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    Requirement For TP Adjustments In Computation Of Arm’S Length Price

    Rule 10B(1)(e)(iii) provides that an adjustment should be made to the profit margin of independent comparable companies to take into account the differences in functions and risks. International commentaries on transfer pricing also recognize that controlled and uncontrolled transactions are comparable only when adjustments with respect to significant differences between them in the risks assumed is made. Therefore, in no event can unadjusted industry average returns themselves establish arm’s length conditions.

    Thus, the objective of comparability analysis is to find more reliable comparables after acknowledging limitations in availability of information. Therefore, comparability adjustment would be warranted where reliability of results can be increased. The factors to be considered for comparability adjustments include:

    The quality of data being adjusted;

    The purpose of adjustment performed; The reliability of adjustment performed;

    Whether functionally comparable companies which differ on account of other factors such as volume of operations, risk assumed should be accepted as comparables? How to eliminate the impact of such differences?

    Appropriate comparability adjustments should be carried out to enable comparison between related and uncontrolled transactions

    Eliminate financial impact of differences in risk profile

    Account for extraordinary factors that may influence profitability Enhance comparability

    Importance of undertaking comparability adjustments is recognized under the Indian transfer pricing regulations. The following are the various TP adjustments that are relevant to the Indian Tested party’s:

    1. Risk Ad justment:

    The provisions of Rule 10B of the Rules prescribe the methods to be used and manner in which it is to be used in determining the ALP relating to any international transaction. In this regard, the provisions of rule 10B(1)(e) of the Rules which states as follows:

    10B(1)(e)(iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market;


    It should be appreciated that one of the principal elements for a transfer pricing analysis is the analysis of risks assumed by the respective parties. In an open market, theoretically, the assumption of increased risk is normally compensated by an increase in expected return. Accordingly, controlled and uncontrolled transactions are comparable only when adjustments with respect to significant differences between them in the risks assumed is made.

    If the Tested Party functions under a limited risk environment vis-à-vis entrepreneurial risk borne by comparable companies who are independent service providers. Accordingly, it is operating under economic circumstances that warrant adjustments to the margins earned by the comparable companies, so as to make the comparison between the margins earned by the comparable companies and the Tested Party appropriate.

    The comparables selected for the analysis by the tax office generally include companies, which have fairly diversified areas of specialization, perform additional functions viz., marketing, etc. and bear more risks akin to any third party independent service provider vis-à-vis the Indian Tested Party. The risks such as legal risk, marketing risk, business risk, etc. are normally associated with every independent company, whereas the Indian tested party is generally insulated from these risks. Further, the tested party bears lesser business risk than independent comparable enterprises due to the nature of its revenue model. It is guaranteed profits by way of a mark-up on costs incurred, regardless of its success or failure. As a consequence, the margins earned by the tested party would be comparatively lower to reflect the lower level of business risk. In addition, it may be noted that among other risks the Tested Party does not bear any credit risk.

    Where a related party sets prices for intercompany transactions so that the Tested Party receives a specified level of operating profitability, the pricing policy can have the effect of removing virtually all business risk from the controlled entity. When analysing controlled entities that bear such a low level of risk by reference to a set of broadly comparable independent firms, as is the case under TN MM, it is a challenge to identify independent firms that are sufficiently comparable to the controlled entities in terms of risks assumed. In circumstances where the Tested Party has been effectively guaranteed a fixed return, functional similarity does not adequately address this risk differential. In such cases, an adjustment to the comparables for this risk differential seems warranted under the Rules and would provide a more precise pricing of the true risk borne by the Tested Party.

    Risk analysis of comparable company’s vis-à-vis the Tested Party Business/market risk

    Market risk occurs when a firm is subjected to adverse sales conditions due to either increased competition in the marketplace, adverse demand conditions within the market, the inability to develop markets or position products to service targeted customers or technology obsolescence. The market risks to be considered include, among other things, fluctuations in cost, demand, pricing, and inventory levels.

    With respect to the services provided by the Tested Party to its AE, there is no specific market risk for the Tested Party as it is not required to penetrate into newer markets or faces competition. The Tested Party does not have any exposure to market risk as it renders all services on a contract basis exclusively to its AE on a revenue model.


    In contrast, independent companies bear significant market risks as they are responsible for marketing their services, identifying customers, facing competition and penetrating into the market. Further, slowdown in the IT industry, adverse economic conditions, technology obsolescence, fluctuations in the demand-supply, etc. would have an impact on the margins of the independent companies. Independent companies bear the vagaries of economic and business factors that prevail in the industry and thus, either incur losses or earn profits due to their dealing in market conditions. In case there is a downfall in the market and they are not able to generate sufficient business, independent companies are likely to have low margins or incur losses. However, the Tested Party would still continue to earn a mark-up over its costs.

    Further, if the Tested Party is a cost-plus entity and is protected from pricing risk by its AEs, means that it does not take the risk of loss nor is it entitled to any profit/surplus therein, but earns an assured return based on its limited functional and risk profile.

    However, in an independent scenario, the comparable companies (that are being considered to determine the ALP) bear the pricing risk, thereby undertake the risk of loss and at the same time also enjoy any profit/surplus therein, therefore substantiating the fundamental principle of economics i.e., the greater the risk, the greater the expected return. In this regard, we wish to emphasize that, since the comparable companies bear the pricing risk and the impact of the same is reflected in the return i.e., net profit/margin it earns, which is not in the case of the Tested Party, a risk adjustment as per Rule10B(1)(e)(iii) for this difference of pricing risk borne by the comparable companies is warranted.

    Contract/service liability risk

    Risks associated with service failures, including not meeting the generally accepted/ regulatory standards influences the price charged in a particular transaction. This could result in product recalls and possible injuries to end users resulting in compensation claims.

    If the Tested Party acts as service provider for its AE and provides services based on the directions received from them. The Tested Party does not have any contractual liability for losses or damages for service failures and the cost of rework (if any) would be recoverable from its AE on a cost plus basis. Accordingly, in economic substance, the Tested Party does not bear any service liability risk. Furthermore, any rework if required will be reimbursed by AEs on a cost plus mark-up basis and hence, risk/cost of rework also resides with AEs and not with the Tested Party. On the other hand, independent third party service providers undertaking marketing and rendering services directly to customers are exposed to service failures and accordingly bear the service liability risk.

    Technology risk

    This risk arises if the market in which the company operates in sensitive to introduction of new products and technologies. In such a case, business enterprises may face loss of potential revenues due to inefficiencies arising from obsolete infrastructure and tools as well as obsolescence of production processes.

    Most of the Indian Tested Party may not bear any risk on this account because they operates as a contract service provider, on a cost plus mark-up basis. On the contrary, independent service providers need to regularly invest in up-gradation of technology to provide new offering/services to the customers. Therefore, any risk arising out of technology obsolescence is considered for the pricing of the services.


    Credit and collection risk


    The credit and collection risks arise when an enterprise supplies products or services to a customer in advance of the payment. In such a scenario the firm runs the risk that the customer will fail to make payment.


    If the Tested Party provides services only to its AE, it does not bear any credit and collection risks. Presuming, in an event where any cost is borne for receiving the delayed payment that cost also shall be reimbursed to the Tested Party on a cost plus mark-up basis. However, independent third party service providers bear substantial credit and collection risks.


    Support from Indian judicial precedents


    Several courts have recognized the importance of undertaking a risk adjustment to increase the reliability of comparability analysis. Some of these decisions are discussed as under:


    I ntell inet Technologies India Private Limited (ITA No. 1237/BANG/2010) Mentor Graphics Noida Private Limited (ITA No. 1969/Del/2006) Sony India Private Limited (I.T.A. No. 4008(Del)/2010)


    1. Working Capital Adjustment:


    The adjustment resulting from the different levels of accounts receivable and accounts payable between the tested party and the comparable companies can be calculated, as described below.


    First, determining the difference between the tested party’s ratio of accounts receivable to total cost and the corresponding ratio of accounts receivable to total cost of each comparable. This difference represents the “excess” or “shortage” of accounts receivable, held by the tested party relative to the comparable companies.


    Next, multiplying the above difference by an interest rate benchmarked in order to arrive at a figure representing the implicit interest expense or benefit to the comparable due to its different accounts receivable carrying costs.


    Similar adjustments were made to determine the interest carrying costs associated with different levels of inventory and accounts payable between the tested party and each of the comparable companies.


    Lastly, the adjustments on account of difference in levels of accounts receivable are added to the unadjusted operating revenue of the comparable companies, and the adjustments on account of difference in levels of inventory and accounts payable are reduced from the operating costs.



    Based on such adjusted operating revenues and operating costs for the comparables, the operating margin, that the comparable would have earned had it been operating with similar working capital position as the tested party, is computed.

    The formula used to calculate the adjusted operating margin is

    Adjusted Operating Profit Adjusted Operating Revenue


    Adjusted Operating Profit = Adjusted Operating Revenue – Adjusted Operating Cost

    Adjusted Operating Revenue = Operating RevenueC + Accounts ReceivableTP - Accounts ReceivableC a Operating Cost TP                                                                                                                                                                                                                                                               Operating Cost C

    Adjusted Operating Cost = Operating CostC + Accounts PayableTP____ -___ Accounts Payable______ C            a

    Operating CostTP                         Operating Cost C

    C is the comparable company;

    TP is the tested party;

    ; and? is the interest rate.

    III. Capacity utilization/ idle capacity adjustment in case of start-up phase:

    To improve the quality of comparables, one might need to calculate an economic/comparability adjustment for the differences in the level of capacity utilization by the comparables and the tested party. The need for a capacity utilization adjustment becomes more acute in cases where the tested party is in a start-up phase or is going through a phase of slow business growth/demand for its products and such situation is not faced by the competitors in the market, or where an eventuality such as a strike or lock-out at a factory results in a significant decline in production.

    Thus, it demonstrates that adjustments towards idle time or excess capacity in case of service providers also is necessary and accepted methodology, practiced both by the taxpayer and revenue authorities.

    The low profit margin earned or loss incurred due to incurrence of high start-up cost and low utilization of capacity is a common phenomenon in case of start-up business. This difference in cost levels of the start-up company vis-a-vis the comparables who might be established players would require an adjustment. The issue of adjustment on account of idle capacity hinges on the concept of the leverage that fixed cost offers to the profitability ratio of business.

    The Delhi Tribunal In case of Global Vantedge Point Pvt Ltd wherein, the Tested Party was an information technology enabled (‘ITeS’) service provider, providing service primarily to its associated enterprise. The Tested Party adopting TNMM method, claimed an adjustment towards its bench strength (ie., idle time of employees) or surplus capacity to the extent of 33.33 % of total capacity. The reason for excess capacity was predicated on the fact that the Tested Party was in its start-up phase and the surplus capacity was carried in anticipation of future growth in business. The Delhi Tribunal held that whenever an entity was established it always carried some surplus capacity vis-à-vis present/projected business operations. Looking into the IT industry which was in a booming stage a surplus capacity to the extent of 1/3rd of the existing capacity is treated as normal in this industry in anticipation of future growth in business. Hence, an adjustment to the profitability of the comparables was allowed to the extent of 33.33 %. Reference could also be drawn in case of Genisys Integrating Systems India Pvt Ltd[4], wherein, the Bangalore Tribunal observed that as per information available in the public domain, the average underutilization of manpower in ITeS industry is 20 %

    Mentor Graphics (Noida) Pvt. Ltd. v. DCIT (109 ITD 101) (Delhi)

    Organisation of Economic Co-operation and Development

    Global Vantedge Point (P) Ltd (37 SOT 1) (Delhi)

    Genisys Integrating Systems (India) Pvt Ltd vs DCIT(2012) (53 SOT 159) (Bang) Mando India Steering Systems Pvt Ltd vs ACIT (2014-TS-110-ITAT-CHNY-TP- 2014) Global Turbine Services Inc vs ADIT (TS-259-ITAT-DEL-TP-2013)

    Amdocs Business Services Pvt Ltd (54 SOT 46) (Pune)

    Mobis India Ltd(ITA No 2112/Mds/2011)

    The rationale for carrying out adjustments to eliminate differences in capacity utilization or idle capacity adjustments is explained in para 2.7 of the OECD Transfer Pricing guidelines. Depending on the facts and circumstances of case and in particular on the proportion of fixed and variable costs, the transactional net margin method (‘TNMM’) may be more sensitive than the cost plus or resale price methods because differences in the levels of absorption of indirect fixed costs (eg fixed manufacturing costs or fixed distribution costs) would affect the net profit indicator but may not affect the gross margin or gross markup on costs if not reflected in price differences.

    1. Depreciation adjustment:

    If Tested Party depreciates the assets on an accelerated basis as compared to the depreciation rates prescribed under the corporate law. Further, based on analysis of annual reports of comparable companies, 60-70% of comparable companies apply the depreciation rates prescribed under the corporate law. Accordingly, the depreciation policy followed by Tested Party and the comparable companies are not similar and hence, requires to be adjusted for such differences while determining arm’s length margin of international transactions of Tested Party.

    Quantification of depreciation adjustment:

    While the Rules provide that appropriate adjustments should be made for arriving at the arms length price, the basis for making such adjustment is not specifically provided by the Indian Transfer Pricing Regulations.

    The following cases where the adjustments for such differences have been provided by various Tribunals: E-gain Communication Pvt. Ltd. v. ITO [2008-TIOL-282-ITAT-PUNE] SchefenackerMotherson Ltd v. ITO [2009-TIOL-376-ITAT-DE L] CIT v. Rakhra Technologies Pvt. Ltd. [2011-TII-07-HC-P&H-TP] Amdocs Business Services Pvt. Ltd. v. DCIT [ ITA No. 1412/PN/11] Qual Core Logic Ltd v. DCIT (ITA No. 893/HYD/2011) Honeywell Technology Solutions Lab Pvt Ltd v. DCIT (IT(TP)A No. 1344/Bang/2011)

    24/7 Customer (P) Ltd. vs. DCIT (ITA No. 227/Bang/2010)

    Reference can be drawn to the above judicial precedents, wherein any specific approach/method have been provided while adjudicating the depreciation adjustment:


    Hon’ble Bangalore Tribunal in the case of 24/7 Customer (P) Ltd. vs. DCIT (ITA No. 227/Bang/2010) – Adjusting the depreciation of comparable companies using the ratio of depreciation to gross block of assets of the tested party. The following are the various steps which are to be followed in computing depreciation adjustment:

    Step 1: Calculate depreciation ratio (Depreciation/ Gross Block) of the Tested Party;

    Step2: Calculate the depreciation amount of the comparable companies on the basis of depreciation ratio as calculated in Step 1;

    Step 3: Recalculate the operating cost & operating profit of the comparable companies on the basis of deprecation calculated in Step 2;

    Step 4: Calculate the operating margin (Operating profit/Operating Cost) on the basis of revised operating cost & profit as calculated in step 3 above;

    Step 5: Calculate the ALP (average of the margins of comparable companies as calculated above).

    Concluding remarks:

    Material differences between comparable companies can render TP analysis inaccurate.The five comparability factors to be kept in mind for TP documentation and analysis include:

    Characteristics of property or services;

    Functions performed taking into account the assets employed and risks; Assumed;

    Contractual terms;

    Economic circumstances of the parties; and

    Business strategies pursued.

    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.

    A Brief About Black Money Law (Bml)

    This law applies only to Resident and Ordinarily resident of India (ROR). The objective of the law is to bring back into India, the money held abroad by Indian residents. It is applicable from 01-07-2015.

    BML applies only to foreign sourced income and assets which are liable to Indian Tax but have not been disclosed in the Income tax return filed in India.

    If the source of investment in foreign asset is explained to the satisfaction, it is not an undisclosed asset located outside India.

    Undisclosed foreign income is taxable in the relevant previous year to which it pertains and undisclosed foreign asset is taxable in the year in which comes to the notice of income tax authority.

    Significance Of Rapport Building With Clients

    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.


    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.

    Indian Transfer Pricing (‘TP’) - Changing Trends

    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:

    International Transaction

    Turnover limit/Loan



    Safe harbour


    Software development and IT enabled services

    (Net Operating margin as a percentage of Operating Cost)

    < INR 5 billion

    >INR 5 billion



    Knowledge process outsourcing services and contract R&D

    services wholly or partly relating to software development

    (Net Operating margin as a percentage of Operating Cost)



    Intra-group loans

    (The safe harbour is what can be added to the base rate of

    State Bank of India)

    <INR 500 million

    >INR 500 million

    Interest rate

    150 basis points

    300 basis points

    Corporate guarantee

    (Percentage of commission is calculated on amount


    <INR 1000 million

    >INR 1000 million


    2% p.a

    1.75% p.a

    Contract R&D services wholly or partly relating to software




    Contract R&D services wholly or partly relating to generic

    pharmaceutical drugs



    Manufacture and export of core auto components



    Manufacture and export of non-core auto components



    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.

    1. 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.
    1. 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.

    1. 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;

    1. 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.
    1. 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.

    Foreign Direct Investments In Limited Liability Partnership

    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.

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