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Transfer Pricing in India CA Hiren D.Shah Ahmedabad [email protected] Indian Regulations. Genesis for New TPR. In India, while introducing the new transfer pricing regulations the Finance Minister said:

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Transfer Pricing in


CA Hiren D.Shah


[email protected]

Indian regulations
Indian Regulations

Genesis for new tpr
Genesis for New TPR

  • In India, while introducing the new transfer pricing regulations the Finance Minister said:

    • The presence of multinational enterprises in India and their ability to allocate profits in different jurisdictions by controlling prices in their intra-group transactions has made the issue of transfer pricing a matter of serious concern. I had set up an Expert Group in November 1999 to examine the detailed structure for transfer pricing legislation. Necessary legislative changes are being made in the Finance Bill based on these recommendations.


  • Introduced by the Finance Act, 2001

    • Finance Act 2002 - clarificatory amendments

    • Circular 14 – Memorandum explaining new TPR

  • Based on the Arm’s Length Principle

  • Initial Burden of Proof is on the Assessee

Overview of Presentation

  • Meaning & Introduction

  • Important Concepts

  • Documentation & Audit

  • Transfer Pricing Audit Process

  • Powers of Assessing Officers

  • Impact of Adjustments made to TP




The process of fixation of Pricing of any Transaction between Associated Enterprises of MNC’s is known as “Transfer Pricing”

Overview - Indian Regulations between Associated Enterprises of MNC’s is known as

Developments – Indian Regime between Associated Enterprises of MNC’s is known as

Finance Act 2001, introduces

detailed Transfer Pricing Regulations

April 2001

21 Aug 2001

Rules 10A to 10E notified

Circular No. 12 issued – Guidelines

to AO’s. Beneficial to Assesses

23 Aug 2001

Circular No. 14 issued – Explaining

Provisions of Finance Act, 2001

Dec 2001

April 2002

Guidance Note issued by the ICAI.

Finance Act, 2002 introduced –

Clarificatory Amendments made

Dec 2001

Section 92 between Associated Enterprises of MNC’s is known as

  • Provides for computation of –

    - Income

    - Expenses

    - Cost Contributions

    at Arms Length Price (ALP)

  • ALP means price applied or to be applied in transactions between unrelated persons & in uncontrolled conditions.

  • TPR not to apply to cases which has the effect of reducing income chargeable to tax or increase the loss [s. 92(3)]

Concept between Associated Enterprises of MNC’s is known as

Independent entity

Associated enterprise

International transactions

- goods

- services

- intangibles

- loans



Transfer price

Arm’s length price

Associated Enterprises between Associated Enterprises of MNC’s is known as

  • Enterprise regarded as AE – Section 92A (1)

    • Based on the concept of commonality of Control. Management or Capital as contained in Article 9 of the OECD Model Tax Convention

  • Enterprises deemed to be AE – Section 92A (2)

    • Capital –

      • Shareholding (a & b), Loan ( c ), Guarantee for borrowing (d), interest (e);

    • Management

      • Appointment of Directors or Executive Director (e & f)

    • Control

      • Intangible property (g), production/trading activities (h & i) , others (j & K )

    • Relationship of mutual interest (m)

Transaction [S. 92F(v)] between Associated Enterprises of MNC’s is known as

  • Transaction includes an arrangement, understanding or action in concert –

  • whether or not formal or in writing;

  • whether or not intended to be enforceable by legal proceedings.

International Transaction [S. 92B] between Associated Enterprises of MNC’s is known as

A transaction between two

Associated Enterprises,

Either or both of whom are

Non - Residents,

in the nature of

Purchase, sale, lease of

Provision of Services

Borrowing/Lending of money

Tangible/intangible property

Cost Sharing arrangements

Applicability of Transfer Pricing between Associated Enterprises of MNC’s is known as

Branch & HO Issues

Whether TPR would apply to

transactions between Indian residents

& their foreign branches.

Whether, TPR would apply to

transactions between foreign residents

& their Indian branches.

Specified date accountant
Specified Date & Accountant between Associated Enterprises of MNC’s is known as

  • Important in the context of transfer pricing Documentation & Audit.

  • Every assessee to whom TP applies shall keep the documentation ready upto the specified date and also furnish a report of an accountant.

  • Specified date means the due date for filing the income tax return of the respective assessee u/s 139.

  • Accountant means a ‘Chartered Accountant’ in practice and would also include ‘Restricted state auditors’.

Methods between Associated Enterprises of MNC’s is known as

  • Price applied in a transaction between independent enterprises in uncontrolled conditions

  • To be determined by applying the Most Appropriate Method, being one of the following five methods

    • Comparable Uncontrolled Price (CUP) Method

    • Resale Price Method (RPM)

    • Cost Plus Method (CPM)

    • Profit Split Method (PSM)

    • Transactional Net Margin Method (TNMM)

  • In case, more than one price is determined by MAM:

    • Apply Arithmetic mean

    • Range of + 5% of the arithmetic mean

Traditional transaction methods

Transactional profit methods

Computation Provisions between Associated Enterprises of MNC’s is known as

  • Characteristics of property / services. 10B)

  • Functions performed, risks assumed, assets / resources employed by the respective enterprises.

  • Contractual Terms

    • Credit terms & mode of payment

    • Volume of Sales / Purchase

    • Selling or Buying Commitments, etc.

  • Economic conditions:

    • size of the enterprises

    • geographical locations

    • size of the market

    • regulatory framework

    • cost of layout & capital, etc.

Documentation 10B)



Background… 10B)

  • Transfer Pricing, not a science but an art.

  • Transfer Price for the same transaction can be different for the assessee & the assessing officer.

  • Transfer pricing depends upon both the nature of the enterprise & the transaction.

  • Proper documentation shifts the burden of proof on the assessing officer.

Legal framework
Legal Framework 10B)

  • Legal requirements for maintenance of information & documentation contained in s. 92D r.w. Rule 10D.

  • S. 92D r.w. rule 10D prescribes the categories of documentation to be maintained and the period for which it is to be maintained.

  • Legal requirement for submission of report of an accountant (T.P. Audit) contained in section 92E r.w. Rule 10E.

Prescribed documentation
Prescribed Documentation 10B)

Documents to be maintained


[Rule 10D(1)]


[Rule 10B(3)]

ICAI’s Classification







Brief Classification of Principal Documents 10B)

Enterprise related





  • Reasons for rejection of a particular method

  • Methods selected for determining ALP

  • How is MAM arrived at & how it is applied

  • Nature & terms of International Trns. (IT)

  • Records having a bearing on IT..

  • Records of Forecasts & analysis

  • Analysis Performed (FAR Analysis)

  • Records of Comparable uncontrolled transactions

  • Ownership structure

  • Group Profile and details of AEs

  • Business overview

Ownership Structure of Group 10B)

  • Shareholding pattern / Membership interest; viz. Name of the shareholder / partner and % of shareholding / int.

    • Reference may be had to the Statutory registers maintained, if any

  • Generic classification in case of large number of shareholders

  • Changes in the shareholding pattern needs to be properly documented

  • Direct and indirect ownership interest in the taxpayer

Profile & Business Overview 10B)

  • Profile of the multinational group:

    • Ownership Linkages & Legal Structure

    • Principal line of business

    • Geographical areas of operation

    • Summarised global financials

  • Overview of Business & Industry:

    • Broad description of industry in which the taxpayer operates (Reference can be made to ITC / NIC codes)

    • Business Model used

    • Technology employed

    • Products manufactured / traded

    • Markets addressed / competition faced

    • Geographical Dispersion of activities

Computation related Documents 10B)

  • Workings of all the methods used for determining ALP

  • Reasons for rejection / selection of particular method

  • Reasons for selecting a particular method as MAM

  • Workings of actual application of MAM

    • includes details of adjustments made to account for differences between controlled & uncontrolled transactions

MAM should be the reliable measure of Arm’s Length Price

Supportive Documents [10B(3)] 10B)

  • Official publications, reports, studies & databases from Government of foreign countries

  • Research reports & technical publications of institutions of national or international repute

  • Published accounts & financial statements relating to business affairs of associated enterprises

  • Price publications including stock market quotations or commodity market quotations

  • Agreements, etc. with AEs or unrelated parties in respect of similar international transactions.

  • Letters & other correspondence documenting any terms negotiated between the assesse & the AE

  • Documents normally used in this connection under the accounting practices followed

Relief & Other Requirements 10B)

  • Assessees having aggregate value of international transactions as recorded in the books of accounts less than Rs. 1 crore exempted from maintaining prescribed documentation

    • However, assessee shall be able to substantiate its transfer price based on the material available with him

  • Documentation, so maintained shall be contemporaneous to the extent possible

  • Prescribed documentation to be kept & maintained for 8 years from the end of the relevant AY

  • No fresh documentation required in respect of same international transaction continuing over more than one year unless there is significant change in:

    - nature or terms of international transactions

    - assumptions made or other factors

Transfer pricing study
Transfer Pricing Study 10B)


Manage the















Transfer pricing study report includes
Transfer Pricing Study Report includes.. 10B)

  • Nature of International Transaction

  • Details of Associated Enterprise

  • Profit Level Indicator

  • Selection of Most appropriate Method – Justification for selected method and reasons for rejecting other methods

  • Access to Database

  • List out Comparables

  • Accept – reject matrix ( Filtration Process)

  • Benchmarking Analysis

  • FAR Analysis

Data search strategy

  • : 10B) Development of Data Search Criteria

  • Data Search is an Art

  • Initial Identification and Screening

  • Secondary Screening, Verification and Selection.

  • Data Search is tedious Process

  • Prowess and Capital Online Software available for Data Search


Data search strategy1

Database A

Database B

Database C



Core Manufacturing

40 Companies

Elimination of companies with insufficient data

25 Companies

  • Data – Non Availability,

  • Continuous Loss making,

  • Companies not engaged into R&D

  • Sales Filter 5. Government Ownership



15 Companies



1. Segment Analysis

2. Must not engage in significant related party transactions

3. Must not own valuable IPRs

8 Acceptable Companies for Comparison

Comparability analysis
Comparability Analysis 10B)

  • Document the entire Data Search Strategy which may include:

    • Identification & Listing of internal & external comparable uncontrolled transactions

    • Nature & Terms of such comparable uncontrolled transactions

  • Document all the comparables found in the search process, which may include:

    • Sources utilised

    • Initial List

    • Rejection Criteria

    • Final List

Electronic Databases facilitates effective

Data Search Strategy

Functional analysis
Functional Analysis 10B)

By Functional Analysis - one also refers to FAR analysis, which means an analysis of Functionsperformed, Assets employed & Risks assumed by various components of a Group.

Understand ‘Business process’

for effective FAR Analysis

Identification of Intra Group Transactions 10B)


Selection of most appropriate method

FAR Analysis

Determination of ALP

Identification of comparable transactions



Establishing Comparability, Adjustment for material differences

Report Filling


Identification of intra group transactions
Identification of Intra Group Transactions: 10B)

  • Business operations of the company should be analysed and a brief summary should be prepared.

  • The company is the ‘TESTED PARTY’ for the purpose of Transfer Pricing Review Process. T

  • The company’s relevant cross border transactions with AE should be identified and briefly described.

Far analysis
FAR Analysis: 10B)

  • A brief functional analysis should be prepared exhibiting functions performed, risks assumed and assets deployed by the participating entities.

  • A preliminary search was performed for ‘potentially comparable’, uncontrolled transactions’.

Identification of comparable transactions
Identification of comparable transactions: 10B)

For identifying comparable transactions, one must understand what comparability is.

Comparability means

  • Comparisons of conditions of taxpayer’s relations with those of independents.

  • Comparability is wider than just a search for (external) comparable or than a mere systematic comparison of financial information.

  • But it is more emphasis on quality and reasonableness

One must satisfy five comparability 10B) factors

  • Five factors determining comparability:

    • Characteristics of property or services

    • Functional analysis (functions performed, assets used, risks assumed)

    • Contractual terms

    • Economic circumstances

    • Business strategies

Some other points are also kept in mind such as 10B) :

  • Recognition of the actual transactions undertaken

  • Evaluation of separate and combined transactions

  • Use of an arm's length range

  • Use of multiple year data

  • Losses

  • The effect of government policies

  • Intentional set-offs

  • Use of customs valuations

  • Use of transfer pricing methods

Establishing comparability adjustment for material differences
Establishing Comparability, Adjustment for material differences

For establishing comparability, 10 steps of search process are essential to follow:

Step 1: Broad based analysis (e.g. industry analysis, analysis of value drivers…)

Step 2: Determination of years to be covered

Step 3: Review of the controlled transaction(s) in order to identify the relevant factors that will influence both the selection of the appropriate transfer pricing method(s) and the comparability analysis

Step 4:Review of existing internal comparable. Where necessary, decision to look for external ones.

Step 5:Determination of available sources of information (including, but not limited to, commercial databases) and of their reliability

Step 6 differences: Selection of the relevant transfer pricing method(s) and definition of the relevant indicia (e.g. what net margin indicator in case of a TNMM).

Step 7: Identification of potential comparables: defining the key characteristics to be met by any uncontrolled transactions to be potentially comparable, on the basis of the relevant factors identified under step 3 and in accordance with the comparability standard established under paragraphs 1.19 to 1.35 of the TP Guidelines

Step 8: Determination of and making comparability adjustments, where and as needed (comparison of taxpayer’s profits with profits which would have accrued at arm’s Length)

Step 9: Interpretation and use of data, determination of the arm’s length remuneration.

Step 10: Implement support process. Install review process to ensure adjustment for material changes and document these processes

Selection of most appropriate method
Selection of most appropriate method differences

  • The Regulations identify five transfer-pricing methods;






  • Section 92C read with RULE 10C provides no priority of methods. Rather, the selection of the pricing method to be used to test the arm’s length character of a controlled transaction must be made under the “MOST APPROPRIATE/ BEST METHOD RULE”.

  • The ‘best method’ is that method which, under the facts and circumstances of the transaction under review, provides the most reliable measure of an arm’s length result.

  • Completeness and accuracy of data, reliability of assumption and the sensitivity of the results for possible deficiencies in the data/ assumptions are some of the key factors to be kept in mind while determining and documenting the most appropriate method.

Determination of alp
Determination of ALP and circumstances of the transaction under review, provides the most reliable measure of an arm’s length result.

  • The Indian Regulations, which have to a great extent have been adopted from OECD Guidelines, require that income arising from international transactions between ‘associated enterprises’ be computed having regard to the arm’s length price.

  • Compliance with the arm’s length principle can be established by showing that the conditions of the controlled transaction are consistent with those actually made in comparable transactions between independent enterprises under comparable circumstances ( ‘comparable uncontrolled transactions’).

Steps and circumstances of the transaction under review, provides the most reliable measure of an arm’s length result.involved in the determination of the arm’s length price can be summarized as Follows:

  • Identification of the “international transaction”;

  • Identification of an “uncontrolled transaction” – Rule 10A (a);

  • Identification and comparison of specific characteristics embodied in international transactions and uncontrolled transactions – Rule 10B (2);

  • Finding out whether uncontrolled transactions and international transactions can be compared by reconciling/resolving differences, if any – Rule 10B (3);

  • Ascertaining the most appropriate method by applying the tests laid down – Rule 10C;

  • Determination of the arm’s length price by applying the method chosen – Rule 10B (1).

  • Section 92C (1) stipulates that the arm’s length price is to be determined by adopting the most appropriate method.

Adjustments and documentation
Adjustments and Documentation and circumstances of the transaction under review, provides the most reliable measure of an arm’s length result.

  • The documentation should provide the quantitative and qualitative screening performed on the external comparable to determine whether the same could be considered comparable to the international transaction and making appropriate adjustments to ensure closer comparability between uncontrolled and controlled transactions

  • The documentation should include the adjustments that are required to achieve closer comparability between uncontrolled and controlled transactions (e.g. adjustments on account of differential credit period, geographical differences, non- recurring expenditure like substantial advertising expenditure incurred by the assesse as compared to the comparable, etc.

  • The documentation should also include the procedure adopted, by which the above adjustments were made.

  • To summarise, the documentation for selecting the MAM should highlight the through appraisal done of all facts and circumstances pertaining to the international transaction and the method selected.

    Report Filling

  • At the end, Transfer pricing study report is prepared with reference to section 92D read together with Rule 10D (1) of the Income Tax Rules, 1962]

Audit Report under Form 3CEB by which the above adjustments were made

  • All assessees entering into international transactions required to furnish a report from an accountant on or before the specified date in Form 3 CEB.

  • Form 3CEB prescribed (Rule 10E)

    • Declaration by the accountant about examination of accounts and records of assessee to review international transactions

    • Opinion as to whether proper information and documents prescribed by Rule 10D are maintained by the assessee

    • Opinion whether particulars given in Annexure to Form 3CEB are true and correct

  • Guidance note issued by the ICAI for its members gives more significance to Management Representations

Powers of Assessing Officers by which the above adjustments were made

  • May require any person who has entered into an international transaction to furnish any information or documents in respect thereof.

  • May make adjustments to the transfer price in following circumstances:

    • Price charged is not in accordance with the methods.

    • Prescribed documentation not maintained in accordance with the provisions of the Act / Rules.

    • Unreliable data used in computing ALP.

    • Assessee failed to furnish required information or documents within the specified time.

  • May also make a reference to the Transfer Pricing Officer if the AO feels necessary & expedient so to do – but with prior approval of Commissioner

Impact of Adjustments by AO by which the above adjustments were made

  • Before making any adjustments ‘principle of natural justice’ to be followed i.e. assessee shall be given an opportunity of being heard.

  • Impact of Adjustments:

    • Recomputation of the total income of the assessee having regard to ALP determined by AO.

    • Denial of deduction under s. 10A / 10B or Chapter VI-A, in respect of such enhanced income

    • Other AEs income not to be recomputed on the basis of recomputation of income of one enterprise

    • Levy of penalty ranging from 100% to 300% of tax on the enhanced income u/s 271(1)(c).

Section by which the above adjustments were made



271 AA

Failure to keep and maintain transfer pricing documentation and information.

Sum equal to 2% of the value of international transaction.

271 BA

Failure to furnish Transfer Pricing Audit Report from an Accountant

One lac rupees

271 G

Failure in furnishing transfer pricing documents and information to tax authorities upon request.

Sum equal to 2% of the value of international transaction.

Penalties under TP Regulations

Ca hiren d shah ahmedabad email hirenindia@hotmail com

CA Hiren D Shah by which the above adjustments were made


Email : [email protected]

Advance Pricing Arrangement - APA

Definition of apa
Definition of APA by which the above adjustments were made

  • APA – An agreement between the Board and the Tax payer

  • Determines, in advance, ALP or Specifies the manner of determination of ALP or both

  • ALP could be one of methods prescribed under TPR or any other method with necessary adjustments or variations

  • ALP cannot be deviate for the period specified in the APA

  • Maximum validity is 5 consecutive years

Types of apa
Types of APA by which the above adjustments were made

  • Unilateral APA

    • Entered into between Board and Tax Payer (Involve One Country)

  • Bilateral APA

    • Entered into between Board and Tax Payer, subsequent to and based on the agreement between CA of two nation (Involve Two Country)

  • Multilateral APA

    • Entered into between Board and Tax Payer, subsequent to and based on the agreement between CA of more than two nation (Involve Two Countries)

Stakeholders by which the above adjustments were made

  • Applicant ( Tax Payer)

  • Board ( CBDT)

  • Central Government ( Approval)

  • Competent Authority ( Joint Secretary (FT&TR-I), Ministry of Finance

  • APA Team ( Board including experts in economics, statistic, law or any other field as may be nominated)

  • For unilateral APAs, the DGIT

  • For Bilateral/multilateral APAs, the Competent Authority of India

Apa process
APA Process by which the above adjustments were made

  • Phase – I – Pre-filing application/constitution

  • Phase – II – APA Application

  • Phase – III –Evaluation and Negotiation stage

  • Phase – IV- Finalisation of APA

  • Phase – V – Post of APA requirements

Phase i pre filing consultation
Phase – I Pre-filing Consultation by which the above adjustments were made

Pre-filing Consultation

Determining the scope of an agreement, issues,



  • In Form No 3CEC

  • Particulars of applicant including details of Authorised representative, Global structure, Particulars of AE, Prior 3 years’ overview of an operation, Functional and Risk Profile, Covered International transactions, Value of covered under TP audits for prior 3 years, type and duration of proposed APA, Proposed TP methodology, Identification of third party comparable, Details of ALP, PLI, Critical Assumptions, History of TP Audit/ Assessment and Appeals, Agreement with AE, Reasons for covering international transactions in APA

Pre filing consultation conferences
Pre-filing consultation/ conferences by which the above adjustments were made

  • Objective of Pre-filing consultation :

    • Determine the scope of the agreement

    • Identify of transfer pricing issues

    • Determine the suitability of international transaction for the agreement

    • Discuss broad terms of the agreement

    • Pre-consultation is mandatory and shall not bind the Board or the taxpayer to enter into an agreement and shall not be deemed to mean that the taxpayer has applied for entering into an agreement

Phase ii apa application
Phase – II APA Application by which the above adjustments were made

  • After pre-filing, tax payer desirous for applying an APA shall make an application for an APA in Form 3CED to –

    • DGIT - Unilateral APA

    • Competent Authority – Bilateral / multilateral APA

  • Time Limit for filing APA

    • Continuing Nature International Transactions

      • First Day of the previous year

    • New International Transactions

      • Before Undertaking such International Transactions

Particulars of an apa application form 3ced
Particulars of an APA application [Form 3CED] by which the above adjustments were made

  • General

  • Functional Analysis

  • Industry and market Analysis

  • Transfer Pricing background

  • TRM Analysis

  • If the application is furnished for unilateral APA with Treaty Country, an explanation for not entering into bilateral/multilateral APA to be provided

  • In case of bilateral/multilateral APAs, evidence for furnishing APA application with the other CA should be enclosed

Compliance during apa process
Compliance during APA Process by which the above adjustments were made

  • During the period when APA is being negotiated, the tax payer would require to undertake the annual transfer pricing compliances and Income tax return filing in the regular manner.

  • Once an agreement is reached, the tax payer would be required to file modified return ( for the covered years those have elapsed) within 3 months from the end of the month in which the agreement is entered into.

  • In case the assessment of the year under APA is completed or pending, the same has to be completed in consonance with the APA.

Phase iii evaluation and negotiation stage
Phase – III – Evaluation and Negotiation stage by which the above adjustments were made

  • Communicate deficiency within 30 days

  • Remove defect within 15 days from the date of communication

  • If defect not removed, an opportunity to be given by DGIT/CA

  • If not attended, application shall not be allowed and fees shall be refunded

Consultation discussion
Consultation & Discussion by which the above adjustments were made

  • The Process of bilateral / multilateral APA shall not be initiated unless the AE(s) situated outside India has initiated process of APA with the CA in the other Country.

  • Once APA filed with CA – India, they forward the copy to DGIT which in turn will forward to APA Team

  • APA Team ( Unilateral APA), APA Team and CA ( Bilateral/multilateral APA) would conduct the main processing of an application by :

    • Holding meetings with the applicant

    • Calling for additional documents/ information/ material from the applicant

    • Visiting, applicants’ business premises; and/or

    • Making inquiries as may be deemed fit

Apa report
APA Report by which the above adjustments were made

  • APA team shall carry out the enquiry and prepare a draft report which shall be forwarded by DGIT to the Competent authority. CA shall enter into negotiation with the CA of the other Country to reach an acceptable set of terms

  • If CA of the other Country does not accept the terms, it shall be informed to the applicant.

  • Applicant cannot be the part of the CA – India and CA- Other Country

  • Applicant can meet the CA in India

Phase iv finalization of apa
Phase – IV – Finalization of APA by which the above adjustments were made

APA entered into between the Board and the applicant

Mutually agreed draft APA prepare

  • APA Would include the following points:

    • International transaction covered

    • Agreed transfer pricing methodology

    • Determination of ALP

    • Definition of relevant terms

    • Critical assumption

    • Other conditions, if any other than provided in the Act or in the Rules

    • Agreement shall not be binding on the Board or the applicant if there is any change in any of the critical assumptions or failure to meet conditions subject to which the agreement has been entered into

    • Transition period shall be governed by Chapter X [ filing APA to entering into an agreement]

Phase v post apa requirement
Phase – V – Post APA requirement by which the above adjustments were made

  • Filing Annual Compliance report to DGIT in Form no 3CEF

  • Within 30 days from the due date of report or within 90 days from the date of entering into the agreement, whichever is later

  • DGIT shall send one copy of report to CA, CIT and TPO having jurisdiction

  • Shall include:

    • Particulars of the tax payer, Type of APA entered into, Details of covered transactions, Changes in the business model, function and risk profile, variation in the agreed critical assumptions and reasons, changes in the terms and conditions

Annual compliance audit
Annual Compliance Audit by which the above adjustments were made

  • Shall be carried out by TPO who shall furnish report within 6 months to DGIT and CA from the end of month in which the annual compliance report is received

  • Regular TP audit shall not be undertaken by TPO for transaction not covered under APA

  • TPO may require applicant to substantiate :

    • Compliance with the terms of the agreement

    • Satisfaction of critical assumptions

    • Correctness of supporting data/information

    • Consistency of application of the TPM

Amendments in application
Amendments in Application by which the above adjustments were made

  • Withdrawal of APA ( Form No 3CEE)

  • Revision of APA

    • Either suomotu or on request of the applicant/DGIT/CA in India when :

    • Change in critical assumption

    • Failure to meet condition subject to which Agreement has been entered into

    • Change in law

    • Request from CA of other country

  • Cancellation of APA

    • Failure of the taxpayer to comply with the terms of the agreement

    • Failure to file the annual compliance report

    • Annual compliance report contains material errors

    • Tax payer doe not agree with the revision of the APA

  • Renewing an agreement

    • As a new application for the agreement except pre-filing

Key consideration of apa into india
Key Consideration of APA into India by which the above adjustments were made

  • BAPA/ MAPA are not achievable where –

    • There is no provision in the domestic law of the other country to enter into APAs or

    • The respective countries do not have tax DTAA with each other [ e.g. India – HongKong]

  • Critical Assumptions are not elaborated in the APA rules. Critical assumptions should be articulated well and should be set in a broad manner so as to ensure that every small change in the facts should not lead to cancellation or revision of an APA

Few examples of critical assumptions
Few Examples of Critical Assumptions.. by which the above adjustments were made

  • Operational

  • Legal

  • Tax

  • Financial

  • Accounting

  • Economic

Key consideration of apa in india
Key Consideration of APA in India by which the above adjustments were made

  • Powers of the Board

  • Competence/ capability of the APA team

  • Timelines

  • Compliance Audit

Apa v tp audit
APA v. TP Audit by which the above adjustments were made

  • Various factors need to be considered while choosing between seeking APA and waiting for/anticipating a TP Audit

    • Cost

    • Certainty

    • Confidentiality

    • Capability

    • Principled and Co-operative attitude of the tax administration

    • Co-operation/ Information flow from AEs

Advantages of apas
Advantages of APAs by which the above adjustments were made

  • Certainty

  • Reduced Documentation burden

  • Time and Cost saving

  • Preferred by Tax Authorities

  • Reduces risk of double taxation

  • Mandatory pre-filing

  • Unilateral can be pursued in case bilateral fails

  • Conjunctive relationship with the tax authorities

  • APA can be guide to the past litigation

  • APA process is able to resolve transfer pricing issues early on in a more efficient, consistent and comprehensive manner than the Standard Audits, appeals and litigation processing which are more of adjudication processes.

Disadvantage of apas
Disadvantage of APAs by which the above adjustments were made

  • High – upfront Cost

  • Time frame

  • Pre-filing forms is too much technical

  • Onerous details required in pre-filing / APA Application

  • No Rollback provisions [APA in resolving open years]

  • Annual compliance Audit

  • Impact of the past litigation

  • Inadequate infrastructure

  • Wide Powers of the Board

Way forward
Way Forward…… by which the above adjustments were made

  • Introduction is a positive move towards bringing in a progressive dispute resolution mechanism

  • Its success depends upon

    • How efficiently and expeditiously it is executed

    • Its practical effectiveness

    • Confidentiality of the tax payers

    • Flexible approach of tax authorities

    • Technical competence of APA team

    • Competence and capabilities of the consultants/representatives

    • Process should be fair and transparent

    • Pre-filing application on anonymous basis is likely to give adequate comfort to the tax payers

Safe harbour rules

Safe by which the above adjustments were madeHarbour Rules

Background by which the above adjustments were made

  • Since the Inception of transfer pricing, the number of cases identified for audit and the transfer pricing adjustments locked up in disputes have increased

  • In order to reduce the number of transfer pricing audits and prolonged disputes, new Section 92CB has been inserted to provide that the determination of ALP u/s 92C or 92CA shall be subject to safe harbour rules.

  • Clause 124(22) of DTC “ Safe Harbour” in relation to computation of arms’ length price means circumstances in which the income tax authorities shall accept the transfer price declared by the assessee.

Safe harbor regime in india
Safe Harbor Regime in India by which the above adjustments were made

  • Finance [ No 2 ] Act, 2009 introduced new section 92CB

    • The determination of arm’s length price under Section 92C or section 92CA shall be subject to safe harbor rules

    • The Board may, for the purposes of sub-section (1), make rules for safe harbor.

  • Intention is to reduce tax disputes

Introduction to safe harbor rules
Introduction to Safe Harbor rules by which the above adjustments were made

  • Considering the increase in transfer pricing litigation, Central Board of Direct Taxes (CBDT) is to formulate safe harbour rules.

  • Aim to reduce the impact of judgemental errors in transfer pricing.

  • Safe harbour has been defined to mean ‘circumstances’ in which the revenue authorities shall accept transfer pricing declared by the tax payer.

    Internationally safe harbour has taken various forms

  • Exclusion of certain classes of transactions based on quantitative thresholds.

  • Stipulations of margins/pricing norms for specified industries/functions (USA, Singapore)

  • Specifying thresholds whereby the onerous documentation requirement is reduced (Brazil)

What is safe harbor
What is Safe Harbor? by which the above adjustments were made

  • Evolution of Safe harbour provisions

    • OECD Committed on Fiscal affairs debated the concept in 1993.

    • Task force recommended safe harbor for small businesses.

    • US Regulations in 1960’s brought in 5 methods + unspecified methods

  • Definition of a Safe harbor

    A Safe harbour (referred to as a comfort mechanism in the OECD Guidelines) has been defined to mean ‘circumstances’ in which, the Indian Revenue Authorities shall accept the transfer pricing declared by the tax payer.

  • Administrative requirements may vary from

    • Total relief to targeted tax payers from Transfer Pricing regulations; to

    • Obligation to comply with various procedural rules as a condition for qualifying for safe harbour.

Factors supporting use of safe harbor
Factors Supporting use of Safe Harbor by which the above adjustments were made

  • Compliance Relief

    • Collection and Analysis of Data

    • Application of simplified method (instead of Best Method)

    • Relief from search of comparables

  • Certainty

    • Prices will be accepted by Tax Authorities

    • Qualified Taxpayers assured that they will not be subject to Audit

  • Administrative Simplicity

    • Once eligibility is established, minimal examination of controlled transactions.

    • Tax administrator can allocate more resources to examination of transactions and taxpayers.

Problems presented by use of safe harbors
Problems presented by use of Safe Harbors by which the above adjustments were made

  • Safe harbor may not be consistent with the Arm’s Length principle as it will be broad based.

  • As per Clause 124(22) “ Safe Harbour” in relation to computation of ALP means, circumstances in which the income – tax authorities shall accept the TP declared by the assessee. It gives a rise to Tax planning opportunities

  • Risk of Double Taxation in other jurisdiction

  • Mutual Agreement Procedure (MAP) Difficulties

Thank you
THANK YOU by which the above adjustments were made