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1. By : Sachin & Neha
31 Jan 2014JRA & Associates
Transfer Pricing
Regulations in India

2. Roadmap
31 Jan 2014JRA & Associates
 Timeline
 Meaning
 Need of transfer pricing regulations
 Overview – Indian Regulations
 Meaning of relevant terms
 Methods
 Audit report & Documentation required
 Penalties
 Domestic transfer pricing
 Safe harbour rules
 Assessing Officer powers
 Services offerings in Transfer Pricing

3. Timeline of Transfer Pricing
31 Jan 2014JRA & Associates
Legislation introduced with effect from April 1, 2001
• Introduction of sections 92A to 92F in Chapter X of Finance Act
2001 & rules 10A to 10E in income tax rules 1962
Generally in line with the OECD guidelines
• Finance act 2012 extends Transfer pricing provisions to SDT
between related parties w.e.f 1 april 2012

4. Meaning of Transfer Pricing
 Transfer prices are the prices at which an enterprise transfers physical
goods & intangible property or provide services to associated
enterprises of MNCs.
 Approximately 60% of the total transactions across the world are
between related parties.
 “The presence of multinational enterprises in India and their ability to
allocate profits in different jurisdictions by controlling prices in intra-
group transactions has made the issue of transfer pricing a matter of
serious concern. I had set up an Expert Group in November 1999 to
examine the detailed structure for transfer pricing legislation. Necessary
legislative changes are being made in the Finance Bill based on these
recommendations.”
Mr Yashwant Sinha
Finance Minister
February 28, 200131 Jan 2014JRA & Associates

5. Taxing
authority
Shifting of
profits
31 Jan 2014JRA & Associates

6. 31 Jan 2014JRA & Associates
Provisions Sections / Rules
Computation of Income, Expenses,
CCA
S. 92
Associated Enterprises S. 92A
Transactions subject to TPR S. 92B
Specified Domestic Transaction S. 92BA
Computational Provisions S. 92C(1) / Rule 10B/10C
Powers of AO S. 92C
Safe Harbour Rules S. 92CB
Advance Pricing Arrangement S. 92CC – 92CD
Documentation Requirements S. 92D / Rule 10D
Audit & Transfer Pricing Report S. 92E, Rule 10E & Form 3CEB
Penalties 271 (1)(c), 271AA, BA, G
Definitions S. 92F/Rule 10A
Overview - Indian Regulations

7. Computation of income from transaction
31 Jan 2014JRA & Associates
 Section 92 provides that any
1.Income
2.Expense
3.Allocation or apportionment of cost or expense
arising from any international transaction b/w two
or more associated enterprises shall be computed
having regard to arms length price
 While determining ALP if the income works out to a
figure lower than income stated in books of accounts
or increase loss then not applicable

8. Associated Enterprises (Section 92A)
31 Jan 2014JRA & Associates
 An enterprise would be regarded as ‘associated
enterprise’ of another enterprise if
1. It participates, directly or indirectly, or through one
or more intermediaries, in the management or
control or capital of the other enterprise, or
2. The persons participating, directly or indirectly, or
through one or more intermediaries, in its
management or control or capital also participate
in the management or control or capital of other
enterprise.

9. Deemed
associated
enterprises
26% or more
voting power
Loans in excess of
51% of book value of
total assets
Guarantee of
10% or more
of total
borrowing
Power to
appoint More
than half of
board of
directors
Supply of
90% or more
raw materials
and
consumables
10% or more
interest in
other firm ,
AOP or BOI
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10. International transaction(Sec 92B)
31 Jan 2014JRA & Associates
It means a transaction between two or more
associated enterprises either or both of whom are
non residents in nature of
 Purchase , sale , lease of tangible or intangible
property
 Provision of services
 Lending or borrowing of money
 Any other transaction having bearing on profits ,
income , losses or assets of such enterprises

11. Arms length price [Sec 92F(ii)]
31 Jan 2014JRA & Associates
The arm’s-length principle requires that transfer prices
charged between related parties are equivalent to those
that would have been charged between independent
parties in the same circumstances.
Sec 92B provides methods for determination of ALP
If two prices possible then arithmetical mean of such prices
shall be taken sec 92C(2)
+/- 3% variance to arm’s length “price” permitted
Case Transfer
price
Alp determined by applying the
arithmetical mean
ALP for transfer
pricing
adjustment
1 100 103.1 103.1
2 100 102.9 100

12. Methods ( Rule 10B)
31 Jan 2014JRA & Associates
 The arm’s length price in relation to an international
transaction is to be determined using the most
appropriate method out of the specified methods as
prescribed by the Board in Rule 10B .
The five specified methods are:
 Comparable Uncontrolled Price Method (‘CUP’);
 Resale Price Method (‘RPM’);
 Cost Plus Method (‘CPM’);
 Profit Split Method (‘PSM’); and
 Transactional Net Margin Method (‘TNMM’)

13. Documents Required

14.  Profile of
Industry
 Profile of group
 Profile of related
parties
 Transaction terms
 FAR related
 Economic
Analysis (method
selection,
comparable
benchmarking)
 Forecasts,
budgets,
estimates
 Agreements
 Invoices
 Pricing related
correspondence
(letters, e-mails,
fax, etc.)
Entity Related Price Related Transaction Related
The onus of proving SDT at ALP is on tax payer
31 Jan 2014JRA & Associates

15. 31 Jan 2014JRA & Associates
Accountant’s Report (Sec 92E)

16. Section 271 –Penalty Implications
Sr.
No.
Type of penalty Section Penalty quantified
1 a) Failure to maintain
prescribed information/
documents
271AA 2% of transaction
value
(b) Failure to report any such
transaction or
(c) Furnish incorrect
information
2 Failure to furnish information/
documents during assessment
u/s 92D
271G 2% of transaction
value
3 Adjustment to taxpayer’s
income during assessment
(concealed income)
271(1)(c) 100% to 300% of tax
on
adjustment amount
4 Failure to furnish accountant’s
report u/s 92E
271BA INR 100,000
31 Jan 2014JRA & Associates

17. Powers of Assessing Officer (sec
92(3) & (4)
31 Jan 2014JRA & Associates
 Determine arm’s length price in following cases :
1. Prices not in accordance with sec 92(1) & (2)
2. Documentation not in accordance with sec
92D(1) and rule 10D
3. Unreliable data or information used in
computation of ALP
4. Failure to furnish documents or information
within specified time under sec 92D(3)
 Disallowance of deduction under section 10AA
and Chapter VI-A from additional income
computed
Powers of Assessing Officer [Sec
92(3) & (4)]

18. Domestic Transfer
Pricing
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19. SDT – Intent of the Law
31 Jan 2014

20. Section 92BA – Meaning of SDT
(inserted by Finance Act, 2012 w.e.f. AY 2013-14 i.e. current FY)
For the purposes of this section and sections 92, 92C, 92D and 92E, “specified domestic
transaction” in case of an assessee means any of the following transactions, not being an
international transaction, namely:-
(i) any expenditure in respect of which payment has been made or is to be made to a person
referred to in section 40A(2)(b);
(ii) any transaction referred to in section 80A;
(iii) any transfer of goods or services referred to in sub-section (8) of section 80-IA;
(iv) any business transacted between the assessee and other person as referred to in section 80-
IA (10);
(v) any other transaction as may be prescribed,
and where the aggregate of such transactions entered into by the assessee in the previous
year exceeds a sum of five crore rupees.
31 Jan 2014JRA & Associates

21. SDT
Inter unit transfer of goods & services by
undertakings to which profit-linked deductions
apply
Expenditure
incurred
between
related
parties
defined
under
section 40A
Transactions between undertakings, to which
profit-linked deductions apply, having close
connection
Any other
transaction
that may be
specified
Overview of Provisions of Sec. 92BA
31 Jan 2014JRA & Associates

22. FMV ALP
No method prescribed for
computing FMV
Six methods prescribed for
computing ALP
No documentation required to be
maintained
Contemporaneous documentation
required to be maintained
Other than reporting in tax audit
report, no statutory compliance
Accountant’s report signed by a CA
to be filed
Assessment done by the AO Assessment done by the TPO
Implication Post Budget 2012 for SDT
31 Jan 2014JRA & Associates

23. Intent of Indian TP Regulations (International transactions)
Indian Co.
Associated
Enterprise
(AE Co.)
Shifting of Profits
Shifting of Losses
India Overseas
Tax @ 32.45% Tax @ lower rate
approx 10%
Tax Saving for the Group – Loss to Indian revenue
31 Jan 2014JRA & Associates

24. Intent of Indian TP Regulations (Domestic transactions)
Particulars (Ordinary Situation) Co. X (SEZ) Co. Y (DTA)
Income 500 1000
Income from related party 100 -
Expenses 300 800
Expense to related party - 100
Profit/ Loss 300 100
Tax rate applicable 0% 32.45%
Tax - 32.45 (100*32.45%)
Particulars (Planned Situation) Co. X (SEZ) Co. Y (DTA)
Income 500 1000
Income from related party 200 -
Expenses 300 800
Expense to related party - 200
Profit/ Loss 400 -
Tax rate applicable 0% 32.45%
Tax - -
Loss to
Revenue –
Tax Saving
to the Group
31 Jan 2014JRA & Associates

25. Intent of Indian TP Regulations (Domestic transactions)
Indian Co.
Tax Holiday
undertaking
Related Enterprise in
Domestic Tariff Area
(DTA)
Shifting of expenses/losses
Shifting of income/profits
India
Tax Exemption
Tax Saving for the Group – Loss to Indian revenue
India
Tax @32.45%
31 Jan 2014JRA & Associates

26. Particulars (Ordinary Situation) Co. X (DTA) Co. Y (DTA)
Income 500 1000
Income from related party 100 -
Expenses 700 800
Expense to related party - 100
Profit/ Loss (100) 100
Tax rate applicable 32.45% 32.45%
Tax - 32.45 (100*32.45%)
Particulars (Planned Situation) Co. X (DTA) Co. Y (DTA)
Income 500 1000
Income from related party 150 -
Expenses 700 800
Expense to related party - 150
Profit/ Loss (50) 50
Tax rate applicable 32.45% 32.45%
Tax - 16.23 (50*32.45%)
Present
Loss to
Revenue* –
Tax Saving
to the
Group
* By shifting of income from a profit making company to a loss making company, the group could reduce its tax
liability by 16.23 for the current year, though the impact will be reversed in future years given carry forward of losses.
Intent of TP Regulations (Domestic transactions)

27. 31 Jan 2014JRA & Associates
A Step towards ensuring certainity & reducing
litigation in transfer pricing.
CBDT has issued draft SHR on 14th August’2013,
inviting public comments.
On 18th September’2013, the Ministry of Finance
issued a press release stating SHR has been
finalised.
Concept of Safe Harbour Rules.
Certainity in the unceratin world of transfer pricing.
Reduced Litigation – A big YES
Safe Harbour Rules

28. Financial year in
which demand
raised
No. of TP
audits
completed
No. of
adjustment
cases
% of
adjustment
cases
Amount of
Adjustment(rs.cr
s)
2004-05 1061 239 23% 1220
2005-06 1501 337 22% 2287
2006-07 1768 471 27% 3432
2007-08 218 84 39% 1614
2008-09 1726 670 39% 6140
2009-10 1830 813 44% 10908
2010-11 2301 1138 49% 23237
2011-12 2638 1343 51% 44531
2012-13 3200 1600 50% 70016
Total 16243 6695 41% 163385
Table indicating increasing transfer pricing adjustments:
31 Jan 2014JRA & Associates

29. 31 Jan 2014JRA & Associates
Eligible International
Transaction
Safe Harbour
ratios
Software development services (IT
services) and Information Technology
Enabled services (ITES), with
insignificant risks
Operating profit margin to operating
Expense
• where the aggregate value of such
transactions < INR 500 crores
≥ 20 percent
• where the aggregate value of such
transactions > INR 500 crores
≥ 22 percent.
Knowledge processes outsourcing
services
(KPO services), with insignificant risks
Operating profit margin to operating
expense ≥ 25 Percent
Safe Harbour for various sectors

30. 31 Jan 2014JRA & Associates
Eligible International Transaction Safe Harbour ratios
Intra-group loan to wholly owned
subsidiary
(WOS) where the amount of loan:
Interest rate equal to or greater than
the base rate of State Bank of India
(SBI) as
on 30th June of the relevant previous
year:
• < INR 50 crores • plus 150 basis points
• > INR 50 crores • plus 300 basis points
Explicit corporate guarantee to WOS
where the amount guaranteed
Commission or Fee of
• < INR 100 crores 2 % or more Per annum
•> INR 100 crores, and the credit
rating
of the borrower, by a Securities and
Exchange Board of India (SEBI)
registered agency is of the adequate
to highest safety.
1.75 % or more Per annum

31. 31 Jan 2014JRA & Associates
Eligible International Transaction Safe Harbour ratios
Specified contract research and
development services (Contract R&D
services), with insignificant risks,
wholly or partly relating
to software development
Operating profit margin to operating
expense ≥ 30 Percent
Contract R&D services, with
insignificant risks, wholly or partly
relating to generic
pharmaceutical drugs
Operating profit margin to operating
expense ≥ 29 Percent
Manufacture and export of:
• core auto components
• non-core auto components
where 90% or more of total turnover
relates to Original Equipment
Manufacturer sales
Operating profit margin to operating
expense:
• ≥ 12 percent
• ≥ 8.5 percent

32. 31 Jan 2014JRA & Associates
 TP Documentation
 Transfer Pricing Planning and Supply Chain
Structuring
 Transfer Pricing Controversy Management
 Mutual Agreement Procedure / Advance Pricing
Arrangement
 Transfer Pricing Valuation Service
 Filling of form 3CEFA for application for opting for
SHR.
 Establishment of criteria for effecting SHRs.
Service offerings in Transfer Pricing