c.v.o. ca’s news & views vol. 20 no. 3 / september 2016 2016/full... · ca deepesh chheda ca...

C.V.O. CA’S NEWS & VIEWS VOL. 20 NO. 3 / SEPTEMBER 2016

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From the desk of ChairmanLet's try to transform ourselves and move towards self-purification,self-enlightenment and self-achievement………………….

NEWS BULLETINCOMMITEE

ChairmanCA Mulesh Savla

Office BearerCA Nilesh Dedhia

AdvisorCA Hiten Gada

ConvenorCA Rahul Nagda

Jt. ConvenorCA Harsh Dedhia

MembersCA Deepesh ChhedaCA Ameet Chheda

CA Paras MaruCA Sagar Maru

CA Niraj ChhedaCA Jeet Gala

CA Pratik ShahnandCA Jinit BhedaSp. Invitees

CA Arvind Nagda

C O N T E N T S

ASSOCIATION NEWS

Forth ComingEvents ....................... 4

EventsRetrospect ................. 4

A R T I C L E S

Overview ofTransfer Pricing ......... 5

Approach toTransferPricing Study ............ 7

Transfer Pricing(‘TP’) Litigation– TP Assessmentand DisputeResolutionPanel (‘DRP’) .......... 13

Discussionson RecentJudgement .............. 18

Issues inDomesticTransferPricing ..................... 21

Virat Kohli -The Captain ............ 24

Representationof Buy Backof shares ................. 25

FEMA Update .......... 17

Dear Members,

Parvadhiraj "Paryushan Parva" brings the importance of some of our religious rituals,Dharma Aaradhna and Satsang with our Saints and Gurus and detach us from our busy,monetary world.

All of us - young and old, men and women happily participate with full vigour and zeal invarious religious rituals and other events. Pravachans and Talks by Saints and learnedGurus are organised during these days to drive out evils from our hearts, transform ourmind and body and lead us to self-purification and enlightenment, and ultimately leadingtoour true destination, salvation.

In the present time, however, perhaps, what is required the most is to be a good humanbeing first. The Paryushan Parva guides us to honour our humanly responsibilitiesreligiously and to use our strength and power for the betterment of all. We all arecommitted; we are responsible to our family members, relatives, the people associated withus, other associates, the society and the whole world. And while we perform all the religiousrituals and Kriyas, we need to take care of these responsibilities too. One would appreciatethat if each one of us thinks on these lines, perhaps, we will have greater happiness andpeace around us.

Our Saints and Gurus, while explaining us the life history of all our Tirthankaras andAacharyas, have time and again warned us to stay away from negative usage of ourstrength and power. As we have always, then to offset the same with vigorous punishmentby the all mighty in future.

Our religion has given us a very strong virtue - forgiveness. To seek pardon and to forgive,both are the traits of brave and strong men. By repenting from the bottom of our heart fora wrong deed and seeking forgiveness for all such wrong deeds by leaving aside our Egomay lead us to get some respite from the rigors of those wrong deeds.

So on the eve of Paryushan Parva, incorporating whatever said above I also seek your allpardon for any of my past wrong doings. Michchhami Dukkaddam!

By walking on this path, let us all purify traits of our soul, get rid of worldly discords and getfully absorbed in the eternal truth by experiencing and realising the true nature of the soul.And by doing so also put an end to all evils present in us.

Then only the days of Parvadhiraj Paryushan Parva will transform us to self-enlightenedand self-achieved, which ultimately will lead us to liberation or salvation.

Warm regards, CA Mulesh Savla

“you can, you should, and if you’re brave enough to start, you will.”


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OVERVIEW OFTRANSFER PRICING

Contributed by :CA Sanjeev Lalan(a member of the association)

he can be reached [email protected]

The provisions relating to Transfer Pricing havenot only been a source of major litigation but alsoaffected the manner in which it complicated someissues of foreign investments within the country.Infact, the amount of litigation that has beengenerated in India on account of transfer pricingprovisions has been unprecedented in volumeterms also as compared to the overall litigationworld over on this aspect.

While it may be fashionable at times to criticise thetax policy of the country, the issues relating toprofit shifting and base erosion has been a subjectmatter of heartburn even amongst the developednations. The levy of around USD 14.5 billion tax byEU on Apple in regards to its operations fromIreland is case in the point. With globalisation andincrease in cross border trade every jurisdictiontrying to extract its rightful share of revenue isquite legitimate. It is estimated that world-widemore than half the transaction take amongst therelated parties. Infact, BEPS initiative of OECD isone of the important developments in this regards.While BEPS has much wider implication as it alsocovers the aspects of base erosion within its ambit,transfer pricing generally affects profit shiftingbetween two entities who are associated in amanner that there exists a possibility of arrangingor influencing the transactions to enable reductionof tax liability.

Originally the provisions of transfer pricing wereintroduced in Chapter X relating to Avoidance ofTax, w.e.f. 1/4/2002 to bring within its ambitInternational Transaction. The observations ofSupreme Court in Glaxo Smithkline’s case resultedin expansion of the scope to certain specifieddomestic transactions w.e.f. 1/4/2013. Earlier, mostof the transactions were governed largely bysection 40A(2)(b) and certain limited cases bydeduction provisions where transaction arising onaccount of close connection got covered for eg.80IA(10).

As per section 92 following transactions arerequired to be computed having regards to arm’slength price—

(a) Income arising from international transaction,including allowable expenditure and interest;

(b) International transactions or specifieddomestic transactions of shared servicesbetween associated enterprises;

(c) Specified domestic transactions relating toallowance of expenses or interest or allocationof any cost or expenses or any income.

The above are subject to further conditions of sub-section (3) which makes applicability of provisionsredundant if they result in reduction of income orenhancement of loss otherwise computed.

Thus, it will be seen that the purpose of theprovisions of section 92 is only to help incomputation of incomes or expenses on arm’s lengthpricing and it does not create any additionalcharge. The provisions relating to transfer pricingare an aid to computation of income or expensesand by themselves cannot bring to tax anythingwhich is otherwise not chargeable by virtue ofsection 5 r.w.s. 2(24). In short these are provisionsrelating to computation only.

The terms which repeatedly arise and needconsideration while dealing with the subject oftransfer pricing are associated enterprise,international transaction and specified domestictransactions. All these terms have been elaboratelydefined and need due consideration to understandwhether the transaction will get covered by any ofthe limbs of the definitions of each term.

The most important machinery provision of thetransfer pricing is section 92C which is beingseparately dealt in the other article. But it would beworthwhile to note that the whole computationmechanism arises from the said section whichprovides for following methods of computation—

(i) Comparable uncontrolled price method;

(ii) Resale price method;

(iii) Cost plus method;

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VOL. 20 NO. 3 / SEPTEMBER 2016 C.V.O. CA’S NEWS & VIEWS

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(iv) Profit split method;(v) Transactional net margin method and(vi) Such other method as may be prescribed.

It may be noted that above are not options to beused for determination of arm’s length price butpreferences to be decided upon and eliminatedbefore jumping to the next appropriate method insequential order. Rule 10B provides elaborateguidance on choice of most appropriate method.

The choice of appropriate method, as discussedelsewhere in this issue, require elaborate study ofthe transactions involved and thus the study reportassumes great significance in determination ofmost appropriate method based on FAR (Function,Assets and Risk) analysis of the entities involved inthe transaction. Rules 10A to 10C are veryimportant provisions in this regards and rule 10Dprovides for documents that are required to becontemporously maintained for purpose ofdetermination of ALP.

In last few years there have been furtherimportant development in the subject of transferpricing and these relate to—(1) Dispute resolution panel providing for

mechanism of determination of ALP by a panelof three Commissioners.

(2) Safe harbour rules which provide for theacceptable margins within which certain typesof transactions may fall.

(3) Advance pricing Agreement is a measurewhich has been recently announced wherebyan entity enters into agreement with theBoard for determination of ALP or manner ofcomputing ALP.

The subject of transactions between related partiesand their impact has also assumed greatersignificance in accounting sphere as well and is notconfined only to disclosure but also seriousdiscussions in boards and audit committees.

However, as a parting though I would like to endby pointing out that is this craze to put things instraight jacket formulae somewhere leading toputting restrictions on business processinnovations? Can there ever be one size fits allapparel?

One may have varying opinions on pros and consbut one thing is definite that the current issue ofNewsletter has important articles on latestdevelopment on the subject and I am surepractitioners of transfer pricing shall find this veryuseful in upcoming audit and assessment season.

You are beautiful. Your beauty, just like your capacity for life, happiness, and success, is immeasurable. Day

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1. Introduction

1.1. Taxation based on transfer pricing and relatedcompliances are becoming an important issue formany companies, both foreign and domestic.India has introduced detailed Transfer PricingRegulations in 2001 and since then the TransferPricing compliances has become one of thebiggest compliance activity for many MNCs.Some of the companies have implemented a fullblown comprehensive approach to transferpricing whereby creating and developing a teamof decision makers and other resource people,both within and outside the company to complywith the inland transfer pricing regulations.

1.2. India has adopted detailed transfer pricingdocumentation rules which has resulted indramatic increase in the volume and complexityof international intra-group trade and theheightened scrutiny of transfer pricing issues bytax administrations and in turn has resulted ina significant increase in compliance costs fortaxpayers. Nevertheless, tax administrationsoften find transfer pricing documentation to beless than fully informative and not adequate fortheir tax enforcement and risk assessmentneeds.

1.3. OECD in its BEPS report has listed down threeimportant objectives which every transferpricing study should take care of: to ensure that taxpayers give appropriate

consideration to transfer pricingrequirements in establishing prices andother conditions for transactions betweenassociated enterprises (‘AEs’) and inreporting the income derived from suchtransactions in their tax returns;

to provide tax administrations with theinformation necessary to conduct aninformed transfer pricing risk assessment;and

to provide tax administrations with usefulinformation to employ in conducting anappropriately thorough audit of the transferpricing practices of entities subject to tax intheir jurisdiction, although it may be

APPROACH TO TRANSFERPRICING STUDY

Contributed by :CA Dighesh Rambhia(a member of the association)


necessary to supplement the documentationwith additional information as the auditprogresses.

2. Approach to Transfer Pricing Study

2.1. The approach of “one size fits all” does notappear viable for the facets of Transfer Pricingstudy. Instead, Transfer pricing study should bebased on the facts and transaction pattern ofeach Assessee.

2.2. In India, prevalent practise of Transfer Pricingstudy is more based on compliance requirementrather than on business requirements.Therefore, to understand the approach forcarrying on transfer pricing study, it isimportant to understand the compliancerequirements for transfer pricing.

2.3. Rule 10D of the Income-tax Rules prescribesvarious information and documents which arerequired to be prepared and maintained. Suchinformation and documents can be divided intotwo parts viz. (i) Primary Information andDocuments and (ii) Supporting Documents.

2.4. The Primary Information and Documentsrequired to be maintained can further beclassified into three categories:Enterprise-wise DocumentationThese sets of documents describes relationship ofthe assessee with AE and the nature of business.This information is largely descriptive. Anillustrative list of information / documents tobe maintained under this classification isprovided below.

Ownership / shareholding pattern of theAssessee;

Business profile of the multinational group; Details of AE(s) with whom international

transactions are entered into; Business of the Assessee and the AEs; and Broad industry profile in which the Assessee

operates.

“How would your life be different if…You stopped allowing other people to dilute or poison your day with their words or opinions? Lettoday be the day…You stand strong in the truth of your beauty and journey through your day without attachment to the validation of others”


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The above documentation would provide the taxauthorities with the preliminary information ofAssessee’s group profile, Assessee’s function inthe group and the industry in which it operates.The broad industry profile, if well documented,will provide the tax authorities with an overviewof the demand and the business drivers withinthe industry as well as the Assessee’s position inthe industry. The documentation can alsoprovide an overview of the Assessee’s growthobjectives, given the evaluation of the industrysector and the competitive dynamics withinindustry in which the Assessee operates.

Transaction specific documentsThese documents explain each internationaltransaction in detail e.g. nature and terms ofcontract, description of the functions performed,assets employed and risks assumed by eachparty to the transaction, economic and marketanalyses, etc. An illustrative list of information /documents to be maintained under thisclassification is provided below.

Details of each international transactione.g. name of the AE(s), product transferred/ service provided, quantity, price; shipmentand credit terms, etc.;

Functional analysis of the Assessee andAE(s) listing the functions performed, assetsemployed and risks assumed forundertaking the international transaction;

Pricing policy adopted for the internationaltransaction;

Budget / forecasts for the Assessee’sbusiness;

Reports of market research studies carriedout and technical publications brought outby institutions of national or internationalrepute;

Record of uncontrolled transactions(internal and external comparables) foreach international transaction includingnature and terms of the uncontrolledtransactions; and

Economic analysis to provide details of dataused and data rejected with reasons thereof.

The above information would capture therelevant information about the Assessee and theconcerned AE(s). The documentation of theprecise functions performed by the parties

(Assessee and AE(s)) and the economiccharacterisation (eg: integrated manufacturer,contract manufacturer, indenting agent, supportservice provider, etc) of the respective partieswould be relevant here. The economiccharacterisation of parties would assist theAssessee to determine the tested party.

Tested party means the AE from whoseperspective the international transaction istested for the determination of the ALP.

In case of an international transaction betweentwo AEs, in order to conduct an economicanalysis, one has to select one of the two AEs asthe tested party. The parameters for selection ofthe tested party could, inter alia, include: The tested party should be the least complex

(functionally) of the transacting parties. There should be availability of reliable data

that requires fewest and most reliableadjustments

The tested party should ideally not ownintangibles / or own fewer intangibles

The reasons for selection of one of the two AEs asthe tested party, based on above parameters,should be adequately documented.

In case the foreign AE is considered as the testedparty for a particular international transaction,the relevant documents regarding the foreignAE should be maintained. It may be pertinent tonote that the Tribunal in the case of RanbaxyLaboratories Ltd. observed that if taxpayerwishes to take foreign AE as the tested party itmust ensure that the relevant data forcomparison is available in public domain or isfurnished to tax administration.

Computation related documentsThese documents detail the methods considered,actual working assumptions, adjustments madeto the transfer prices and any other relevantinformation / data relied for determining theALP. An illustrative list of information /documents to be maintained under thisclassification is provided below.

Nature of each international transactionand the rationale for selecting the mostappropriate method for each internationaltransaction. The Assessee is required tosubstantiate the selection by proper

“If you could kick the person in the pants responsible for most of your trouble, you wouldn't sit for a month.”


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documentation and the manner in whichthe method was applied to eachinternational transaction;

Actual working / computation of the armlength’s price (‘ALP’) i.e. recording thecalculations i.e. comparability analysisperformed to determine whether or notuncontrolled transactions are comparable tothe international transactions with reasonsfor adjustments made to make thecomparability analysis more reliable.

Critical factors and assumptions influencingthe determination of the ALP;

Adjustments made (along with reasons) tothe Assessee’s transfer prices so as to align itwith ALPs; and

Any other information relevant for thedetermination of the ALP

One of the aspects of documentation is to capturethe group policies and the pricing methodologyof the international transaction. For instance,pricing methodology could be either on cost plusmark-up basis, percentage on sales basis,bilateral negotiations basis, etc to appropriatelysubstantiate the arm’s length nature of thetransaction.

2.5. The Supporting Documents would primarilyinclude the official publications, reports, studiesetc. of the Government of the country of AE orother country, market research studies, reportsand technical publications of reputedInstitutions (National and International), pricepublications etc. to support the PrimaryInformation and Documents kept andmaintained by the Assessee.

In case of exceptional transactions, assesseeshould endeavour, as far as possible, to record allrelevant information (available at the time ofentering into the international transaction) thatis critical for the management to determine thepricing / other factors of the internationaltransaction. The information / documentsmaintained could be in the form of minutes ofBoard of Directors meeting, emails, faxes,agreements, quotations, independentvaluations, market surveys, etc.

3. Comparability Analysis in TransferPricing Study

3.1. The key to any transfer pricing study is thecomparability analysis. Comparability analysis

is relevant not only for the determination of ALPunder the method selected, but also for selectionof the most appropriate method itself.

The documents required for comparabilityanalysis under each of the prescribed methodscould be different. An illustrative list ofdocuments to be maintained by the Assessee forthe determination of ALP in case of aninternational transaction is discussed below:

3.1.1. Comparable Uncontrolled Price (‘CUP’)Method:CUP method compares the price for propertytransferred or services provided in a controlledtransaction to a price in a comparableuncontrolled transaction.

When assessing the factors in determiningcomparability between controlled anduncontrolled transactions, the Rules providethat the specific characteristics of the propertytransferred or services provided, the functionsperformed, the contractual terms and theconditions prevailing in the market, would be,inter alia, some of the relevant factors.

For the transactions benchmarked using theCUP method, the documents that may bemaintained by the Assessee to justify the CUPcould, inter alia, include the following: Process of identification and listing of: Internal Comparable Uncontrolled

TransactionsAn internal CUP could be available wherethe tested party undertaking the controlledtransaction also undertakes an uncontrolledtransaction in respect of the same property/ service, in the same financial year

External uncontrolled comparabletransactionsAn external CUP would be available whenthird parties undertake transactions similarto that of a tested party

Nature, terms and conditions ofuncontrolled comparable transactions

The supporting agreements /correspondence / minutes of meetings andany other documents exchanged betweenthe Associated enterprises (‘AE’)

Basis of selection of the CUPs consideringthe functions performed, assets utilized and

“You are essentially who you create yourself to be and all that occurs in your life is the result of your own making.”


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risks assumed by the tested party (asdocumented under the functional analysis)vis-à-vis the comparables

3.1.2. Resale Price Method (‘RPM’):RPM compares the gross profit margin in acontrolled transaction with the gross profitmargin in an uncontrolled transaction.

RPM is applicable to transactions involving apurchase and subsequent sale of the sameproperty or services. Consequently, greaterdegree of similarity is required between theproducts / services (of the tested party vis-a-visthe comparable).

For the transactions benchmarked using theRPM, the documents that may be maintained bythe Assessee to justify the ALP could, inter alia,include the following: Details of resale price charged in an

uncontrolled transaction Details of controlled transaction between AEs, and, the transaction between AE and the third

partysuch as, terms of the transactions and thefunctions performed, assets utilized andrisks assumed

Search conducted to find the comparables Analysis conducted to find comparable gross

margin data In case of any adjustments to gross margin

of the comparables, further documentationwould be required

Documents supporting the computation ofALP

3.1.3. Cost Plus Method (‘CPM’):CPM compares the mark-up over costs in acontrolled transaction with the mark-up overcosts in an uncontrolled transaction.

CPM envisages the computation of the total cost(direct and indirect) of production incurred bythe enterprise in respect of the propertytransferred or services provided to an AE.

For the transactions benchmarked using theCPM, the documents that may be maintained bythe Assessee to justify the ALP could, inter alia,

include the following: Total cost of production of the tested party. Search conducted to find the comparables. In case of any adjustments to mark-up,

further documentation would be required. Documents supporting the computation of

ALP.

3.1.4. Profit Split Method (PSM):PSM is applicable mainly in internationaltransactions involving transfer of uniqueintangibles or in case of multiple interrelatedinternational transactions.

PSM determines the combined net profit of theAEs and the same is then split in proportion ofthe relative contributions of the AEs. Thecombined net profit may be partially allocated toeach AE so as to provide it with a basic returnand the balance, after such allocation, may besplit amongst the AEs in proportion to theirrelative contribution which may be determinedbased on intangibles, etc owned by the AEs.

For the transactions benchmarked using thePSM, the documents that may be maintained bythe Assessee to justify the ALP could, inter alia,include the following: Number and nature of transactions closely

interlinked. Details of all AEs involved in the

transaction. Functions performed by each AE. Intangibles owned by each AE.

Search conducted to identify ordinaryoperating profits for each of the AE.

Basis of apportionment and allocation ofprofits.

3.1.5. Transactional Net Margin Method (TNMM):TNMM is generally appropriate for transactionswhere RPM / CPM cannot be adequately applied.TNMM is more tolerant to the functionaldifferences since these differences often getreflected in the variation in the operatingexpenses.

TNMM examines the net profit margin[generally, operating profit after depreciationbut before interest] from controlled transactionsin relation to a relevant base like sales, costs,

“The discontent and frustration that you feel is entirely your own creation.”


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assets, etc. Unlike RPM and CPM whichcompares gross margins / mark-up, TNMMinvolves a comparison of margins at the netprofit level.

For the transactions benchmarked using theTNMM, the documents that may be maintainedby the Assessee to justify the ALP could, interalia, include the following: Determination of functions for choice of

comparables. Search conducted to find the comparables. Calculation of net profit margin of

comparables and the tested party alongwith assumptions made.

Determination / use of appropriate profitlevel indicator (‘PLI’).In case of any adjustments to net profitmargin, further documentation would berequired.

Computation of ALP.

3.1.6. Search process for identification ofcomparables using RPM, CPM, PSM andTNMM:

The Assessee needs to properly document thesearch process to find the comparables. TheAssessee, inter alia, needs to maintain thefollowing documents in this regard: Search methodology for determining

comparables. Details of database (such as, Prowess,

Capitaline Plus and ACE, and internationaldatabases, such as, Onesource, Amadeus,TP Catalyst) selected for conducting thesearch for comparables.

Source documents for each of the aboveprocesses.

Reasons for acceptance or rejection ofcomparables.

Detailed accept / reject sheet. Reasons forrejection of comparables may, inter alia,include the following:

Sufficient financial / descriptiveinformation is not available to so as toundertake analysis;

Companies have been declared sick; Companies have ceased business operations

or are currently inactive; Companies have experienced exceptional

year of operations; Companies are engaged in activity other

than activities carried out by the testedparty;

Companies themselves had transactionswith related parties (i.e. transactions arenot uncontrolled);

Segmental information is not available / isinsufficient to undertake analysis;

Companies experience persistent operatinglosses.

Short business descriptions of acceptedcomparables.

Financial data of all companies forming partof the search.

Calculation of the margins / mark-up usingannual report data / database data for allaccepted companies, bringing out thefollowing:

Working of arithmetic mean of comparablesmargin / mark-up.

Details of adjustments made to account fordifferences.

Other Method

The intent of having the ‘other method’ appearsto be to provide flexibility to the taxpayer toselect a method other that five methods forbenchmarking routine transactions (such asreimbursement of expenses, etc) and non-routine / unique transactions (such as transfer ofintangibles, etc). This would also enabletaxpayer to credible rely upon data referred to incommercial negotiations, data points reflectingmarket conditions and other persuasiveevidences which would help in establishing ALP.

Broadly, this step is in line with the OECD TPguidelines and many other global jurisdictionsthat support use of ‘other method’ provided itsatisfies the arms-length principle and is foundto be more appropriate based on facts andcircumstance of the case. Of course if the ‘othermethod’ is used, it must be supported by anexplanation of why conventionally recognizedmethods were regarded as less appropriate andwhy selected ‘other method’ provides a bettersolution.

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Other method seems to be a price based methodand therefore an extensions of CUP method as itrelies on the price been charged or paid or wouldhave been charged or paid for the same orsimilar uncontrolled transaction, with orbetween non AE.

Following could be scenarios where other methodcan be useful: Use of revenue split / allocation in case of

investment banking, logistics and similarcomplex uncontrolled transactions

Use of tender documents, price quotations todemonstrate ALP in case of loan, guaranteetransactions

Reliance on standard rate cards Use of valuation methodologies for

determining ALP for transfer of business/intangibles

Technical valuation reports for determiningALP for purchase/ sale of fixed assets.

It should however be kept in mind that forapplication of the ‘other method,’ the taxpayerswould still be required to satisfy the sixcomparability factors prescribed by Rule 10C.Also, other method still relies on the availabilityof same and similar uncontrolled transaction forthe purpose of benchmarking analysis.Therefore, the applicability of the other methodin the scenario where no comparableuncontrolled transactions are available wouldstill be a challenge.

3.1.7. Adjustments to price / margin / mark-up.In case of any adjustments to price / margin /mark-up, the following needs to be documented: Nature of adjustments. Rationale of adjustments. Working of adjustments. Impact of adjustment.

Adjustments for differences may involvesubjectivity in assigning quantitative data forqualitative factors. The adjustments could, interalia, include adjustments for depreciation, creditperiod, working capacity, client rating,credentials, quantity, etc.

3.1.8. Use of PLIIn absence of specific guidelines on the choiceof PLI (to benchmark international

transactions) under the Indian transferpricing legislation, one has the discretion toadopt either of the following PLIs:

Gross margin or operating margin onoperating cost; or

Gross margin or operating margin onoperating revenue.

The adoption of PLI in different methods isdiscussed hereunder:

Under the CPM, the PLI usually adopted isgross margin (mark-up) on operating cost

Under the RPM, the PLI usually adopted isgross margin on operating revenue

Under the TNMM, the selection of PLIdepends on the nature of transactionsentered into by the tested party

In case transactions of a tested partypertain to receipt of income, the PLIadopted is operating margin on operatingcost.

In case transactions of a tested partypertain to payment of expenses, the PLIadopted is operating margin on operatingrevenue.

4. ConclusionTransfer Pricing analysis on paper lookssimple but in practice it can be a laborious,difficult, time-consuming and, more oftenthan not, expensive exercise. Seekinginformation, analysing all the data fromvarious sources, documenting the analysisand substantiating adjustments, all steps costprecious time and money. It is thereforeimportant to put the need for Transfer Pricinganalyses into perspective and to keep theburden and costs that should be borne by ataxpayer to identify possible comparableand obtain detailed information thereonreasonable and proportionate to thecomplexity of the transaction. It is recognisedthat the cost of information can be a realconcern, especially for small to medium sizedoperations, but also for those MNEs that dealwith a very large number of controlledtransactions in many countries. However, itshould be observed that burden of cost cannotbe a reason for dilution of Transfer Pricingcomparability standards.

“What we achieve inwardly will change outer reality.”


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TRANSFER PRICING (‘TP’) LITIGATION– TP ASSESSMENT AND DISPUTE

RESOLUTION PANEL (‘DRP’)

Contributed by :CA Kushal Dedhia(a member of the association)


“Your fear is 100% dependent on you for its survival.”


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2. Transfer pricing assessment – Section92CA

A. Reference to the TPOIn order to reduce the rising volume of transferpricing litigations and to provide clarity andprocedural uniformity, the Central Board ofDirect Taxes (CBDT) has recently issuedInstruction No. 03/2016 on 10 March, 2016(Instruction) replacing Instruction No. 15/2015 issued on 16 October, 2015 to giveguidance to Assessing Officers (AOs) andTransfer Pricing Officers (TPOs) regardingtransfer pricing assessments. The saidinstruction focuses on the procedure forreference to be made by AO to the TPO andoutlines the respective roles of AO and TPO withreference to international transactions.Some key aspects of the Instruction thatare likely to impact the transfer pricinglandscape of the country are highlightedbelow.(i) Selection of cases by the AO

Till date, any case involving an aggregatevalue of the international transactionexceeding INR 150 million was mandatorilyselected for scrutiny and referred to theTPO.

Under the new guidelines, the selection ofthe cases for TP assements would be basedon the risk parameters and not on the basisof the value of the internationaltransaction.

(ii) Reference to the TPO

Under the following circumstances only, AO hasto mandatorily refer the case to the TPO

Case I- All cases selected for scrutiny on thebasis of TP risk parameters either under theCASS or manual selection process.

Case II - Cases selected for scrutiny on non-TP risk parameters shall be referred to TPOonly in following circumstances:

Either has not filed accountant’s report (i.e.Form 3CEB) or has filed Form 3CEB buthas not disclosed an internationaltransaction(s) or SDT(s) or both;

Historical TP adjustment of INR 10 crores ormore and such an adjustment has beenupheld by the judicial authorities or ispending in appeal; and

• Findings of TP issues in respect ofinternational transactions or SDT’s or bothduring search and seizure and survey.

Case III - Cases involving a TP adjustmentin earlier years which has been set-asideeither fully or partially by the ITAT or HighCourt or Supreme Court.

Henceforth, if any case is referred by theAO to the TPO, the taxpayer can firstapproach AO asking for the reason forreference so as to confirm whether thesame is in conformity with the aboveinstruction.

B. Update on time limit for transfer pricingassessment – Finance Act 2016 Based on the amendment in the Finance Act

2016, the time limit for completion ofassessment where reference is made to theTPO reduced to 33 months (from 36 months)from the end of the relevant assessmentyear i.e. henceforth it will be 31st December.

Accordingly, the transfer pricing assessmentswill now have to be concluded by 31st October(i.e. any time before sixty days prior to the dateon which time limit for fresh assessment us. 153expires i.e. 31st December). Kindly note that, intechnical parlance the due date for completion oftransfer pricing assessment comes to 01stNovember, however the department hasinternally communicated to the TPO to considerthe completion date as 31st October.

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In lieu of the above amendment, the due date forongoing transfer pricing assessment for AY2013-14 will be 31st October, 2016 instead ofJanuary, 2017. Further, the time available for completing

transfer pricing assessments excludes thetime:

for which the assessment is stayed by Court;

or where a reference for exchange ofinformation with other countries has beenmade to the Competent Authority.

Where the time available for completion ofassessment excluding such period is lessthan 60 days, the time available to the TPOwill now be extended to 60 days, maximumtime period to close the assessment is 1 yearfrom date on which the first reference forexchange of information is made.

3. Dispute Resolution Panel (‘DRP’) – Section144C

DRP mechanism was introduced by Finance Act,2009 as an alternative to first appellateauthority i.e. Commissioner of Income-tax(Appeals) [CIT(A)] with the objective of speedydisposal of disputes and to encourage the growthof foreign investment in India.

The salient features of the DRP are asunder:

taxpayers with transfer pricing adjustmentsor a foreign company can only apply to theDRP;

it has a wide powers akin to those of thecourt under the Code of Civil Procedure,1908 and the directions issued by the DRPare binding on the tax officer;

the DRP consists of three commissioners ordirectors of income tax appointed by theCentral Board of Direct Taxes (CBDT) andthe dedicated panels are located in metrocities for efficient disposal of cases;

no payment of tax till AO issues the finalorder in pursuance of DRP directions;

DRP application has to be filed in Form 35Ain quadruplicate and the format for thesame is explained below;

DRP also accepts additional evidencethrough separate application but at theirdiscretion as there are no rules prescribed asin the case of ITAT;

The taxpayer can raise any matter beforethe DRP irrespective of the fact that such anissue was not raised before the AO. Inplethora of judgments it has been upheldthat though the powers of CIT(A) is co-terminus to the power of the AO,still it hasno jurisdiction over the matters, which werenot raised or processed before the AO;

DRP has to complete the hearing and giveits final directions within a period of ninemonths from the end of the month in whichthe draft order was forwarded to theassessee; and

The directions issued by the DRP can bechallenged by the assessee before the ITAT,however this directions cannot be challengeby the Revenue(as amended in the FinanceAct 2016, earlier it was appealable by theRevenue)

Format of Form 35A is reproduced below:

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4. India is showing a decline in transfer pricing litigation and creating a tax friendlyenvironment thereby making the country preferred destination for inbound investments.

Indian transfer pricing completed eleven rounds of transfer pricing audits in March 2016.

India has more number of TP Rulings (over 2000 reported TP rulings) than most other countries in theworld where TP law has been in existence for several decades prior to introduction of this law in India in2001.

The TP litigation history in India, which has occurred in the last decade consistently shows an upwardtrend, as evident from the table below:

Particulars FY 2005-06 FY 2006-07 FY 2007-08 FY 2008-09 FY 2009-10 FY 2010-11FY 2011-12 FY 2012-13 FY 2013-14 FY 2014-15

Amt. of Adj. (in crs.)* 1,220 2,287 3,432 7,754 10,908 24,111 44,532 70,016 59,602 46,466No. of TP Audits completed* 1,061 1,501 1,768 1,945 1,830 2,368 2,638 3,171 3,617 4,290No. of adj. cases * 239 337 471 754 813 1207 1,343 1,686 1,920 2,353

* Statistics considered from the Annual Reports 2013-14 and 2014-15 published by Ministry of Finance.

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It is pertinent to note that the number of TPaudits in the last five years have almost doubled.

In each of these FYs, the revenue authoritieshave made TP adjustments in more than 50% ofthe selected cases.

It is also interesting to observe that the quantumof TP adjustments during FY 2011-12 exceededRs. 44,000 crores, which is a whopping 85%increase when compared with the earlier FY (i.e.FY 2010-11).

The next FY (i.e. FY 2012-13) witnessed massiveadjustments to the tune of Rs. 70,000 crores, andthis is the highest in any year to date. One of theprimary reasons for the huge surge in TPadjustments in FY 2012-13 is the TP disputerelating to valuation of shares.

However, FY 2014-15 has seen a reverse trend.In fact, there has been a reduction of 22% in thequantum of adjustments when compared withFY 2013-14. Similarly, recently concludedtransfer pricing assessments in FY 2015-16shown a dip as compared to previous years. Thisis primarily because the government of Indiawants a non- confrontational environment witha stable and taxpayer friendly environment.

The litigation in India will even more decrease infuture due to the following key developments inrecent years:

Introduction of faster dispute resolutionmechanisms such as Advanced PricingAgreement (APA)’ Mutual Agreement Procedure(MAP), Safe Harbour Rules and Roll-backprovisions for APA.

Introduction of the range and multiple year dataconcept which will help in reducing TP litigationsince the comparability analysis undertakenusing the arithmetic mean and current yeardata has been a continuous challenge in India.

Recently introduced guidelines on criteria forselection of the cases for TP scrutiny and theinstruction to be followed by the AO for referringthe case to the TPO. These guidelines prescribedselection of transfer pricing case based on riskbased parameters as against the earlier criteriaof monetary threshold. These guidelines hashelped in reducing the overall number of cases tobe picked up for scrutiny.

Although a good amount of steps have alreadybeen taken for creating taxpayer friendlyenvironment in India but still many areas forimprovement do exist. However, with the makein India concept and a radical liberalization ofthe Foreign Direct Investment (FDI), India’sintention is very clear, making itself a preferreddestination for inbound investments andimproving the ease of doing business.

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Foreign Investment in other Financial Services Sector

Press Information Bureau, GOI (Press Release) dated August 10, 2016

The Union Cabinet has given its approval to amend regulation for foreign investment in the Non-BankingFinance Companies (NBFCs).

The present regulations on NBFC stipulates that FDI would be allowed on automatic route for only 18specified NBFC activities after fulfilling prescribed minimum capitalization norms mentioned therein.

In the proposed amendments are as under:

a. FDI in “Other Financial Services” will be permitted under automatic route provided such servicesare regulated by any other regulator (Reserve Bank of India, Securities and Exchange Board ofIndia, Pension Fund Regulatory and Development Authority etc.)/ Government Agencies.

b. FDI in “Other Financial Services” not regulated by any regulators/government agencies will bepermitted under approval route.

c. Minimum capitalization norms specified for NBFCs will be eliminated as most of the regulators havealready fixed minimum capitalization norms.

FEMA UPDATECompiled by :

CA. Manoj Shah


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This article deals with the recent cases adjudicated inthe field of transfer pricing. Accordingly, thefollowing judgements have been hand-picked for theunique subject matter dealt by them. I have tried tocover the cases to discuss both simple and basic issuesand complex issues in the field of transfer pricing.Happy reading!

1. M/sObulapuram Mining Company Pvt. Ltd.Vs. DCIT[TS 512 ITAT 2016 (Bang)]Background:The ld. Commissioner of Income Tax (Appeals)(‘CIT(A)’) passed an order U/s 263 of Income TaxAct, 1961(‘the Act’) holding the ld. AssessingOfficer (‘AO’)’s Order to be erroneous andprejudicial to the interest of the Revenue.The ground for holding the AO’s order to beprejudicial as stated by the CIT (A) in his Orderbeing that the AO did not make reference to theld. Transfer Pricing Officer (‘TPO’)inspite ofCentral Board of Direct Taxes(‘CBDT’)Instruction No.3 dated 25 May 2003,which states that where the value of theinternational transactions exceeds INR 5 Crores,the case must be referred to TPO fordetermination of the Arm’s Length Price (‘ALP’).This case deals with certain critical matterswhich can be broadly enlisted as under:a. Whether is it mandatory for the AO to make

a reference to the TPO as per the provisionsof the Act or can he himself determine theALP?

b. Whether the above mentioned circularoverrides the provisions of the Act inauthority making the reference to the TPOmandatory for the AO above a certaintransaction value?

c. Is it essential for the AO to apply his ownmind before making a reference to the TPOand for the CIT before granting hisapproval for the same?

Discussions before the Income TaxAppellate Tribunal (‘ITAT’):The discussions in the captioned case have

DISCUSSIONS ONRECENT JUDGEMENT

revolved around the fact that the CIT held theorder to be erroneous and prejudicial solely forthe reason that the AO did not make anyreference to the TPO for determination of theALP thereof.The ld. AR in his representations based hiscontentions on the judgement of Hon’bleBombay High Court in the case of M/s VodafoneIndia Services Pvt. Ltd. Vs. Union of India,wherein it was held that the said Instruction(supra) departs from the Law. Further, theHon’ble ITAT, in the case under consideration,has placed due reliance on the order of co-ordinate Benchin the case of Tata ConsultancyServices Ltd.(ITA No.7513(Mum)/2010)whichfollowed the order of Vodafone India (supra) andwent on to prove that the said Instruction(supra) as issued by the CBDT sets off from theprovisions of the Act.The ld. CIT in his order passed u/s 263, placedreliance on the Instruction (supra)in addition tothe judgement of the Special Bench in the caseof M/s Aztec Software & Technology ServiceLtd.Vs. ACIT (294 ITR 321) which upholds thevalidity of the said Instruction and its precedentjudgement in the case of M/s Sony India Pvt.Ltd. (288 ITR 52(Del.)). However, a laterjudgement passed in the case of Vodafone India(Supra) accentuated the fact that in view of theamendment in the Act effectuated by theFinance Act, 2007, the AO is required to pass theorder in conformity with the TPO’s Order incontrast with the provision existent prior to theforegoing amendment in the Act which statedthat the AO is required to pass his AssessmentOrder merely having regard to the TPO’s order.In view of the judgement passed in theaforementioned Vodafone India case, it can beundeniably comprehended that the relianceplaced by the ld. CIT(A) on the erstwhilejudgements viz. Aztec Software (supra) andSony India (Supra) is misplaced, since the Orderhas been passed in respect of the assessmentyear subsequent to amendment becoming intoeffect, the impugned orders shall fail to beapplicable.Further, on perusal of the relevant excerpt of the

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Tata Consultancy (supra), it can beapprehended that the ITAT has affirmed thatthe aforesaid Instruction detracts from the lawin view of the fact that it does away with astatutory obligation, disregarding the need toapply his mind before making a reference to theTPO. In consideration of the substance overform, we discern the fact that the ultimateauthority lies with the AO to determine the ALPof a transaction which, in view of the saidInstruction is supplanted as it requires amandatory reference to be made to the TPO, if incase the value of the international transactionsexceeds INR 5 Crores. Also, the Tribunal hasconstrued that Section 92CA(1) can be inferredto be have implied that the AO has to first forman opinion in a manner indicated in Section92CA(3) before making a reference to the TPO.In order to underpin the above inference, theHon’ble Tribunal in the captioned case hasquoted various miscellaneous judgements in itsOrder which recapitulate the fact that thecondition precedent to making a reference to theTPO being that the AO has to prima facie havea belief that it is necessary or expedient to makea reference to the TPO. Also, for the CIT toaccord his approval to the same, he must applyhis mind considering the circumstances, on acase to case basis. The primary duty ofcomputing the income of the assessee is that ofthe AO and that where the AO require aspecialist to look into the matter he must referthe same to the TPO.Further, the Hon’ble Bombay High Court inVodafone India (supra) has reiterated the factthat, it is pre-requisite to grant an opportunity tobe heard to the assessee before making areference to the TPO for determination of theALP to avoid any undue hardship to theassessee. This leads to the conclusion that theInstruction (supra) also violates the principle ofnatural justice.In view of a landmark judgement referred by theHon’ble Tribunal in the captioned case, it washeld that Section 119 of the Act permits theCBDT to specify conditions subject to which aprovision can apply, but the conditions cannothave effect of curtailing the scope of thededuction granted by the section; the deductiongranted by a section cannot be cut down in theguise of imposing a condition; that in effect, isnot a condition but an impermissible attempt tore-write the section. Hence the CBDT maycontrol, exercise the powers of the departmental

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officer in administrative matters, but not quasi-judicial.The decision taken apropos to the captionedmatter by the Hon’bleITAT underscores that theprovisions of the Act place the primary onus onthe AO to determine whether it is judicious torefer the case to the TPO by application of hismind and no circular can supplant this authorityto mandate such reference and before any suchreference is made an opportunity must beafforded to the assessee to refute the need forsuch reference. Further, the CIT also has to bemindful of the facts of the case in granting hisapproval for a reference to be made by the AO tothe TPO. Additionally, the Hon’bleITAT hasbeen empowered to quash any Instruction/Circular issued by the CBDT which is bad in lawto the extent that it goes beyond the provisionsof the Act.

2. Page Industries Ltd Vs. DCIT [TS-382-ITAT-2016(Bang)-TP]The assessee is a company incorporated underthe provisions of the Companies Act, 1956 and isengaged in the business of manufacture andsale of ready-made garments. The assessee-company is a licensee of the brand-name ‘Jockey’for the exclusive and marketing of Jockeyreadymade garments under license agreementwith Jockey International Inc, USA [‘JII’], acompany incorporated in USA and the owner ofthe brand Jockey. In consideration for grantingthe right to use brand-name, the assessee-company paid consideration in the form ofroyalty at the rate of 5% of the sales.The AO referred the matter to the TPO. Whiledoing so, the TPO has treated expenditureincurred on advertisement and marketing andproduct promotion as an internationaltransaction and attempted to determine the ALPby applying Bright Line Method.Pursuant to the TPO’s order, draft assessmentorder was issued by the AO wherein the saiddisallowances were proposed. It was contendedby the assesseecompany before the DisputeResolution Panel (‘DRP’) that the saidtransactions do not constitute internationaltransaction as the assesseecompany and JII donot constitute an Associated Enterprise (‘AE’)within the meaning of Section 92A of the Act. Itwas submitted that the conditions specified u/s92A(1) of the Act are not existing between theassesseecompany and JII. In the absence of


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relationship of assesseecompany and JII, thetransaction does not constitute to be aninternational transaction within the meaning ofSection 92B of the Act.Being aggrieved, assessee-company is in appealbefore ITAT.After due consideration of the arguments of theassessee and the Revenue, the ITAT holds thattheassessee and JII are not associatedenterprises for AY 2010-11 as the parameters ofSec 92A(1) which provides for management /control / capital of the other enterprise are notfulfilled. The assessee was a mere licensee of thebrand-name ‘Jockey’ for exclusive manufactureand marketing of goods under license agreementwith JII.Further, it was observed that theassessee owned the entire manufacturing facilitywith a capital investment of INR 100 crores andhad employed 15000 withoutany participation ofJII either in the capital or management of theassessee.Thus, in the instant case, the ITAT rejectedTPO’s view that the two enterprises should betreated as associated entities u/s 92A(2).ITATwhile arriving at this conclusion consideredthe amendment to Sec 92A(2) enacted videFinance Act, 2002 w.e.f. April 1, 2002 wherein itis provided that in order to constituterelationship of an AE, the parameters laid downin both subsections (1) and (2) should befulfilled; Accordingly, ITAT opines “If we were tohold that there is a relationship of AE, once therequirements of sub-sec (2) are fulfilled, then theprovisions of sub-sec(1) renders otiose orsuperfluous”.ITAT while providing its decisionalso relied on SC rulings in State of Tamil NaduVs. M.K. Kandaswami and Calcutta JuteManufacturing Co on principles ofinterpretation of statutes to state that Courtsshould not adopt construction which would upsetor even impair the purpose in introducing aparticular; Thus, concludes that “since theparameters laid down in sub-section (1) are notfulfilled, there is no relationship of AE betweenassessee-company and JII and therefore, theprovisions of chapter X of the Act have noapplication”.

3. Kirloskar Toyota Textile MachineryPrivate Limited vs. DCIT [TS-363-ITAT-2016(Bang)-TP]The assessee, Kirloskar Toyota TextileMachinery Pvt Ltd, is engaged in manufactureand sale of textile machinery, manufacture and

sale of auto transmission components and is alsoengaged in distribution of material handlingequipment.The assessee in the FAR analysiscontended thatthe capacity utilization was at 78% of totalcapacity and thereby cost of overheads above theutilised capacity was not to be considered.Accordingly, the assessee stated that Gross Profit(‘GP’)margin on sales be considered for thepurpose of comparability analysis as GP wascalculated as sales less cost of raw materialconsumed. Since, the assessee stated that due tounderutilization of capacity, the comparability ofOperating Profit / Operating Cost did not giveproper analysis.ITAT noted that the TPO himself in many caseshad acknowledged the fact that in case where inthe rate of depreciation impacts the profit marginof the company, then the company should beallowed depreciation adjustment or can opt forPLI as PBDIT/TC.ITAT approves, in principle, assessee’s claim thatgross profit over sales can eliminate difference indepreciation claim due to machinery age, rate /method difference, directs AO/TPO to adoptcomparison of profitability ratios using grossprofit over sales to benchmark internationaltransaction of purchase of auto-componentsfrom AE for AY 2010-11. The ITAT alsotakes anote of DRP’s observation that details of capacityutilization of the comparable companies and rateof depreciation could not be analysed.Hence, it has been opined that it would be betterif gross profit analysis is undertaken taking salesless cost of raw material as basis (excluding costincluding depreciation, interest etc.) tounderstand whether the import of material fromAE had affected the profitability of assessee.Duereliance is placed on ITAT rulings inSchefenackerMotherson, Market ToolsResearch, Qual Core Logic and BA ContinuumIndia (approved by Andhra Pradesh HC).Further, accepting assessee’s contention that AOhad not given effect to DRP directions to restrictTPadjustment to cost of import of raw materialfrom AE, the ITAT opines “to that extent, AO’sorder is not in compliance with the directions ofDRP”. Accordingly, remits to file to AO/TPOwhile clarifying that if any adjustment isrequired, it should be restricted to cost ofmaterial as directed by DRP.

Note:- Views, if any, expressed are personal and readers mayseek specific professional advice based on their facts.

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ISSUES IN DOMESTICTRANSFER PRICING

Contributed by :CA Gautam Motaa member of the association


1. Introduction:Transfer pricing regulations,were firstintroduced in India in the year 2001 and appliedonly to international transactions between twoassociated enterprises. With advancement ofbusiness practices, more aggressive domestic taxplanning and various other factors, need wasfelt to have a similar transfer pricing provisionsfor domestic transactions. The said need was feltinspite of having specific anti avoidanceprovisions (like section 40A(2)(b) etc.).Similarview was also expressed by theApexCourt while delivering the judgementin thecase of CIT v/s. GlaxoSmithkline Asia PrivateLimited (2010) 195 taxmann 35. The Court heldthat “The larger issue is whether TransferPricing Regulations should be limited to cross-border transactions or whether the TransferPricing Regulations to be extended todomestictransactions. In domestic transactions,the under invoicingof sales and overinvoicingofexpenses ordinarily will be revenue neutral innature,except in two circumstances having taxarbitrage such as where one of the relatedentities is (i) loss making or (ii) liable to pay taxat a lower rate and the profits are shifted to suchentity. The CBDT should examine whetherTransfer Pricing Regulations can be applied todomestic transactions between related partiesu/s 40A(2) by making amendments to theAct…………….”Accepting the suggestion made by theApexCourt, the Finance Minister whilepresenting the Finance Bill for 2012, introducedthe provisions of transfer pricing for certain“Specified Domestic Transactions” w.e.f. AY2013-14.Transfer pricing for domestictransactions is still in its nascent stage with thelaw regards to the same still not developed fully.In last couple of years of transfer pricing audits,the professional fraternity has faced lot ofproblems while finalsing the domestic transferpricing report. In the said article attempt hasbeen made to identify those significant issueapplicable to a larger group and providepossiblesolutions / views that could be adoptedwhile finalizing the transfer pricing audit/report.

2. Specified Domestic Transactions – Section92BA

Section 92BA of the Income Tax Act, 1961(hereinafter referred to as “the Act”), defines theterm “Specified Domestic Transactions”(hereinafter referred to as “SDT’s”) as followingtransactions and which are not internationaltransactions:(1) any expenditure incurred between related

parties defined u/s 40A(2)(b);(2) any transaction referred to in section 80A;(3) any transfer of goods or services referred to

in section 80-IA(8);(4) any business transacted between the

assessee and other person as referred to insection 80-IA(10);

(5) any transaction, referred to in any othersection under Chapter VI-A or section10AA, to which section 80-IA(8) or section80-IA(10) are applicable; or

(6) any other transaction which may beprescribed (currently there are no othertransaction which have been prescribed),

The said provisions would be applicable onlywhere the aggregate of the above mentionedSDT’s exceed the threshold limit of INR 20crorew.e.f. A.Y. 2016-17. Earlier, the said limitwas INR 5 crore.

3. Issues3.1 General IssuesA. In case where payment is made to a

director (who is a non-resident) – whetherreporting required under International TPor Domestic TP or both ?The definition of “specified domestictransaction” as per S. 92BA is very clear and itstates that “……any transactions, not being aninternational transaction, namely…”. Thus,if a transaction falls within the ambit ofinternational transaction, then the sametransaction need not be reported for the purposeof Domestic TP.

B. Whether provisions of DTP apply totransactions between two entities fallingwithin the highest tax bracket:The biggest criticism that Domestic TP has facedis that it also applies to those Assessees who aretaxed at maximum marginal rate. No exceptionhas been made in the provision as regards itsapplicability to such class of Assessees.

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she can be reached [email protected]

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Ideally, the intent of legislature was always toapply the provisions to those Assessee where therewas possibility of tax evasion /avoidance. In acase, where both the Assessee are taxed at highestrate, there is no possibility of tax evasion andaccordingly provisions of transfer pricing shouldnot be made applicable. The said view has alsobeen upheld by Hon’ble Gujarat High Court1.However, considering the fact that there aresevere penal consequences for non-reporting oftransactions. It would be advisable to report thesame in Form 3CEB.

C. In case there is adjustment under DTPprovisions, whether any correspondingadjustment required to be made whilecomputing book profit?If any additions are made by the Tax Officer byway of Transfer Pricing adjustments, then ideallythe said additions should be restricted to normalprovisions only2. No such adjustments should bemade by the Tax Officer while computing profitsunder Section 115JB, since provisions of S. 115JBis a code3 in itself and only specified adjustmentsas prescribed are to be factored while computingbook profits.

3.2 Issues relating computation of thresholdlimit

A. Value of transaction – Whether Book Valueor Market Value of transactions?Consider a case whereactual transaction valuewith related parties is Rs. 20.2 crore but thetransaction has been actually recorded in books atRs. 19.8 crore to circumvent the provisions ofdomestic transfer pricing. In such a case whetherprovisions of DTP should be applicable?Theoretically, it should be the book value of thetransaction that needs to be considered whilecomputing the overall threshold limit of 20 crore.However, if one goes by the intent and purpose ofintroducing the said section, it would have to bethe fair value / actual value of the transaction. Inabsence of any clarity, it would always bepreferable to proceed with a conservative view, toensure that penalty provisions are not attractedat a later stage.

B. Netting off expense and incometransactions with the same party ?Consider a case where Assessee has to pay a sumof Rs. 22 crore to a related party for purchase ofgoods and has to receive a sum of Rs. 5 crore forrendering certain services. Can the Assessee claim

that the expense and income should be netted offwhile computing the threshold limit?The two transactions are distinct and separatetransactions. Accordingly, the option of netting offthe income and expense transactions is notavailable. Transfer pricing provisions would beapplicable in the instant case.

C. When a particular transaction gets coveredwithin the definition of specifiedtransaction twice – whether should be addedtwice?In case of an business enterprise claiming taxholiday exemptions, there can be a situation thata particular transaction might get covered withinthe ambit of domestic transfer pricing twice (i.e. asper S. 40(A)(2)(b) and S. 80IA (10). Though thetransaction gets covered within the definition ofSDT, however perse the transaction is one andthe same. Hence, in such a case the transactionought to be considered only once while computingthe threshold limit.

3.3 Issues relating to applicability of S.40A(2)(b)

A. Applicability of provisions of Section40A(2)(b) - Direct ownership vis-à-visIndirect ownership?Section 40A(2)(b) has used the term “substantialinterest” in its various clauses. The term“substantial interest” is defined to include a‘beneficial owner of shares’ carrying not less than20% of voting power. The issue arises whether‘beneficial ownership’ includes direct as well asindirect shareholdings.Issue under consideration is debatable. Thepredominant view being that for the purpose of S.40A(2)(b), it should always be immediateshareholding that needs to be considered and notthe indirect shareholding. The said view has alsobeen upheld by various judicial authorities4.Further, the revised ICAI Guidance Note ontransfer pricing(August 2013)also suggests that itmay be appropriate toconsider only directshareholding and not indirect shareholding forpurpose of determining whether provisions of S.40A(2)(b) to a particular transactions.

B. Purchase of Capital Asset from a relatedparty and depreciation thereon - whethercovered?The section has been introduced to disallow theexcess expenditure claimed in profit and losswhile making payment to related party. In case ofcapital expenditure, the Assessee generally claimsdepreciation (which is treated as allowance) andtherefore for purpose of S. 40A(2)(b), expenditure

1CIT v. Gujarat Gas Financial Services Ltd 233 Taxman 05322Cash Edge India Private Limited v. ITO [ITA NO. 64/Del/2015]3Apollo Tyres Ltd v. CIT [2002] 255 ITR 273 (SC)

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should generally be interpreted as revenueexpenditure. Any capital expenditure paid torelated party is generally not covered by provisionof S. 40A(2)(b). Therefore purchase of capitalasset from a related party and depreciationthereon should not be considered for purpose ofdomestic TP.It may also be noted that as per Revised ICAIGuidance Note on TP (August 2013)states that S.40A(2)(b)provisions are also applicable toexpenditure of capital nature and being eligiblefor claim of 100%deduction under provisions suchas section 35(2AB), 35 or35AD of the Income-taxAct, 1961 (the Act).Accordingly, purchase of fixed assets are excludedwithin the purview of 40A(2)(b), however capitalexpenditure for which 100% deduction is allowedin year 1 should be considered for purpose ofdomestic transfer pricing.

C. Whether a person is related or not as per S.40A(2)(b) – should be checked at what pointof time?Consider a situation where A is paid a sum ofRs 1,00,000/- by the Company for availing certainservices. Later on, the Company appoints Mr. B(who is relative of Mr. A) as a director of theCompany on 1st December, 2015. Whetherpayment made by Company to Mr. A beconsidered for transfer pricing?The services were availed by the Company muchprior to the appointment of Mr. B as the director.On the date of availment of services the saidtransaction was an independent transaction.Therefore, though Mr. B is a director of theCompany for a part of the year, any paymentwhich is made prior to its appointment to itsrelatives should not be consider for the purpose oftransfer pricing.However, the department may always try to coverthe said transactions within the purview ofdomestic TP.

3.4 Issue relating to S. 80IA(10)A. Meaning of the term “Close Connection” as

per Section 80-IA(10)Provisions of S. 80IA(10) try to regulate thetransfer price between parties having closeconnection. However, the term ‘close connection’has been neither defined in the Act nor inGuidance Note issued by the ICAI. Accordingly,in absence of any guidance available it would bereasonable to consider all parties which are

covered u/s 40A(2)(b) to consider as closelyconnected. In extreme circumstances and to bevery conservative, all the entities covered withinthe definition of Associated Enterprises as perprovisions of Section 92A can also be consideredas closely connected parties.

3.5 Benchmarking of transactionA. Difficulty to justify transactions like

Director’s Remuneration, Commission,Salary paid to the relative of the Director,etc:The payments like Directors Remuneration,Commission paid, Salary to relative of Directorwho is an employee of the company, etc is difficultto justify in absence of sufficient data in publicdomain. In majority of the cases, the paymentsare being made to the said parties based on theknowledge and skills they possess. Every personuses different skills in performing the functionsallocated to him and thus, the amount paid tothem for the functions so performed cannot bebenchmarked with some other Directorperforming similar functions. This is because, theskills and knowledge possessed by them vary.

However, though difficult the same could bejustified using any of the following approach: If overall remuneration paid is within the

limits prescribed under the Companies Act,2013

Obtaining salary quotation from externalagency for similar qualifications

Average salary paid to key employees vis-à-vis average salary to directors

Evaluating % increase in the salary of keyemployees & directors over past few years

4. ConclusionIt is very much evident that the applicability andbenchmarking challenges in respect of domestictransaction is still not very settled. Withintroduction of the said provision, additionalcompliance burden has been casted on theAssessee in terms of contemporaneousdocumentation requirement. One really wonders,whether such a provision which does not result inany additional tax collection to the governmentshould continue on the statute and whether itactually adds to “Ease of doing business in India.”

However, considering the fact that the law is onthe statute it would be advisable for taxpayersand professionals to be aware of the intricacies ofdomestic transfer pricing provisions and ensurethat same are applied in correct manner to ensurethat they are not charged with stringent penaltiesfor non-compliance.

4 CIT v. Plasmac Machine Mfg. Co. Ltd. [1993] 201 ITR 650(Bombay HC), Sumilon Industries Ltd v. Income tax Officer (ITANos 3296 &3297/ Ahd/2008)

“How would your life be different if…You stopped validating your victim mentality? Let today be the day…You shake off yourself-defeating drama and embrace your innate ability to recover and achieve.”


24

Virat Kolhi, the captain, is a metamorphosis of theperson he used to be before being shouldered withthe responsibility of captaining the Indian TestTeam in addition to being the lynchpin of theteam’s fledgling test batting line up. He hasevolved into a talismanic leader, who wears hispassion on his sleeve. He hasgone from being thebrat of Indian cricket to being a masterful batsmanwith a level head on his shoulders and a cold,calculative chamber of a mind. This manleads theteam like a lion leads his pride.

The composure and maturity that he has come togather has made him a more complete player thanhe ever was. For any team he faces, he has becomeessential viewing as soon as he swaggers onto thepitch, irrespective of the state of the game. Nobodywants to miss the magic that his blade wields. Histwin hundreds in Australia at the very beginningof his stint as captain just go to show how hethrives under the pressure that comes with leadingthe side. Some men shirk responsibility. It insteadmakes Kohli a greater player.

His style of captaincy is more about leading byexample than by delegation. He backs his playersand is not scared of saying a word or two on thefield. Or three if he’s playing against Australia. Hebelieves in his ideas and is a willing learner, bothevidenced first by his firm belief in playing fivebowlers and six batsmen in tests and then by himtweaking the same after a loss.

In many ways, his batting in all formats has seenimprovements, gradually, after being awarded thecaptaincy. His maturity in the last six months inlimited overs cricket has been a breath of fresh air.He has been batting like a man possessed. It isalmost like it is in his nature to rise to greatnesswhen greatness is expected of him.

Indian cricket fans have labeled Kohli the naturalsuccessor to Sachin Tendulkar. However, Kohli’sstyle is more reminiscent of Ricky Ponting’s. Kohli,like Ponting, is an aggressive batsman. Bothinherited their captaincies from cooler heads andlegends in MS Dhoni and Steve Waughrespectively. Both can have a bout or two of

petulance, but have inherent leadership qualities.Time will tell if Kohli goes on to match Ponting asa player or as a captain. Ponting had his best yearsas a test player scoring more than 6000 runsbetween 2001 and 2006, from ages 27- 32, at anaverage of 73. The signs are more than positive.Kohli is 27, at the beginning of his peak, much likePonting was in 2001.

Kohli and Ponting have been termed arrogant byfans and critics alike. However, in a lot of ways,that arrogance was a vital cog in making Pontingthe player and captain he was. It galvanizedPonting’s side. The same can be said about ViratKohli. And a certain Portuguese footballer whoplies his trade at Real Madrid.

And a sprinter from Jamaica who also happens tobe the fastest man in the world. That arrogance iswhat makes them unstoppable. That is what makesthem great leaders. After all, a man who wants tolead the orchestra must turn his back on the crowd.

VIRAT KOHLI - THE CAPTAIN

Contributed by :CA Jinit Bheda(a member of the association)


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