Transfer Pricing Rules and TP Assessment CA.Manish Bafna 27th

Report
B S R & Co.
Transfer Pricing Rules and TP Assessment
27 October 2012
Manish Bafna
Senior Manager, Global Transfer Pricing Services
B S R & Co., Mumbai, India
Agenda
•
Transfer Pricing Rules
- Overview
- Practical Experience
- Case Laws
•
•
Penalties
•
Advance Pricing Agreements
- Overview
Transfer Pricing
Assessments
2
Transfer Pricing - Rules
3
Rule 10 of the Income-tax Rules, 1962
10A
10B &
10 AB
Meaning of expressions used in
computation of ALP
Determination of ALP under Section
92C
10C
Most Appropriate Method
10D
Information / Documentation to be
maintained
10E
Accountant’s Report
10 F –
10 T
Advance Pricing Agreements
4
Rule 10A - Meaning of
expressions used in computation
of ALP
5
Rule 10A – Meaning of expression used in computation of
ALP
a) “uncontrolled transaction” means a transaction between enterprises other than
associated enterprises, whether resident or non-resident
Associated Enterprises
Controlled
transaction
Uncontrolled
transaction
Assessee
Third Party
6
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 ITAT
• The 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.
7
Rule 10A – Meaning of expression used in computation
of ALP
b) “property” includes goods, articles or things, and intangible property
c) “services” include financial services
d) “transaction” includes a number of closely linked transactions
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.
8
Rule 10B – Determination of arm’s length price under
section 92C
9
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)
10
Rule 10B(1)(a) - CUP Method
• Most Direct Method for benchmarking
• Two types of CUPs- Internal CUP & External
CUP
• Adjustments required for differences which
could materially affect the price in the open
market e.g.: Difference in
 Volume / quality of product
 Risks assumed
 Geographic market
• OECD - Priority to Internal CUP due to higher
degree of comparability
Outside India
Sub Co.
Unrelated Co. X
Unrelated Co. Y
External CUP
 credit terms
Transfer Price
• Requires strict comparability in products,
contractual terms, economic terms, etc.
Parent Co.
Outside India
India
Unrelated Co. Z
11
Rule 10B(1)(b) - RPM
• To be applied when a goods
purchased or service obtained from
an AE is resold to an unrelated
enterprise.
Parent Co.
Transfer Price
INR 75
Outside India
• Compares resale gross margin
earned by AE with resale gross
margin earned by similar independent
distributors
• Preferred 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.
Resale Price
INR 100
India
Unrelated Co. Y
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`
12
Rule 10B(1)(b) - RPM
• Involves use of gross margins
• Identify the price at which goods / services purchased from AE are resold to
non-AE
• Reduce the resale price by normal gross profit margin arising from comparable
uncontrolled transactions
• Reduce 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
Usually used in case where the enterprise is engaged in pure resale, with no
value addition
13
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
parties
 Contract/toll manufacturing agreement
• 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
Transfer Price INR 125
Outside India
India
Sub Co.
COGS INR 70
 Long term buy/supply arrangements
Parent Co.
Co. Y / AE
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
14
Rule 10B(1)(c) - CPLM
• Involves use of gross margins
• Identify direct and indirect costs of production of goods / services
• Identify the normal gross profit mark-up arising from comparable
uncontrolled transaction
– Mark-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
Used in case where enterprise transfers goods / services to AE after adding
substantial value
15
Rule 10B(1)(c) – CPLM…
• Direct costs would generally include:
– Purchased Material costs (including freight, custom duty, etc.);
– Labour costs and manufacturing overheads
• Indirect 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.
16
Rule 10B(1)(d) - PSM
• Evaluates allocation of combined profit/loss
in controlled integrated transactions
• The contribution made by each party is
based upon a functional analysis and
valued, if possible, using external
comparable data
• To 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:
US Co A –
Technology
intangibles
Outside India
India
Mfg. Co B
Mkt Co C
Marketing
intangibles
 Contribution PSM Analysis
 Residual PSM Analysis
17
Rule 10B(1)(d) - PSM
• Two alternate approaches to arrive at ALP
• Relative Contribution approach:




Determine combined net profit of AEs
Split 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
18
Rule 10B(1)(d) – PSM…
• Residual Profit approach:

Allocate basic return to each enterprise based on markets returns achieved for
comparable uncontrolled transactions

Allocate residual profit based on relative contribution as discussed above

Profit so split is taken into account to arrive at ALP
Used in case of transfer of unique intangibles or multiple interrelated
transactions
19
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 parties
• Preferred method in India, due to broad
level of product comparability and high
level of functional comparability
• Internal TNMM preferable –when entity
has uncontrolled transactions also
Parent A
Unrelated Cos.
Outside India
India
Subsidiary B
Unrelated Cos.
Net margin 5%
Net margin 3%
20
Rule 10B(1)(e) - TNMM
• 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 transaction
• Adjust 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
Usually regarded as an indirect method, but is most widely used
21
Rule 10B(1) - Summary of Methods
Method
(a)
(b)
CUP
RPM
Product
Comparability
Functional
Comparability
Approach
Remarks
Very High
Subsumed in
product
Prices are
benchmarked
Very difficult to apply as
very high degree of
comparability required
High
GPM
(on sales)
benchmarked
Difficult to apply as high
degree of comparability
required
GPM
(on costs)
benchmarked
Difficult to apply as high
degree of comparability
required
High
(c)
CPLM
High
High
(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 analysis
22
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 B
23
Rule 10B(2) - Comparability Factors
(a) Characteristics
Depends on type: tangible,
intangible or service
(c) Contractual terms
Where not written,
deduce from conduct
(b) Functional Analysis
Comparability
factors
Conduct is best evidence
of risk bearing, should be
consistent with control
(d) Economic Circumstances
Geography, size of market, date
and time
24
Rule 10B(2) - Comparability Factors
•
Practical Experience
–
Sources of information and reliability
–
Timing issues in comparability
–
Documenting a search of comparables
–
Identifying 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.)
25
Rule 10B(3) - Adjustments for Comparability
• 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
26
Rule 10B(3) - Adjustments for Comparability
• Practical Experience:
– Indian law permits adjustments only to comparables and not tested party
– The TPOs generally reject adjustments inter-alia stating that the assumptions,
approximations and estimations used in computation are not tenable
– Challenge 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
27
Rule 10B(3) - Adjustments for Comparability
Assessee
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.
28
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 documentation
29
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 data
30
Rule 10B(4) - Usage of Multiple Year Data
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.
31
Rule 10C - Most Appropriate Method
32
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:—
a) Nature and class of international transaction;
b) Class and functions performed by associated enterprises;
c) Availability, coverage and reliability of data;
d) Degree of comparability;
e) Possible adjustments;
f)
Nature, extent and reliability of assumptions.
33
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 taxpayer
34
Rule 10D - Information /
Documentation to be maintained
35
Rule 10D - Information / Documentation to be maintained
Entity related
Price related
Transaction related
 Profile of industry
 Transaction terms
 Agreements
 Profile of group
 Functional analysis
 Invoices
 Profile of Indian entity
 Profile
of
enterprises
associated
(functions, assets and risks)
 Economic analysis
(method selection, comparable
benchmarking)
 Pricing related
correspondence
(letters, emails etc)
 Forecasts, budgets, estimates
Contemporaneous documentation requirement – Rule 10D
Documentation to be retained for 9 years
No specific documentation requirement if the value of international transactions is
less than one crore rupees
36
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.
37
Rule 10E - Accountant’s Report
38
Rule 10E - Accountant’s Report
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 to
international transaction(s)
1.
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.
2.
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.
3.
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.
39
Accountant’s Report – Legal Requirement
•
Accountant’s Report contains following
disclosures:-
–
Nature of international transactions
–
Book value and Arm’s length value
of international transactions
–
Method adopted for the purpose of
benchmarking
–
Documentation
length
nature
to
of
justify
arm’s
international
transactions
40
Transfer Pricing - Penalties
41
Penalties
Section
271(1)(c)
271AA
Default
Penalty
In case of a post-inquiry adjustment, there
is deemed to be a concealment of income
100-300% of tax on the adjusted
amount
Failure to maintain documents
2% of the value of each
international transaction;
2% of the value of each
international transaction for Nonreporting of transaction
271G
Failure to furnish documents
2% of the value of the
international transaction
271BA
Failure to furnish accountant’s report
Rs 100,000
However, penalty for concealment of income shall not
be levied if the taxpayer demonstrates that price charged or paid has
been determined in ‘good faith’ and with ‘due diligence’.
42
Transfer Pricing Assessment
43
Transfer Pricing Litigation Scenario in India
• Seven rounds of TP audits completed – AY 2002-03 to AY 2008-09
Particulars
No. of cases
selected for scrutiny
No of cases
adjusted
% of cases
adjusted
Adjustments
AY 2002-03
1081
236
22
1403
AY 2003-04
1501
345
23
2631
AY 2004-05
1768
477
27
3947
AY 2005-06
1479
370
25
5060
AY 2006-07
1600
800
50
10,000
AY 2007-08
2301
1138
49
23,237
AY 2008-09
2589
1338
52
44,500
(In INR Cr)
INR 44,500 crores of TP adjustment in recent concluded audit cycle for AY 2008-09
44
Audit Process
File tax return and Accountant’s Report (30th November)
DRP Mechanism-Finance Act 2009
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 Procedure
Notice to be issued by the TPO – TPO calls for supporting
documents and evidence
Appeal to CIT(A)
Passes an order
TP Audit
Income Tax Appellate Tribunal
Based on results of above mentioned procedure
assessing officer passes the order
Rectification application can be
made against the order of TPO
for apparent mistakes
Appeal can be made against
the order of AO as order of
TPO included within the
order of the AO
High Court – only on matters related to law
Supreme Court
Constitutional Bench
45
Transfer Pricing Audit Experience
•
Triggers for Detailed Scrutiny
‒ Consistent losses / low margins of the taxpayer attributable to intercompany transactions
‒ Significant 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
comparables
46
Transfer Pricing challenges
1
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.
2
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
Marketing Intangibles:
− Tax authorities require Indian Companies to be compensated for extra ordinary advertising and
marketing expenses – Bright Line Test – “Maruti Suzuki”.
4
5
Business Restructuring
− Rationale for change in business model to be adequately documented
− Exit charge and valuation of intangibles
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 basis
47
Advance Pricing Agreement Rule 10F to Rule 10T
48
APA Rules – Overview
• APA legislation effective 1 July 2012 & APA Rules notified 30 August 2012
• Types - Unilateral, Bilateral, Multilateral
• Validity – 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
million
Rs 1.5 million / approx US$
30,000
Over Rs 2 billion / approx US$ 40
million
Rs 2 million / approx US$
40,000
49
Questions
50
Thank You !!
Presenter’s contact details
Manish Bafna
Senior Manager
B S R &Co., Mumbai, India
Phone : +91 (22) 3090 2230
E-mail : [email protected]
Kolkata
Mumbai
Pune
Infinity Benchmark, Plot No.G-1,
10th floor, Block - EP & GP,
Sector - V, Salt Lake City
Kolkata 700091
Tel: +91 33 44034066
Fax: +91 33 4403 4199
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Apollo Mills Compound,
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Tel +9122 39896000
Fax +91 22 39836000
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Bund Garden
Pune 411 001
Tel: +91 20 3058 5764/ 65
Fax: +91 20 30585775
Bangalore
Kochi
Hyderabad
Chennai
Chandigarh
Delhi
Solitaire, 139/26, 3rd Floor,
Inner Ring Road,
Koramangala,
Bangalore 560071
Tel +91 80 3980 6000
Fax +91 80 3980 6999
4/F, Palal Towers,
M. G. Road,
Ravipuram, Kochi 682016
Tel +91 (484) 302 7000
Fax +91 (484) 302 7001
8-2-618/2
Reliance Humsafar,
4th Floor
Road No. 11, Banjara Hills
Hyderabad 500 034
Tel +91 40 6630 5000
Fax +91 40 6630 5299
No. 10, Mahatma Gandhi Road,
Nungambakam,
Chennai 600 034
Tel +91 40 3914 5000
Fax +91 40 3914 5999
SCO 22-23
1st floor. Sector 8 C
Madhya Marg
Chandigarh 160019
Tel : 0172 3935778
Fax 0172 3935780
Building No.10,
Tower B, 8th Floor,
DLF Cyber City, Phase – II
Gurgaon 122002 Haryana
Tel +91 124 3074000
Fax +91 124 2549101
51
Rule 10 B - Reproduced
52
Rule 10B(1)(a) - CUP Method…
(a) comparable uncontrolled price method, by which,—
(i)
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;
53
Rule 10B(1)(b) – RPM…
(b) resale price method, by which,—
(i)
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;
(iii)
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;
54
Rule 10B(1)(c) – CPLM…
(c) cost plus method, by which,—
(i)
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;
(ii) 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;
(iii) 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;
(iv) the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up
arrived at under sub-clause (iii);
(v) 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;
55
Rule 10B(1)(d) – PSM…
(d) 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—
(i) the combined net profit of the associated enterprises arising from the international transaction
in which they are engaged, is determined;
(ii) 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;
(iii) the combined net profit is then split amongst the enterprises in proportion to their relative
contributions, as evaluated under sub-clause (ii);
(iv) 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;
56
Rule 10B(1)(e) – TNMM…
(e) transactional net margin method, by which,—
(i) 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;
(ii) 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;
(iii) 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;
(iv) 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);
(v) 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.
57
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.”
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