It is important to develop good working relationships with clients to ensure effective audit engagement.

To be a successful auditor it is essential to build rapport with the audit client. There are several approaches and techniques related to rapport building. Auditors can adopt certain means in the course of their work to build a strong rapport with the client which will assist in maximizing the success of the audit function. The approaches include knowledge of client business, acting proactively, active listening, problem solving skills and a partnering approach to the relationships.

Knowledge of client business

To gain deep insight of the client business and processes it is very essential to review prior audit work papers including financial statements, understanding key performance metrics, trends for the area being reviewed. In depth understanding of the laws and regulations are all means to demonstrate an understanding of the business. An auditor who demonstrates their understanding of client business or processes that is being audited is often respected by the clients. For the areas of any uncertainty, auditors should consider discussing any questions with client management team.

Acting Proactively

Advance planning, proactive communication and advanced scheduling of meetings, arrivingto meetings on time and keeping to scheduled time and agenda items thus demonstrate respect for client time, hence will provide an opportunity to auditors to build rapport with the clients. Additionally, auditors should confirm their information requirement list is comprehensive to minimise any back and forth communication with the client. At the commencement of the engagement the auditor shall identify and understand the client’s communication preferences. The auditor should evaluate the form of communication to ensure it is the most effective method of communication to obtain necessary communication.

Active listening

Active listening play a vital role to increase rapport with the client, auditors should approach the meetings, interviews, and other interaction with the goal of active listening. Various obstacles to listening can prevent auditors from truly understanding the message being conveyed by the client. If needed the auditor should consider paraphrasing what has been said by the client to the client to ensure an accurate understanding of process and information relayed.

Problem solving skills

Engagements shall be approached by the auditors not only keeping in mind about the external and internal environment of the business and its unit but also with the motive to analyse the information gathered, including any exceptions identified to determine the who, why, where, when, what and how behind the information. This approach may assist auditor to identify risks that were not considered in prior audits. Close interactions with the client would help to recognize the most appropriate solutions for any risks that are uncovered thereby maximizing the audit effectiveness.

Strategic partner

Auditors have an opportunity to build rapport with and gain respect from, their clients by developing a partnering approach to the relationship. This include working closely with the clientto truly understand the root causes behind any issue identified and working recommendations that not only address the root cause but also consider the associated benefits and costs. This can incorporate reporting to senior management best practices client has implemented within its organization and sharing best practices that the auditor has seen within other operating units.

Impact of rapportbuilding

Developing good working relationship with the client not only make the day– to-day audit process more enjoyable for the auditor and the client, it also lead to a more successful audit function that will add value to the clients. Always look at the long term, not the short term with clients. Building trust is the key so that clients talk openly and we become their trusted advisor.

FUNDAMENTALSOF RAPPORT BUILDING

This article is contributed by Partners of SBS and Company LLP – Chartered Accountant Company You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

The TP Regulations in India were introduced in 2001 under the anti-abuse provisions of the Income-tax Act, 1961 (ITA) largely modelled on the TP principles followed by the organisation for Economic Cooperation and development (OECD) and aimed to ensure that transactions between group companies adhere to the arm's length standard. Initially, the TP law was applicable only to cross border transactions between group companies (referred to as Associated Enterprises or AEs) and now has been expanded to specified domestic transactions to. Chapter X deals with Transfer Pricing Regulations (TPR) with sec 92 to 92F of ITA. The rules for interpretation and implementation of the provisions are Rule 10A to 10E of the IncomeTax rules, 1962 (‘Rules’).

India as a TPjurisdiction has positioned itself in a reckonable manner in the global tax scenario. Overthe past 8 years, while the basic framework has remained the same, the law has seen substantial changes-some applying retrospectively. In the decade that passed since the introduction of TP regime in India, the country has seen a significant tax disputes and litigation surrounding TP issues reflecting growing aggressiveness on part of the tax authorities to plug purported erosion of tax base. Not surprising, in many global tax surveys, India is often recognized as a country having a very challengingTP regime.

In the recently concluded the TP audits, the Indian tax authorities continued with their rigorous enforcement and new issues continue to emerge such as allocation of location savings, investment in share capital, marketing intangibles etc. There is a sustained surge in the quantum of transfer pricing adjustments spanning many industries like information Technology, Automotive, Pharmaceuticals and Finance & Insurance, as evidentfrom the statistics in thetable below(INR Crore– Thousands):

While the Indian Government has been responsive to the taxpayer grievances on growing TP disputes and has initiated a number of steps to resolve TP Disputes (such as introduction of alternative resolution mechanism, APA, safe harbours, clarification on identification of contract development centres etc), the same have notyetyielded results. Further, the failure of the Governmentto bring in detailed guidance in the implementation of Indian TP regulations, has exacerbated the situation. Some of the recent development in TP in India has been discussed below briefly:

1. Safe Harbour Rules:

Safe Harbour rules were announced with a view to reduce the number of TP audits and prolonged litigation on TP disputes in India. The CBDT has notified the safe harbour rules based on Rangachary committee recommendations. The safe harbour rules are applicable for 5 years starting from the year of application.

The safe harbours prescribed for the assessee’s engaged in rendering the prescribed International Transaction are as follows:

Definitions for eligible assessee with insignificant risk, eligible international transactions, Operating expenses & Operating cost have been prescribed underthe rules.

If the assessing officer is of the opinion that the assesse is ineligible for the safe harbour option, then he would refer the matter to the TPO. Assesse can appeal to the Commissioner against such action of the assessing officer.

Where a taxpayer’s transfer price is accepted by the tax authority under the safe harbour rules, the taxpayer is not entitled to invoke Mutual Agreement Procedure (‘MAP’) under an applicable taxtreaty.

2. Advance Pricing Agreement (APA):

TP has emerged a key area of litigation in the recent years. The cost, lengthy processes, and inevitable uncertainty make litigation an undesirable alternative for taxpayers and governments.

The Finance Act 2012 introduced provisions to enable Advance Pricing Agreements (APAs) in the ITA with effect from 1 July 2012 the rules for implementingAPAs were notified. The Rules enable a taxpayer to file an application for a unilateral, bilateral or a multilateral APA. The Rules contain procedures for APA applications, information, data, and forms that need to be filed, circumstances under which the Board may discontinue an APAand compliance procedures for monitoring a concluded APA.

The introduction of APAs is expected to provide an alternative remedy to resolve TP disputes in advance. The success of APA programs in many countries offers a significant opportunity for the Indian tax administration to resolve international TP issues mutually in advance.

As a first step for initiating the APA process, a taxpayer is required to undertake a pre-filing consultation, which canalso be requested on an anonymous basis, before a formal APA application is submitted.

The taxpayers’ AE is expected to initiate an APA process with the Competent Authority (CA) in the other country in case a bilateral or multilateral APA is envisaged.

The Rules provide for an application fee which could be INR 1 to 2 million depending upon the value of the international transactions entered into or proposed to be entered into during the proposed period of the APA.

TheAPAmechanism isbroadlyasfollows:

• The taxpayer can approach the Board for determination of the arm’s length price(ALP) in relation to an internationaltransaction that may be entered into bythe taxpayer.
• TheALP in an APA is determined using any method includingthe prescribed methods, with necessary adjustments or variations.
• The ALP determined under the APA deemed to be the ALP for the international transaction with respect to which the APA has been entered into.

• The APA is binding on both the taxpayer and the tax authorities as long as there are no changes in law or facts that served as the basisfortheAPA.
• The APA is valid for the period specified in the APA subject to a maximum period of 5 consecutive financial years.
• Rollback option has been also provided in the recent FA 2015 and with which the taxpayers can opt for a rollback of APA and hence the taxpayers can opt for a litigation free Five years going forward and fouryears backward (totally9years)from the date of signingthe application.

3. India’s new Company Law -Arm’s length concept for Related Party Transactions (RPT):

With the new Companies Actseeking arm’s length concept for dealing with RPTs, companies need to assess whether their RPTs comply with the arm’s length principle and thereafter evaluate their compliance and reporting obligation under company law. The scope of RPTs under the Companies Act ismuch wider in scope than the TP provisions.

While the Companies Act does not provide any guidance for determining the manner in which thearm’s length principle would need to be applied, companies may find it useful to refer to the manner in which the principle is applied under the Income Tax Act to test whether the transactions are in accordance with thearm’s length principle.

4. Specified DomesticTP:

The Finance Act 2012 has extended the scope of TP provisions to specified domestic transactions based on the suggestion made by the Apex Court in the case of Glaxo smithkline Asia Pvt Ltd. The intent is to curb tax arbitrage possible in cases where companies tend to shift profits from one tax paying entity to another tax exempt or loss making entity within India. (Threshold limit for applicability of SDT Provisions is the value of the transactions (consolidated) till FY 2014-15 is 5 Crores and from FY 15-16 the threshold limit has been extended to 20 Crores).

As perthe provisions, thefollowing domestictransactions would be underthe purview of the Indian TPR: Payments to related parties;

Inter-unit/inter-company transactions that impact tax holiday profits;

Other transactions as may be specified;

5. Revision in Tolerance range calculation and usage of multiple year data:

• In Budget 2014, the finance minister has made an announcement that ‘range concept’ (where there are adequate number of comparables and usage of multiple year data, for determination of ALP, would be introduced;
• The finance Act, 2014 has introduced a proviso to section 92C(2) of the Act, that provides for ALP determination in relation to a international transaction or SDT undertaken on or after April 1, 2014. (i.e. from Assessment Year 2015-16), ALP shall be computed in such manner as may be prescribed.

The CBDT on May 21, 2015, announced draft rules on the application of range concept and use of multiple year data.

Arithmetic mean under the following scenarios:

• In cases where “range” concept does not apply, the arithmetic mean concept shall continueto apply along with benefit of tolerance range;
• In cases where multiple year data is to be used, the same would apply whether “range” concept is used or arithmetic mean is used for determining the ALP.

6. Conclusion

Taxpayers in India find themselves in a challenging position of documenting and defending their transfer pricing as transfer pricing controversies continue to rise. In view of the current trend of transfer pricing in India, it is crucialfortaxpayersto strengthen theirtransfer pricing policies as well asthe documentation to support them, explore and evaluate risk mitigation strategies and alternate mechanisms with regard to already concluded transactions and future transactions

This article is contributed by Partners of SBS and Company LLP – Chartered Accountant Company You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

Limited Liability Partnerships (for brevity referred as ‘LLP’) is one of the emerging trends among the types of vehicles available for conduct of business or profession. LLP’s are governed by Limited Liability Partnership Act, 2008. This article aims at understanding the overview of regulatory requirements when Foreign Direct Investments(for brevity ‘FDI’) are made in LLP’s.

FDIs in LLP’s are governed by Notification No 20/2000-RB dated 03.05.2000 (amended from timeto time) which deals with The Foreign Exchange Management (Transfer or Issue of Security By a Person Resident Outside India) Regulations, 2000. As per Regulation 5(9) of the said regulations, any person resident outside India (other than a citizen of Pakistan and Bangladesh) or any entity incorporated outside India (other than entity in Pakistan or Bangladesh) and not being specified personsmay contribute foreign capital either by way of capital contribution or by way of acquisition/transfer of profit shares in the capital structure of LLP under FDI, subject to the terms and conditions mentioned in Schedule 9 of the said Notification.

Read more: Foreign Direct Investments In Limited Liability Partnership

The taxability of intangibles in the sphere of indirecttaxation is often ambiguous and litigation prone. The whole country has witnessed the decision of the apex court in the case of Tata Consultancy Services vs

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State of Andhra Pradeshwherein it was held that intangible intellectual property right in the computer software is ‘goods’ and accordingly chargeable to VAT. Post this judgment, the whole perspective of looking at intangibles from the indirect tax point of view has changed and the taxability of such intangibles has gathered complexity leading to huge litigation since the assessee has to face troubles from both the center and state Revenue Authorities.

In the above context, this article tries to understand the implications under service tax and VAT on the copyrights which originate in the process of movie production. Let us try to understand under what circumstances, a producer of the movie is required to pay VAT or service tax when he exploits various rights involved in the movie. Further, let us also try to understand the taxability when a producer chooses to exploit one right among the bundle of rights pertaining to the movie. In order to understand the answerstothe above questions raised, it isvery importantto have basic knowledge aboutthe business of movie productions, origination of the rights therein and their commercial exploitation.

The person engaged in production of cinematographic film is entitled for various rights namely satellite broadcasting rights, video-on-demand rights, Near video-on-demand service rights, video copyrights, DVD copyrights, Broadband rights, Internet rights, terrestrial TV rights, air borne rights, High sea rights, hotel closed circuit rights, theatrical rights, dubbing rights, sub-titling rights, negative rights, re-assignment rights, remake and reproduction rights and animation rights.

The producer of the cinematographic film exploits all or any of the above rights to generate income by transferring all these rights as a whole on permanent or temporary basis. However, in certain arrangements, the producer might transfer (temporary or permanent) one right among the entire rights to one person and the remaining rights to another person. Let us say, the theatrical rights have been transferred (temporary or permanent) to one company and all other rights pertaining to the film are transferred (temporary or permanent) to another company.

The transfer of rights on a permanent basis would mean that the producer relinquishes allthe rights in the film to another person for a period and during such period, the producer does not have any rights in such film. Such period may be for perpetuity or say5 years. Such a transfer is called as permanent transfer. For example, the producer transfers all rights in the film unconditionally and exclusivelyto another person for a period (5 years or 99 years) and during such period, he does not have any rights in such film. This is the case of permanent tra nsfer.

However, if the producer transfers rights with certain conditions, limitations and reservations, such a transfer is called temporary transfer of such copyright. For example, the producer might transfer distribution rights of a film on a condition that the distribution of such film can be done only for a specific territory. Since such transfer is not an unconditional transfer and not an exclusive one, the transfer results in a temporary mode.

2004-TIOL-87-SC-CT-LB

Now, that we have understood the mode of business and channels for generation of income for the producer, let us proceed further to understand the indirect tax implication on the same.

Under the indirect tax laws, the mode of transfer (temporary or permanent) is very crucial to determine the taxation of such transaction. On a top level discussion, we can conclude that if the transfer is made on temporary basis, there shall be an obligation under service tax law and if the transfer is made on permanent basis, there shall be an obligation under VAT laws. However, what is interestingto understand is the law involved in arriving such conclusions which is explained in the succeeding paras.

To understand the conclusion that the permanent transfer of rights attracts obligation under VAT, a brief background as to how the VAT laws understand the concept of ‘goods’ has to be known. The best method we have is to understand the judgment delivered by the apex court in the case of Tata Consultancy (supra), where in it was held that “Goods may be a tangible property or an intangible one. It would become goods provided it has the attributes thereof having regard to (a) its utility; (b) capable of being bought and sold; and (c) capable of transmitted, transferred, delivered, stored and possessed”.

Hence, from the above it can be understood that the intangibles which have the above attributes can be regarded as ‘goods’ and the rights in cinematographic film undoubtedly satisfies all such attributes and hence carefully it can be concluded that such rights are ‘goods’.

Once, it is concluded that the rights involved in the cinematographicfilm are goods, the next question to be answered is whether the transfer of such right to use the goods (rights of cinematographic film) shall be considered as ‘sale’ under the VAT laws. To answer such a question, the definition of ‘sale’ as laid down under the VAT laws is crucial and let us see whether the definition of ‘sale’ under the state VAT laws covers such transfer of rightto usethe goods under its ambit.

Vide Explanation IV to the definition of ‘sale’ as provided in Section 2(28) of the Andhra Pradesh Value

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Added Tax Act, 2005, includes the transfer of right to use goods is deemed to be ‘sale’ .

Since that it is concluded that the intangibles are ‘goods’ and transfer of right to use such goods is ‘sale’, now we will try to understand when the obligation to pay VAT arises. The obligation to pay VAT arises only in a scenario where there is transfer of right to use in goods from one person to another on a permanent basis.

Only in the permanent basis, it can be said that the right to use in the goods is transferred to the other person and in all other modes of transfer, the right to use rests with the seller despite of the fact the possession is with the assignee during such period of transfer. Hence, when the producer transfers the right in the cinematographic film on a permanent basis to another person for a consideration, VAT has to be paid on such consideration.

Once, the mode of transfer of right in the cinematographic film is on permanent basis, there shall not be any implications under the service tax law on such transactions since such transactions which are in the nature of ‘Deemed Sales’ are specifically excluded from the definition of ‘Service’ as enumerated in Section 65 B (44) of Finance Act, 1994. Once the said transaction is excluded from the definition of ‘Service’, there shall be no compliance required under service tax law.

However, if the transfer of rights in cinematographic film is temporary in the nature, then such a transaction attracts compliance under service tax law. The same was made unambiguously clear by the legislature by inserting under the Declared Services vide Section 66E (c), ibid as ‘temporary transfer or permitting the use or enjoyment of any intellectual property right’.

So, the question now before us is how to decide a particular transfer to be a temporary or permanent in order to comply under respective laws as described in the above paragraphs. It is not out of context to mention that either under the VAT laws or Service Tax laws, there was mention about how to decide the transfer to be a permanent or temporary. The only test available in this regard is the wisdom laid down by

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the apex court in the case of BSNL vs. Union Of India. The said judgment lays down five conditions to determine whether the transfer of right to use goods is permanent or temporary. If all the conditions laid hereunder are met, then the said transfer is called permanent or otherwise can be concluded as temporary. The said conditions are:

1. There must begoods availablefordelivery;
2. There must be consensus ad idem as to the identity of the goods;
3. The transferee should have legal right to use the goods– consequently all legal consequences of such

use including any permissions or licenses required thereof should be available to the transferee;

4. For the period during which the transferee has such legal right, it has to be the exclusion to the

transferor;

5. Having transferred such right to use the goods during the period for which it is to be transferred, the owner cannot again the same rights to others.

Any agreement entered for transfer of right to use goods (in the instant case, rights of cinematographic film) has to be scrutinized as to satisfaction of the above conditions. If all the above laid down conditions are cumulatively satisfied, then the producer of the film has to pay VAT on the consideration received and if any of the conditions mentioned above are not met, then the producer has to pay service tax on such consideration.

So, the above discussion answers the question as to when the producer of the cinematographic film has to pay VAT or service tax when he exploits the right involved in the film. Now, this leaves us with final question to be answered is what is the taxability when a producer chooses to exploit one right among the bundle of rights pertaining to the movie, which is answered hereunder.

Let us answer the above question by taking an example. Say, a producer of the film, who is the exclusive owner of the film, has 4 different rights emanating from the film. The producer chooses to retain 3 rights with him and exploit 1 right (say satellite rights) by transferring to another person for a consideration. The mode of transfer adopted by the producer is a permanent basis and the terms of the transfer state that the buyer has an exclusive right over the satellite right to the exclusion of the seller. Now, the question that needs to be answered is whether this transaction is subjected to service tax or VAT.

From the above discussions, we have learnt that when a transfer of right to use goods is done on a permanent basis, then VAT has to be paid and in all other scenarios, service tax is required to be paid. In the instant example, out of the 4 rights available to the producer, only 1 right is assigned on the permanent basis and the remaining 3 still vests with the producer alone. So, the ambiguity here is whether the permanent basis test is to be applied to all the rights emanating from the film or has to be applied for each individual right.

The consequence of above is, if it is to be applied for all the rights, then the producer in the instant example has to pay service tax on such transaction, since the transfer is not on permanent basis since the 3 rights are still vested with him. If it is to be applied for each right emanating from the film, then VAT has to be paid on the income generated from exploitation of such single right and the same methodology has to be adopted for each and every single right depending upon the mode of transfer.

There is no clarity for the above question in both service tax law and VAT laws. Hence, the resort has to be on the judicial precedents in absence of statutory support. There was a recent judgment by the High

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Court of Madras in the case of AGS Entertainments Private Limited vs Union of India, wherein the Madras High Court has an occasion to deal with the transfer of copyrights in particular with film industry.

In the said judgment, the High Court has perused various clauses of the agreements pertaining to the transfer of distribution rights and others and concluded that only if the producer transfers all rights pertaining to an intellectual property right that is to say all modes of commercial exploitation then only the said transaction can be called as ‘sale’ and in all other cases the same can be called as temporary transfer wherein service tax is to be paid. That is to say the permanent basis test has to be applied to all the 4 rights (in the example, we have taken)to conclude about the taxability of the transaction.

However, the facts of the case involved in the above judgment are transfer of distribution rights by the producer to the distributor. The producer has only parted the distribution rights pertaining to specific area and for all other areas the producer has right to distribute the movie. That is to say in the facts of the case involved, the producer has not assigned exclusive distribution rights to the distributor, whereas the facts involved in the example we have taken, the producer has assigned exclusive rights to another person. So, we can conclude that the ratio of the decision of the High Court of Madras cannot be straightly adopted duetothevariation inthefacts.

Further, the Honorable High Court at one instance has an occasion (vide Para 76 &77) to deal asto what is the tax implication, if the producer relinquishes all the rights pertaining to the copyright vide one mode of exploitation, that is say in that case the producer has assigned exclusive rights for a particular movie to another person for exhibition of such movie through television for the entire world. However, the High Court did not get into detail in respect of taxation of such transaction and has not given any conclusion.

From the above, we understand that if the producer assigns one right emanating from an intellectual property to any other person exclusively (that isto say allthe conditions mentioned in the BSNLjudgment (supra) are satisfied in respect of such right) then it can be concluded that there shall be no impact of service tax on such right for the reasons mentioned hereunder.

The copyrights in the cinematographic film are bundle of rights. Each right has its own identity and each right involved in the film can be transferred to different persons without affecting other rights involved therein. That isto say, the audio rights involved in a movie can be transferred to one company, the satellite rights to another company and the distribution rights to another company. Each right is independent from other rights and has its own identity and marketability. Hence, the permanent basis test has to be adopted on individual rights and not on the bundle of rights. Since, there are no judicial precedents in the above context, we request the Central Board of Excise and Customs comes up with a clarification before the litigation arises.

This article is contributed by Partners of SBS and Company LLP - Chartered Accountant Company. You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.