Overview of Transfer Pricing Regulations in India

1. Overview of Transfer Pricing Regulations in India CA Jinesh R. Bhagdev J. B. Nagar CPE Study Circle

2. Contents Background Identification of Associated Enterprises Identification of International Transactions / Specified Domestic Transactions Functional, Assets and Risk Analysis Methods and Selection of the Most Appropriate Method

3. Background

4. Background • Any income arising to "AEs"from an "International Transaction"shall be computed having regard to "ALP" • Preconditions • Two or more AEs; • Enter into an international transaction • Consequence • Income (expenses) to be computed having regard to ALP

5. Identification of Associated Enterprises

6. Associated Enterprises • Means direct or indirect participation in management, control or capital: • by one enterprise into another enterprise; or • by the same person in both the enterprises • Equity holding, Control of Board of Directors / Appointment of one or more Executive Directors, mutual interest constitute AEs • Either or both of the AEs should be non-residents

7. Associated Enterprises – Deeming Fiction C O M P A N Y A (NR) C O M P A N Y B (Common) Participation in capital > = 26% Loan > = 51% of book value of assets Guarantee > = 10% of borrowings Appointment > half of the directors Dependence on know-how, patent etc Supply of raw material > = 90% Firm/AOP/BOI>=10% Interest Existence of Mutual Interest Relationship at any time during the year sufficient to constitute AE

8. Identification of International Transactions (Specified Domestic Transactions)

9. International Transactions • Means "transaction" between two or more AEs: • Transaction between two or more AEs (atleast one of which will be non-resident) of purchase, sale or lease of tangible property and / or intangible property, provision of services, financing, cost sharing / cost contribution arrangements Or • Affecting profits, losses, income, assets or liabilities of the enterprises

10. International Transactions • Prominent Transactions now specifically included • Capital Financing including guarantee • Any type of advance payment or deferred payments • Receivables • Transaction of business restructuring or reorganisation with the AE • Intangible Property – As clarified • Customer Lists • Customer Contracts • Customer Relationships • Human Capital Related intangibles assets, such as, trained and organised work force, employment agreements, union contracts;

11. Deemed International Transaction – Section 92B(2) XYZ Inc. USA Prior arrangement relating to quantity and price of goods Non - AE Outside India Subsidiary AEs India • Related prior agreement • between XYZ Inc. and • Non –AE • The terms of the • transactions are • determined in substance • by XYZ Inc. ABC Ltd. India Sale of goods Deemed International Transaction

12. Domestic Transaction under the ambit of Transfer Pricing Regulations • Any expenditure in respect of which payment is made or is to be made to a person referred to in Section 40A(2)(b) of the IT Act; • Any transaction that is referred to in Section 80A; • Any transfer of goods or services referred to in Section 80-IA(8) i.e. applicable to companies operating as industrial undertaking or enterprises engaged in infrastructure development;

13. Domestic Transaction under the ambit of Transfer Pricing Regulations • Provided that the aggregate value of the transaction entered into by the • assessee with its domestic AE exceeds Rs. 5 crore •  Any business transacted between the assessee and other person as referred to in section 80-IA(10); • Any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which provisions of sub-section (8) or sub-section (10) of section 80-IA are applicable; • Any other transaction, as may be prescribed by the board.

14. Domestic Transaction under the ambit of Transfer Pricing Regulations • Most likely transactions under the scanner of the TP Authorities would be: • 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 of the group companies; • Payment made to relatives of key personnel of the group companies.

15. Functional, Assets & Risk Analysis

16. Functional, Assets & Risk Analysis • FAR Analysis is the Heart of Transfer Pricing as on the • basis of FAR Analysis, one has to select the comparable companies

17. Functional, Assets & Risk Analysis Based on the FAR Analysis, Tested Party needs to be identified. Based on the FAR Analysis, Each of the Party (parties to the transaction) needs to be Economically Characterized (E.g. Contract Manufacturer, Full-Fledged Manufacturer, Distributor, Full-Fledged Trader, Contract Service Provider, etc.)

18. Methods and Selection of Most Appropriate Method

19. Methodology in Computing ALP • Section 92C lays the foundation • The ALP in relation to an international transaction shall be determined by applying one of the following method • Traditional Methods • CUP Method • RPM • CPM • Profit Based Methods • PSM • TNMM • Such other method as may be prescribed by the Board • Other method of determination of arm's length price

20. Traditional Methods

21. Comparison

22. Comparison

23. Profit Based Methods

24. Comparison

25. Background – Profit Based Method • Profit based methods are more appropriate in situations where • Each of the parties make valuable and unique contribution in relation to the controlled transaction or when the transactions are highly inter-linked; or • Reliable data for application of traditional method is not available • Traditional method cannot be applied to every possible situation; • Mere difficulty in obtaining data for application of traditional methods should not be the sole criteria for adopting profit based methods in determining ALP

26. Other Method

27. Background – Other Method • the other method for determination of the ALP in relation to an international transaction shall be • any method • which takes into account price charged / paid / would be charged / payable • for same or similar uncontrolled transaction • with or between non-associated enterprises • under similar circumstances, considering all the relevant facts

28. Most Appropriate Method Indian TPR does not provide any hierarchy or priorityfor selection of MAM MAM is that method which, under the facts and circumstances of the transaction under review, provides the most reliable measureof an arm’s length result Each method needs to be tested on merits depending on the nature of international transaction, availability of comparable data, extent to which reasonable and reliable adjustments can be made, etc.

29. Factors for Selection of MAM • Nature and class of international transaction • The class or classes of AEs entering into an international transaction • Availability, coverage and reliability of data necessary for application of MAM • The degree of comparability existing between the international transaction and uncontrolled transaction • Extent to which reliable and accurate adjustments can be made • Nature, extent and reliability of assumptions required to be made in application of a method

30. JineshBhagdev Jinesh R. Bhagdev & Co. Proprietor #3, ShyamSadan, Opp. Sairaj Garden, 3rdIraniWadi, Kandivli (West), Mumbai – 400 067 India Email: jinesh@jbhagdev.com Website: www.jbhagdev.com Contact No: 99209 22929 THANK YOU