Concept of Transfer Pricing Regulations

1. PAVAN SOMANI B.Com, ACA, & Grad. CWA HINGOLI Concept of Transfer Pricing Regulations PAVAN R. SOMANI  B.Com, ACA, & Grad. CWA Hingoli

2. PAVAN SOMANI B.Com, ACA, & Grad. CWA HINGOLI Transfer Price: What and Why? • TP means the value or price at which transactions take place amongst related parties. • TP are the prices at which an enterprise transfers physical goods and intangible property and provides services to associated enterprises • TP gain significance because these can be used by the controlling party to their advantage to minimize tax incidence. • Approximately 60% of the total transactions across the world are between related parties. • If the transactions are across different tax jurisdictions, where tax rates are different, shifting is beneficial.

3. PAVAN SOMANI B.Com, ACA, & Grad. CWA HINGOLI Factors Affecting Transfer Pricing • Internal factors: Performance Measurement and Evaluation • External Factors: • Accounting Standard • Income Tax • Custom Duty • Currency Fluctuations

4. PAVAN SOMANI B.Com, ACA, & Grad. CWA HINGOLI Income Tax Act and TP • Finance Act 2001 substituted the old section of 92 of the ITA by sections 92,92A to 92 F. • These sections are the backbone of Indian Transfer Pricing Regulation. • These sections define the meaning of related parties, international transactions, pricing methodologies etc.

5. PAVAN SOMANI B.Com, ACA, & Grad. CWA HINGOLI TPR: Some Important Concepts • Income/Expenses/Cost arising from an international transaction shall be computed having regard to arm’s length price (ALP). • ALP provisions can be applied if it leads to decrease in taxable income or increase in losses.

6. PAVAN SOMANI B.Com, ACA, & Grad. CWA HINGOLI Associate Enterprise: 92A • Direct or Indirect Control/Control through intermediary • Holding 26% of voting power • Advance of not less than 51% of the total assets of borrowing company. • Guarantees not less than 10% on behalf of borrower • Appointment of more than 50% of the BoD • Dependence for 90% or more of the total raw material or other consumables

7. PAVAN SOMANI B.Com, ACA, & Grad. CWA HINGOLI Arm’s Length Price • Price which two independent firms would agree on. • Price which is generally charged in a transaction between persons other than associated enterprises.

8. PAVAN SOMANI B.Com, ACA, & Grad. CWA HINGOLI Arm’s Length Price Methods: 92C • Comparable uncontrolled price method • Resale price method • Cost plus method • Transaction Net Margin Method • Profit split method

9. PAVAN SOMANI B.Com, ACA, & Grad. CWA HINGOLI Comparable uncontrolled price method (CUP) • CUP method compares the price transferred in a controlled transaction to the price charged in a comparable un-controlled transaction. • CUP method is the most direct and reliable way to apply the arm’s length principle.

10. PAVAN SOMANI B.Com, ACA, & Grad. CWA HINGOLI Resale price method (RPM) • The resale price method begins with the price at which a product is resold to an independent enterprise (IE)by an associate enterprise. • X sold to AE at Rs. 1000 (profit: 300) • AE sold to an IE at Rs. 2000 • (profit of Rs. 500 for relevant IE) • Arms length price = 2000 - 500 = 1500

11. PAVAN SOMANI B.Com, ACA, & Grad. CWA HINGOLI Profit Split Method (PSM) • PSM is used when transactions are inter-related and is not possible to evaluate separately. • PSM first identifies the profit to be split for the AE. The profit so determined is split between the AE on the basis of the functions performed/assets/CE

12. PAVAN SOMANI B.Com, ACA, & Grad. CWA HINGOLI Cost Plus Method (CP) • In CP method, first the cost incurred is determined. An appropriate cost plus mark-up is then added to the cost to arrive at an appropriate profit. The resultant figure is the arm’s length price.

13. PAVAN SOMANI B.Com, ACA, & Grad. CWA HINGOLI Transaction Net Margin Method (TNM) • The Net Profit Margin realized is computed in relation to Costs incurred or sales effected or assets utilized. • The Net Profit Margin realized by an Unrelated Enterprise from a comparable Uncontrolled transaction or group of transactions is computed. • From this the Net Profit Margin is comparable uncontrolled transaction is adjusted to take into account the differences, if any, between the transactions being compared, which could materially affect the amount of Net Profit Margin in the open market.

14. PAVAN SOMANI B.Com, ACA, & Grad. CWA HINGOLI Transfer Pricing Methods

15. PAVAN SOMANI B.Com, ACA, & Grad. CWA HINGOLI Some Transactions subject to ALP • Exchanging property • Selling of real estate at a price different from MP • Use of trade names or patents at exorbitant rates even after their expiry. • Purchase at little or no cost. • Payment for services never rendered. • Sales below MP/ Purchase above MP • Interest free borrowings

16. PAVAN SOMANI B.Com, ACA, & Grad. CWA HINGOLI Accountant's Report • Persons who enter into an international transaction during the previous year shall obtain report from an 'Accountant' • The report should be submitted on or before September 30th of the relevant assessment year in case of company and on or before 31st July in case of other Assessee. • The report should be in the format as prescribed by the Central Board of Direct Taxes.

17. PAVAN SOMANI B.Com, ACA, & Grad. CWA HINGOLI Penalties :

18. PAVAN SOMANI B.Com, ACA, & Grad. CWA HINGOLI Alternate Dispute Resolution Mechanism • As the TP law marches ahead, the Government is concerned about the rising TP disputes, arising due to increasing cases of adjustments to ALP. The Finance (No.2) Act, 2009, has thus put in the following amendments :- • Safe Harbour rules (Section 92CB) for determining the ALP. The rules would provide the circumstance under which the income tax authorities would automatically accept the TP declared by the assessees. • A Dispute Resolution Panel (DRP), (Section 144C) consisting of a collegiums of 3 commissioners of income tax for dealing with complex matters relating to TP or the tax disputes of foreign companies.

19. PAVAN SOMANI B.Com, ACA, & Grad. CWA HINGOLI Some Cases • MARUTI SUZUKI INDIA LTD ( THE HIGH COURT OF DELHI ) • Domestic entity should not make payment of running royalty to foreign entity if the lump sum fees on account of technology transfer is already paid. • Foreign entity should make the payment to domestic entity on account of benefit derives from marketing intangibles. • If advertisement, promotion and marketing expenses incurred by domestic entity are more than similarly situated comparable independent domestic entity, the foreign entity should compensate in respect of advantage obtained in terns of brand building.

20. PAVAN SOMANI B.Com, ACA, & Grad. CWA HINGOLI Some Cases • MARUTI SUZUKI INDIA LTD ( THE SUPRIEM COURT) The Hon’ble Supreme Court (Supreme Court), on 1st October 2010, in the case of Maruti Suzuki India Ltd. has directed the Transfer Pricing Officer (TPO) to complete the transfer pricing assessment proceedings without being influenced by the judgment passed by the Delhi High Court.