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CA. Prashant Kotecha Baroda Branch of WICASA Full Day Seminar on Income Tax
25 February 2010
Return of income Details of Annual Report / Financial Statements Form 3CD (Under Section 44AB) From 3CEB (Under Section 92E)
25 February 2010
Form 3CEB
Transfer Pricing Audit Only disclosure of International
25 February 2010
General The price at which one entity / division transfers goods or renders services to another division / entity International The price at which an enterprise in Country A transfers goods or renders services to an enterprise in Country B belonging to the same multinational group
Finished goods
B Ltd.
A Inc.
25 February 2010
important international taxation issue in the World. Over 2/3rd of international trade is carried out within multinational enterprises (MNEs). transactions between MNEs arises questions of quantification of taxation eligibility of each country on the same transaction.
The
Governments need to ensure that the taxable profits of MNEs are not artificially shifted out of their jurisdiction and that the tax base reported by MNEs in their country reflects the economic activity undertaken therein.
CA. Prashant Kotecha
25 February 2010
Foreign investment started pouring in as a result of economic reform measures taken by the Government. Industrial licensing policy has been considerably liberalized, tax structure simplified and made internationally compatible. The economic climate in the country is conducive to investment. India has entered into agreements with almost all the capital and technology exporting countries, to avoid double taxation of income arising in India by virtue of business connection.
Introduction to Transfer Pricing CA. Prashant Kotecha
25 February 2010
25 February 2010
25 February 2010
developing countries
Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with
25 February 2010
Tax Avoidance
India
Co. A
S.P. Cost
Rs.120 Rs. 90
Tax @ 35%
USA
Co. A Sells to Co. C at Rs. 120 Profit by Co. A is Rs. 30 Tax Rs. 10.50 (@ 35%)
Co. C
25 February 2010
Tax Avoidance
India
Co. A Co. B
Dubai
Tax Heaven
Co. C
Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5
25 February 2010
TP Regulation in India
Special Provisions Relating to Avoidance of Tax
92 92A 92B 92C 92CA 92D 92E 92F Computation of income from international transaction having regard to arms length price Associated Enterprise International Transaction Computation of Arms Length Price Reference to Transfer Pricing Officer Maintenance of information and documents Report from Accountant to be filed Definitions of certain terms relevant to computation of arms length price
CA. Prashant Kotecha
25 February 2010
The price that is charged from or paid to unrelated parties in uncontrolled conditions.
25 February 2010
goods, or
Possession of knowhow, patents, copyrights, trade-marks, licenses franchises,
etc. or
Investment or Providing loans or In the business of acquiring, holding, underwriting or dealing with shares,
25 February 2010
Section - 92
Computation of income from international transaction
An international transaction, between two or more
associated enterprise
Income to be derived having regard to arms length price. Provisions of this section shall not apply in case it has the
effect of reducing income chargeable to tax, or of increasing the loss, as the case may be.
Introduction to Transfer Pricing CA. Prashant Kotecha
25 February 2010
Not -Applicable
Confusing
25 February 2010
Introduction to Transfer Pricing
Thumb Rule
Applicability of Transfer Pricing Regulations.
Four basic conditions :1. The transaction should be international transaction, and 2. It should be between two or more enterprises as defined in
92A, and
4. At least one of them is non-resident in India as per section -6
Introduction to Transfer Pricing CA. Prashant Kotecha
25 February 2010
25 February 2010
interest
Sec 92A Covers, in general, the persons participates in management, control, or capital or having influence over the other person in respect of transactions entered
Covers all the persons covered
25 February 2010
Analyzing 92A
1. Direct AE
92(1)(a) Associated Enterprise (AE) in relation to other enterprise means an enterprise: participates, directly or indirectly, or through intermediaries in --management or, --control or, --capital of other enterprise.
Introduction to Transfer Pricing CA. Prashant Kotecha
25 February 2010
Analyzing 92A
India
Co. A Participates
Co. B
Participates
Participates
Co. C
25 February 2010
Analyzing 92A
1. Direct AE
92A(1)(b) The one or more persons participates directly or indirectly or through intermediary in --management or, --control or, --capital of one enterprise, the same person or persons participates in that of the other enterprise directly or indirectly or through intermediary.
Introduction to Transfer Pricing CA. Prashant Kotecha
25 February 2010
Analyzing 92A
India
Co. A
Participates
Participates
Co. B
25 February 2010
Analyzing 92A
2. Indirect AE (Deemed AE)
92A(2)(a) two enterprises shall be deemed to be associated enterprises if, at any time during the previous year
one enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in the other enterprise; or
25 February 2010
Analyzing 92A
India
Co. A
Co. B
25 February 2010
Analyzing 92A
2. Indirect AE (Deemed AE)
92A(2)(b) two enterprises shall be deemed to be associated enterprises if, at any time during the previous year
any person or enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in each of such enterprises; or
25 February 2010
Analyzing 92A
India
Co. B
25 February 2010
Analyzing 92A
2. Indirect AE (Deemed AE)
92A(2)(c) two enterprises shall be deemed to be associated enterprises if, at any time during the previous year
a loan advanced by one enterprise to the other enterprise constitutes not less than fifty-one per cent of the book value of the total assets of the other enterprise; or
CA. Prashant Kotecha
25 February 2010
Analyzing 92A
India
Co. A
Co. B
25 February 2010
Analyzing 92A
2. Indirect AE (Deemed AE)
92A(2)(d) two enterprises shall be deemed to be associated enterprises if, at any time during the previous year
one enterprise guarantees not less than ten per cent of the total borrowings of the other enterprise; or
25 February 2010
Analyzing 92A
India
Co. A Associated Enterprises
Loan of US $ 20 Billion Guarantees US $ 2 Billion (10% of Loan) Bank / financial inst. Co. B
25 February 2010
Analyzing 92A
2. Indirect AE (Deemed AE)
92A(2)(e) two enterprises shall be deemed to be associated enterprises if, at any time during the previous year
more than half of the board of directors or members of the governing board, or one or more executive directors or executive members of the governing board of one enterprise, are appointed by the other enterprise; or
CA. Prashant Kotecha
25 February 2010
Analyzing 92A
India
Co. A
Appoints more than half of Board of Directors / members or 1 or more Executive Directors
Associated Enterprises
Co. B
25 February 2010
Analyzing 92A
2. Indirect AE (Deemed AE)
92A(2)(f) two enterprises shall be deemed to be associated enterprises if, at any time during the previous year
more than half of the directors or members of the governing board, or one or more of the executive directors or members of the governing board, of each of the two enterprises are appointed by the same person or persons; or
CA. Prashant Kotecha
25 February 2010
Analyzing 92A
India
Appoints > 50% of Board of Directors / members or 1 or more E.D. Board / Governing Body Person(s) Sec 2(31)
Co. A
Associated Enterprises
Co. B
25 February 2010
Analyzing 92A
2. Indirect AE (Deemed AE)
92A(2)(g) two enterprises shall be deemed to be associated enterprises if, at any time during the previous year
the manufacture or processing of goods or articles or business carried out by one enterprise is wholly dependent on the use of know-how, patents, copyrights, trade-marks, licenses, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights; or
25 February 2010
Analyzing 92A
India
Co. A Manufactures/processes goods or articles
Dependent on Associated Enterprises Owner or in possession of exclusive rights of know-how, patent, copy-rights etc.
Co. B
25 February 2010
Analyzing 92A
2. Indirect AE (Deemed AE)
92A(2)(h) two enterprises shall be deemed to be associated enterprises if, at any time during the previous year
ninety per cent or more of the raw materials and consumables required for the manufacture or processing of goods or articles carried out by one enterprise, are supplied by the other enterprise, or by persons specified by the other enterprise, and the prices and other conditions relating to the supply are influenced by such other enterprise; or
CA. Prashant Kotecha
25 February 2010
Analyzing 92A
India
Co. A
Associated Enterprises
Procures at least 90% of total Requirement of RM & Consumables terms and prices defined by Co. B
Co. B
OR
25 February 2010
Analyzing 92A
2. Indirect AE (Deemed AE)
92A(2)(i) two enterprises shall be deemed to be associated enterprises if, at any time during the previous year
the goods or articles manufactured or processed by one enterprise, are sold to the other enterprise or to persons specified by the other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprise; or
CA. Prashant Kotecha
25 February 2010
Analyzing 92A
India
Co. A
OR
25 February 2010
Analyzing 92A
2. Indirect AE (Deemed AE)
92A(2)(j) two enterprises shall be deemed to be associated enterprises if, at any time during the previous year
where one enterprise is controlled by an individual, the other enterprise is also controlled by such individual or his relative or jointly by such individual and relative of such individual; or
CA. Prashant Kotecha
25 February 2010
Analyzing 92A
India
Controlled By Co. A Associated Enterprises Same Individual Controlled By Co. B or His Relative or Jointly An Individual
25 February 2010
Analyzing 92A
2. Indirect AE (Deemed AE)
92A(2)(k) two enterprises shall be deemed to be associated enterprises if, at any time during the previous year
where one enterprise is controlled by a Hindu undivided family, the other enterprise is controlled by a member of such Hindu undivided family or by a relative of a member of such Hindu undivided family or jointly by such member and his relative; or
CA. Prashant Kotecha
25 February 2010
Analyzing 92A
India
Controlled By Co. A Associated Enterprises Same HUF or Controlled By Co. B Its member(s) or Members relatives or Jointly HUF
25 February 2010
Analyzing 92A
2. Indirect AE (Deemed AE)
92A(2)(l) two enterprises shall be deemed to be associated enterprises if, at any time during the previous year
where one enterprise is a firm, association of persons or body of individuals, the other enterprise holds not less than ten per cent interest in such firm, association of persons or body of individuals; or
CA. Prashant Kotecha
25 February 2010
Analyzing 92A
India
Partnership Firm
or
AOP
or
BOI
25 February 2010
Analyzing 92A
2. Indirect AE (Deemed AE)
92A(2)(m) two enterprises shall be deemed to be associated enterprises if, at any time during the previous year
there exists between the two enterprises, any relationship of mutual interest, as may be prescribed.
25 February 2010
Analyzing 92A
India
Co. A
Co. B
25 February 2010
International Transaction
Section 92B(1)
For the purposes of this section and sections 92, 92C, 92D and 92E,
international transaction means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises.
25 February 2010
International Transaction
Section 92B(2) A transaction entered into by an enterprise with a person
other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise.
Introduction to Transfer Pricing CA. Prashant Kotecha
25 February 2010
Computation of ALP
Section 92C
The arms length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to - the nature of transaction or - class of transaction or - class of associated persons or - functions performed by such persons or - such other relevant factors (a) Comparable Uncontrolled Price Method; (CUP) (b) Resale Price Method; (RPM) (c) Cost Plus Method; (CPM) (d) Profit Split Method; (PSM) (e) Transactional Net Margin Method; (TNMM)
25 February 2010
TP Assessment
Section 92CA
If A.O. considers it necessary or expedient so to do, he may,
with the previous approval of the Commissioner, refer the computation of the arms length price in relation to the said international transaction under section 92C to the Transfer Pricing Officer (TPO).
On receipt of the order from the TPO, the A.O. shall
proceed to compute the total income of the assessee in conformity with the arms length price as so determined by the TPO.
Introduction to Transfer Pricing CA. Prashant Kotecha
25 February 2010
Documentation
Section 92D Every person who has entered into an international
transaction shall keep and maintain such information and document in respect thereof, as prescribed under Rule 10D Requirement of Rule 10D
Introduction Company Overview Industry Overview Details of International Transactions FAR Analysis Most Appropriate Method Economic Analysis
CA. Prashant Kotecha
25 February 2010
TP Audit Report
transaction during a previous year shall obtain a report from an accountant and furnish such report on or before 30th September, in form 3CEB duly signed and verified by an accountant.
25 February 2010
Questions ?...?...?
Contact Details Mo. 98251 53981 Mail: prashant.kotecha@kcmehta.com kotechaprashant@gmail.com
Introduction to Transfer Pricing CA. Prashant Kotecha
25 February 2010
Thank You
25 February 2010