Statement of Credentials | 1

Transfer Pricing

Recent Trends & Key Developments

PHD Chamber

International Tax Conference

September 04, 2014

New Delhi

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SESSION DETAILS

Topic: Transfer Pricing – Recent Trends and Key Developments

Moderator – Mr. Mukesh Butani, Chairman, BMR Legal

Panelists

Mr. Vijay Iyer, Partner and National Leader, EY

Mr. Tarun Arora, Partner, Deloitte

Mr. Amit Agarwal, Partner, Nangia & Co.

Mr. Sanjiv Malhotra, Partner, BMR & Associates LLP

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CONTENTS

DISPUTES LANDSCAPE

SAFE HARBOUR

APA

RECENT AMENDMENTS – FINANCE

ACT, 2014

CBDT GUIDANCE ON R&D

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DISPUTES LANDSCAPE

260 490730

1,6502,320

4,940

9,470

11,6699,934

23 22

27

39

44

51 5153 53

0

2000

4000

6000

8000

10000

12000

14000

0

10

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2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

Am

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Assessment Year

Adjustment Amount (USD Million) % of adjustment cases

Source: Annual Report 2013-14 of Ministry of Finance (Budget Division)

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SAFE HARBOUR RULES

What has been the experience so far?

Is it inconsistent with arm’s length standard?

Implicit premium over arm’s length price?

Dis-entitlement under MAP for avoidance of double taxation

Subjectivity around characterization

What about Domestic Transactions?

Should safe harbour rules be extended to transactions such as support services,

management fee transactions?

Global policies of MNEs vs safe harbour margins?

Requirement to maintain documentation

How do we see safe harbour rules evolving in India?

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APA REGIME – SOME THOUGHTS

What has been the experience so far

378 APA applications filed as on 31 March 2014 - enthusiastic response in second cycle

Issues covered: Marketing intangibles, management cross charges, corporate guarantee,

share issuance, IT / ITeS, royalty, contract research and development, contract

manufacturing, TNMM margins and cost allocations

5 Unilateral APAs signed on March 31, 2014

Industry - Pharmaceuticals; Telecom and Financial services

Transactions - Corporate guarantees; Non-binding investment advisory services and

Contract manufacturing

Who should opt for APA ?

Companies facing litigation on similar issues

Where new transactions are proposed to be introduced

Losses

Routine transactions or complex ones?

Roll back provisions introduced under the APA scheme (subject to inflation adjustment) -

Amendment to the APA Rules awaited

What more needs to be done?

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KEY AMENDMENTS: FINANCE ACT, 2014

Inter-quartile range

Positive move – Better late than never

How does it work globally?

What does the law say now?

How the adjustment would be made if the price is outside the range – where in the range the transfer price should be set?

Multiple year data

Why was the amendment required?

What has been the Courts’ view on multiple year data?

Global best practices

What is the law as of today?

Deemed transactions

Historical points / controversies

Key rulings – Kodak India, Swarnandhara IJMII Integrated Township Development Co. Pvt. Ltd.

New law as of today

Penalty – Section 271G

Need for this amendment especially when penalty provision under section 271AA (penalty on failure to maintain the mandatory transfer pricing documentation) has not been amended?

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CBDT GUIDANCE ON R&D SERVICES

Circular No. 2 rescinded by issuing new Circular No. 5

Circular No. 3 amended and reissued as Circular No. 6

Controversy explained

General operating models

Positive Changes by CBDT

Restoration to selection of ‘most appropriate method’ instead of profit split method

Elimination of ‘cumulatively complied with’ in respect of conditions in circular no. 3

Deletion of the requirement that R&D centre does not use economically significant assets including intangibles

Acknowledgment of existence of three categories

Grey Areas

Clarity needed with regard to categorization

Economically significant assets and Economically significant realized risks – possibility of varied interpretation

Challenges

Onus on taxpayer to correctly determine characterization and support through documentation

UN TP Manual and Discussion Draft on Intangibles

Key observations

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SOME HOT TOPICS

INTERPLAY BETWEEN ALP & TAX HOLIDAY PROVISIONS

A.T. Kearney India Pvt. Ltd. Vs Additional Commissioner of Income Tax, Range – 1, New Delhi

Income Tax Appellate Tribunal, Delhi Benches

ITA No. 348/Del/2013

Bench Members: Sh. R.S. Sayal (AM) and Sh. George George K. (JM)

• Claim of deduction under section 10A in respect of revenue from

‘international transactions’

Main issue

Contentions discussed

Whether section 80-IA(10) applies when the second party to the

transaction is a non-resident

It should be an arranged course of business between the related persons

to produce more than ordinary profits

Effect of insertion of proviso to sub-section (10) w.e.f. 1st April 2013

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SOME HOT TOPICS

INTERPLAY BETWEEN ALP & TAX HOLIDAY PROVISIONS

Expression ‘any other person’ not qualified by phrase ‘resident in India’

Related person can be resident of India or of any country

Provision is simply concerned with the increase in profits of the assessee having

eligible business

Cumulative conditions to be satisfied – ‘Close connection’ and ‘arrangement’

Utmost importance on the part of the Assessing Officer to demonstrate that the

transactions were ‘arranged’ to produce more profit - position has to be ‘necessarily

proved’

Mere higher profits of an eligible business is no criteria to invoke section 80-IA(10)

Proviso to sub-section (10) of section 80-IA applicable in case of Specified Domestic

Transactions and is effective 1st April 2013 – does not include international

transactions

Effect of proviso – in case of ‘arranged’ SDT – ‘reasonable profit’ shall be profit

determined having regard to ALP - AO still to establish that such ‘arrangement; is not

correct

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SOME HOT TOPICS

MOST APPROPRIATE METHOD

Mattel Toys (I) Pvt. Ltd. Vs Deputy Commissioner of Income Tax, Circle 6(3), Mumbai

Income Tax Appellate Tribunal, Mumbai Benches

ITA No. 2476/Mum/2008

Bench Members: Sh. Rajendra Singh (AM) and Sh. Amit Shukla (JM)

• Change in the ‘most appropriate method’ (‘MAM’) so as to produce better

or more appropriate ALP

Main issue

Assessment year 2002-03

Mattel Toys (I) Pvt. Ltd. (‘assessee’) Subsidiary of Mattel Inc, USA

Disputed transaction Import of finished goods for resale in India

Method selected as per TP Study Transactional Net Margin Method (‘TNMM’)

Net margin of assessee (-) 51.22 percent

Adjusted margin of comparables (-) 17.41 percent

Contention of assessee – Most Appropriate Method Resale Price Method (‘RPM’) is the MAM

Adjustment made by the TPO INR 1.32 crore

Brief Facts

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SOME HOT TOPICS

MOST APPROPRIATE METHOD

Assessee entitled to raise plea for change of method in assessment/ appeal

proceedings

Appellate Court must consider such plea if change in method produces better or

more appropriate ALP on facts of the case

Upholds assessee's claim for use of Resale Price Method (RPM) for benchmarking

distribution activity

Product similarity not vital aspect for RPM, but operational comparability to be seen

Reliance placed on OECD TP Guidelines & ICAI Guidelines

ITAT ruling in Textronix and L'oreal relied upon

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DISCLAIMER

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This presentation provides general information existing as at the time

of preparation and reflects personal views of the Panel. The

presentation is only meant for the panel discussion on International

Tax Conference on Recent Trends & Key Developments organized by

PHD Chamber. No responsibility for loss arising to any person acting

or refraining from acting as a result of any material contained in this

presentation will be accepted by the Panel. It is recommended that

professional advice be taken based on the specific facts and

circumstances. This presentation does not substitute the need to refer

to the original pronouncements.

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GLOSSARY

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APA Advance Pricing Agreements

CBDT Central Board of Direct Taxes

ICAI The Institute of Chartered Accountants of India

IT Information Technology

ITeS Information Technology Enabled Services

ITAT Income Tax Appellate Tribunal

MAP Mutual Agreement Procedure

MNE Multinational Enterprises

OECD Organisation for Economic Co-operation and Development

R&D Research & Development

RPM Resale Price Method

SDT Specified Domestic Transactions

TNMM Transactional Net Margin Method

TP Transfer Pricing