APPLICABILITY OF TRANSFER PRICING By Monica Jain Nilay Shah

1. APPLICABILITY OF TRANSFER PRICINGBy Monica Jain Nilay Shah M.V.Damania & Co.

2. What is Transfer Pricing? M.V.Damania & Co.

3. Intent of Indian TP Regulations (International transactions) Shifting of Profits India Overseas Indian Co. Associated Enterprise (AE Co.) Tax @ 32.45% Tax @ lower rate approx 10% Shifting of Losses Tax Saving for the Group – Loss to Indian revenue M.V.Damania & Co.

4. International Transaction A transaction between two Associated Enterprises, Either or both of whom are Non - Residents, in the nature of Purchase, sale, lease of Provision of Services Borrowing/Lending of money Tangible/intangible property Cost Sharing arrangements M.V.Damania & Co.

5. MEANING OF ASSOCIATED ENTERPRISES (INTERNATIONAL TRANSACTIONS) • Capital related: 26% or more equity holding. • Management related: Appointment of one or more EDs >1/2 of the BOD. • Control: Wholly dependent know-how etc., 90% or more of raw materials supplied etc. • Loan advanced by one enterprise => 51% of the BV of total assets of the other enterprise. • One enterprise guarantees => 10% of the total borrowings of the other enterprise. M.V.Damania & Co.

6. MEANING OF ASSOCIATED ENTERPRISES (INTERNATIONAL TRANSACTIONS) • Common control • Firm/AOP/BOI holds not less than 10 % interest in other Firm/AOP/BOI • There exists between 2 enterprises any relationship of mutual interest as may be prescribed. M.V.Damania & Co.

7. EXAMPLE A Ltd. (Indian Co.) has taken loan from foreign bank of ` 2.56 crore during F.Y. 2012-13. Book Value of A Ltd. is ` 5 crore as on date of borrowing and on 31st March, 2013 Book Value is ` 6 crore. Are A Ltd. & Bank AEs ? M.V.Damania & Co.

8. SPECIFIED DOMESTIC TRANSACTIONS UNDER INCOME TAX ACT – 1961 M.V.Damania & Co.

9. Intent of TP Regulations… (Domestic transactions) Shifting of expenses India India Indian Co. Loss making Related Enterprise Profit making Tax @ 32.45% Reduced tax due to shifting of profits Tax @ 32.45% No tax or reduced tax due to loss Shifting of income Tax Saving for the Group – Loss to Indian revenue M.V.Damania & Co.

10. Intent of Indian TP Regulations… (Domestic transactions) Loss to Revenue – Tax Saving to the Group M.V.Damania & Co.

11. Intent of TP Regulations…(Domestic transactions) 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. M.V.Damania & Co.

12. Overview of Provisions of Section 92BA Inter unit transferof goods & services by undertakings to which profit-linked deductions apply SDT Expenditure incurred between related partiesdefined under section 40A Any other transaction that may be specified Transactions between undertakings, to which profit-linked deductions apply, having close connection M.V.Damania & Co.

13. Relationship can exists any timeduring the year Sec 40A (2)(b) – Related Party M.V.Damania & Co.

14. Type of transactions covered (illustrations for payments made by a Company) … • Case 2 - To an individual who has substantial interest in the business or profession of the taxpayer or relative of such individual – Section 40A(2)(b)(iii) Case 1 - Director or any relative of the Director of the taxpayer – Section 40A(2)(b)(ii) Assessee (Taxpayer) Assessee (Taxpayer) Director Director Substantial interest >20% Relative Mr. A Mr. D Mr. C Mr. A Mr. D Mr. C Relative Relative Covered transactions Holding Structure M.V.Damania & Co.

15. Type of transactions covered (illustrations for payments made by a Company) … • Case 4 – Any other company carrying on business in which the first mentioned company has substantial interest – Section 40A(2)(b)(iv) Case 3 – To a Company having substantial interest in the business of the taxpayer or any director of such company or relative of the director – Section 40A(2)(b)(iv) Mr. D Assessee (Taxpayer) C Ltd Director Substantial interest >20% Assessee (Taxpayer) A Ltd Relative Substantial interest >20% Substantial interest >20% Substantial interest >20% Mr. C A Ltd B Ltd Covered transactions Holding Structure M.V.Damania & Co.

16. Type of transactions covered (illustrations for payments made by a Company) … Case 5 – To a Company of which a director has a substantial interest in the business of the taxpayer or any director of such company or relative of the director – Section 40A(2)(b)(v) B Ltd Director Director Substantial interest >20% Assessee (Taxpayer) Mr. A Mr. C Relative Mr. D Covered transactions Holding Structure M.V.Damania & Co.

17. Type of transactions covered (illustrations for payments made by a Company)… Case 6 – To a Company in which the taxpayer has substantial interest in the business of the company – Section 40A(2)(b)(vi)(B) • Case 7 – Any director or relative of the director of taxpayer having substantial interest in that person– Section 40A(2)(b)(vi)(B) Substantial interest >20% Assessee (Taxpayer) Mr C A Ltd Director Assessee (Taxpayer) Substantial interest >20% Relative B Ltd Substantial interest >20% Mr B D Ltd Covered transactions Holding Structure M.V.Damania & Co.

18. A Ltd is a manufacturing Company. A Limited Purchases RM from B Ltd. of Rs. 4.5 Cr and sales FG to B Limited of Rs 5.5cr. B Limited has substantial interest in A Limited. Analyze if the above transaction is covered under SDT for A Limited and B Limited? If in the above case A ltd. Is located in SEZ(special economic zone) area. Is this transactions covered under SDT? M.V.Damania & Co.

19. A Limited (Indian Company) is holding 24 % shares in B Inc.(Overseas Company). Analyze if A Limited and B Inc. are associate enterprise. M.V.Damania & Co.

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