Transfer Pricing

REVENUES PERSPECTIVE

A Presentation By

Ms Anuradha Bhatia DIT(TP)-II, Mumbai.

TRANSFER PRICING REVENUE'S PERSPECTIVE

INDEX

Background The REVENUES Perspective Our Expectations An Overview The Audited Accounts The Report in Form 3CEB Statutory Documentation Requirements Documentation Requirements and Expectation Bridging the Expectations Gap

TRANSFER PRICING REVENUE'S PERSPECTIVE

BACKGROUND

Transfer pricing (TP) is a subject of relatively recent origin, in the Indian tax regime.

The TP law is evolving. It reflects the dynamism/momentum, with which global trade is changing and emerging. The TP law in India is fast evolving and has evinced global interest.
Since TP itself needs to factor in the rapid movements in global trade, the law is bound to move in tandem.
contd... 3

TRANSFER PRICING REVENUE'S PERSPECTIVE BACKGROUND

Increasing globalization, dismantling of trade barriers and the free movement of capital are the change inducing factors Though TP is a limited subject in the tax code, its horizons being global, are much bigger. Its role in income tax revenues is gaining importance.

Conventionally, TP largely impacted foreign grown MNCs, but now, more and more home grown MNCs, as well as close knit/family run businesses like diamond and jewellery are in the TP net.
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TRANSFER PRICING REVENUE'S PERSPECTIVE

The recent flurry of ITAT TP judgments, indicates the appellate churning out of the law. Its principles will crystallize on an all India basis, in due course of time. The government is sensitive to the dynamic nature of the subject and is open to changes and amendments, so as to smoothen the TP administration. TP compliance costs are comparatively high.

The government is also sensitive to the TP compliance cost and the fact that even SMEs would tend to be in the TP net, if the threshold bar is not high enough.
contd
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TRANSFER PRICING REVENUE'S PERSPECTIVE

The limited availability of information in public domain has been a hindrance in TP audits. The volume of TP audits is increasing each year and so are the consequent adjustment to income of the assessees. The ITD is constantly reviewing the TP law and practices, training its staff and learning its lessons, both in India and abroad. You can call our lessons as CUP (internal/domestic) and TNMM (external/foreign). There is a lingering gap, between the expectations of the ITD and the tax payers compliance. The expectation gap needs to be bridged to the satisfaction of both 6 parties.

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THE REVENUE'SS PERSPECTIVE

Assessees need to pay more attention to TP compliances and maintenance of data/records. The flow of even mandatory information and disclosures, from the assesses, have not been free and forthright, at all times. TP conduct has not been satisfactory and information tends to be shared, when snared. Sharing of information facilitates TP audits.
contd

TRANSFER PRICING REVENUE'S PERSPECTIVE

There is a general unwillingness to give even routine data, on grounds of confidentiality and secrecy. At times data of even a wholly owned AE is not furnished, citing lack of control over the AE. Even though information is available, direct methods like CUP are avoided and TNMM is preferred.

TRANSFER PRICING REVENUE'S PERSPECTIVE

A more detailed and focussed effort is needed to explain the assessees business and transactions with AEs, particularly for new age/technology businesses. FAR analysis is often deficient and vague.
The list of comparables with the tested party, are cherry picked, and result in a biased statistical jugglery. ARs at times do not take the pains to effectively put forward their cases..BUT
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TRANSFER PRICING REVENUE'S PERSPECTIVE

We find that based on experience, the assessees, and their ARs, are willing to accept, amend and adapt.
There has been a willingness to accept our findings, on the part of the assessees and to rearrange their international transactions.
contd

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TRANSFER PRICING REVENUE'S PERSPECTIVE

Assessees have modified their TP practices, on the basis of past TP audits.

ARs have been willing to put in the efforts, to match our expectations.
ARs have kept pace with changes in the law, which is why I have been invited here

.
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TRANSFER PRICING REVENUE'S PERSPECTIVE

OUR EXPECTATIONS AN OVERVIEW

The primary expectations of the ITD from the tax payer, are basic and fundamental, as in any other tax administration matter viz.

comply with the TP law. maintain the records as stipulated. the data/documents furnished to the ITD must be correct, complete and forthright.
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TRANSFER PRICING REVENUE'S PERSPECTIVE

suitably explain the TP transactions, with adequate supporting evidence, avoid frivolous litigation and most important. do not arrange your affairs with AEs, such as to deprive India, of its legitimate revenue.

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THE AUDITED ACCOUNTS

The primary evidence, as well as the source of data, and the starting point of any tax scrutiny/audit remains the good old audited accounts. Glaring errors and mismatches have been noted between the audited accounts and TP information.
Errors of omission and commission in the accounts and mismatches between the audited accounts and the TP reports, obviously lead to suspicion and breakdown of customary trust and dependence on audited statements.
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TRANSFER PRICING REVENUE'S PERSPECTIVE

THE REPORT IN FORM 3CEB

The audited accounts and their supporting mandatory records, lead to the report of the chartered accountant in Form 3CEB. Just as the disclosures in the audited accounts have to be true and fair, so is it the case of disclosures in Form 3CEB.
contd

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TRANSFER PRICING REVENUE'S PERSPECTIVE

The ITD depends upon the Form 3CEB report and considers the attestation and disclosures of the following therein, with a sense of expected diligence and responsibility of the part of the respective CA

Examination of records related to international transactions (IT) of the assesses. That the information and documents related to the IT is proper. The particulars furnished in the annexure to Form 3CEB are true and correct.
contd

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TRANSFER PRICING REVENUE'S PERSPECTIVE

We thus expect a correct information related to the AEs as prescribed in disclosures in form 3CEB times.

and complete disclosure of IT of the assesses, with its the said annexure. TP have not been complete at
contd

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TRANSFER PRICING REVENUE'S PERSPECTIVE

While the Reports of the accountants in Form 3CEB have been by and large satisfactory, we do notice cases of : Concealment/incomplete disclosure of information. Non reporting of AEs and transactions with them. Mismatches between Form 3CEB and the audited accounts. Misclassification of information. ERRORS AND PARTICULARLY DELIBERATE ONES ERODE THE TRUST BETWEEN US AND THE ASSESSEES.

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TRANSFER PRICING REVENUE'S PERSPECTIVE

STATUTORY DOCUMENTATION REQUIREMENTS

The main operating data needed by the ITD for the TP audit of assessees, is clearly stated in Rule 10D of the Income Tax Rules, 1962. The requirement to maintain information and contemporaneous documents is mandatory and we expect a strict and complete compliance thereof. This information assists the TPO to do a proper and correct review of the assessees TP.
contd
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TRANSFER PRICING REVENUE'S PERSPECTIVE

We have noted numerous instances of such information not maintained or an unwillingness to furnish it, though mandatorily required. Such attitude of assessees has in fact been a subject matter of litigation at times. While the law of the land will suitably evolve, we believe that such stark unwillingness on the part of assessees portends an attitude to conceal.

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TRANSFER PRICING REVENUE'S PERSPECTIVE

DOCUMENTATION REQUIREMENTS AND EXPECTATION

The documentation requirements as mentioned in Rule 10D are summarized below :Organisational structure Details of shares Profile of the group Name, address, legal status, ownership linkages and country of tax residence of each of the enterprises in the group with whom taxpayer has entered into international transactions during the tax year.

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Nature of business / industry and market conditions

Broad description of the business of the taxpayer Industry background Business of the associated enterprises.

Controlled transactions

Nature and terms of international transactions Details of property transferred/services provided; Quantum and value of international transaction(s).
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TRANSFER PRICING REVENUE'S PERSPECTIVE Background documents Record of economic and market analysis Forecasts, budgets or any other financial estimates Record of uncontrolled transactions along with analysis to evaluate its comparability with international transactions Record and evaluation of comparability of transactions Description of functions performed, risks assumed and assets employed.

Comparability, functional and risk analysis

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TRANSFER PRICING REVENUE'S PERSPECTIVE Selection of the transfer pricing method Description of methods considered for determining ALP Best method selected, along with reasons for selection Record of actual working of ALP Details of actual working of the comparable data with respect to ALP Details of differences between comparable data and un-controlled transaction Mode of adjusting the factors.
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Application of the transfer pricing method

TRANSFER PRICING REVENUE'S PERSPECTIVE Assumptions, strategies, policies Supporting information Assumptions, policies and price negotiations, if any, which have critically affected the determination of SLP. Official reports, publications, databases and studies from the government in the country of residence of the AE, or any other country, as relevant to the international transaction; Market research studies and technical publications brought out by institutions of national or international repute; Correspondence documenting the terms negotiated between the AEs.

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BRIDGING THE EXPECTATIONS GAP

Since tax administration and enforcement, are strictly within the domain of the prescribed law, its requirements are explicit. So is the case of our expectations in the case of TP. The mandatory requirements of TP documentation and disclosures are clearly laid down by the law. The expectations of the ITD are thus an open secret and in public knowledge.
contd
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TRANSFER PRICING REVENUE'S PERSPECTIVE

A fair and proper administration of the tax law is a joint effort between the ITD and the assesses. Good submissions/arguments, beget good orders. An open, positive and transparent attitude on the part of the assesses, goes a long way in bridging the expectations gap.

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Thank You Very Much

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