TRANSFER PRICING 20/11/2016 Andheri (west) CPE study circle 1 - PowerPoint PPT Presentation

CHARTERED ACCOUNTANTS o Tax o Audit o Consulting ` TRANSFER PRICING 20/11/2016 Andheri (west) CPE study circle 1

CHARTERED ACCOUNTANTS CHARTERED ACCOUNTANTS ` o Tax o Audit o Consulting o Tax o Audit o Consulting ISSUES IN ROADMAP MANUFACTURING INDUSTRY & RANGE CONCEPT INTRA GROUP SERVICE (IGS) ISSUE & INTERNATIONAL ` VALUATION OF TRANSFER PRICING SHARES INDIA TRANFER PRICING LANDSCAPE – STORY SO FAR (RECAP) 17/09/2016 20/11/2016 Andheri (west) CPE study circle Borivali Kandivali East Study Circle 2 2

CHARTERED ACCOUNTANTS o Tax o Audit o Consulting ` 20/11/2016 Andheri (west) CPE study circle 3

CHARTERED ACCOUNTANTS o Tax o Audit o Consulting INDIA TRANSFER PRICING LANDSCAPE – STORY SO FAR ` 20/11/2016 Andheri (west) CPE study circle 4

CHARTERED ACCOUNTANTS o Tax o Audit o Consulting RECAP • Introduction of Dispute Resolution Panels – effective in limited sense, not achieved intended objectives • Inordinately delayed resolution at ITAT level – Positive is that there has ` been a significant disposal of cases during FY 2015-16 • HC rulings on significant issues are in favour of taxpayers; Tribunal Rulings also, substantially, in favour of taxpayers ; also remanded back in certain cases • Issuance of clarificatory circulars on critical TP issues (e.g. Circular on R & D centers) • Introduction of Safe Harbour Rules • Introduction of Range concept and allowing use of multiple years data • Dedicated DRP charge for commissioners • APA (along with rollback provisions) 20/11/2016 Andheri (west) CPE study circle 5

CHARTERED ACCOUNTANTS o Tax o Audit o Consulting ` INTERNATIONAL TRANSFER PRICING 20/11/2016 Andheri (west) CPE study circle 6

CHARTERED ACCOUNTANTS o Tax o Audit o Consulting ` DEEMED INTERNATIONAL TRANSACTION – CASE STUDIES 20/11/2016 Andheri (west) CPE study circle 7

CHARTERED ACCOUNTANTS o Tax o Audit o Consulting DEFINITION – INTERNATIONAL TRANSACTION • The term international is exhaustively defined and covers all transaction between two or more AEs, either or both whom are non-residents . ` • In addition, a transaction entered into by an enterprise with an independent third party can also be deemed to be an international transaction entered into between two AEs if either of the following condition are satisfied : a)There is a prior agreement in relation to the relevant transaction between such independent third party and the AE of that enterprises; or b) The term of the relevant transaction are determined in substance between such independent third party and the AE of that enterprise 20/11/2016 Andheri (west) CPE study circle 8

CHARTERED ACCOUNTANTS o Tax o Audit o Consulting CASE STUDY – 1 (Prior agreement is available) MNC Global Supply 1 ABC UK 1 USA(AE) Agreement: MNC USA and non-resident ` unrelated party (ABC UK) Transaction between 2 MNC India and non- Outside India resident unrelated party 2 (ABC UK) India MNC India WOS of MNC USA 20/11/2016 Andheri (west) CPE study circle 9

CHARTERED ACCOUNTANTS o Tax o Audit o Consulting CASE STUDY – 1.1 (No prior agreement is available but terms of the transaction is determined in substance) MNC Terms is determined in 1 ABC UK 1 USA(AE) substance between MNC USA and non-resident ` unrelated party (ABC UK) Transaction between 2 MNC India and non- Outside India resident unrelated party 2 (ABC UK) India MNC India WOS of MNC USA 20/11/2016 Andheri (west) CPE study circle 10

CHARTERED ACCOUNTANTS o Tax o Audit o Consulting CASE STUDY - 2 ABC UK(AE) ` 1 Purchase of raw material from ABC UK 1 Sale of finished goods 2 (manufactured out of Outside India raw material supplied by ABC UK) India Price is determined by ABC UK Provided interest – free 3 loan for manufacturing ABC India XYZ India 2 finished goods WOS of ABC UK 3 20/11/2016 Andheri (west) CPE study circle 11

CHARTERED ACCOUNTANTS o Tax o Audit o Consulting CASE STUDY - 3 ABC USA (AE PQR USA(AE) 1 1 PQR USA acquired of XYZ India) business of ABC USA ` Outside India India As a global sale 2 arrangement, PQR PQR India 2 ABC India India acquired assets WOS of PQR USA of ABC India 20/11/2016 Andheri (west) CPE study circle 12

CHARTERED ACCOUNTANTS o Tax o Audit o Consulting CASE STUDY - 4 PQR India imports raw PQR Germany XYZ Germany (AE 1 materials from its AE i.e. of XYZ India) (AE) PQR Germany ` Outside India 1 India Price is determined by PQR USA PQR India sells auto 2 components to XYZ India at a price PQR India XYZ India WOS of predetermined 2 WOS of PQR USA Germany between PQR Germany and XYZ Germany 20/11/2016 Andheri (west) CPE study circle 13

CHARTERED ACCOUNTANTS o Tax o Audit o Consulting CASE STUDY - 5 ABC UK ( Holding Company) ABC USA 2 ABC India ` 1 3 Customer in India 1 2 3 ABC India ABC USA entered provided services into an onshore and ABC USA assigned to an Indian offshore service the contract to ABC customer under agreement with an India assignment of Indian customer contract 20/11/2016 Andheri (west) CPE study circle 14

CHARTERED ACCOUNTANTS o Tax o Audit o Consulting ` INTRA GROUP SERVICE 20/11/2016 Andheri (west) CPE study circle 15

CHARTERED ACCOUNTANTS o Tax o Audit o Consulting INTRODUCTION  MNE group may obtain services directly or indirectly from independent companies, or from companies of same MNE group (i.e. intra-group)  ` Benefits of intra group services o Economies of scale, synergy, efficient use of resources & high degree of specialization o Developing own expertise, coordination & control and avoiding duplication of work  I�tra Group “ervi�e ��IG“�� includes o Services by One member to other member or members of MNE o Services provided by group of members for the benefit of overall group o Service by Parent company to member & group of members o Service from third party on behalf of member or members 20/11/2016 Andheri (west) CPE study circle 16

CHARTERED ACCOUNTANTS o Tax o Audit o Consulting CHALLENGES Evidencing that Evidencing the Evidencing that the recipient commercial/econ the recipient has required these ` omic benefit actually received services derived by the the services recipient Chargeable Need Test Evidence Test Benefit Test services No No No Non Chargeable services 20/11/2016 Andheri (west) CPE study circle 17

CHARTERED ACCOUNTANTS o Tax o Audit o Consulting INTRAGROUP SERVICES ` IGS Chargeable Non chargeable service service LVAS HVAS Shareholder Duplication Incidental TP Simplified Full TP 20/11/2016 Andheri (west) CPE study circle 18

CHARTERED ACCOUNTANTS o Tax o Audit o Consulting Chargeability and ALP of IGS Chargeability & ALP of IGS ` Directly chargeable Indirectly chargeable ALP TNMM CUP CPM 20/11/2016 Andheri (west) CPE study circle 19

CHARTERED ACCOUNTANTS o Tax o Audit o Consulting Illustrations • Whether guarantee given by group member increasing credit rating is IGS? • appointment and remuneration of parent company directors • Where the enterprise benefitted from global marketing and public relations ` campaigns done by Group Company ? • activity of parent �o�pa�y’s in preparation and filing of consolidated financial reports • Service undertaken to reduce risk of a wrong business decision (e.g. by getting a second legal opinion on a subject) • activities of parent company for raising funds used to acquire share capital in subsidiary companies; 20/11/2016 Andheri (west) CPE study circle 20

CHARTERED ACCOUNTANTS o Tax o Audit o Consulting Illustrations • Whether AE received enhance credit rating by reason of its affiliation with larger group; is IGS ? • activities of the parent company to protect its capital investment in subsidiary ` companies. • Resource sharing service • Whether supplier giving additional credit based on guarantee given by IGS? • Accounting & Auditing service • �eeti�gs of the pare�t �o�pa�y’s �oard of dire�tors a�d shareholder 20/11/2016 Andheri (west) CPE study circle 21

W CHARTERED ACCOUNTANTS o Tax o Audit o Consulting A Y ALP Chargeable services ` T Benefit Test Charging Calculation O Indepe Cost Economic Benefit ndent Direct Cup TNMM Indirect A plus party L Anticipate Received d P 20/11/2016 Andheri (west) CPE study circle 22

CHARTERED ACCOUNTANTS o Tax o Audit o Consulting IGS – A DOUBLE EDGED SWORD Service Provider  How much does the service cost? ` Service Recipient  How much is the service worth?  How much would a comparable independent enterprise be prepared to pay for that service in comparable circumstances?  How much would it cost to provide the service in-house?  How much would an external service provider charge? 20/11/2016 Andheri (west) CPE study circle 23

CHARTERED ACCOUNTANTS o Tax o Audit o Consulting Determination of ALP Minimum price acceptable for provider ` Maximum price acceptable for recipient Range of AL Prices 20/11/2016 Andheri (west) CPE study circle 24

CHARTERED ACCOUNTANTS o Tax o Audit o Consulting CHECKLIST OF DOCUMENTS ` 20/11/2016 Andheri (west) CPE study circle 25