case studies pwc. case study i holding company receives service fees from : f co. (wos) overseas -...
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Case Studies
PwC
Case Study I
• Holding company receivesservice fees from :
F Co.(WOS)
overseas
- INR 6 crores from ICo 1
- INR 4 crores from ICo 2
India- INR 8 crores from F Co.
Holding Co. Implications
Applicability of domestic TPprovisions to
a) Holding Co
I Co. 1 I Co. 2 b) I Co. 1
c) I Co. 2
d) F Co.
Tax Free Entity Taxable EntityTax Free Entity
Expense
Income
Transactions Between
Coverage Check Point Conclusion
Holding Co. to ICo1.
• Two Different Entity• Taxable to Tax free• 80 IA(8) – N.A.• 80 IA (10) - Applicable
• Close Connection• Ordinary Profit• Threshold Limit
H Co. • SDT N.A.
because income is not covered in SDT
ICo.1• SDT is applicable
Holding Co. to ICo2.
• Two Different Entity• Taxable to Taxable • 80 IA(8) – N.A.• 80 IA (10) – N.A.• 40A(2)(b) - Applicable
• Income/Expense• Threshold Limit
H Co.• SDT N.A.
because income is not covered in SDT
ICo.2• SDT is N.A. as
threshold limit does not exceeds.
Implication
Case Study II
• Holding company makespayment for services to:
F Co.(WOS)
overseas
- INR 2 crores - ICo 1
- INR 2 crores - ICo 2
India- INR 2 crores - F Co.
Holding Co. Total services payment – 6crores
Implications
Whether Domestic TP would applyto the Holding Company
I Co. 1 I Co. 2
Taxable EntityTax Free Entity
Expense
Income
Transactions Between
Coverage Check Point Conclusion
Holding Co. to ICo1.
• Two Different Entity• Taxable to Tax free• 80 IA(8) – N.A.• 80 IA (10) - Applicable
• Close Connection• Ordinary Profit
H Co. • SDT is applicableICo.1• SDT is N.A.
Holding Co. to ICo2.
• Two Different Entity• Taxable to Taxable • 80 IA(8) – N.A.• 80 IA (10) – N.A.• 40A(2)(b) - Applicable
• Income/Expense H Co.• SDT is applicableICo.2• SDT is N.A.
However, SDT is not applicable to even Holding Co. because aggregate value of transaction to Holding Co. is below threshold limit.
Implication
Case Study IIIMarket price v/s Arm‟s length price
• ICo 2 acts as a contract manufacturer for ICo 1
ICo 1 purchases a fixed quantity of goods fromICo 2 every year – assured commitment
In order to utilise entire manufacturing capacity,ICo 2 also manufactures, and sells goods to thirdparties
ICo 2 charges same rate for the products sold tothird parties and to ICo 1
Prior to the amendment: Price charged tothird parties arguably was considered as marketprice and since the price paid by ICo 1 correspondto market price, there has been no 40A(2)(b)challenge
Post amendment, whether INR 100 would bethe right arm‟s length price for the purchasesmade by ICo 1?
Can sale price by ICo 2 to ICo 1 be compared withsale price by ICo 2 to Third Parties on account ofcertain differences viz. difference in functionalprofile?
FCo•
•
•100%
INR 100 p.u
Sale of goods
100%
•
ICo 1 ICo 2
Sale of goodsINR 100 p.u
•
Third Parties
•
Terms Of AgreementParticulars [AE] [ Non AE]
Sale FOB FOBFree Warranty Offered NA 6 months
[cost ofRs 150]
Free Gift Benefits offered due to large volume of orders placed
10 ----
Quantity Discount 20 ----Cash/Credit 1 month.
[Cost of credit 1.5% pm]
Cash basis
• Even though price charged to related party & unrelated party are same, question of determination of Arm’s Length must have to be established.
• Terms of Agreement must have to be seen. For e.g.
Implication
Case Study IVDeduction under section 80IC
Company A
Overall Profitmargin 15%
• Company A has three units: Unit A and UnitB (Manufacturing units) and Head Officeunit
Head Office performs functions of R&D,marketing and distribution of goodsproduced by the manufacturing units
•
HO
Unit - ATax
Holidayu/s 80IC
Unit - BNon-Tax
Holiday
• Profitability is ascertained by allocating theexpenses incurred by the Head Office in anappropriate ratio between Unit A and Unit B
Whether the reported profitability of the taxholiday undertaking can be varied by the taxauthorities on the grounds that:
― HO is separate undertaking; and
•
Owns Brands, performsR&D and marketing
activities, etc― Costs allocable to Unit A should be
charged using mark up or alternativelyimputing a royalty cost?
Case Study VI
Unit A
Unit B (Power Generation Unit)
Expenses incurred
of Rs. 7 Crore
Expenses incurred for F.Y. 12-13 for which Unit A raised Debit Note to Unit B.
Unit B has not yet commenced the operation.
Hence, no profit is generated for F.Y. 2012-13.
It may or may not start operation in F.Y. 2013-14.
Whether the nature of transaction covered under the purview of Domestic Transfer Pricing?
If yes then still it be applicable under Domestic Transfer Pricing as no profit is generated by Unit B in that year to take exemption u/s 80IA(8)?
FACTS
Case Study VII : Specified Domestic Transactions
A Ltd.
B Ltd. C Ltd.
X Inc. Y Inc. Z Inc.
35% 22%23%
60%40%
• A, B, C ltd are Indian companies• X,Y, Z Inc. are foreign companies • Value of each transaction exceeds 5
crore. They are as under:
1. A ltd sells goods to Z Inc.2. A ltd has borrowed interest bearing
loan from X Inc.3. B ltd pays royalty to A ltd for use of
brand4. B ltd purchases goods from C ltd5. Y Inc. provides managerial services
to A ltd6. C ltd received technical services
from X Inc.
Which of the above transactions are regarded as SDT???
A Ltd.
Z Inc.
23% holding
1. A ltd sells goods to Z Inc.
Sells goods
Income
Expense
Transactions Between
Coverage Check Point Conclusion
A Ltd. & Z Inc. • Two Different Entity
• Taxable to Taxable• 80 IA(8) – N.A.• 80 IA (10) – N.A.• 40A(2)(b) -
Applicable
• Income / Expenses
• Threshold
A Ltd.• SDT is
N.A.Z Inc.• SDT is
N.A.
Neither Domestic nor International Transfer Pricing will apply.
2. A ltd has borrowed interest bearing loan from X Inc.
A Ltd.
X Inc.
35% holding Expense
Income
International Transfer Pricing will apply & hence Domestic Transfer Pricing will not applicable.
Transactions Between
Coverage Check Point Conclusion
A Ltd. & X Inc.
• Two Different Entity
• Taxable to Taxable
• 80 IA(8) – N.A.• 80 IA (10) – N.A.• 40A(2)(b) -
Applicable
• Income / Expenses
• Threshold
A Ltd.• SDT is
N.A.
X Inc.• SDT is
N.A.
A Ltd.
B Ltd.
40% holding
3. B ltd pays royalty to A ltd for use of brand
Royalty
Income
Expense
Transactions Between
Coverage Check Point Conclusion
A Ltd. & B Ltd.
• Two Different Entity
• Taxable to Taxable
• 80 IA(8) – N.A.• 80 IA (10) – N.A.• 40A(2)(b) -
Applicable
• Income / Expenses
• Threshold
A Ltd.• SDT is
N.A.
B Ltd.• SDT is
Applicable
Domestic Transfer Pricing will apply.
4. B ltd purchases goods from C ltd
A Ltd.
B Ltd. C Ltd.
60% Holding
40% Holding
IncomeExpense Transactions Between
Coverage Check Point Conclusion
B Ltd. & C Ltd. • Two Different Entity
• Taxable to Taxable
• 80 IA(8) – N.A.• 80 IA (10) –
N.A.• 40A(2)(b) -
Applicable
• Income / Expenses
• Threshold
B Ltd.• SDT is
Applicable
C Ltd.• SDT is
N.A.
Common Holding
Domestic Transfer
Pricing will apply.
A Ltd.
Y Inc.
22%Holding
5. Y Inc. provides managerial services to A ltd
Income
Expense
Transactions Between
Coverage Check Point Conclusion
Y Inc. & A Ltd. • Two Different Entity
• Taxable to Taxable
• 80 IA(8) – N.A.• 80 IA (10) – N.A.• 40A(2)(b) -
Applicable
• Income / Expenses
• Threshold
Y Inc.• SDT is N.A.
A Ltd.• SDT is
Applicable
International Transfer Pricing will not apply. However, Domestic Transfer Pricing will apply
A Ltd.
C Ltd.
X Inc.
35% Holding
60% Holding
6. C ltd received technical services from X Inc.
Transactions Between
Coverage Check Point Conclusion
C Ltd. & X Inc. • Two Different Entity
• Taxable to Taxable
• 80 IA(8) – N.A.• 80 IA (10) – N.A.• 40A(2)(b) -
Applicable
• Income / Expenses
• Threshold
C Ltd.• SDT is
Applicable
X Inc.• SDT is N.A.
Income
Expense
Domestic Transfer Pricing will apply.
Case Study VIII : Aggregation for the purpose of determining SDT
X Ltd.
Sister Concern 1Eligible for 80IC
Sold goods of Rs 1 Crore
Unit A of X Ltd.(Power Generation Unit)
Eligible for 80IA
Unit B of X Ltd.(Manufacturing steel in
Himachal Pradesh)Eligible for 80IC
Power generated by unit A is
used by Unit B Sister Concern 2
X Ltd.
25% holdin
g
X ltd purchas
es power
for Unit B worth
Rs. 1 Crore
• Whether foregoing transactions would constitute SDT u/s 92 BA?• If transaction between X Ltd. & sister concern 2 is worth Rs. 2 Crore, then whether
Answer would change accordingly?
Transaction Value
Rs. 2 Crore
Case Study IX : Value for the purpose of aggregation,Where no entry is made in books of account
Y Ltd.
Brick manufacturin
g
Engaged in business of
Generation of steam and
power by use of coal
Eligible for deduction u/s
80IA (Tax Free)
Fly Ash is produced during generation of steam which is used by brick manufacturing unit.
No specific cost is attached to Fly ash (being a by-product).
Hence transfer from power unit to brick unit has not been recognized in books of accounts.
FACTS
• What value of the fly ash would be considered for purpose of determining whether the value of transaction exceeds a sum of Rs 5 crore as required under section 92BA of the Act?
FLY ASH(by product generated)
Case Study X : Inter-unit transfer of stores and spares
Whether the stores and spares purchased by Z ltd and used by the eligible unit would e covered u/s 80-IA(8) of the Act;
If yes, what would be the ALP for the same?
A Ltd.
Eligible unit u/s 80IC
Various other units
FACTS
Z ltd engaged in manufacturing of various products through various units.
Out of various units, one is eligible unit u/s 80-IC.
Purchase of Stores/spares done at one place and then the same is used by different units as per the requirement.
Purchase Centralized
Purchaseutilization
Case Study XI : DTP in case of loss making unit in SEZ
I Ltd.
SEZ Unit
Engaged in the business of computer software development
During the year, I. Ltd. has entered into Software Development contract with its sister concerns.
The concerned financial year is the first financial year of the Unit and has resulted in an overall loss from its operations.
Accordingly, no deduction has been claimed by the company under Section 10AA for the said year.
Whether DTP provisions, relating to Section 10AA, would apply to the SEZ unit for the relevant year?
FACTS
Case Study XII : Applicability of DTP provisions before the “initial assessment year’ of an eligible unit
Whether the DTP provisions relating to Section 80IA (8) / 80IA (10) would apply to W Ltd. for the first 5 years of the power business, when it would not be claiming any deduction under Section 80IA?
Whether the position would be different, if the power undertaking is incurring losses in these five years and the profits generated by other business undertaking of W Ltd. are adequate to absorb the losses so incurred by the power undertaking?
Whether DTP provisions would apply in the 6th year, if even in that year, the power undertaking continues to incur losses?
Whether DTP provisions would apply if after commencement of the initial assessment year, the power undertaking incurs losses?
Commence business of generation and distribution of power
Eligible for Deduction u/s 80IA (4)(iv)
Quantum of Deduction : 100% of the profits and gain derived from such business for 10 consecutive years
As per Section 80IA (2), deduction can be claimed for any 10 consecutive assessment years out of 15 years beginning from the year in which the undertaking generates power.
W Ltd. has decided to start claiming deduction only from the 6th assessment year.
QUERYFACTS
Case Study XIII: Section 40A(2) and section 80-IA(10)
A Pvt. Ltd.
B Pvt. Ltd.
Manufactures cement in the state of Uttaranchal,
Profit is eligible for deduction u/s 80IC
Purchases limestone of Rs. 6 Crore
Group company
35% holding
• Whether Section 40A(2) of the Act would apply to such purchases?
• Whether section 80-IA (10) of the Act would apply to such purchases?
• Whether such transactions would be regarded as SDT’s ?
• If yes, what would be the implications on the assessee
QUERY
Case Study XIV : Director’s Remuneration
Unit A
Mr. ABC
Public limited company
Ms DEF
Executive Directors
Remuneration
Mr. XYZ
Non-Executive Directors
Sitting fees and
comm
ission
Which would be the most appropriate method of determining the ALP
Case Study XV : Allocation of head office expenses
P Ltd.
One of the activity is construction of housing project(Eligible for
deduction u/s 80-IB(10)
Head OfficePays remuneration to whole time directors and managers
Will the provision of Section 80A(6)/80-IA(8) and in turn the DTP regulations apply for the purpose of allocation of a part of the managerial remuneration to the housing project while computing the eligible profits form the housing project.
QUERY
• Whether SDT Provision will be applicable or not?
• If yes, which method should be adopted for determining ALP ?
Y Pvt. Ltd.Y Pvt. Ltd. Raw Material
X Pvt. Ltd.X Pvt. Ltd.
Further Process
Supplies to
Makes& send back to
Directors of Both the Companies are
from same family.
Directors of Both the Companies are
from same family.
Transactions exceeds Rs. 5 Crore
Case Study XVI : Further Processing of goods
Sold goods @ Rs. 90
Sold goods
@
Rs. 100
Whether the provisions of Specified Domestic transactions are applicable to Firm ABC or not?
Now if answer is NO, how to report & what to report? If firm ABC is able to establish that all sale are bona fide transactions with closely connected
firm XYZ and results in NO tax avoidance and / or claiming higher deduction u/s 80-IC by it, can it argue that since charging provisions are not applicable, SDT provisions dealing with valuation should not apply and thus Chapter X does not apply to it?
Case Study XVII : SDT between P’ship Firms
ISSUES
Is provisions of SDT would be applicable to insurance
companies whose computation of profit as per section 44 of the Act is to be
computed as per first schedule?
Whether section 40(A)(2)(b) would be applicable on two
state government companies who entirely
have different business but they have transactions inter
se?
ISSUES
ISSUES
Whether transaction between two related
companies whereby sales is made by profit making
company at a lower rate to loss making company would
attract SDT provisions?
ISSUES
Can higher profit earned by the company be considered
as ‘ more than ordinary profits’ under section
80IA(10)?
ISSUES
What is the appropriate approach for the company
to demonstrate that section 80IA(10) should not apply?
ISSUES
Can the tax authorities restrict the tax holiday claim to the extent of the average
profits earned by the comparable companies in
the light of amendments in Finance Act, 2012 related to
domestic transactions?