit mark-ups
on costs
PSM Medium Operating Profit
margins
Complex
Method,
thinly used
TNMM Medium Operating Profit
margins
Most
commonly
used
method

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TRANSFER PRICING METHODS - IN GENERAL
CUP used for transactions involving homogeneous products (eg traded commodities), interest rate
charged on a loan, royalty payments, franchise fees or license fees
RPM used for distributors ie when goods purchased from related parties and sold to independent
parties
CPM used in cases involving manufacture, assembly or production of tangible products or services
that are sold / provided to related parties
PSM is appropriate where both parties to the transaction make unique and valuable contributions or
where the transaction involves highly integrated operations for which a one sided approach would
not be appropriate
TNMM - Applicable for any type of transaction and often used to supplement analysis under other
methods, most frequently used method in India
Rule - 10AB, provides for applying any other method that gives better picture of ALP of such
transactions - Intangible assets, IPRs, Technical know-how, R&D services

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COMPARABLES
All methods require comparables
Transfer price is set/ defended using data from comparable transactions
Comparable transaction should be independent and similar to tested transactions
Factors for judging comparability (Rule 10C(2)):
 Nature of transactions undertaken (ie type of goods, services etc)
 Company functions
 Risks assumed
 Contractual terms (ie similar credit terms)
 Economic and market conditions

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DOCUMENTATION
Profile of
industry
Profile of group
Profile of Indian
entity
Profile of
associated
enterprises
Transaction terms
Functional analysis
(FAR related)
Economic analysis
(method selection,
comparable
benchmarking)
Forecasts, budgets,
estimates
Agreements
Invoices
Pricing related
correspondence
(letters, emails etc)
Price related Transaction related
Contemporaneous documentation requirement
Documentation to be retained for 9 years from the financial year
Documentation is not required to be maintained if the aggregate value of international transactions
does not exceed INR 1 crore
Entity related
Description and
analysis of
uncontrolled
transactions
Description and
analysis of
methods
considered and
adopted
Methodology related

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ACCOUNTANT’S REPORT (FORM 3CEB) - RULE 10E
Obtained by every tax payer filing a return in India and having international transaction
To be filed by due date for filing return of income
Essentially comments :
 whether the tax payer has maintained the transfer pricing documentation as required by the
legislation;
 whether as per the transfer pricing documentation the prices of international transactions are
at arm’s length, and
 certifies the value of the international transactions as per the books of account and as per the
transfer pricing documentation are “true and correct”

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TRANSFER PRICING & OTHER TAX LINKAGES
Common aspects required to be analyzed while preparing TP report
PE implications
International tax structure
Foreign jurisdiction lawsTreaty provisions
Customs issues Withholding tax issues
Economic substance Intangible valuations
TP Architecture

21. Tax Treaty - Insights

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WHAT IS TAX TREATY?
What is a tax treaty?
Tax treaties are international agreements entered into between Governments for the allocation of
fiscal jurisdiction so as to avoid double taxation of the same income
The purpose of the DTAA is to remove impediments to the flow of trade and investment by the
elimination of international double taxation
What is the purpose of a tax treaty?
Elimination of double taxation
Clarification of fiscal situation of tax payer
Sharing of tax revenues between contracting countries
Promotion of cross border trade
Exchange of information to combat tax avoidance/ tax evasion
Section 90 of the Act empowers the Central Government to enter into tax treaties with the
government of any foreign country
The provisions of the Act shall apply to the extent they are more beneficial than the provisions of
the treaty

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NATURE OF TAX TREATY
Types of tax systems followed
Residence based tax system
 Connecting factor is "residence"
 Country of residence has the primary jurisdiction to tax
 In case of conflict "tie-breaker test"
Source based tax system
 Connecting factor is "income"
 Country of source shall restrict its right to tax
Country of residence will give credit for tax paid in the country of source

24. Transfer Pricing and Tax treaty

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ARTICLES OF TAX TREATY
SCOPE PROVISIONS
1. Article 1 - Personal Scope
2. Article 2 - Taxes covered
3. Article 29 - Entry into force
4. Article 30 - Termination
ANTI-AVOIDANCE
1. Article 9 - Associated Enterprise
2. Article 26 - Exchange of Information
ELIMINATION OF DOUBLE
TAXATION
1. Article 23 - Elimination of double
taxation
2. Article 25 - Mutual Agreement
DEFINITION PROVISIONS
1. Article 3 - General definitions
2. Article 4 - Residence
3. Article 5 - Permanent
Establishment
SUBSTANTIVE PROVISIONS
1. Article 6 - Immovable property
2. Article 7 - Business Profits
3. Article 8 - Shipping, etc
4. Article 10 - Dividends
5. Article 11 - Interest
6. Article 12 - Royalties & TSF
7. Article 13 - Capital gains
8. Article 14 - Independent Personal Services
9. Article 15 - Dependent Personal Services
10. Article 16 - Directors
11. Article 17 - Artistes & Sports persons
12. Article 18 - Pensions
13. Article 19 - Government service
14. Article 20 - Students
15. Article 21 - Other income
16. Article 22 - Capital
MISCELLANEOUS PROVISIONS
1. Article 24 - Non-discrimination
2. Article 27 - Diplomats
3. Article 28 - Territorial Extension

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ARTICLE 9 - ASSOCIATED ENTERPRISES
Article 9 confirms in a treaty situation:
 the domestic right of a contracting state
 to adjust the profits of an enterprise located on its territory, which is managed, held or
controlled directly or indirectly by an enterprise of the other contracting state
 If the conditions in their relationship differ from the conditions which would have been
stipulated between independent enterprises (ie other than on arm’s length terms)

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ARTICLE 27 - MUTUAL AGREEMENT PROCEDURES
If taxpayer has been subjected to tax not in accordance with provisions of the tax treaty, then
MAP could be exercised
Under MAP, competent authorities from states concerned try to resolve tax issues
Article 27 provides for a machinery whereby competent authorities can interact between
themselves to resolve all outstanding issues amicably
Taxpayer can take recourse to MAP even before tax has been levied
Time limit for MAP application is 3 years from date of first notification of action leading to taxation
not in accordance with DTAA
The tax payer has an option to follow the decision given under MAP

28. OPEN HOUSE & DISCUSSIONS
THANK YOU
E: Jhunjhunwala.sandeepr@gmail.com
M: +91 97401 55469
D: +91 80 4032 0011