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TRANSFER PRICINGTRANSFER PRICING

EXPECTATIONS FROM TAX PAYER ANDEXPECTATIONS FROM TAX PAYER AND

ROLE OF DEPARTMENT IN ALTERNATIVE DISPUTE RESOLUTION MECHANISMROLE OF DEPARTMENT IN ALTERNATIVE DISPUTE RESOLUTION MECHANISM

INDEXINDEX

BackgroundBackground

Our ExpectationOur Expectation An OverviewAn Overview

The Audited AccountsThe Audited Accounts

The Report in Form 3CEBThe Report in Form 3CEB

Documentation Requirements and ExpectationDocumentation Requirements and Expectation Bridging the Expectations GapBridging the Expectations Gap

Alternate Dispute Resolution MechanismAlternate Dispute Resolution Mechanism


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BACKGROUNDBACKGROUND

Transfer pricing (TP) is a subject of relativelyTransfer pricing (TP) is a subject of relatively

, ., .

The TP law is evolving.The TP law is evolving.

contd...contd...


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BACKGROUNDBACKGROUND

Increasing globalization, dismantling of trade barriersIncreasing globalization, dismantling of trade barriersand the free movement of capital are the changeand the free movement of capital are the changeinducing factorsinducing factors

Though TP is a limited subject in the tax code, itsThough TP is a limited subject in the tax code, itshorizons being global, are much bigger.horizons being global, are much bigger.

Conventionally, TP largely impacted foreign grownConventionally, TP largely impacted foreign grownMNCs, but now, more and more home grown MNCs, asMNCs, but now, more and more home grown MNCs, aswell as close knit/family run businesses like diamond andwell as close knit/family run businesses like diamond andjewellery are in the TP net.jewellery are in the TP net.


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The recent flurry of ITAT TP judgments, indicates theThe recent flurry of ITAT TP judgments, indicates the

appellate churning out of the law. Its principles willappellate churning out of the law. Its principles willcrystallize on an all India basis, in due course of time.crystallize on an all India basis, in due course of time.

The government is sensitive to the dynamic nature of theThe government is sensitive to the dynamic nature of the..

TP compliance costs are comparatively high.TP compliance costs are comparatively high.

The government is also sensitive to the TP complianceThe government is also sensitive to the TP compliancecost and the fact that even SMEs would tend to be in thecost and the fact that even SMEs would tend to be in theTP net, if the threshold bar is not high enough.TP net, if the threshold bar is not high enough.

contdcontd


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The limited availability of information in public domainThe limited availability of information in public domainhas been a hindrance in TP audits.has been a hindrance in TP audits.

The volume of TP audits is increasing each year.The volume of TP audits is increasing each year.

e ncome ax epar men s cons an y rev ew ng ee ncome ax epar men s cons an y rev ew ng eTP law and practices, training its staff and learning itsTP law and practices, training its staff and learning itslessons, both in India and abroad.lessons, both in India and abroad.

There is a lingering gap, between the expectations of theThere is a lingering gap, between the expectations of theITD and the tax payers compliance. The expectationITD and the tax payers compliance. The expectationgap needs to be bridged to the satisfaction of bothgap needs to be bridged to the satisfaction of bothparties.parties.


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THE EXPECTATION GAPTHE EXPECTATION GAP

Assesses need to pay more attention to TPAssesses need to pay more attention to TP

compliances and maintenance of data/records.compliances and maintenance of data/records.

The flow of even mandatory information andThe flow of even mandatory information and

disclosures, from the assesses, have not been free anddisclosures, from the assesses, have not been free and

forthright, at all times.forthright, at all times.

TP conduct has not been satisfactory and informationTP conduct has not been satisfactory and information

tends to be shared, when snared.tends to be shared, when snared.

contdcontd


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There is a general unwillingness to give even routineThere is a general unwillingness to give even routinedata, on grounds of confidentiality and secrecy.data, on grounds of confidentiality and secrecy.

mes a a o even a w o y owne s nomes a a o even a w o y owne s nofurnished, citing lack of control over the AE.furnished, citing lack of control over the AE.

Even though information is available, direct methods likeEven though information is available, direct methods likeCUP are avoided and TNMM is preferred.CUP are avoided and TNMM is preferred.


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A detailed and focused effort is needed to explain theA detailed and focused effort is needed to explain theassessees business and transactions with AEs,assessees business and transactions with AEs,particularly for new age/technology businesses.particularly for new age/technology businesses.

FAR analysis is often deficient and vague.FAR analysis is often deficient and vague.

The list of comparables with the tested party, are cherryThe list of comparables with the tested party, are cherry

picked, and result in a biased statistical jugglery.picked, and result in a biased statistical jugglery.

ARs at times do not take the pains to effectively putARs at times do not take the pains to effectively putforward their cases..forward their cases..BUTBUT


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EXPECTATIONS FROM TAX PAYER ANDEXPECTATIONS FROM TAX PAYER ANDROLE OF DEPARTMENT IN ALTERNATIVE DISPUTE RESOLUTION MECHANISMROLE OF DEPARTMENT IN ALTERNATIVE DISPUTE RESOLUTION MECHANISM


We find that based on experience, theWe find that based on experience, the

assessees, and their ARs, are willing to accept,assessees, and their ARs, are willing to accept,

amend and adapt.amend and adapt.

There has been a willingness to accept ourThere has been a willingness to accept our

findings, on the part of the assessees and tofindings, on the part of the assessees and torearrange their international transactions.rearrange their international transactions.

contdcontd


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EXPECTATIONS FROM TAX PAYER ANDEXPECTATIONS FROM TAX PAYER ANDROLE OF DEPARTMENT IN ALTERNATIVE DISPUTE RESOLUTION MECHANISMROLE OF DEPARTMENT IN ALTERNATIVE DISPUTE RESOLUTION MECHANISM

Assessees have modified their TP practices, on theAssessees have modified their TP practices, on the

basis of past TP audits.basis of past TP audits.

ARs have been willing to put in the efforts, to match ourARs have been willing to put in the efforts, to match ourexpectations.expectations.

ARs have kept pace with changes in the law, which isARs have kept pace with changes in the law, which iswhy I have been invited herewhy I have been invited here..


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OUR EXPECTATIONSOUR EXPECTATIONS AN OVERVIEWAN OVERVIEW

The primary expectation of the ITD from the taxThe primary expectation of the ITD from the taxpayer, are basic and fundamental, as in any other taxpayer, are basic and fundamental, as in any other taxadministration matter viz.administration matter viz.

comply with the TP law.comply with the TP law.

maintain the records as stipulated.maintain the records as stipulated.

the data/documents furnished to the ITD must bethe data/documents furnished to the ITD must becorrect, complete and forthright.correct, complete and forthright.


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suitably explain the TP transactions, with adequatesuitably explain the TP transactions, with adequate

supporting evidence,supporting evidence,

avoid frivolous litigation andavoid frivolous litigation and most important.most important.

do not arrange your affairs with AEs, such as to deprivedo not arrange your affairs with AEs, such as to deprive

India, of its legitimate revenue.India, of its legitimate revenue.


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THE AUDITED ACCOUNTSTHE AUDITED ACCOUNTS

The starting point of any tax scrutiny/audit remains theThe starting point of any tax scrutiny/audit remains thegood old audited accounts.good old audited accounts.

Glaring errors and mismatches have been notedGlaring errors and mismatches have been noted

between the audited accounts and TP information, evenbetween the audited accounts and TP information, evenin cases where the auditors have been the transnationalin cases where the auditors have been the transnationalaccounting firms.accounting firms.

Errors of omission and commission in the accounts andErrors of omission and commission in the accounts andmismatches between the audited accounts and the TPmismatches between the audited accounts and the TPreports, obviously lead to suspicion and breakdown ofreports, obviously lead to suspicion and breakdown ofcustomary trust and dependence on auditedcustomary trust and dependence on auditedstatements.statements.


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THE REPORT IN FORM 3CEBTHE REPORT IN FORM 3CEB

accounts have to be true and fair, so isaccounts have to be true and fair, so isthe case of disclosures in Form 3CEB.the case of disclosures in Form 3CEB.

contdcontd


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information related to the IT of the assesses, with itsinformation related to the IT of the assesses, with itsAEs as prescribed in the said annexure.AEs as prescribed in the said annexure.

contdcontd


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While the Reports of the accountants in Form 3CEBWhile the Reports of the accountants in Form 3CEBhave been by and large satisfactory, we do noticehave been by and large satisfactory, we do noticecases of :cases of :--

Concealment/incomplete disclosure of information.Concealment/incomplete disclosure of information.

Non reporting of AEs and transactions with them.Non reporting of AEs and transactions with them.

sma c es e ween orm an e au esma c es e ween orm an e au eaccounts.accounts.

Misclassification of information.Misclassification of information.

ERRORS AND PARTICULARLY DELIBERATE ONESERRORS AND PARTICULARLY DELIBERATE ONESERODE THE TRUST BETWEEN US AND THEERODE THE TRUST BETWEEN US AND THEASSESSEES.ASSESSEES.


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STATUTORY DOCUMENTATIONSTATUTORY DOCUMENTATION

REQUIREMENTSREQUIREMENTS

e ma n opera ng a a nee e y e or e ma n opera ng a a nee e y e or the TP audit of assessees, is clearly stated inthe TP audit of assessees, is clearly stated in

Rule 10D of the Income Tax Rules, 1962.Rule 10D of the Income Tax Rules, 1962.

Strict and complete complaince of informationStrict and complete complaince of information

and contemporaneous document is madatory.and contemporaneous document is madatory.contdcontd


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Unwillingness to furnish information.Unwillingness to furnish information.

Such stark unwillingness on the part ofSuch stark unwillingness on the part ofassessees portends an attitude to concealassessees portends an attitude to concealand could be perhaps due to a lack of anyand could be perhaps due to a lack of any

punishing penal provision for such nonpunishing penal provision for such noncompliance.compliance.


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BRIDGING THE EXPECTATIONS GAPBRIDGING THE EXPECTATIONS GAP

Since tax administration and enforcement, are strictlySince tax administration and enforcement, are strictly

within the domain of the prescribed law, itswithin the domain of the prescribed law, its

re uirements are ex licit. So is the case of ourre uirements are ex licit. So is the case of our

expectations in the case of TP.expectations in the case of TP.

The mandatory requirements of TP documentation andThe mandatory requirements of TP documentation and

disclosures are clearly laid down by the law. Thedisclosures are clearly laid down by the law. The

expectations of the ITD are thus an open secret and inexpectations of the ITD are thus an open secret and in

public knowledge.public knowledge.

contdcontd


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A fair and proper administration of the tax law is a jointA fair and proper administration of the tax law is a jointeffort between the ITD and the assesses.effort between the ITD and the assesses.

AnAn open, positive and transparentopen, positive and transparent attitude on theattitude on thepart of the assesses, goes a long way in bridging thepart of the assesses, goes a long way in bridging theexpectations gap.expectations gap.


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ALTERNATE DISPUTE RESOLUTION MECHANISMALTERNATE DISPUTE RESOLUTION MECHANISM

As the TP law marches ahead, the government is concernedAs the TP law marches ahead, the government is concernedabout the rising TP disputes, arising due to increasing cases ofabout the rising TP disputes, arising due to increasing cases ofadjustments to ALP.adjustments to ALP. The Finance (No. 2) Act, 2009The Finance (No. 2) Act, 2009, has thus put, has thus putin the following amendments :in the following amendments :--

Safe Harbour rules (Section 92CB)Safe Harbour rules (Section 92CB) for determining the ALP.for determining the ALP.The rules would provide the circumstances under which theThe rules would provide the circumstances under which theincome tax authorities would automatically accept the TPincome tax authorities would automatically accept the TPdeclared by the assesses.declared by the assesses.

A Dispute Resolution Panel (DRP), (Section 144C)A Dispute Resolution Panel (DRP), (Section 144C)consisting of a collegiums of 3 commissioners of income taxconsisting of a collegiums of 3 commissioners of income taxfor dealing with complex matters relating to TP or the taxfor dealing with complex matters relating to TP or the taxdisputes of foreign companies.disputes of foreign companies.

contdcontd


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An alternate dispute resolution mechanism is aAn alternate dispute resolution mechanism is a

prevailing mode in many other countries and as the TPprevailing mode in many other countries and as the TPlaw develops in India, we have also rightfully adoptedlaw develops in India, we have also rightfully adoptedit.it.


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DISPUTE RESOLUTION PANELDISPUTE RESOLUTION PANEL ANANOVERVIEWOVERVIEW

AO to forward a draft of the proposed assessment orderAO to forward a draft of the proposed assessment orderto the eligible assessee, if he proposes to make anyto the eligible assessee, if he proposes to make any

,,

prejudicial to the interest of the assessee.prejudicial to the interest of the assessee.

Eligible assessee means one in whose case a variationEligible assessee means one in whose case a variationarises as a consequence of the order of the TPO andarises as a consequence of the order of the TPO and

any foreign company.any foreign company.

On receipt of such draft order, the assessee shall withinOn receipt of such draft order, the assessee shall within30 days of its receipt:30 days of its receipt:--

contdcontd


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file his acceptance of the variations to the AO orfile his acceptance of the variations to the AO or

file his objections if any, to such variations with i) thefile his objections if any, to such variations with i) theDRP and ii) the AO.DRP and ii) the AO.

DRP means a collegium consisting of three CITsDRP means a collegium consisting of three CITs..

The AO shall pass the assessment order, within oneThe AO shall pass the assessment order, within onemonth from the end of the month, in which, themonth from the end of the month, in which, theacceptance is received or the period of filing ofacceptance is received or the period of filing of

objections expires.objections expires.

The DRP shall, in a case where objection is received,The DRP shall, in a case where objection is received,issue such directions as it thinks fit, for the guidance ofissue such directions as it thinks fit, for the guidance of

the AO, to enable him to complete the assessment.the AO, to enable him to complete the assessment.


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The section prescribes that the DRP shall examine suchThe section prescribes that the DRP shall examine suchrecords and make such enquiry as it thinks fit, beforerecords and make such enquiry as it thinks fit, before

issuing directions to the AO.issuing directions to the AO.

The DRP may confirm, reduce or enhance the variationsThe DRP may confirm, reduce or enhance the variations..

any proposed variation or issue any direction for furtherany proposed variation or issue any direction for furtherenquiry and passing of the assessment order.enquiry and passing of the assessment order.

In case of any difference of opinion in the DRP, the pointIn case of any difference of opinion in the DRP, the point

will be decided by the opinion of the majority.will be decided by the opinion of the majority.


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Every direction of the DRP shall be binding on the AO.Every direction of the DRP shall be binding on the AO.

No directions shall be issued unless an opportunity ofNo directions shall be issued unless an opportunity ofbeing heard is given to the assessee and to the AO.being heard is given to the assessee and to the AO.

o rec on s a e ssue a er mon s rom e eno rec on s a e ssue a er mon s rom e enof the month in which the draft order was forwarded toof the month in which the draft order was forwarded tothe assessee.the assessee.

Upon receipt of the directions, the AO shall complete theUpon receipt of the directions, the AO shall complete the

assessment in conformity with the directions, withoutassessment in conformity with the directions, withoutproviding any further opportunity to the assessee, withinproviding any further opportunity to the assessee, withinone month from the end of the month in which theone month from the end of the month in which thedirection is received.direction is received.


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DRPDRP A FEW COMMENTSA FEW COMMENTS

The newly inserted section 144C has generated a lotThe newly inserted section 144C has generated a lotof excitement and interest. It will be a path breakingof excitement and interest. It will be a path breakingmechanism in dispute resolution for TP and foreignmechanism in dispute resolution for TP and foreign

..

The Hon. Supreme Court, in the recent case of HCLThe Hon. Supreme Court, in the recent case of HCLTechnologies Ltd. has approvingly taken note of theTechnologies Ltd. has approvingly taken note of theDRP and has advised the parties to resort to it. It alsoDRP and has advised the parties to resort to it. It also

directed the competent authority DRP, to not rejectdirected the competent authority DRP, to not rejectthe application of the assessee.the application of the assessee.

Suitable directions/action to put section 144C intoSuitable directions/action to put section 144C into

motion are awaited.motion are awaited.


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Thank You Very MuchThank You Very Much

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