domestic transfer pricing

Domestic Transfer Pricing

By CA MANOJ KUMAR C/O MANOJ KUMAR MITTAL & CO.

CHARTERED ACCOUTANTSPh No. 9810764620

Relevant Provision of the Income Tax Act-Chapter X

Sec Particulars Applicable

92 Computation of income from international transaction having regard to Arm' length price

Yes

92A Meaning of Associated Enterprises NO

92B Meaning of International Transaction No

92BA Meaning of Specified Domestic Transaction Yes

40A(2)(b )

Payment to relatives Yes

92C Computation of Arm' Length Price Yes

92CA Reference to TPO Yes

92CB Power of Board to make safe harbour Rule No

92CC Advance Pricing Agreement No

92D Maintenance of documentation Yes

92E Audit Report-Form 3CEB-Applicable Yes

271AA Penalty for non maintenance of documentation or information of transaction

Yes

271BA Penalty for failure report u/s92E -3CEB Yes

271G Penalty for furnish documentation and information u/s 92D

Yes

271(1)(c)

Concealment of Income or furnishing of inaccurate Particulars

Yes

Rule-10A Meaning of expression used in computation of ALP

10AB Other method of determination of ALP introduced by finance Act, 2012

10C Most Appropriate Method

10D Information and documents to be maintained u/s 92D

10E Audit Report U/s 92E

Relevant Circular and notification-Circular NO. 6-P, Dated 6-7-1968 and circular NO. 4-P[LXXVI-65], dated 7-6-1968

For related Party, reference is to 40A(2)(b)-Related Party AS-18 Section 92A-Associates Parties

This is introduced by the Finance Act, 2012 on the guidance of the SC in Glaxo Smithline 236 CTR 113(SC)

The purpose of introduction To avoid tax arbitrage for determination of income between related

enterprises for determination of income between related party

transaction for eliminating discrenatiory power of AO in calculating

FMV and to compute ALP on scientific basis through proper documentation.

Domestic Transfer Pricing

Difference between price and transfer Price

Price means the price at which transaction takes places between party

Transfer Pricing means the price at which the transaction takes places between two related enterprises.

Due to special relationship between related enterprises, the transfer price may be different from price for any transaction.

Arm’s Length Price(Sec 92F(ii))- It means a price which is applied

or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions;

Concept of Transfer Pricing

Transfer Pricing Arm’ Length Price

Related Party

Resident

DomesticTransaction

*Goods*Services

*Intangibles*Loans

Independent Party

Resident

Specified Domestic Transaction (not being international transaction) will be subject to transfer pricing at par with the norms applicable to International transaction.(Sec 92(2)

In respect of Specified Domestic Transaction, an allowance for an expenditure or allocation of any cost or expense or income shall be computed as per ALP and however, no computation shall be made which result in reducing income or increasing loss. Sec 92(2A) or 92(3)

MAT liability will continue as per books.

Domestic Transfer Pricing from 01.04.2013

Sec-92BA-Meaning of Specified Domestic Transaction-Scope of the sectioni) any expenditure for which payment made or to be made to

a person covered u/s 40(A)(2)(b)

ii) Any transfer of goods and services between eligible units and non eligible unit of two associate of an undertaking -(80)(IA)(8)

iii) Any business transaction with entities having close Connection-80(IA)(10)

iv) Any other transaction as may be specified.

Domestic Transfer pricing regulation

Section Particulars Explanation

92BA(i) An expenditure for which payment made or to be made to person referred in Sec 40(A)(2b)

Applicable to taxpayer making payment and incurring expenditure and not to receipent of income and not applicable to notional expenditure.

92BA(ii) Any transaction referred in sec 80A

Any transfer of goods and services between two associate enterprises to which profit linked deduction apply

92BA(iii) Any transfer of goods and services in 80IA(8)

Any transfer of goods and services between two associates enterprise to which profit linked deduction apply

92BA(iv) Any business transacted between assessee and other person having close connection-80 IA(10)

Transfer of goods and services between two enterprises having close connection. The word close connection no where defined but also find reference in Sec 42(ii) of 1922 act.

Sec 92BA(v)

Any transaction referred in sec under chapter VI A or Sec 10AA to which 80(IA)(10) or (8) is applicable

Scope for transfer of goods and services is being enlarged covering all transaction under chapter VI A or Sec 10AA.

Sec 92BA(vi)

Any other transaction It may be specified in future.

Specified Domestic Transaction

Section Tax Payers covered Applicability of TP provisions on SDT aggregating a value of more

than INR50 million

40A(2) Applicable to taxpayers making payment / incurring expenditure and not to recipients of such income

The reasonableness of payments is to be computed with regard to the arm’s length price.

80A(6) Enterprise claiming deductions from total income under chapter VI-A

The goods and services of an eligible business are to be transferred to any other business carried on by the same taxpayer and vice-a-versa, to meet the arm’s length test.

80IASub Section (8)And (10)

Infrastructure developersTelecommunications service providersDevelopers of Industrial parksProducers or distributors of power

An enterprise with an eligible business and close connection with any other person

The goods and services of an eligible business transferred to any other business carried on by the same taxpayer and vice-a-versa, are to meet the arm’s length test.

With reference to Sub Section (10), a business transacted between a taxpayer carrying on an eligible business with a close connection, which results in more than ordinary profits too the business, is to meet the arm’s length test.

Section Tax Payers covered Applicability of TP provisions on SDT

aggregating a value of more than INR50 million

80-IAB Developers of SEZs

The provisions of section 80IA Sub section (8) and (10) are to apply to an undertaking referred to in these sections.

Small Scale industry engaged in operating Cold storage plant

Industrial undertaking in industrially backward state as mentioned in VIII Schedule (ex : Jammu and Kashmir)

Multiplex theaters and convention centers

Company carrying on scientific research and development

Eligible housing projects Eligible hospitals

80-IC / 80-IE Persons with units in specified states / north-eastern states claiming deduction

80-ID Hotels located in districts with World Heritage sites

10AA Persons with income from SEZ units

The above provision will be applicable if the aggregate of such transaction exceeds Rs 5.00 Cr.

If Entity A sells goods to entity B for Rs. 3.00 cr and entity B sell goods to entity A for 2.5 cr the question is whether it will be applicable. Yes

Whether notional income principle will be applicable for clause 80(IA)(8) or (10)-NO

A pays rent of Rs. 4 crores to B ltd and pays interest on loan of Rs, 1.5 crores to C, as the aggregate of tranaction exceeds Rs. 5 Cr, it will be covered.

Characteristic Fair Market Value Arm’s Length Pricing

Definition

The price which goods or services would have fetched or cost in the open market

A price which is applied in a transaction in uncontrolled conditions

Computation Mechanism No specific mechanism provided in law

Most appropriate method out of five prescribed methods

Transaction ValueAny market pricing point can be treated as fair market value

Arithmetic mean of comparable prices treated as arm’s length price

Sample SizeOne comparable may be sufficient to establish fair market value

Require bigger sample size for establishing arm’s length

Deviation No deviation permitted from fair market value

Deviation of plus / minus three percent is permitted

Fair Market Value vs. Arm’s Length Price

Sec 40A(2)(a)

Assessee Related Party

b(i) Individual Any relative of the assessee u/s 2(41)

b(ii) Where the assessee is a company, firm, AOP or HUF

1)Director of the company, partner of the firm, member of AOP or HUF, or 2)any relative of such director, partner or member

b(iii) 3) An individual having substantial interest in the business or profession or any relative of him(substantial interest means 20% at any time during PY)

b(iv) 4)Any company, firm or AOP or HUF, having a substantial interest in the business or profession of the assessee or any director, partner or member of such company or Firm or HUF or any relative of them orAny other company carrying on business or profession in which the first mentioned company has substantial interest.(w.e.f. 01.04.2013)

b(v) a company, firm, AOP, HUF whose director, partner, member having a substantial interest in the business or profession of the assessee or any director, partner, member of such company, firm, AOP or HUF, or any relative of them

b(iv) A) Any person carrying of business or profession in which assessee or any relative of assessee has substantial interest.

B) Any person carrying on business or profession in which the director, partner or member of company, firm, AOP or HUF or any relative of them has a substantial interest. Then company, firm, AOP or HUF is related to such person.

Relative means◦ -Husband

◦ -Wife

◦ Brother

◦ Sister

◦ Any lineal ascendant or descendent Circular 6P of 1968

Definition of Relatives-Sec 2(41)

X ltd(assessee)

Case Study-1-Payment to director or relative of director of the company- 40A2b(ii)

Y-Director X

LTD

C-Relative

of director-

Y

Nature of Transaction Whether Covered

The X Ltd pays to C Rs. 6 Cr for consultancy services

X ltd procures professional services from Y

A

Related Transaction

Related Party

X LTD

A has substantial interest in X ltdX and A and X and Y are related person

Case Study-II-payment to person having substantial interest in the business or any relative of such perosn40 A 2b(iii)

Y, relative of A


The X Ltd pays Rs. 2 lacs to Y for consultancy services

X ltd receives payment from A for professional services

D ltd has substantial interest in X ltd X and D, X and Y, X and C are related person.

D Ltd

X LTD

Case Study-III-payment to company, firm, HUF or AOP or any director , partner of member thereof or any relative of director , partner or member -40A2b(iv)

Y, Director of D LTD

C –Relative of Y


The X Ltd pays to Y for consultancy services

X ltd procures professional services from C

Illustration – Section 40A(2)(b)(iv)A

B C

D E A & B--------- YesA & C--------- Yes

A & D--------- No A & E---------- No B & C---------- Yes D & E----------- No

Transactions covered ?*Post Budget 2012 amendment under section 40A

A

X Ltd

A has substantial interest in X ltd X and A, X and Y, X and Z and X and C are related person

Case Study –IV-Payment to company, HUF, Firm or AOP of which director, partner or member has substantial interest in assessee or any other director, partner or member of such co. firm or AOP or relative of thereof -40A2bv

Director in Y

ltd

Z director in Y

ltd

C relative of Z


The X Ltd pays to A for consultancy services

X ltd procures professional services from C

X ltd takes interest free loan from C

X ltd pays remuneration to Z being an employee in X ltd

A C - relative of A

Y Ltd

A is an assessee , C is relative of A C substantial interest in Y ltd A and Y, Y and C are related person.

Case Study V-Payment to a person in whom assessee or any relative of assessee has substantial interest-40Ab (vi)A

X LTD

H ltd

C has substantial interest in H ltd or Y has substantial interest in H ltdX and H, X and Y, X and C are related person

Case Study VI-Payment to a person in whom the assessee being co.,firm, HUF or AOP has a substantial interest or any director, partner or member there of or any relative of them-40A2bvi B

Y, Director of X Ltd

C relative of Y


The X Ltd pays to H ltd for purchase of goods

X ltd procures professional services from Y

X ltd pays interest to Y of Rs. 100000 for loan taken from him.

Brief Background► Relevant extracts of the Departmental Circular - Circular NO. 6-P,Dated 6-7-1968 and circular NO. 4-P[LXXVI-65], dated 7-6-1968

► It may be noted that the new provision is applicable to all categories ofexpenditure incurred in businesses and professions, including expenditure on purchase of raw materials, stores or goods, salaries to employees and also other expenditure on professional services, or by way of brokerage, commission, interest, etc.

► Where payment for any expenditure is found to have been made to arelative or associate concern falling within the specified categories, it willbe necessary for the Income-tax Officer to scrutinize the reasonablenessof the expenditure with reference to the criteria mentioned in the section.► The Income-tax Officer is expected to exercise his judgment in areasonable and fair manner. It should be borne in mind that the provisionis meant to check evasion of tax through excessive or unreasonablepayments to relatives and associate concerns and should not be applied ina manner which will cause hardship in bona fide cases.

Sec 80(A)(6) refers to internal transaction between units/undertaking of the assessee in respect of goods and services. Hence, it applies to both income and expenses.

Any transaction referred in Sec 80A

Where the goods and services are transferred from eligible business to any other business or vice versa,

The consideration for transfer as recorded in the books of eligible business does not correspond to the market value

The AO, then for the purpose of deduction, may compute the profit and gain according to the market value of such goods and services

Explanation inserted by finance Act, 2012Market Price means the ALP in case of transaction covered under domestic transfer pricing u/s 92BA.

Sec 80 IA(8)-Deduction in respect of profit and gain

That Where it appears to the AO that because of close connection between assessee carrying on eligible business and any other business or or for any other reason , any business transacted between them produces abnormal profit to the assessee, then AO may take the profit of the eligible business what can be reasonable derived from this business.

Proviso inserted by Finance Act, 2012,

That if the business transacted between them is covered by SDT, then the will compute the profit as per ALP.

80 IA-(10)-

As per this section, any unit located in SEZ area and is engaged in providing any goods or services is exempt from tax.

Sec 10AA

XYZ Ltd

Power Production

Sugar Production

Cloth Production

There is a company XYZ Ltd which has a three unit, one deals in production of sugar, another garments and one in generation of power. The power is supplied for the production of sugar and cloth. If any shortage comes in the production of power. The power is purchased from state Electricity Board. The power unit is tax free unit.

The power is purchased for production of cloth and sugar at Rs. 5 per unit. However, the rate of state electricity board is 4 per unit. Hence, the profit of power unit is being enhanced which is tax free and other unit is being reduced,

Similarly, there are certain common expenditure which as per accepted accounting principle is being should be divided into three unit but all the expenses are divided into cloth and sugar unit so as to reduce their profit.

Case Study

A ltd provides loan to B Ltd which is more than 50% of its total assets

The manufacture or processing of goods or articles or business carried on by the a assessee is wholly dependent on knowhow, trade mark or any kind of data, documentation provided by other enterprises.

A ltd supplies more than 90% of the raw material to B Ltd for its manufacturing operation.

90% of the goods produced by A Ltd is sold to B Ltd and this is B ltd who determines the price of the goods.

Close Connection

Section Nature of Default Amount of Penalty

271(1)© Explanation 7

Post Assessment Adjustment on higher side

100 t0 300% of tax on adjusted amount

271 AA Failure to maintain documents or information

2% of the value of SDT

271BA Penalty for failure to furnish report u/s 92E

Rs. One hundred Thousand Rupees

271 G Penalty to furnish information or documents u/s 92 D

2% of the value of SDT

Penalty

► This amendment will take effect from 1st July,2012.

► The due date for completion of a TP assessments is extended by 3 months.

► The existing and the new extended period for completion of pending proceedings and subsequent proceedings under the provisions is given below :

Assessment Timelines

Proceeding under section

Current time allowed Proposed time

Sec 143 and 92CA Within 33 months of the end of the A Y

36 months

148/92CA 21 months from the end of the FY in which notice issued

36 months

250/254/263 and 92CA

21 months from the end of the month in which order received

24 months

As per the proposed GAAR provisions in Chapter X of the Income Tax Act ,An arrangement whose main purpose is to obtain a tax benefit and which also satisfies at least one of the four tests, can be declared as 'impermissible avoidance agreements'.

The four tests inter alia are: The arrangement that creates rights and obligations, which are

not normally created between parties dealing at arm's length; It results in misuse or abuse of provisions of tax laws; it lacks commercial substance or is deemed to lack commercial

substance. Is carried out in a manner , which is normally not employed for

bonfide purpose.TP Implications will arise mainly if it satisfies any one of the following two tests :

The arrangement that creates rights and obligations, which are not normally created between parties dealing at arm's length

It lacks commercial substance

Implication of GAAR on TP

Documentation for specified Domestic Transaction within the specified time limit

Benchmarking for the specified domestic Transaction-onus on the tax payer

Determining the arm’s length price following six method as provided in the Act

Adjustment in the price-No corresponding adjustment allowed to other party causing double taxation

Preparing TP report Giving audit report in form 3CEB

Compliance Requirements

International TP Domestic TP

• International transactions [Sec 92B]

• Specified domestic transactions [Sec 92BA]

• Shareholding not less than 26% • Shareholding not less than 20%

• No minimum thresh hold for applicability of TP provisions

• Rs. 5 crore is the minimum thresh hold for applicability of TP provisions. If aggregate value of transactions is less than Rs. 5 crore, provisions u/s 40A(2)(a) will be applicable – FMV and not ALP.

• APA coverage is available • APA coverage is not available

International TP vs. Domestic TP

1. If transactions are covered under SDT provisions, disallowance u/s 40A(2)(a) may be made by the AO only when transactions are not at arm’s length. [Proviso to Sec 40A(2)(a)]

2. Software / databases generally used for searches- Prowess, Capitaline Plus

Provisions applicable only to expenditure where payment is made

or to be made

◦ Does this include capital expenditure?

◦ Does this include transactions without consideration?

◦ Does threshold apply to the amount recorded in the Books of

Account or Amount determine as per ALP?

Wide coverage and goes beyond the related parties covered under

AS-18

Whether Government approval u/s 295, 297 of the Companies Act

would be relevant?

Probable Issues

If aggregate of International and Domestic transaction

exceeds INR 50 million, Do we need to demonstrate ALP for

Domestic transaction which is otherwise below INR 50

million?

If aggregate of International and Domestic transaction

exceeds INR 50 million, but the International Transactions are

below INR 10 million, Do we need to maintain documents

prescribe under Rule 10D? ( Reference Rule 10D(2)

Would claim of Depreciation comes under the ambit of

Domestic Transfer Pricing?

Under which Form, report for Domestic transfer Pricing shall

be given? [ Section 92BA refer Section 92E] [ Prescribed

form u/s92E is Form 3CEB which refers to the report on

International Transactions] Revised Form 3CEB shall be

notified in order to cover Specific Domestic Transactions

Section 92A [AE and Deemed AE] deals with directly or

indirectly interested vis-à-vis Section 40A(2)(b) [Specified

Domestic Related Party] deals with directly interested

Interest free Loans to Group Companies

Granting of Corporate Guarantees/ Performance Guarantees by Parent Company to its subsidiaries

Intra-group purchase/ sell/ service transactions

Payment made to key personnel e.g. transaction with Directors/CFO/CEO etc..

Payment made to key personnel of Group Companies

Payment made to relative of key personnel of the assessee/group companies

Transaction under scanner of SDT

Commission to relatives of the directors/ partners

Salary paid to the relatives of the directors/Partners

Remuneration to the directors

Extra Purchase Price and Interest foregone to relatives

Good sold at lower than market price if bona fide

Higher Purchase Price than rates prevailing in the market

Interest paid to sister concerns at rate higher than normal rates

Hire Charges of Machinery or Rent paid for use of Immovable property

Difficulty to establish transaction in ALP

Type of payments/ transactions Challenges

• Salary and Bonuses paid to the partners

• Remuneration paid to the Directors

• Transfer of land

• Joint Development agreements• Project management fees• Allocation of expenses between

the same taxpayer having an eligible unit and non-eligible unit

• Definition of Related Party

• Benchmarking?• Whether the limit as mentioned

in section 40 (b) would be the ALP?

• Benchmarking?• Whether the limit as mentioned

in Schedule XIII would be the ALP?

• Whether the rates mentioned in the ready reckoner be considered as ALP?

• Benchmarking?• Benchmarking?• Whether these allocation would

be SDT – Sec 80-IA(10)?

• Directly v/s Indirectly

Challenges

a) Transfer pricing provisions are not applicable in case where income is not chargeable to tax at all.

[Amiantit International Holding Ltd., (2010) 322 ITR 678 (AAR)]

b) Provisions of section 40A(2) are not applicable to a co-operative society. [CIT vs. Manjara Shetkari Sahakari Sakhar Karkhana Ltd.(2008) 301 ITR

191 (Bom.)]

d) When a person commits an offence by not maintaining the books of accounts as contemplated by section 44AA, the offence is complete. After that there can be no possibility of any offence as contemplated by section 44AB and therefore, the imposition of penalty is erroneous. [Surajmal Parasmal Todi vs. CIT (1996) 222 ITR 691 (Gauhati)] Note : This decision may be helpful in the context of sections 271AA, 271G and 271BA.

e) Correlative adjustments - if excessive or unreasonable expenses are disallowed in the hands of tax payer at time of the assessment then corresponding adjustment to the income of the recipient will not be allowed in the hands of recipient of income. Hence, it would lead to double taxation in India.

Expenses paid by domestic companies to related parties will be challengedCorresponding adjustment not permitted for disallowed expenses; will lead to double

taxation

Transaction within CompanyCompany with multiple units and claiming tax holiday will be questioned on inter unit transfersAuthorities will attempt to reduce profitability of exempted unit by reducing the quantum of deduction

Tax HolidayCompanies declaring ‘More than ordinary Profits’ for tax holiday units will loose excessive income-tax benefits

Shift of ApproachApproach will shift from generic ‘Fair Market Value’ concept to Arm’s Length pricing

Compliance Heavy Compliance burden of maintaining:

transfer pricing documentation and reporting of transactions (Form 3CEB) Assessment

Assessment / audit by specialized cell of TPO

Impact of DTP

DOCUMENTATION

What documents are required to be maintained

Entity Related- Profile of the Entity- Profile of the Industry- Profile of the Group

Price Related- Transaction Terms- Functional Analysis(Function, Assets and Risk)- Economic Analysis(method selection, comparable

bench marking- Forecast, budget and estimates

Sec 92D and Rule 10D

Transaction Related

◦ Agreements◦ Invoices◦ Price Related Documents( letter, emails, Fax etc) ◦ other authentic documents(Official publication,

published accounts etc.

Entity Profile- Nature of Client’s Business- What is his legal status- What is the terms of the Contract- The documents must start with who does what and in

what legal capacity-Identify the parties to transaction-Identify the parties legal status Subsidiary or Branch)- Identify the relation between them( Principal or agent)

Here the identification of related parties will come That will help in carrying out industry analysis.

Entity Related documents

First of all, to which industry the entity pertains

The industry profile tells us about the price prevailing in the market for the transaction covered

it has to be for the period of documentation covered

Industry Profile

The important factor to be kept in mind:-

Product characteristics - Generic/ Specialty products – Margins are often influenced by these factors

Market Dynamics – e.g. Matured, growing, nascent etc. (impacts pricing strategies of companies)

Market positioning – wholesaler or retailer, contract or full fledged manufacturer

Existence of any restrictive regulations e.g. DPCO in pharma industry

◦ Compensation usually will reflect the functions that each enterprise performs (taking into account assets used and risks assumed).

◦ To determine whether controlled and uncontrolled transactions or entities are comparable, a functional analysis is necessary

◦ Functions that might need to be identified and compare include, e.g. design, manufacturing, assembling, research and development, servicing, purchasing, distribution, marketing, advertising, transportation, financing and management.

◦ Functional analysis should consider the type of assets used, such as plant and equipment, the use of valuable intangibles, financial assets etc.

◦ Functional analysis is incomplete unless the material risks assumed by each party have been considered

◦ A comprehensive FAR Analysis should enable 2-sided review for both related parties and the taxpayer with:

◦ Clear distinction of the functions and risks of the taxpayer and the related parties

◦ Commensurate compensation

Price related Documentations-Functional Analysis

◦ Economic analysis refers to benchmarking the financial parameters of the assessee and comparable companies

◦ Search Strategy to be clearly documented

Selection of Most Appropriate Method, Tested Party, Profit Level Indicator

Analysis of internal comparables

Databases used and applicability of filters used to select comparables

Search methodology and basis for acceptance / rejection of companies

◦ Document any adjustments made for differences in functions/ risks borne by the comparables vis-à-vis taxpayer/domestic related parties

◦ Periodic review for TP Policy and TP documentation for both - taxpayer and related parties to:

reflect changes in the market/ comparables

reflect changes in functions/ risks of each transacting entity

update the changes in the nature of transactions

Economic Analysis

◦ Documents other than TP reports

◦ Information relevant to a transfer pricing assessment depends on the facts and circumstances of the case, and thus it is not possible to define extent and nature of information reasonable for the Transfer Pricing Assessment

◦ Documents that may be helpful for showing the process of negotiations for determining or revising prices, and may include inter-co agreements, invoices, emails/ faxes

◦ Documents which could support the business description and functional analysis – published reports, annual report, news articles etc.

Transaction Related documentation

The step includes determination of Arm’s length price selecting the Most Appropriate Method out of the prescribed method based on the facts and circumstances of the each SDT.

Types of Method CUP-Comparable uncontrolled Price Method RPM-Resale Price Method CPM-Cost Plus Method PSM-Profit Split Method TNMM-Transaction Net Margin Method other Method-Prices Charges or paid or would have

been charged or paid

Transfer Pricing Method-92C-Computation of Arm’s Length Price

Factors considered for selection of the Most Appropriate Method:

◦ Nature and class of specified domestic transaction

◦ Class of domestic related enterprise and functions performed

◦ Availability, coverage and reliability of data

◦ Degree of comparability

◦ Extent to which reliable and accurate adjustments can be made

◦ The nature, extent and reliability of assumptions for application of the method

Most Appropriate Method – Rule 10C of the Rules

Methods Comparability Approach Remarks

CUP Very High Prices are benchmarked

Very difficult to apply as very high degree of comparability required

RPM High GPM (on sales) benchmarked

Difficult to apply as high degree of comparability required

CPLM High GPM (on costs) benchmarked

Difficult to apply as high degree of comparability required

PSM Medium Profit Margins Complex Method, sparingly used

TNMM Medium Net Profit Margins Most commonly used Method

◦ Rule 10AB has now been inserted in the Income-tax Rules, 1962 - Applicable from FY 2011-12.

◦ “any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts."

◦ Effectively, this implies that under this “other method” “quotations” rather than prices “actually” charged or paid can also be used by the taxpayers

◦ Could also cover new instances of ALP computation which would now arise due to the various amendments introduced in the Finance Act 2012 like expansion/clarification of the definition of “international transaction” and introduction of domestic transfer pricing. (e.g. intangibles, exit charge)

Other Method Rule 10AB – Sixth method notified by CBDT

The next step is to prepare the TP report accounting for all the aforesaid procedure.

TP Report

◦ The accountant’s report requires

furnishing of factual information relating to international transaction

the arm’ s length price determined and the method applied;

an opinion as to whether the prescribed documentation has been

maintained;

the disclosures have been verified and the same is “True and Correct”.

◦ Form No. 3CEB consists of the following parts: Form No. 3CEB; Annexure to Form No.3CEB; and Appendices to the Annexure (wherever required).

◦ For FY 2012-13, the due date of filing Form 3CEB is Nov 30, 2013

Certification-Accountant’s report-Form 3CEB

◦ This report has to be signed by – Chartered Accountant’s within the meaning of the Chartered

Accountants Act, 1949 (38 of 1949); or Any person who, in relation to any State, is , by virtue of the person in

subsection (2) of section 226 of the Companies Act, 1956 (1 of 1956), entitled to be appointed to act as an auditor of companies registered in that State.

◦ This report must be obtained by every person who has entered into an “Specified Domestic transaction” during the previous year;

◦ It must be furnished on or before the due date applicable to such person or filing its return of income for the relevant assessment year;

◦ Like any other Audit report, specify whether the assessee is required to maintain Transfer Pricing documentation, and also in case the assessee is not able to provided complete information – relevant for international transactions

Immediate Identification of covered entities and persons Identification of covered transactions Review of the pricing mechanism for the covered transactions Planning for corrective steps to be taken (within FY 2012-13) for developing

a proper arms’ length mechanism for proposed transactions including: Functions, Assets and Risk (FAR)analysis Economic Analysis including Benchmarking

Ongoing RevieAw of existing transaction for change in facts and circumstances Examining any new transactions and reviewing the pricing mechanism for

such transaction Year end compliance

Preparation of Transfer Pricing Documentation (TP Report): Covered persons Covered transactions Nature and quantum of transactions Arm’s length pricing of all such transactions using Prescribed methods

Filing of Accountant’s Report in [Form No. 3CEB]

A quick summary of SDT

◦ Now the Transfer pricing provisions will not be limited to just the large groups any more. Many mid-sized groups, partnership firms, Hindu Undivided Families (‘HUFs’) and even individuals in smaller cities will now have to adhere to the TP rules.

◦ This amendment will largely increase the compliance burden for taxpayers having substantial domestic related party transactions.

Conclusion

Prowess Capitaline plus

Software for Benchmarking

THANK YOU

CA MANOJ KUMAR9810764620