27 October 2012 Manish Bafna Senior Manager Global Transfer Pricing Services B S R amp Co Mumbai India B S R amp Co Agenda Transfer Pricing Rules Overview Practical Experience Case Laws ID: 207000
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Slide1
Transfer Pricing Rules and TP Assessment
27 October 2012Manish BafnaSenior Manager, Global Transfer Pricing ServicesB S R & Co., Mumbai, India
B S R & Co.Slide2
Agenda
Transfer Pricing RulesOverviewPractical ExperienceCase LawsPenalties
Transfer Pricing Assessments
Advance Pricing Agreements - OverviewSlide3
Transfer Pricing - RulesSlide4
Rule 10 of the Income-tax Rules, 1962
Meaning of expressions used in computation of ALP
10A
Determination of ALP under Section 92C
10B &
10 AB
Most Appropriate Method
10C
Information / Documentation to be maintained
10D
Advance
Pricing Agreements
10E
10 F – 10 T
Accountant’s ReportSlide5
Rule 10A - Meaning of expressions used in computation of ALPSlide6
Rule 10A – Meaning of expression used in computation of ALP
“uncontrolled transaction” means a transaction between enterprises other than associated enterprises, whether resident or non-resident
Associated Enterprises
Third Party
Assessee
Controlled transaction
Uncontrolled transactionSlide7
Rule 10A – Meaning of expression used in computation of ALP
Assessee
Principal held
Tecnimont ICB P. Ltd Mumbai ITAT
All methods of ALP computation and Rule 10A entail comparison with ‘uncontrolled transactions’; Comparable may be internal or external, but its transactions must necessarily be with third parties
Bayer Material Science P. Ltd Mumbai ITAT
Mumbai ITAT had held that comparables with related party transactions can be considered, in case of inability to find uncontrolled comparable transactions
Avaya India (P) Ltd
Delhi ITAT
The Tribunal upheld the TPO’s approach of rejecting companies having related party transactions of more than 15%.
Philips Software
Bangalore ITAT
Companies with
even a single rupee of transactions
with associated enterprises cannot be considered as comparables.
Sony India
Delhi ITATThe Tribunal held that an entity can be taken as uncontrolled if its related party transaction do not exceed 10 to 15 percent of total revenue.Slide8
Rule 10A – Meaning of expression used in computation of ALP
Assessee
Principal held
Star India
Mumbai ITAT
Aggregation of different business activities for testing arm’s length price is contrary to the transfer pricing principles.
Ranbaxy
Laboratories
Delhi ITAT
Transactions should not be aggregated unless they are inextricably linked.
UCB India Pvt Ltd.
Mumbai ITAT
International transaction comprised only 50 percent of total sales, and, hence it was held that UCB India’s approach of entity level TNMM is not appropriate.
“property” includes goods, articles or things, and intangible property
“services” include financial services
“transaction” includes a number of closely linked transactions Slide9
Rule 10B – Determination of arm’s length price under section 92CSlide10
Rule 10B & 10 AB – Determination of arm’s length price under section 92C
(1) For the purposes of sub-section (2) of section 92C, the arm’s length price in relation to an international transaction or specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :— (a) comparable uncontrolled price method (Rule 10 B(1)a) (b) resale price method (Rule 10 B(1)b)
(
c
) cost plus method (Rule 10 B(1)c) (
d
) profit split method (Rule 10 B(1)d)
(
e
) transactional net margin method (Rule 10 B(1)e)
(f) any other method (Rule 10 AB)
Slide11
Rule 10B(1)(a) - CUP Method
Most Direct Method for benchmarkingRequires strict comparability in products, contractual terms, economic terms, etc.Two types of CUPs- Internal CUP & External CUPAdjustments required for differences which could materially affect the price in the open market e.g.: Difference in
Volume / quality of product
credit terms
Risks assumed
Geographic market
OECD - Priority to Internal CUP due to higher degree of comparability
Sub Co.
Parent Co
.
Transfer Price
Unrelated Co. X
Internal CUP
Outside India
Unrelated Co. YUnrelated Co. ZExternal CUP
Outside IndiaIndiaSlide12
Rule 10B(1)(b) - RPM
To be applied when a goods purchased or service obtained from an AE is resold to an unrelated enterprise.Compares resale gross margin earned by AE with resale gross margin earned by similar independent distributorsPreferred method for distributor buying purely finished goods from a group company (if no CUP available)dependant more on similarity of functions performed & risks assumed rather than product comparability
Sub Co.
Parent Co.
Transfer Price INR 75
Unrelated Co. Y
Resale Price INR 100
Outside India
India
Price paid by Sub Co. to AE is at arm’s length if the 25% resale margin earned by Sub Co. is more than margins earned by similar Indian distributors`Slide13
Involves use of gross margins
Identify the price at which goods / services purchased from AE are resold to non-AEReduce the resale price by normal gross profit margin arising from comparable uncontrolled transactionsReduce the expenses incurred in connection with purchase (e.g. custom duty)Adjust the resultant price for functional and other differences which could materially affect such gross profit margin in open market
Adjusted price is considered as ALP
Rule 10B(1)(b) -
RPM
Usually used in case where the enterprise is engaged in pure resale, with no value additionSlide14
Rule 10B(1)(c) - CPLM
Compares mark up (profits) earned on direct and indirect costs incurred with that of comparable independent companies Preferred method in case Semi finished goods sold between related partiesContract/toll manufacturing agreement
Long term buy/supply arrangements
Applied in cases of manufacture, assembly / production of tangible products or services that are sold / provided to AEs
Comparability not dependent on close physical similarity between the products.
Larger emphasis on functional comparability
Sub Co.
Parent Co.
Co. Y / AE
Outside India
India
Co. Z
Price charged by Sub co to AE is at arm’s length if the 25% mark up on cost is more than that of similar Indian assemblers
Transfer Price INR 125
Direct cost & Indirect cost of Production INR 30COGS INR 70Slide15
Involves use of gross margins
Identify direct and indirect costs of production of goods / servicesIdentify the normal gross profit mark-up arising from comparable uncontrolled transactionMark-up to be computed as per same accounting norms
Adjust the comparable mark-up for functional and other differences which could materially affect such mark-up in open market
Add the adjusted mark-up to the identified costs to arrive at the ALP
Rule 10B(1)(c) -
CPLM
Used in case where enterprise transfers goods / services to AE after adding substantial valueSlide16
Direct costs would generally include:
Purchased Material costs (including freight, custom duty, etc.);Labour costs and manufacturing overheadsIndirect costs would generally include:
Fixed
cost of production such as rent & property taxes on manufacturing facilities;
Variable
indirect production costs such as consumables, utilities etc.
Following costs generally not included
Selling
expenses, including advertising; general and administrative expenses; research & development, etc.
Rule 10B(1)(c) – CPLM…Slide17
Rule 10B(1)(d) - PSM
Evaluates allocation of combined profit/loss in controlled integrated transactionsThe contribution made by each party is based upon a functional analysis and valued, if possible, using external comparable dataTo be applied in cases involving transfer of unique intangibles or in multiple international transactions that cannot be evaluated separately
The two methods discussed by OECD Guidelines:
Contribution PSM Analysis
Residual PSM Analysis
US Co A –
Technology
intangibles
Mfg. Co B
Mkt Co C
Marketing
intangibles
Outside India
IndiaSlide18
Two alternate approaches to arrive at ALP
Relative Contribution approach: Determine combined net profit of AEsSplit the combined net profit amongst the AEs in proportion to their ‘relative contributions’
Relative
contribution made by each of AE to the earning of such combined net profit
is based on:
Functions performed, assets employed and risks assumed by each enterprise taken as basis for such evaluation
Reliable external market data which indicate how relative contribution would be evaluated by unrelated enterprises
Profit so split is taken into account to arrive at ALP
Rule 10B(1)(d) -
PSMSlide19
Residual
Profit approach:Allocate basic return to each enterprise based on markets returns achieved for comparable uncontrolled transactionsAllocate residual profit based on relative contribution as discussed above Profit so split is taken into account to arrive at ALP
Rule 10B(1)(d) – PSM…
Used in case of transfer of unique intangibles or multiple interrelated transactionsSlide20
Rule 10B(1)(e) - TNMM
Examines net operating profit from transactions as a percentage of a certain base (can use different bases i.e. costs, turnover, etc) in respect of similar partiesPreferred method in India, due to broad level of product comparability and high level of functional comparabilityInternal TNMM preferable –when entity has uncontrolled transactions also
Parent A
Unrelated Cos.
Subsidiary B
Net margin 5%
Unrelated Cos.
Net margin 3%
Outside India
IndiaSlide21
Determine the net profit margin earned by the
assessee from the international transaction, as a percentage of an appropriate base (e.g. percentage of costs incurred, sales effected, assets employed, etc.)Using the same base, compute net profit margin from a comparable uncontrolled transactionAdjust the comparable margin for differences which could materially affect such margin in open market Adjusted net profit margin is taken into account to arrive at ALP
Rule 10B(1)(e) -
TNMM
Usually regarded as an indirect method, but is most widely usedSlide22
Rule 10B(1) - Summary of Methods
Method
Product Comparability
Functional Comparability
Approach
Remarks
(a)
CUP
Very High
Subsumed in product
Prices are benchmarked
Very difficult to apply as very high degree of comparability required
(b)
RPM
High
High
GPM
(on sales)
benchmarkedDifficult to apply as high degree of comparability required
(c)CPLMHigh
HighGPM (on costs) benchmarked
Difficult to apply as high degree of comparability required
(d)
PSM
Medium
High*
Profit Margins
Complex Method, sparingly used
(e)
TNMM
Medium
More tolerant
Net Profit Margins
Most commonly used Method
* Relevant for certain parts of the PSM analysisSlide23
Rule 10 AB – Other Method
Introduced by CBDT vide notification dated 23-5-2012
Allows
use of any method taking into consideration the price actually charged or would have been charged in an uncontrolled transaction
Whether quotations can be considered as comparable ?
Use of standard rate cards, price lists, etc;
Valuation Report
Whether the other method can be considered to justify specified domestic transaction ?
Whether other method can have priority over the five method as specified in Rule 10 BSlide24
Rule 10B(2) - Comparability Factors
Comparability factors
(a) Characteristics
Depends on type: tangible,
intangible or service
(b) Functional Analysis
Conduct is best evidence of risk bearing, should be consistent with control
(d) Economic Circumstances
Geography, size of market, date and time
(c) Contractual terms
Where not written, deduce from conductSlide25
Rule 10B(2) - Comparability Factors
Practical ExperienceSources of information and reliabilityTiming issues in comparabilityDocumenting a search of comparablesIdentifying comparables having uncontrolled transactions
Comparability adjustments
Selecting or rejecting internal / external comparables
Single year vis-à-vis multiple year data
Other issues (Loss making companies, companies with extreme results, etc.)Slide26
An Uncontrolled transaction shall be comparable to international transactions if:
(i) none of the differences between the transactions being compared or between the enterprises entering into such transactions are likely to materially affect the price, or cost charged, or profit arising from, such transactions in the open market; or(ii) reasonable accurate adjustments can be made to eliminate the material effects of such differences.
Thus, the Indian regulations
expressly require
that adjustments to prices/margins should be made (where appropriate) to enhance comparability
Practical Experience – Kind of adjustments asked for:
Working capital adjustment
Volume adjustment
Idle capacity adjustment
Adjustment for difference in risk profile
Adjustment for differences in accounting policies
Adjustment for difference in depreciation rates
Rule 10B(3) - Adjustments for ComparabilitySlide27
Practical Experience:
Indian law permits adjustments only to comparables and not tested partyThe TPOs generally reject adjustments inter-alia stating that the assumptions, approximations and estimations used in computation are not tenableChallenge lies in obtaining reliable and adequate data of comparables for computation of adjustments
Lack of guidance on computation methodology
Courts favor adjustments for proper comparability
Quantification of adjustment is a huge challenge
Adjustments being accepted - Working capital adjustment, Risk adjustments
Rule 10B(3)
- Adjustments for ComparabilitySlide28
Rule 10B(3)
- Adjustments for ComparabilityAssessee
Principal held
Diamond Dye Chem. Ltd.
The ITAT held that adjustment for difference in volume should be allowed to the assessee.
Fiat India Pvt. Ltd.
The ITAT upheld the assessee’s contention and allowed claim for adjustment on account of under utilization of capacity.
E-Gain
Communication
Pvt. Limited
The ITAT upheld the assessee’s contention and allowed claim for adjustment on difference in the depreciation policy.
Mentor Graphics
(Noida) Pvt. Ltd.
The ITAT allowed
adjustments for working capital, risk profile and R&D expenses.Slide29
Rule 10B(4) - Usage of Multiple Year Data
The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into : Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an
influence on the determination of transfer prices
in relation to the transactions being compared
.
Use of multiple year data considered useful to even out fluctuations caused by:
Adverse business scenarios,
Economic situation; and
Product life cycle
Multiple year data widely used due to non-availability of relevant year financial statements of comparable companies at the time of finalizing TP documentationSlide30
Rule 10B(4) - Usage of Multiple Year Data
Practical Experience:TPOs follow first leg of rule 10B(4), reject multiple year data Adopt only data relating to the relevant financial year and undertake adjustments Courts allow usage of multiple year data if proper reasoning in terms of proviso to rule 10B(4)
available
Case
Laws
Assessee
Principal held
Aztec Software
Bangalore ITAT
(Five Member Special Bench)
Multiple-year data may be used if one can demonstrate that such data has an influence on determination of ALP
Skoda Auto India Pvt Ltd
Pune ITAT
ITAT directed the TPO to consider the impact of product cycle on use of multiple-year dataSlide31
Assessee
Principal held
Customer Services India (P) Ltd.
Delhi ITAT
Mandatory and absolute requirement of law for use of the current financial year data cannot be dispensed with even if the relevant data was not available with the appellant in the electronic data base at the time of preparation of the TP report.
The TPO is empowered to determine the ALP by using the current financial year data available at the time of transfer pricing proceedings and to conduct the comparability analysis by using such data.
Multiple year data should be used only when it adds value to the transfer pricing analysis.
Honeywell Automation India Limited
Pune ITAT
Under Indian transfer pricing regulations, for comparability purposes, consideration of subsequent year data or average profits not permitted
In relation to comparability analysis, the OECD guidelines allowed use of profits for the period under consideration, previous or next year or average of such profits. However, under Rule 10B(4) there is no provision for consideration of data for a subsequent assessment year.
Rule 10B(4) - Usage of Multiple Year DataSlide32
Rule 10C - Most Appropriate MethodSlide33
Rule 10C - Most Appropriate Method
(1) For the purposes of sub-section (1) of section 92C, the most appropriate method shall be the method which is best suited to the facts and circumstances of each particular international transaction, and which provides the most reliable measure of an arm’s length price in relation to the international transaction.(2) In selecting the most appropriate method as specified in sub-rule (1), the following factors shall be taken into account, namely:—
Nature and class of international transaction;
Class and functions performed by associated enterprises;
Availability, coverage and reliability of data;
Degree of comparability;
Possible adjustments;
Nature, extent and reliability of assumptions.Slide34
Rule 10C - Most Appropriate Method
Assessee
Principal held
Starlite
Mumbai ITAT
Taxpayer – none of the methods can applied to determined ALP
TPO – selected TNMM as the MAM
ITAT – remanded back the matter to determine fresh assessment in line with the submissions made by the Assessee
Nimbus Communication Ltd
Mumbai ITAT
TPO made adjustment without specifying any method;
The ITAT deleted the adjustment stating that arms’ length price needs to be determined using one of the prescribed methods mandated in section 92C(1) of the Act.
MSS India Pvt Ltd
The most appropriate method adopted by the taxpayer cannot be disturbed unless the revenue authorities are able to demonstrate that a particular method is more appropriate vis-à-vis the method adopted by the taxpayerSlide35
Rule 10D - Information / Documentation to be maintainedSlide36
Contemporaneous
documentation requirement – Rule 10D Documentation to be retained for 9 yearsNo specific documentation requirement if the value of international transactions is less than one crore rupeesProfile of industry
Profile of group
Profile of Indian entity
Profile of associated enterprises
Transaction terms
Functional analysis (functions, assets and risks)
Economic analysis (method selection, comparable benchmarking)
Forecasts, budgets, estimates
Agreements
Invoices
Pricing related correspondence (letters, emails etc)
Entity related Price related
Transaction relatedRule 10D - Information / Documentation to be maintainedSlide37
Rule 10D - Information / Documentation to be maintained
Assessee
Principal held
Philips Software
Bangalore ITAT
The ITAT held that the documentation maintained by the assessee to justify arm’s length price based on contemporaneous data cannot be rejected by the TPO without pointing out any deficiency or insufficiency therein.
UCB India Pvt Ltd.
Mumbai ITAT
Substantive compliance should be the criteria and the test should be as to whether non-maintenance/deficiency in maintenance of some records fundamentally effects or distorts the computation of arm’s length price; if it does not make a material difference then the effect is not fatal.Slide38
Rule 10E - Accountant’s ReportSlide39
Report from an accountant to be furnished under section 92E.
10E. The report from an accountant required to be furnished under section 92E by every person who has entered into an international transaction during a previous year shall be in Form No. 3CEB and be verified in the manner indicated therein.FORM NO. 3CEB[See rule 10E]Report from an Accountant to be furnished under section 92E relating tointernational transaction(s)
We have examined the accounts and records of
<<Entity Name, Postal Address and PAN Number>>
relating to the international transactions entered into by the assessee during the previous year ended on 31 March 2012
.
In our opinion proper information and documents as are prescribed have been kept by the assessee in respect of the international transaction(s) entered into so far as appears from our examination of the records of the assessee.
The particulars required to be furnished under section 92E are given in the Annexure to this Form. In our opinion and to the best of our information and according to the explanations given to us, the particulars given in the Annexure are true and correct.
Rule 10E - Accountant’s ReportSlide40
Accountant’s Report – Legal Requirement
Accountant’s Report contains following disclosures:- Nature of international transactionsBook value and Arm’s length value of international transactionsMethod adopted for the purpose of benchmarking
Documentation to justify arm’s length nature of international transactionsSlide41
Transfer Pricing - PenaltiesSlide42
Penalties
Section
Default
Penalty
271(1)(c)
In case of a post-inquiry adjustment, there is deemed to be a concealment of income
100-300% of tax on the adjusted amount
271AA
Failure to maintain documents
2% of the value of each
international transaction;
2% of the value of each international transaction for
Non-reporting of transaction
271G
Failure to furnish documents
2% of the value of the international transaction
271BA
Failure to furnish accountant’s reportRs 100,000
However, penalty for concealment of income shall not be levied if the taxpayer demonstrates that price charged or paid hasbeen determined in ‘good faith’ and with ‘due diligence’.Slide43
Transfer Pricing Assessment Slide44
Particulars
No. of cases selected for scrutiny
No of cases adjusted
% of cases adjusted
Adjustments
(In INR Cr)
AY 2002-03
1081
236
22
1403
AY 2003-04
1501
345
23
2631
AY 2004-05
1768
47727
3947AY 2005-06
1479370
25
5060AY 2006-07
1600
800
50
10,000
AY 2007-08
2301
1138
49
23,237
AY 2008-09
2589
1338
52
44,500
INR 44,500 crores of TP adjustment in recent concluded audit cycle for AY 2008-09
Seven rounds of TP audits completed – AY 2002-03 to AY 2008-09
Transfer Pricing Litigation Scenario in IndiaSlide45
Audit Process
TP AuditFile tax return and Accountant’s Report (30th November)Reference to be made to TP Officer (‘TPO’) by the Assessing Officer (‘AO’); Compulsory Reference to be made by AO
if international transactions exceed INR 150 million
(Internal guidelines)
Appeal can be made against
the order of AO as order of
TPO included within the
order of the AO
Notice to be issued by the TPO – TPO calls for supporting
documents and evidence
Rectification application can be
made against the order of TPO
for apparent mistakesBased on results of above mentioned procedure assessing officer passes the order Appeal ProcedureAppeal to CIT(A)Passes an order
Income Tax Appellate TribunalHigh Court – only on matters related to lawSupreme CourtConstitutional Bench
DRP Mechanism-Finance Act 2009 Slide46
Transfer Pricing Audit Experience
Triggers for Detailed ScrutinyConsistent losses / low margins of the taxpayer attributable to inter-company transactionsSignificant changes in profitability of the taxpayer
High value intra-group services such as royalty / technical payouts, cost allocations, etc.
Payment of ‘management charges’ and ‘royalty’ not passing the ‘benefit test’
Net losses incurred by routine distributors
Low mark-ups for services
Significant marketing expenses by manufacturing / distribution companies
Others
Demanding information on transactions by AE with other AE
Insistence on use of ‘single-year’ data
Exclusion of loss making / low margin companies from the set of comparablesSlide47
Contract R & D Services:
Tax authorities require Indian entity to get a share of the global profit earned by the parent entity on the ground that Indian entity is part owner of the Intellectual Property as majority of R & D work is undertaken by it in India. Definition of total cost for the purpose of computing mark-up in case of R & D activities.
3
2
Marketing Intangibles:
Tax authorities require Indian Companies to be compensated for extra ordinary advertising and marketing expenses – Bright Line Test –
“Maruti Suzuki”.
Comparability between branded products and generic products:
Tax authorities generally compare the import price of raw materials used for branded products with prices prevailing in local market for unbranded generics – “
Serdia Pharmaceuticals”
Use of secret data - data sourced from Customs; Also data sourced by using statutory powers.
1
Management recharges / cost allocation:
Payment of management recharges disallowed unless the same is supported by robust documentation Basis of cost allocation scrutinized in detail Disallowances made on an arbitrary basis5Transfer Pricing challenges
Business Restructuring Rationale for change in business model to be adequately documented Exit charge and valuation of intangibles 4Slide48
Advance Pricing Agreement -
Rule 10F to Rule 10T Slide49
APA Rules – Overview
APA legislation effective 1 July 2012 & APA Rules notified 30 August 2012Types - Unilateral, Bilateral, MultilateralValidity – Up to 5 years (renewal possible)
Coverage – Existing/ongoing transactions & New transactions
Mandatory Pre-Filing Application & Consultation – option to remain anonymous
APA Directorate to include panel of experts - Economists, Statisticians, etc
Annual APA Compliance Report & Compliance Audit
Fees (only at APA Application stage):
Transaction Value
Fees
Up to Rs 1 billion
/
approx US$ 20 million
Rs 1 million / approx US$ 20,000
Up
to Rs 2 billion / approx US$ 40 millionRs 1.5 million / approx US$
30,000Over Rs 2 billion / approx US$ 40 millionRs 2 million / approx US$ 40,000Slide50
QuestionsSlide51
Bangalore
Solitaire, 139/26, 3rd Floor, Inner Ring Road,Koramangala,Bangalore 560071Tel +91 80 3980 6000
Fax +91 80 3980 6999
Chandigarh
SCO 22-23
1st floor. Sector 8 C
Madhya Marg
Chandigarh 160019
Tel : 0172 3935778
Fax 0172 3935780
Chennai
No. 10, Mahatma Gandhi Road,
Nungambakam, Chennai 600 034Tel +91 40 3914 5000Fax +91 40 3914 5999Delhi Building No.10, Tower B, 8th Floor,
DLF Cyber City, Phase – IIGurgaon 122002 HaryanaTel +91 124 3074000Fax +91 124 2549101Hyderabad8-2-618/2Reliance Humsafar, 4th FloorRoad No. 11, Banjara HillsHyderabad 500 034Tel +91 40 6630 5000
Fax +91 40 6630 5299Kochi4/F, Palal Towers,M. G. Road,Ravipuram, Kochi 682016Tel +91 (484) 302 7000Fax +91 (484) 302 7001Kolkata Infinity Benchmark, Plot No.G-1, 10th floor, Block - EP & GP, Sector - V, Salt Lake City
Kolkata 700091Tel: +91 33 44034066Fax: +91 33 4403 4199Mumbai Lodha Excelus, 1st Floor, Apollo Mills Compound, N.M. Joshi Marg, Mahalakshmi, Mumbai 400 011Tel +9122 39896000
Fax +91 22 39836000Pune 703, Godrej Castlemaine Bund Garden Pune 411 001Tel: +91 20 3058 5764/ 65Fax: +91 20 30585775Thank You !!
Presenter’s contact detailsManish BafnaSenior ManagerB S R &Co., Mumbai, IndiaPhone : +91 (22) 3090 2230E-mail : manishb@kpmg.com Slide52
Rule 10 B - ReproducedSlide53
Rule 10B(1)(a) -
CUP Method…comparable uncontrolled price method, by which,—the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified;(ii
) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market;
(
iii
) the adjusted price arrived at under sub-clause (
ii
) is taken to be an arm’s length price in respect of the property transferred or services provided in the international transaction;Slide54
Rule 10B(1)(b) –
RPM…(b) resale price method, by which,—the price at which property purchased or services obtained by the enterprise from an associated enterprise is resold or are provided to an unrelated enterprise, is identified;
(
ii
) such resale price is reduced by the amount of a normal gross profit margin accruing to the enterprise or to an unrelated enterprise from the purchase and resale of the same or similar property or from obtaining and providing the same or similar services, in a comparable uncontrolled transaction, or a number of such transactions;
the price so arrived at is further reduced by the expenses incurred by the enterprise in connection with the purchase of property or obtaining of services;
(
iv
) the price so arrived at is adjusted to take into account the functional and other differences, including differences in accounting practices, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of gross profit margin in the open market;
(
v
) the adjusted price arrived at under sub-clause (
iv) is taken to be an arm’s length price in respect of the purchase of the property or obtaining of the services by the enterprise from the associated enterprise;Slide55
Rule 10B(1)(c) – CPLM…
cost plus method, by which,—the direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise, are determined;the amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined;
the normal gross profit mark-up referred to in sub-clause (
ii
) is adjusted to take into account the functional and other differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market;
the costs referred to in sub-clause (
i
) are increased by the adjusted profit mark-up arrived at under sub-clause (
iii
);
the sum so arrived at is taken to be an arm’s length price in relation to the supply of the property or provision of services by the enterprise;Slide56
Rule 10B(1)(d) – PSM…
profit split method, which may be applicable mainly in international transactions involving transfer of unique intangibles or in multiple international transactions which are so interrelated that they cannot be evaluated separately for the purpose of determining the arm’s length price of any one transaction, by which—the combined net profit of the associated enterprises arising from the international transaction in which they are engaged, is determined;the relative contribution made by each of the associated enterprises to the earning of such combined net profit, is then evaluated on the basis of the functions performed, assets employed or to be employed and risks assumed by each enterprise and on the basis of reliable external market data which indicates how such contribution would be evaluated by unrelated enterprises performing comparable functions in similar circumstances;
the combined net profit is then split amongst the enterprises in proportion to their relative contributions, as evaluated under sub-clause (
ii
);
the profit thus apportioned to the assessee is taken into account to arrive at an arm’s length price in relation to the international transaction :
Provided
that the combined net profit referred to in sub-clause (
i
) may, in the first instance, be partially allocated to each enterprise so as to provide it with a basic return appropriate for the type of international transaction in which it is engaged, with reference to market returns achieved for similar types of transactions by independent enterprises, and thereafter, the residual net profit remaining after such allocation may be split amongst the enterprises in proportion to their relative contribution in the manner specified under sub-clauses (
ii
) and (
iii), and in such a case the aggregate of the net profit allocated to the enterprise in the first instance together with the residual net profit apportioned to that enterprise on the basis of its relative contribution shall be taken to be the net profit arising to that enterprise from the international transaction;Slide57
Rule 10B(1)(e) – TNMM…
(e) transactional net margin method, by which,—the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base;
the
net profit margin
realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base;
the net profit margin referred to in sub-clause (
ii
) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market;
the net profit margin
realised
by the enterprise and referred to in sub-clause (
i
) is established to be the same as the net profit margin referred to in sub-clause (iii);the net profit margin thus established is then taken into account to arrive at an arm’s length price in relation to the international transaction.Slide58
Rule 10AB – Any other transaction……
For the purposes of clause (f) of sub-section (1) of section 92C, the other method for determination of the arms' length price in relation to an international transaction shall be any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non associated enterprises, under similar circumstances, considering all the relevant facts.”