BACKGROUNDER - ICSI

2y ago
32 Views
2 Downloads
414.28 KB
85 Pages
Last View : 20d ago
Last Download : 2m ago
Upload by : Dani Mulvey
Transcription

GUIDETOTRANSFER PRICINGBACKGROUNDER(i)

First Edition : November 2016Price : Rs. 120/-- (Excluding postage) THE INSTITUTE OF COMPANY SECRETARIES OF INDIAAll rights reserved. No part of this book may be translated or copied in anyform or by any means without the prior written permission of The Institute ofCompany Secretaries of India.Published by :THE INSTITUTE OF COMPANY SECRETARIES OF INDIAICSI House, 22, Institutional Area, Lodi RoadNew Delhi - 110 003Phones : 45341005, 41504444; Fax : 24626727E-mail : info@icsi.edu ; Website : www.icsi.eduISBN : 97-89-382207849Printed at Samrat Offset Works/500/November 2016(ii)

PREFACEThe era of globalization has witnessed a significant increase in theforeign institutional investments along with the huge opening of theproduction, sale, distribution and exchange of goods and servicesbeyond borders. This has resultant to the multiplicity of internationaltransactions. The amplification in Cross Border transactions, especiallyamong the Associated Enterprises, has enforced the substantial valueof the applicability and enforcement of the provisions related to transferpricing under the Income Tax Act, 1961 and other specified statutes inIndia.It is noteworthy that owing to proportional relation with thetransactions at global market, the law relating to transfer pricing isdynamic and smooth with trending changes in the cross bordertransactions. Company Secretaries as the qualified professionals inensuring compliances to sanction the authenticity and legitimacy ofthe cross border transactions plays pivotal role in implementing theprovisions of Transfer Pricing. In short, they ensure the practicalimplications of the law and the rules relating to transfer pricing.With a view to guide the businesses for cross border transactionsand to act and operate as Principal Officer for governance andcompliance, it is imperative for professionals to advance expertise onvarious dimensions of Transfer Pricing.With the substantial amendments in Transfer Pricing Regulation overa period of time, this “Guide to Transfer Pricing” will help theprofessionals to augment their skills and expertise in Transfer PricingRegulation. The Guide deals with concept of Transfer Pricing, Methodsof Computing Arm’s Length Price, Applicability of Transfer PricingProvision to Domestic Transaction, Documentation, Consequences ofnon compliances, Advance Pricing Agreement ‘APA’, Safe Harbour Rulesetc.I appreciate the efforts of Mr. Govind Krishna Agarwal, AssistantDirector in bringing out this publication under the guidance of Ms. SoniaBaijal, Director (Professional Development, Perspective Planning &(iii)

Studies). I am also thankful to Mr.Vishwanath Kane, Deloitte Haskins &Sells for his value addition made to the publication.I am sure this Guide will be of immense practical value toprofessionals and corporate executives.I would personally be grateful to users and readers for offering theirsuggestions for further improvement of this Guide.CS Mamta BinaniPresidentThe Institute of Company Secretaries of IndiaPlace : New DelhiDate : November 04, 2016(iv)

CONTEN TSIntroduction1Need of Transfer Pricing Regulations2Transfer Pricing Regulations in India2Applicability of the Transfer Pricing Regulation3What is Arm’s Length Price?3Conclusion5Transfer Pricing ConceptObjective of Transfer Pricing Provisions6Associated Enterprises6Deemed Associated Enterprises7Meaning of International Transaction9Deemed International Transaction10Specified Domestic Transaction13Transfer Pricing - MethodsIntroduction15Comparable Uncontrollable Method (CUP Method)16Applicability of CUP Method18Resale Price Method18Cost Plus Method20Profit Split Method22Transaction Net Margin Method (TNMM Method)26Applicability of TNMM Method28Comparability as per Income Tax Act28Multiple Year Data and Range Concept29(v)

Application of Range Concept31Selection of Transfer Pricing Methods33Reference to Transfer Pricing officer35Who is Transfer Pricing Officer ?36Determination of Arm’s Length price by Transfer37Pricing OfficerRectification of Arm’s Length Price order by Transfer37Pricing OfficerPowers of Transfer pricing officer37Transfer Pricing – DocumentationBurden of Proof43Submission of documents with the Tax Authorities43Non Applicability of Documentation Requirement44Retention period of documents kept under Rule 10D44Country by Country Reporting (CbCR)45Transfer Pricing – Penalty for ContraventionPenalty for concealment of income or forfurnishing inaccurate particular of Income[Section 271(1)(C)]48Penalty for failure to furnish information ordocument [Section 271G]49Penalty for failure to keep and maintain recordsand documents in respect of International Transactionor specified domestic transactions [Section 271AA]49Penalty for failure to furnish report undersection 92 [Section 271BA]49Penalty for failure to answer questions, sign statements,furnish information, return statements etc.[Section 272A]50(vi)

Transfer Pricing – Applicability to Domestic TransactionsMisuse of tax incentives by Corporate51Examples on misuse of tax incentive by corporate51Facts and Ruling of Supreme Court in CIT vs. GlaxoSmith Kline Asia (P) Ltd.52Specified Domestic Transaction54Advance Pricing Agreement54Determination of Arm’s Length Price under AdvancePricing Agreement54Validity of Advance Pricing Agreement55Bindingness of Advance Pricing Agreement55Procedure and scheme of Advance Pricing Agreement 56Filling of Modified Return for any Assessment yearsrelevant to previous year to which APA applies56Roll back provision in Advance Pricing Agreement‘APA’58Power of Board to make Safe Harbour Rules[Section 92CB]59Filing of form 3CEFA/3CEFB59Abbreviations74Glossary75(vii)

IntroductionThe globalization of the Indian economy has resulted in considerableincrease in foreign institutional investments, a huge expansion in theproduction and service base and also a multiplicity of internationaltransactions across the globe between related parties. In cases, whereinthe transactions are entered into between independent enterprises, theprice therefore is determined by market forces. However, when atransaction is entered into between the associated enterprises, thecommercial and financial aspects of the transactions may not beinfluenced by external market forces but may be determined based oninternal factors. In such cases, the transfer price agreed between theassociated enterprises does not reflect arm’s length price and thereforethe income arising from such transactions and the consequent taxliabilities of the associated enterprises could be distorted.The existence of different tax rates and rules in different countriesoffers a potential incentive to multinational enterprises to manipulatetheir transfer prices to recognise lower profit in countries with highertax rates and vice versa. This can reduce the aggregate tax payable bythe multinational groups / companies and increase the after tax returnsavailable for distribution to shareholders.Suppose a company X purchases goods for 100 rupees and sells itto its associated company Y in another country for 200 rupees, who inturn sells in the open market for 400 rupees. Had X sold it direct, itwould have made a profit of 300 rupees. But by routing it through Y, itrestricted it to 100 rupees, permitting Y to appropriate the balance.The transaction between X and Y is arranged and not governed by marketforces. The profit of 200 rupees is, thereby, shifted to the country of Y.The goods is transferred on a price (transfer price) which is arbitrary i.e.Rs. 200, but not on the market price i.e. 400.Transfer pricing is the setting of the price for goods and services sold1

2Guide to Transfer Pricingbetween controlled (or related) entities within an enterprise. Forexample, if a subsidiary company sells goods to a parent company, thecost of those goods paid by the parent to the subsidiary is the transferprice.Need for Transfer Pricing RegulationIn an economy where multinational enterprises/big diversifiedbusiness groups play a prominent role in the development of the country,the governments need to ensure that the taxable profits are not artificiallyshifted out of their jurisdiction and that the tax base reported in theircountry reflects the economic activity undertaken therein. To ensurethe fair valuation of economic activity (Production of goods/services,other transactions) in their jurisdiction, about 70 countries such as US,China, Brazil, Indonesia, Germany, England have issued transfer pricingguidelines and rules.Transfer Pricing Regulation in IndiaIncreasing participation of multi-national groups in economicactivities in India has given rise to new and complex issues emergingfrom transactions entered into between two or more enterprisesbelonging to the same group. Hence, there was a need to introduce auniform and internationally accepted mechanism of determiningreasonable, fair and equitable profits and taxes in India. Accordingly,the Finance Act, 2001 ushered in India the law of transfer pricing byvirtue of introduction of Sections 92 to 92F of the Income Tax Act,1961 (the Act) which guides the computation of transfer price andsuggests detailed documentation procedures. Year 2012 brought a bigchange in transfer pricing regulations in India whereby governmentextended the scope of transfer pricing regulation to specified domestictransactions which are enumerated in Section 92BA of the Income TaxAct, 1961. This would help in curbing the practice of transferring profitfrom a taxable domestic zone to tax free domestic zone or shifting theprofits from profit making entity to loss making entity within the groupin order to defer the tax payments.As stated earlier, the fundamental of transfer pricing regulation isthat transfer price should represent the arm’s length price of goodstransferred and services rendered / provided from one unit to anotherunit within a group.

Guide to Transfer Pricing3Applicability of the Transfer Pricing RegulationThe transfer pricing regulation would apply based upon certaincriteria. Firstly, there must be an international transaction. Secondly,such international transaction must be between two or more associatedenterprises either or both of whom are non-residents. Further, a specifieddomestic transaction, not being an international transaction has to fulfillthe conditions outlined in section 92BA of the Act in order to attractthe transfer pricing provisions.The international transactions should involve incurring of any costor expenses or interest or it should involve in purchase, sale or lease oftangible or intangible property or in the lending or borrowing of moneyor any other transaction having a bearing on the profits and income,losses or assets of such enterprises.Further, as per section 92B(2) even if a transaction entered intobetween an enterprise with a person other than an associated enterprise,it shall be deemed to be a transaction between associated enterprises ifthere exists a prior agreement in relation to the relevant transactionbetween such other person and the associated enterprise or the termsof the relevant transaction are determined in substance between suchother person and the associated enterprise. Consequently the provisionsof this chapter shall apply even in such cases.Further also, as per section 92(3), these transfer pricing regulationare not intended to be applied in cases where the effect of applicationof these provisions reduces income chargeable to tax in India or increasesthe loss as applicable.What is Arm’s Length Price?In general, an arm’s length price is the price at which independententerprises deal with each other, where the conditions of theircommercial and financial relations ordinarily are determined by marketforces. In other words, the transfer price should represent the price whichcould be charged from an independent party in uncontrolled conditions.Determining the arm’s length price is very important for an entity. Incase the transfer price is not at arm’s length, it may have followingconsequences:A. Incorrect evaluation of the performance of an entity.

4Guide to Transfer PricingB. Incorrect pricing of the final product (In case where the goods/services are used in the manufacturing of final product)C. Non-compliance with applicable laws / regulations andconsequent attraction of penalty provisions.The same may be explained with the following examplesCompany X and Company Y is working under the common umbrellaof Mohan & Company. Company X manufactures a product which israw material for Company Y.CaseCriteria XEffect on Company XEffect on Company Y1Company Xcharges pricemore than theArm’s lengthprice fromCompany YThe revenue ofcompany X willincrease.The total cost of theproduct in case ofCompany Y willincrease. This willresult into incorrectpricing of its productwhich may furtherlead to the productbecoming incompetitive.2Company Xcharges priceless than theArm’s lengthprice fromCompany YThe revenue ofcompany X willdecrease. The parentcompany may closethe company Xtreating it as lossmaking entity.The total cost ofcompany Ywilldecrease. Therefore,the company Y maycharge lower pricewhich may lead toloss at an entity level.3Company Xcharges atArm’s lengthprice fromCompany YThe revenue ofCompany X will berepresenting true andfair view of itsoperation.Company Y will bepaying the price asequivalent to marketprice of Company’s Xproduct and its costwill be correct. Onthe basis of the costarrivedafterconsidering the arm’s

Guide to Transfer PricingCaseCriteria X5Effect on Company XEffect on Company Ylength price ofcompany’sXproduct, company Ywill be able to takecorrectpricingdecision.ConclusionTransfer pricing has a direct bearing on the company’s profitability/revenue. Importance of transfer pricing may be understood by the factthat in financial year 2014-2015, the tax authorities in India have madean adjustment of exceeding Rs. 46,000 crores in the taxable income ofcompanies on account of alleged non-adherence to the arm’s lengthprice in case of covered transactions. Since Company Secretary is theprincipal officer of the company, he / she must guide the transfer pricingpractices in his / her company. He / she should ensure that the transferprice declared for the product/services or other transactions of thecompany has been calculated as per the Transfer Pricing regulation andthe transfer price represent the arm’s length price.***

6Guide to Transfer PricingTransfer Pricing - ConceptsThe Finance Act, 2001 introduced the transfer pricing concept inIndia vide insertion of Section 92 to Section 92F of the Act, which canalso be called the Transfer Pricing Code of India. Subsequently, theFinance Act, 2012, has made many changes in Transfer PricingRegulation to broaden the tax base and accordingly expanded the scopeof the transfer pricing provisions to cover certain “specified domestictransactions” (not being an international transaction) entered into withinor between two domestic entities within India.Objective of Transfer Pricing Regulation1. To regulate the International transaction or SDT between twoassociated enterprises.2. To ensure that transaction entered between two associatedenterprises or specified domestic transaction is carried out at anarm’s length price.3. Transfer Pricing Codeis enacted to curb the arrangement whichis mainly entered into between the entities to shift the profit fromhigher tax jurisdiction to lower tax jurisdiction. The shifting ofprofit is often done with an overall objective of lowering the taxbase of the group entities.4. To prevent the misuse of incentive given by Indian Governmentfor developing some specific areas/sectors.“The concept of associated enterprises and International transactionare very important for applying the transfer pricing regulation. Section92A and Section 92B deal with these two important concepts of chapterX of Income Tax Act, 1961.”Associated Enterprises (AE)Associated Enterprises has been defined in Section 92A of the Act.6

Guide to Transfer Pricing7It prescribes that “associated enterprise”, in relation to another enterprise,means an enterprise—(a) Which participates, directly or indirectly, or through one or moreintermediaries, in the management or control or capital of theother enterprise; or(b) In respect of which one or more persons who participate, directlyor indirectly, or through one or more intermediaries, in itsmanagement or control or capital, are the same persons whoparticipate, directly or indirectly, or through one or moreintermediaries, in the management or control or capital of theother enterprise.The basic criterion to determine an AE is the participation inmanagement, control or capital (ownership) of one enterprise byanother enterprise whereby the participation may be direct or indirector through one or more intermediaries, control may be direct or indirect.Deemed Associated EnterprisesThe Finance Act, 2002 has amended sub-section (2) of section 92Ato the effect that for the purposes of sub-section (1), two enterprisesshall be deemed to be associated enterprises if, at any time during theprevious year any of the conditions mentioned in clauses (a) to (m) aresatisfied. For the purposes of these clauses, two enterprises would bedeemed to be an associated enterprise if the conditions stipulated thereinare fulfilled at any time during the previous year. Further, the words‘directly’ or ‘indirectly’ have not been used in clauses (c) to (m), andtherefore, direct relationship between two enterprises is relevant forthe purposes of clauses (c) to (m) in order to determine whether theyare associated enterprises.As per Section 92A(2), two enterprises shall be deemed to beassociated enterprises if, at any time during the previous year,—(a) one enterprise holds, directly or indirectly, shares carrying notless than twenty-six per cent of the voting power in the otherenterprise; or(b) any person or enterprise holds, directly or indirectly, sharescarrying not less than twenty-six per cent of the voting power ineach of such enterprises; or

8Guide to Transfer Pricing(c) a loan advanced by one enterprise to the other enterpriseconstitutes not less than fifty-one per cent of the book value ofthe total assets of the other enterprise; or(d) one enterprise guarantees not less than ten per cent of the totalborrowings of the other enterprise; or(e) more than half of the board of directors or members of thegoverning board, or one or more executive directors or executivemembers of the governing board of one enterprise, are appointedby the other enterprise; or(f) more than half of the directors or members of the governingboard, or one or more of the executive directors or members ofthe governing board, of each of the two enterprises are appointedby the same person or persons; or(g) the manufacture or processing of goods or articles or businesscarried out by one enterprise is wholly dependent on the use ofknow-how, patents, copyrights, trade-marks, licences, franchisesor any other business or commercial rights of similar nature, orany data, documentation, drawing or specification relating toany patent, invention, model, design, secret formula or process,of which the other enterprise is the owner or in respect of whichthe other enterprise has exclusive rights; or(h) ninety per cent or more of the raw materials and consumablesrequired for the manufacture or processing of goods or articlescarried out by one enterprise, are supplied by the other enterprise,or by persons specified by the other enterprise, and the pricesand other conditions relating to the supply are influenced bysuch other enterprise; or(i) the goods or articles manufactured or processed by oneenterprise, are sold to the other enterprise or to persons specifiedby the other enterprise, and the prices and other conditionsrelating thereto are influenced by such other enterprise; or(j) where one enterprise is controlled by an individual, the otherenterpri

The Guide deals with concept of Transfer Pricing, Methods of Computing Arm’s Length Price, Applicability of Transfer Pricing . Objective of Transfer Pricing Provisions 6 Associated Enterprises 6 . of this chapter shall apply even in such cases. Further also, as per section 92(3), these transfer pricing regulation .

Related Documents:

GUIDELINE ANSWERS EXECUTIVE PROGRAMME (New Syllabus)JUNE 2019 MODULE 1 ICSI House, 22, Institutional Area, Lodi Road, New Delhi 110 003 Phones: 41504444, 45341000; Fax: 011-24626727 E-mail: info@icsi.edu; Website: www.icsi.edu

CAREER IN COMPANY SECRETARYSHIP A HANDBOOK (Corrected upto 26th July, 2013) ICSI House, 22, Institutional Area, Lodi Road, New Delhi 110 003 tel 011-4534 1000, 4150 4444 fax 91-11-2462 6727 email info@icsi.edu website www.icsi.edu

Nitin Grover, Chairperson, Gurugram Chapter of NIRC-ICSI & CS P K Mittal, Past Council Member, ICSI. Screen View of Webinar by Gorakhpur Chapter: CS Ashish Garg, President, ICSI, CS Ranjeet Pandey, Immediate Past President and Co

Working together is success Henry Ford Dear Professional Colleagues, At the outset, let me extend a warm and cordial welcome to ICSI-WIRC, your own home ground of the profession. Our Profession has seen sweeping changes in the year 2016 viz, emergence of GST, NCLT, Bankruptcy code and many more. The Company

Chronic Obstructive Pulmonary Disease (COPD) ICSI has endorsed with qualifications the Veteran's Affairs/Department of Defense (VA/DoD) Clinical Practice Guideline for the Management of Chronic Obstructive Pulmonary Disease. Using the ICSI endorsement process, this document has been reviewed by the ICSI COPD work group: Anderson B,

Backgrounder: China’s 12th Five-Year Plan 3 for the first time, not just energy efficiency and also for the 12th Five-Year Plan we‘re looking at the consumption side management and not just production.‖14 Among the 12th FYP‘s environmental goals, there is a restricted target for non-fossil fuels to reach 11.4 percent of total

George Gund Foundation for their support of this work. A previous edition of this paper was compiled by Harriet Dichter, BUILD Consultant; Mina Hong, Start Early; and Asia Canady, Start Early. Suggested Citation Harriet Dichter and Ashley LiBetti, Improving Child Care Compensation Backgrounder October 2021, (The BUILD

IEEP backgrounder on sustainable consumption . 2 If everyone in the world wanted to consume in the same way as Europeans by 2050, we would need a quantity of natural resources equivalent to three Earths. 11 Sustainable consumption aims at defining how consumption could be changed in line with constraints linked with the amount of