Case Studies

1. Case Studies PwC

2. Case Study I • Holding company receives service fees from : F Co. - INR 6 crores from ICo 1 (WOS) - INR 4 crores from ICo 2 overseas - INR 8 crores from F Co. India Income Implications Holding Co. Applicability of domestic TP provisions to a) Holding Co Expense b) I Co. 1 I Co. 1 I Co. 2 c) I Co. 2 Tax Free Entity Tax Free Entity Taxable Entity d) F Co.

3. Implication

4. Case Study II • Holding company makes payment for services to: F Co. - INR 2 crores - ICo 1 (WOS) - INR 2 crores - ICo 2 overseas - INR 2 crores - F Co. India Total services payment – 6 Expense Holding Co. crores Implications Whether Domestic TP would apply Income to the Holding Company I Co. 1 I Co. 2 Tax Free Entity Taxable Entity

5. Implication

6. Case Study III Market price v/s Arm‟s length price • ICo 2 acts as a contract manufacturer for ICo 1 • ICo 1 purchases a fixed quantity of goods from FCo ICo 2 every year – assured commitment • In order to utilise entire manufacturing capacity, ICo 2 also manufactures, and sells goods to third parties • ICo 2 charges same rate for the products sold to third parties and to ICo 1 100% 100% • Prior to the amendment: Price charged to INR 100 p.u third parties arguably was considered as market ICo 1 ICo 2 Sale of goods price and since the price paid by ICo 1 correspond to market price, there has been no 40A(2)(b) challenge Sale of goods INR 100 p.u • Post amendment, whether INR 100 would be the right arm‟s length price for the purchases Third Parties made by ICo 1? • Can sale price by ICo 2 to ICo 1 be compared with sale price by ICo 2 to Third Parties on account of certain differences viz. difference in functional profile?

7. Implication • Even though price charged to related party & unrelated party are same, question of determination of Arm’s Length must have to be established. • Terms of Agreement must have to be seen. For e.g.

8. Case Study IV Deduction under section 80IC • Company A has three units: Unit A and Unit Company A B (Manufacturing units) and Head Office unit Overall Profit margin 15% • Head Office performs functions of R&D, marketing and distribution of goods produced by the manufacturing units HO • Profitability is ascertained by allocating the expenses incurred by the Head Office in an Unit - A Unit - B Tax Non- appropriate ratio between Unit A and Unit B Holiday Tax u/s 80IC Holiday • Whether the reported profitability of the tax holiday undertaking can be varied by the tax authorities on the grounds that: ― HO is separate undertaking; and Owns Brands, performs ― Costs allocable to Unit A should be R&D and marketing activities, etc charged using mark up or alternatively imputing a royalty cost?

9. Case Study VI FACTS Unit A • Expenses incurred for F.Y. 12-13 for which Unit A raised Debit Note to Unit B. • Unit B has not yet commenced the operation. • Hence, no profit is generated for F.Y. 2012-13. • It may or may not start operation in F.Y. 2013-14. Expenses incurred of Rs. 7 Crore Unit B (Power Generation Unit) • Whether the nature of transaction covered under the purview of Domestic Transfer Pricing? • If yes then still it be applicable under Domestic Transfer Pricing as no profit is generated by Unit B in that year to take exemption u/s 80IA(8)?

10. Case Study VII : Specified Domestic Transactions • A, B, C ltd are Indian companies • X,Y, Z Inc. are foreign companies • Value of each transaction exceeds 5 crore. They are as under: • A ltd sells goods to Z Inc. • A ltd has borrowed interest bearing loan from X Inc. • B ltd pays royalty to A ltd for use of brand • B ltd purchases goods from C ltd • Y Inc. provides managerial services to A ltd • C ltd received technical services from X Inc. X Inc. Y Inc. Z Inc. 22% 35% 23% A Ltd. 40% 60% B Ltd. C Ltd. Which of the above transactions are regarded as SDT???

11. A ltd sells goods to Z Inc. Expense Z Inc. Sells goods 23% holding A Ltd. Income Neither Domestic nor International Transfer Pricing will apply.

12. A ltd has borrowed interest bearing loan from X Inc. Income X Inc. 35% holding Expense A Ltd. International Transfer Pricing will apply & hence Domestic Transfer Pricing will not applicable.

13. B ltd pays royalty to A ltd for use of brand Income A Ltd. 40% holding Royalty B Ltd. Expense Domestic Transfer Pricing will apply.

14. B ltd purchases goods from C ltd Common Holding A Ltd. 40% Holding 60% Holding B Ltd. C Ltd. Income Expense Domestic Transfer Pricing will apply.

15. Y Inc. provides managerial services to A ltd Income Y Inc. 22% Holding A Ltd. Expense International Transfer Pricing will not apply. However, Domestic Transfer Pricing will apply

16. C ltd received technical services from X Inc. Income X Inc. 35% Holding A Ltd. 60% Holding C Ltd. Expense Domestic Transfer Pricing will apply.

17. Case Study VIII : Aggregation for the purpose of determining SDT Unit A of X Ltd. (Power Generation Unit) Eligible for 80IA X Ltd. X Ltd. X ltd purchases power for Unit B worth Rs. 1 Crore 25% holding Sold goods of Rs 1 Crore Power generated by unit A is used by Unit B Transaction Value Rs. 2 Crore Sister Concern 1 Eligible for 80IC Sister Concern 2 Unit B of X Ltd. (Manufacturing steel in Himachal Pradesh) Eligible for 80IC • Whether foregoing transactions would constitute SDT u/s 92 BA? • If transaction between X Ltd. & sister concern 2 is worth Rs. 2 Crore, then whether Answer would change accordingly?

18. Case Study IX : Value for the purpose of aggregation, Where no entry is made in books of account FACTS Y Ltd. • Fly Ash is produced during generation of steam which is used by brick manufacturing unit. • No specific cost is attached to Fly ash (being a by-product). • Hence transfer from power unit to brick unit has not been recognized in books of accounts. Engaged in business of Brick manufacturing Generation of steam and power by use of coal FLY ASH(by product generated) Eligible for deduction u/s 80IA (Tax Free) • What value of the fly ash would be considered for purpose of determining whether the value of transaction exceeds a sum of Rs 5 crore as required under section 92BA of the Act?

19. Case Study X : Inter-unit transfer of stores and spares FACTS • Z ltd engaged in manufacturing of various products through various units. • Out of various units, one is eligible unit u/s 80-IC. • Purchase of Stores/spares done at one place and then the same is used by different units as per the requirement. A Ltd. Purchase Centralized Various other units Eligible unit u/s 80IC Purchase utilization • Whether the stores and spares purchased by Z ltd and used by the eligible unit would e covered u/s 80-IA(8) of the Act; • If yes, what would be the ALP for the same?

20. Case Study XI : DTP in case of loss making unit in SEZ Engaged in the business of computer software development FACTS I Ltd. • During the year, I. Ltd. has entered into Software Development contract with its sister concerns. • The concerned financial year is the first financial year of the Unit and has resulted in an overall loss from its operations. • Accordingly, no deduction has been claimed by the company under Section 10AA for the said year. SEZ Unit • Whether DTP provisions, relating to Section 10AA, would apply to the SEZ unit for the relevant year?

21. Case Study XII : Applicability of DTP provisions before the “initial assessment year’ of an eligible unit FACTS QUERY • Commence business of generation and distribution of power • Eligible for Deduction u/s 80IA (4)(iv) • Quantum of Deduction : 100% of the profits and gain derived from such business for 10 consecutive years • As per Section 80IA (2), deduction can be claimed for any 10 consecutive assessment years out of 15 years beginning from the year in which the undertaking generates power. • W Ltd. has decided to start claiming deduction only from the 6th assessment year. • Whether the DTP provisions relating to Section 80IA (8) / 80IA (10) would apply to W Ltd. for the first 5 years of the power business, when it would not be claiming any deduction under Section 80IA? • Whether the position would be different, if the power undertaking is incurring losses in these five years and the profits generated by other business undertaking of W Ltd. are adequate to absorb the losses so incurred by the power undertaking? • Whether DTP provisions would apply in the 6th year, if even in that year, the power undertaking continues to incur losses? • Whether DTP provisions would apply if after commencement of the initial assessment year, the power undertaking incurs losses?

22. Case Study XIII: Section 40A(2) and section 80-IA(10) QUERY Manufactures cement in the state of Uttaranchal, Profit is eligible for deduction u/s 80IC • Whether Section 40A(2) of the Act would apply to such purchases? • Whether section 80-IA (10) of the Act would apply to such purchases? • Whether such transactions would be regarded as SDT’s ? • If yes, what would be the implications on the assessee A Pvt. Ltd. 35% holding Purchases limestone of Rs. 6 Crore B Pvt. Ltd. Group company

23. Case Study XIV : Director’s Remuneration Public limited company Unit A Sitting fees and commission Remuneration • Which would be the most appropriate method of determining the ALP Mr. XYZ Mr. ABC Ms DEF Non-Executive Directors Executive Directors

24. Case Study XV : Allocation of head office expenses Head Office P Ltd. Pays remuneration to whole time directors and managers One of the activity is construction of housing project (Eligible for deduction u/s 80-IB(10) QUERY • Will the provision of Section 80A(6)/80-IA(8) and in turn the DTP regulations apply for the purpose of allocation of a part of the managerial remuneration to the housing project while computing the eligible profits form the housing project.

25. Case Study XVI : Further Processing of goods Raw Material Supplies to X Pvt. Ltd. Y Pvt. Ltd. Transactions exceeds Rs. 5 Crore Further Process & send back to Makes Directors of Both the Companies are from same family. • Whether SDT Provision will be applicable or not? • If yes, which method should be adopted for determining ALP ?

26. Case Study XVII : SDT between P’ship Firms Sold goods @ Rs. 90 Sold goods @ Rs. 100 • Whether the provisions of Specified Domestic transactions are applicable to Firm ABC or not? • Now if answer is NO, how to report & what to report? • If firm ABC is able to establish that all sale are bona fide transactions with closely connected firm XYZ and results in NO tax avoidance and / or claiming higher deduction u/s 80-IC by it, can it argue that since charging provisions are not applicable, SDT provisions dealing with valuation should not apply and thus Chapter X does not apply to it?

27. ISSUES Is provisions of SDT would be applicable to insurance companies whose computation of profit as per section 44 of the Act is to be computed as per first schedule?

28. ISSUES Whether section 40(A)(2)(b) would be applicable on two state government companies who entirely have different business but they have transactions inter se?

29. ISSUES Whether transaction between two related companies whereby sales is made by profit making company at a lower rate to loss making company would attract SDT provisions?

30. ISSUES Can higher profit earned by the company be considered as ‘ more than ordinary profits’ under section 80IA(10)?

31. ISSUES What is the appropriate approach for the company to demonstrate that section 80IA(10) should not apply?

32. ISSUES Can the tax authorities restrict the tax holiday claim to the extent of the average profits earned by the comparable companies in the light of amendments in Finance Act, 2012 related to domestic transactions?