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Taxation

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Direct Tax

Transfer Pricing

Overview
Transfer Pricing in India was introduced in 2001 for curbing tax avoidance by laying down norms for computation of income arising from international transactions or specified domestic transactions(“SDTs”) having regard to the “arm’s length price”. The Indian Transfer Pricing Regulations (TP Regulations) comprise Sections 92 to 92F of the Income-tax Act, 1961 (“the Act”) and Rules 10A to 10T of the Income Tax Rules, 1962 (‘the Rules’) which guides computation of the transfer price and suggests detailed documentation procedures.

The Finance Act, 2012 expanded the scope of TP regulations by insertion of a new section 92BA in the Indian Income tax Act, 1961 to include SDTs within its ambit. SDTs would include transactions entered into by domestic related parties, or by an undertaking with another undertaking of the same tax payer. In addition the Finance Act, 2012 also introduced Section 92CC and 92CD read with Rules 10F to 10T and 44GA to provide the Advance Pricing Agreement Regime in the Indian transfer pricing environment.

Key features of the TP Regulations

  • every person who has undertaken an international transaction with an associated enterprise shall maintain information and contemporaneous documentation as prescribed under the Rules
  • every person who has entered into an international transaction during a previous year shall obtain an Accountant’s Report and furnish such report on or before the filing of the income tax return which is 30th November following the end of the financial year.
  • stringent penalties have been prescribed for non-adherence to the TP Regulations

How can we help you?
As one of the leading advisers to companies, PNK understands the need to approach the transfer pricing norms in a much customised manner that provides valuable inputs to the management so as to facilitate their decision making. Our Transfer Pricing professionals provide comprehensive solutions tailored to business objectives after profiling the exact nature and the extent of the transactions.

Our specialist team is competent to assist your company in the following areas of Transfer Pricing:
  • Transfer pricing Planning
  • Transfer pricing documentation
  • Issuance of Accountants report
  • Planning & documentation for specified Domestic Transactions
  • Litigation support & representation services
  • Defense – Assistance, Representation & advisory
  • Due diligence review
  • Advance pricing Agreements

a. Transfer pricing Planning
Determination of transfer pricing policy is an ex-ante approach which brings certainty to the inter-company transfer pricing and mitigates transfer pricing exposure in advance. Therefore, prior taking on any international transactions or specified domestic transactions with its associated enterprise it is essential that the transaction is evaluated, structured and planned specifically considering the transfer pricing impact.

Our planning approach is fact specific and would cover the following:
  • supply chain Re- engineering
  • new transactions planning
  • structuring cost sharing arrangements domestic and international inter-company transactions
  • comparability/ economic analysis
  • preparation of inter-company agreements from a transfer pricing perspective
  • documentation
  • process set up and integration

b. Transfer pricing documentation
The burden of demonstrating the arm’s length nature of the international transactions rests on the taxpayer. Rule 10D of the Indian Income Tax Act, 1962, prescribes thirteen mandatory documents in this regard and requires the taxpayer to maintain documentation contemporaneously. Some of the requirements are general in nature while others are more specific to the relevant international transactions.

Our services would include the following: Our documentation approach is non-standard and in-fact specific or unique for each client to ensure practical and robust defense during TP Assessments.
  • identification of international transactions and associated enterprises
  • functions, Assets and Risks analysis (FAR)
  • economically characterising entities / functions
  • economic analysis / Comparability analysis
  • documentation – all the above steps are detailed in a report and the required documentation/ recommendation is prepared

c. Issuance of Accountants report
The taxpayer is required to file an Accountant’s Report in Form 3CEB with the Income Tax Department within the due date of filing of return of income which is 30th November following the end of the financial year, for taxpayers subject to transfer pricing. The report provides details on the international related party transactions and provides a confirmation of the Accountant on whether the required documentation has been maintained by the taxpayer.

d. Planning & documentation for specified Domestic Transactions
The Indian TP Regulations are applicable to SDTs from 01 April 2012. SDTs would include transactions entered into by domestic related parties, or by an undertaking with other undertakings of the same entity, for the purposes of section 40A, Chapter VI-A, section 10AA, and which exceed a monetary threshold of Rs 5 crore in aggregate during a financial year.

The new section 92BA provides that SDTs are following transactions:
  • a payment made by a company to a related person referred in Section 40A(2)(b) of the Act, including payment to a director of the company or any person who has a substantial interest in the company (i.e., has a beneficial ownership of shares carrying not less than 20% of voting power);
  • transactions referred to in Section 80IA(8) – transactions between the tax-incentivised business and another business carried on by the taxpayer
  • transactions referred to in Section 80IA(10) – transactions between the tax-incentivised business of the taxpayer and another person with whom the taxpayer shares a “close connection”
  • any other transaction that may be prescribed by the Board

e. Litigation support & representation services
Indirect taxation laws have always been complex and subject matter of interpretation/ litigation. This leads to the Companies receiving Show Cause Notices requiring them to explain the rational for following a particular interpretation/ claiming tax benefits, etc. This generally culminates into a long draw litigation matter. Further it is always advisable to obtain upfront clarification from tax offices on specified issue if there is a mechanism in place. We at PNK can assist the Companies in better handling and early closure of such matters.

Our services cover the following:
  • representation before all adjudicating Authorities including CESTAT
  • representation before Advance Ruling Authority
  • representation before Ministry of Finance
  • representation before Settlement Commission for settlement of cases
  • day-to-day litigation support on notices, summons etc. received from tax authorities

The new section 92BA provides that SDTs are following transactions:
  • Diagnostic exercise would be conducted for review of the transactions & policies and to develop transaction matrix and understanding the current policy adopted by the group
  • Planning – functional analysis and economic analysis for determination of appropriate TP policy for SDT
  • First year monitoring on a quarterly basis to ensure smooth implementation
  • Compliance would include documentation and filing of Form 3CEB

f. Defense – Assistance, Representation & advisory
The conclusion of latest transfer pricing audits by Indian revenue authorities witnessed aggregate income adjustments to the tune of Rs 44,000 crore for one year alone, which is more than the aggregate income adjustments made by revenue authorities in audits of previous 4 years.

Looking at this the year-on-year rapid escalation in transfer pricing disputes, it is imperative to handle the Transfer pricing disputes strategically and with great caution.

Our services would include the following:
Representation before AO/ TPO, DRP, CIT (A), ITAT, HC & SC would include:
  • strategising
  • assistance in preparing submissions
  • assistance in preparing statement of facts and grounds of appeals
  • representation before the authorities
  • co-ordination with legal counsel
  • related advisory

g. Due diligence review
Companies are increasingly opting for the mutual agreement procedure as one of the options of resolving disputes. This route is used for mainly resolving issues relating to characterization of income, permanent establishment profit attribution and transfer pricing issues. It provides a mechanism to avoid double tax and resolve issues through the competent authority route when actions adopted by either of the tax authorities are contrary to the treaty provisions. The aggrieved party has to approach the competent authority of their country who will then decide whether to admit the application and if so forward the application to the CA of the other country. The settlement is achieved through negotiations between the CAs and the conclusions are binding on the revenue of the respective countries. Rules 44G and 44H are provided in the Indian Income tax Rules, 1962, to facilitate MAP proceedings. Further, for countries like US and UK, there is a MoU which prescribes certain procedures to be adopted.

Our services would include the following:
  • assistance in filing the MAP application and letter
  • making a presentation to the Competent authority to explain the facts, position and arguments
  • following up regularly to understand the status and progress of the discussions between the competent authorities
  • assisting in providing additional information or support needed by the competent authorities to enable achieving an efficient and effective settlement
  • assisting in all formalities post the MAP settlement

h. Advance pricing Agreements
To address the year-on-year rapid escalation in transfer pricing disputes along with the current dire need of corporate India, the APA code was earlier introduced vide the Finance Act, 2012. This mechanism is widely prevalent in countries with advanced transfer pricing regimes.

Our services would include the following:
  • Assistance in carrying out a cost benefit analysis, understanding the pros and cons, helping in determining the type of APA etc
  • Preparing and representing in the pre-filing consultation
  • Preparing the APA application (bi-lateral or multilateral through assistance from our relevant overseas offices)
  • Assistance in coordinating, preparing additional submissions and in negotiating the terms with the APA authorities (including negotiations with all the relevant competent authorities)
  • Assistance with compliance reports audits, revision, renewal and cancellation of APAs

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