Overview of Transfer Pricing in India - EY India

Views:
 
     
 

Presentation Description

Read about transfer pricing in India & its applicability which can help you build and implement the structure that makes sense for your business & to manage the cost of trade.

Comments

Presentation Transcript

slide 1:

Overview of Transfer Pricing

slide 2:

Page 2 ► Legislative framework ► Transfer pricing study ► Assessment and Litigation ► Key Recent Developments Contents

slide 3:

Page 3 April 1 2001 onwards  Comprehensive legislation introduced in Union Budget 2001 ► Detailed Rules providing guidance for application of the legislation framed Transfer Pricing in India- Background

slide 4:

Page 4 Concept of transfer pricing  Transfer Pricing refers to the pricing of international transactions between two associated enterprises ► 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 ► A price between unrelated parties is known as the “arm’s length” price

slide 5:

Page 5 Concept International transactions - goods - services - intangibles - loans Independent entity Resident Associated enterprise Resident Transfer price Arm’s length price

slide 6:

Page 6 Applicability ► The provisions of Section 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 defined in Sec 92B ► Provisions do not apply in certain cases Section 923 ► Further w.e.f. 1 April 2012 TP provisions shall also apply to specified domestic transactions SDT defined in Sec 92BA

slide 7:

Page 7 Applicability  Consequences of these provisions:  Computation of income/ expenses having regard to the Arm’s length price Section 921  Maintenance of prescribed Documentation Section 92D read with Rule 10D  Obtaining of Accountant’s report under Form 3CEB Section 92E  To ensure compliance with the arm’s length principle stringent Penalties have been prescribed

slide 8:

Page 8 ► Section 921 – Any income or expense or interest arising from an international transaction shall be computed having regard to the arm’s length price ► Section 923 - The provisions are not intended to be applied in case determination of arm’s length price reduces the income chargeable to tax or increases the loss as the case may be Applicability

slide 9:

Page 9 Meaning of Associated enterprises Section 92A ► Direct or indirect participation through one or more intermediaries in management 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

slide 10:

Page 10 Deemed Associated enterprises Section 92A2 1. 26 direct / indirect holding by enterprise OR 2. By same person in each enterprise 3. Loan 51 of Total Assets 4. Guarantees 10 of debt 5. 10 interest in Firm / AOP / BOI 6. Appointment 50 of Directors / one or more Executive Director by an enterprise OR 7. Appointment by same person in each enterprise 8. 100 dependence on use of intangibles for manufacture / processing / business 9. Direct / indirect supply of 90 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 - a member of HUF - his relative or - Jointly by member and relative Equity Holding Management Activities Control

slide 11:

Page 11 International transaction Section 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 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 the enterprises or ► mutual agreements or arrangements for allocation or apportionment of or any contribution to any cost or expense incurred ► Scope expanded in Finance Act 2012 to include - intangibles like marketing intangibles human capital Business restructuring inter-company guarantees capital funding etc.

slide 12:

Page 12 Deemed international transaction Sec 92B2 ► Transaction between A and 3rd party also subject to transfer pricing norms if:  a prior agreement exists between A’s parent and 3 rd party both non- residents in relation to services rendered by A to the 3 rd party or  terms of transaction are determined in substance by A’s parent and 3rd party A’s Parent 3rd party A Prior agreement A’s Parent 3rd party A Determination of terms Transactions with non-group companies deemed to be international transactions subject to transfer pricing regulations

slide 13:

Page 13 Specified Domestic Transactions SDT Scope of transfer pricing provisions expanded effective FY 2012-13 and onwards ► Applicable to specified domestic transactions if aggregate value of such transactions exceeds INR 5 crores ► Transactions that could be impacted include ► Transfer of goods/services between related domestic companies wherein either of them is eligible for tax holiday benefit ► Transfer of goods / services between tax holiday eligible business / units and other businesses / units of the taxpayer in India ► Payments made to persons specified u/s 40A2b definition amended ► All provisions applicable for determination of ALP for international transactions would apply in case of SDT also. Also penal provisions applicable to international transactions would apply to SDT

slide 14:

Page 14 Which ones of these entities are associated enterprises of ABC India ABC Japan ABC India XYZ Japan XYZ Taiwan 100 74 100

slide 15:

Page 15 Arm’s length price Determination of arm’s length prices using one of the Prescribed methods Whether you arrive at a single price The price thus determined is the arm’s length price The arithmetic mean of such prices which varies from transfer price not exceeding 3 upper ceiling is the arm’s length price 92C2 Yes No Price applied or proposed to be applied in a transaction between persons other than associated enterprises in uncontrolled conditions

slide 16:

Page 16 The Arm’s Length Range - How it works ► In most cases it is not possible to identify a single price that can be considered to be an uncontrolled price. ► It may be that a number of different comparables are equally comparable. Several comparable transactions can therefore define an arm’s length range of possible transfer prices ► Overall range may contain extremes. Indian legislation recognizes only arithmetic mean with a +/-5 variation though statistically and internationally an inter-quartile range may be more appropriate. ► If transfer price falls within a +/- 5 range pricing should be defendable as arm’s length from tax authority audit perspective

slide 17:

Page 17 Comparable Uncontrolled Price Resale Price Method Cost Plus Method Transfer Pricing Methods Prescribed methods Profit Split Method Transactional Net Margin Method Traditional Transaction Methods Transactional Profit Methods Other Method ► Tax payer may apply any of the above methods that is considered most appropriate for a transaction

slide 18:

Page 18 Comparables ► All methods require comparables ► Transfer price is set/ defended using data from comparable companies ► Comparable company should be independent and similar to an associated enterprise. ► Following factors are generally used in judging comparability Rule 10C2: ► nature of transactions undertaken i.e. type of good service etc. ► company functions ► risks assumed ► contractual terms i.e. similar credit terms ► economic and market conditions

slide 19:

Page 19 Comparable Uncontrolled Price Method -Rule 10B1a ► Compares the price charged in a controlled transaction with the price in an uncontrolled transaction ► Requires strict comparability in products contractual terms economic terms etc

slide 20:

Page 20 Comparable Uncontrolled Price Method Identification of price charged or paid in comparable transactions Such price adjusted to account for differences if any between international transaction and uncontrolled transactions Adjusted price arrived above taken to be arm’s length price

slide 21:

Page 21 Manufacturer A Related party - B Non-related party Non-related party B ► External CUP Non-related party A ► Internal CUP Comparable Uncontrolled Price Method

slide 22:

Page 22 Resale Price Method- Rule 10B1b ► Compares the resale gross margin earned by associated enterprise with the resale gross margin earned by comparable independent distributors ► An arms’ length gross margin should be sufficient for a reseller to cover its operating expenses and make an appropriate operating profit in light of its functions and risks ► Preferred method for a distributor buying purely finished goods from a group company without any value addition if no CUP available Group Manufacturer Hong Kong Related Distributor India Unrelated Distributors 75 100

slide 23:

Page 23 Resale Price Method Identification of resale price by tested party Such price reduced by expenses incurred customs duty etc. in purchase of the product/ services. This price may be adjusted to account for functional and other differences if any Resale price reduced by normal gross profit with reference to uncontrolled transactions Adjusted price arrived above taken to be arm’s length price

slide 24:

Page 24 ► Compares the gross profit on costs the associated enterprise earns with the gross profit on costs earned by comparable independent companies ► Preferred method for: ► manufacturer supplying semi-finished goods ► company providing services Cost Plus Method Rule 10B1c Manufacturer A Indian Related Manufacturer B US Cost + 40 US Market

slide 25:

Page 25 Cost Plus Method Identification of direct and indirect costs of production incurred in tested party transactions Normal gross profit adjusted to account for functional and other differences if any Adjusted gross profit added to total costs identified in step 1 Identification of normal gross profit with reference to uncontrolled transactions Sum arrived above is taken to be arm’s length price

slide 26:

Page 26 Profit Split Method-Rule 10B1d ► Appropriate for transactions which are not capable of being evaluated separately ► Calculates the combined operating profit resulting from a whole inter-company transaction based on the relative value of each associated enterprises contribution to the operating profit ► The contribution made by each party is determined on the basis of a division of functions performed valued if possible using external comparable data ► Applicable for analyzing tangible intangible or services issues

slide 27:

Page 27 Profit Split Method Determination of combined net profit of the associated enterprises arising out of international transaction Splitting of combined net profit amongst enterprises in proportion to their relative contributions Profit thus apportioned to the tested party is used to arrive at the arm’s length price Evaluation of relative contributions by each enterprise on the basis of functions performed risks assumed and assets employed

slide 28:

Page 28 Transactional Net Margin Method-Rule 10B1e ► Examines net operating profit from transactions as a percentage of a certain base can use different bases i.e. costs turnover etc in respect of similar parties ► Ideally operating margin should be compared to operating margin earned by same enterprise on uncontrolled transaction ► Can compare to “comparable transactions” between independent parties ► Applicable for any type of transaction and often used to supplement analysis under other methods ► Most frequently used method in India due to lack of availability of comparable uncontrolled prices and gross margin data required for application of the comparable uncontrolled price method/ cost plus method/ resale price method

slide 29:

Page 29 Transactional Net Margin Method Net profit from uncontrolled transaction adjusted to account for differences if any The net profit thus established is taken into account to arrive at an arm’s length price for the international transaction Computation of net profit as a percentage of a certain base realised from the international transaction. Computation of net profit realized by the tested party or an unrelated enterprise in a comparable uncontrolled transaction

slide 30:

Page 30 Which method applies Pharma Company India Third parties 10kgs at Rs 100 per kg Pharma Company USA 100kgs at Rs 100 per kg Sale of tablets Which method applies to this transaction and why

slide 31:

Page 31 Entity related Price related Transaction related  Profile of industry  Profile of group  Profile of Indian entity  Profile of associated enterprises  Transaction terms  Functional analysis functions assets and risks  Economic analysis method selection comparable benchmarking  Forecasts budgets estimates  Agreements  Invoices  Pricing related correspondence letters emails etc Contemporaneous documentation requirement – to be maintained by November 30 of relevant Assessment Year Documentation to be retained for 9 years from financial year Comprehensive Documentation is not required to be maintained if the aggregate value of all international transactions does not exceed one crore rupees Documentation-Rule 10D

slide 32:

Page 32 Accountant’s report-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 30 November ► Essentially comments on the following: ► 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”

slide 33:

Page 33 TP Penalties-Section 271 Default Penalty Post-inquiry adjustment deemed concealment of income 100-300 of tax on the adjusted amount Failure to maintain documents report transactions Maintains or furnishes incorrect information/ documentation 2 of the transaction value Failure to furnish documents 2 of the transaction value Failure to furnish accountants report Rs 100000

slide 34:

Page 34 Reading references ► OECD guidelines and commentary ► Guidance note from the Institute of Chartered Accountants ► BNA daily tax and transfer pricing reports ► ITS worldwide weekly updates ► For international case laws – Intranet riacheckpoint.com ► www.ibfd.org

slide 35:

Page 35 Fact gathering Functional analysis Economic analysis Documentation/ Accountants report 1 3 2 4 Mapping of international transaction Analysis of Functions Risks and Intangibles Industry Analysis Selection of Best Method Selection of Comparables Calculation of arms length result Report writing/ Accountants report Our Approach to Transfer pricing Our proposed approach for transfer pricing review will be based on the following phases of work as described in detail below:

slide 36:

Page 36 Steps in a transfer pricing study 1 Investigation data collection • Questionnaire • Interview 2 Documentation • Industry overview • Functional analysis • Economic analysis 3 Others • Assist in implementation • Litigation support

slide 37:

Assessment Procedure U/s 92CA the AO may refer determination of ALP to the TPO with prior approval of Commissioner 1 TPO would then notify the taxpayer to produce evidence supporting transfer price as arm’s length 2 TPO would determine ALP by passing an order based on information gathered from the assesse/ other sources and intimate the AO taxpayer 3 AO would proceed to compute income of the taxpayer in conformity with ALP determined by the TPO and pass a draft order 4

slide 38:

Page 38 Dispute Resolution Panel  The AO to provide “draft” order to assessee in case any adjustment is proposed.  The assessee has to file the objections within 30 days of receipt of the draft order  Directions of the DRP to be issued within 9 months of the end of month draft order forwarded to Assessee  The directions issued by the DRP Panel are appealable in the ITAT by the Assessee.  The department can appeal against the DRP directions for objections filed after 1 July 2012. TPO’s order AO’s draft order No response AO’s order ITAT File Objections with DRP Within 30 days of receipt of draft order DRP Order Within 9 Months from end of the month in which draft order was forwarded to Assessee Appeal AO Order CITA Show cause notice

slide 39:

Page 39 Advance Pricing Arrangement ‘APA’ regime ► Introduced with effect from 1 July 2012 ► Framework enables unilateral bilateral and multilateral APAs ► APA to be binding on both the taxpayer and the tax authority for a period not exceeding five years ► APA team constitution notified. Unilateral APAs to lie with APA directorate headed by DGIT and bilateral/ multilateral APAs to be handled by the Competent Authority ► Detailed process guidelines released: ► APA applications have a minimum filing fee based on value of international transaction ► APA framework includes mandatory pre-filing consultation ► Provisions allow rejection amendments and withdrawal of APA applications ► Provisions contain Annual Reporting norms to monitor adherence to the terms of the APA ► Roll-back not allowed ► Framework do not contain ‘firewall’ provisions in respect of information shared with APA authority during negotiations

authorStream Live Help