Transfer pricing_Intra group service

TRANSFER PRICINGINTRA GROUP SERVICES (IGS)CHAMBERS OF TAX CONSULTANT – 06th July, 2016

SN & Co.Chartered Accountants

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INTRODUCTION MNE group may obtain services directly or indirectly from independent companies,

or from companies of same MNE group (i.e. intra-group)

Benefits of intra group services o Economies of scale, synergy, efficient use of resources & high degree of specializationo Developing own expertise, coordination & control and avoiding duplication of work

Intra Group Service (“IGS”) includes o Services by One member to other member or members of MNE o Services provided by group of members for the benefit of overall group o Service by Parent company to member & group of members o Service from third party on behalf of member or members


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INCLUSI

ONS TO

IGS

Planning and Budgetary control

Coordination

Financial and Legal advice

Management and Administrative services

Accounting and Auditing service

Computer services & SAP Consulting service

Human Resource services

Credit risk analysis service

Marketing & Distribution support service

Resource Sharing service

Reimbursement of ASP

R&D service


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INTRAGROUP SERVICES

IGS

Chargeable service

LVAS

TP Simplified

HVAS

Full TP

Non chargeable

service

Shareholder Duplication Incidental

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WAY

TO

A LP

IGS

Non Chargeable services

Chargeable services

Benefit Test

Independent party

ALP

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WAY To ALPChargeable services

Benefit Test

Economic Benefit

Received Anticipated

Independent party

ALP

Charging

Direct Indirect

Calculation

Cup Cost plus TNMM

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WAY TO ALP

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SHAREHOLDER SERVICE Activities carried out even though group members do not need the activity

Activity is performed solely because of its ownership interest in its capacity as shareholder

An independent entity would not be willing to pay for service and thus would not justify a charge to the recipient

Examples:

o appointment and remuneration of parent company directorso meetings of the parent company’s board of directors and shareholdero activity of parent company’s in preparation and filing of consolidated financial reportso activities of parent company for raising funds used to acquire share capital in subsidiary

companies; ando activities of the parent company to protect its capital investment in subsidiary

companies.


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DUPLICATION SERVICE Service provided to AE which has already obtain same service either by itself or

from independent entity – Eg. Legal opinion

Exceptions – Duplication service being IGS

Service providing benefit to AE for which an independent party would also be willing to pay

Temporary service - Example - process of being centralized for an MNE group

Service undertaken to reduce risk of a wrong business decision (e.g. by getting a second legal opinion on a subject)


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INCIDENTAL BENEFITS/PASSIVE ASSOCIATION IGS performed by a group member relates only to some group members but

incidentally provides benefits to other group members

AE has not received IGS when it obtains incidental benefits attributable solely being part of a larger GROUP, and not to any specific activity being performed


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• Whether AE received enhance credit rating by reason of its affiliation with larger group; is IGS ?

• Whether guarantee given by group member increasing credit rating is IGS?

• Whether supplier giving additional credit based on guarantee given by IGS?

• Where the enterprise benefitted from global marketing and public relations campaigns done by Group Company ?

Contd…


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Chargeable

WAY TO ALP

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CENTRALIZED SERVICES MNE group often will

centralize certain business functions within an associated enterprise and wide variety of services are centralized both low and high-value adding services


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ON CALL SERVICES Parent company or a group service centre may be on call to provide services at

any time, by having staff, equipment etc. available all the time

An intra-group service would exist to the extent that it would be reasonable to expect an independent enterprise in comparable circumstances to incur ‘standby’ charges to ensure the availability of the services when the need for them arises (e.g. a service contract for priority computer network repair in the event of a breakdown)

On call service can be considered as IGS even if the actual services are never or infrequently provided


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INTRA GROUP SERVICES

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1. Shareholder service

2. Duplication service

3. Incidental benefits/Passive Association

4. Centralized services

5. On call services


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ALP

WAY TO ALP

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METHOD OF CHARGING FOR IGS The charge should be that which would have been made and accepted between

independent enterprises in comparable circumstances.

A tax administration would need to identify what arrangements have been made between AEs to facilitate charges between them:

o Direct charge methodo Indirect charge method

Directly Allocable Cost:

• Services that can be identified as directly benefiting a particular group company, thus allowing the costs to be directly assigned

• Provides greater transparency to the tax authorities


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Contd…Indirectly Allocable Cost:

Used where proportion of the value of services rendered to each entity cannot be exactly quantified except on an approximate or estimated basis.

Identify all relevant costs and allocate them among all recipients using sensible allocation key/s.

Allocation of cost should commensurate with the benefit derived by the recipient

Allocation method chosen must lead to a result that an independent enterprises would have been prepared to accept


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Indirectly Allocable Cost:

Allocation keys shall be based on the nature of service:

o IT: number of PCso Business management software (e.g. SAP): number of licenceso Human Resources: headcounto Health and safety: headcounto Management development: headcounto Tax, Accounting, etc.: turnover or size of balance sheeto Marketing services: turnovero Vehicle fleet management: number of cars

Contd…


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Service Provider How much does the service cost?

Service Recipient

How much is the service worth? How much would a comparable independent enterprise be prepared to pay for

that service in comparable circumstances?

How much would it cost to provide the service in-house?

How much would an external service provider charge?

IGS – A DOUBLE EDGED SWORD


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DETERMINATION OF ALPMinimum price

acceptable for provider

Maximum price acceptable for recipient

Range of AL Prices


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CALCULATION OF ALP• ALP generally is calculated using methods:

o CUPo CPM o TNMM

• A CPM would most likely be the most appropriate method where the nature of the activities involved, assets used and risks assumed are comparable to those undertaken by independent enterprises

• Challenge in Cost Plus : Cost comparison & availability of gross margin in service industry

• TNMM : Sustains variables as comparison is at Net margin


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CASE STUDYCushman & Wakefield India Pvt Ltd (Delhi High Court)

M/s. Fosroc Chemicals India Pvt. Ltd (Bangalore ITAT) [ITA No. M.P. No.47/Bang/2015]

Reimbursement to AEs of cost for coordination and liaison service

Technical and management services under CCA

Sec 92(3) does not allow to reduce profit which was rejected by HC

AO after reference to TPO cannot verify the allowability of claim u.s 37 was also rejected by HC

HC demands benchmarking of cost to cost arrangement from ALP test to verify price charge and to verify whether the cost is inflated or not

• Commercial expediency can be verified by AO and not TPO • In a case where expenses are actually reimbursed without a mark-up, tax base erosion can happen only if the costs reimbursed are inflated. • It is important to determine whether the costs claimed to have been apportioned between the various group entities have not been inflated and are allocated on a proper basis


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• Documents evidence for rendering of service

• Cost allocation methodology

• Benchmarking study

• Intercompany agreement


DOCUMENTATION

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CHECKLIST OF DOCUMENTS FOR INTRA GROUP SERVICES

Sr No

Particulars

Docs to be collectedLocal entity

Parent entity

1. Intercompany service agreement 2. Evidence demonstrating receipt of service

3. Copy of emails, correspondence etc demonstrating scope of work and negotiation of price between group companies

4. Copy of invoices raised – recommended by BEPS for LVAS 5. Details of cost incurred by group company for providing such services

6. Documents demonstrating the charge made on other group entities

7. In case of allocation of cost, certificate from an independent auditor certifying the basis of allocation key used and calculation of charges

8. Benchmarking study done/ Transfer pricing report 9. Detail write up should be maintained to demonstrate following points:

o Difference between regular service received by local entity v/s headquarter service received so as to prove that there is no duplication of service

o Reasons for availing such service

o Documents to substantiate that the services were actually received and were consistently received


26SN & Co.Chartered Accountants

INDIAN APPROACH – TP AUDIT

Benefits Test – IGS service been

provided?

Justification of mark-up – Routine

services vs. value added services

Intra group charge - Cost

allocation / cost base working

Documentation

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CHALLENGES

Evidencing that the recipient required these services

Evidencing that the recipient has actually received the services

Evidencing the commercial/economic benefit derived by the recipient

Need Test Evidence Test Benefit Test Chargeable services



No No No

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McCann Erickson India Pvt Ltd. - (Delhi ITAT) ITA No. 5871/Del/2011 - Management and coordination service

o Need Test: Only a business expert can evaluate true intrinsic and creative value of services received. Reference of need test complied by the taxpayer

o Benefit Test: Over the years 14% revenue growth substantiated by Taxpayer

o TNMM justified if o Transaction if interrelated o Nexus with core revenue generating activity o No revenue generating capacity in isolation o Only one class of business

o DRP direction of reducing adjustment to 40% cannot by denied by the TPO & AO

CASE STUDY


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Dresser Rand India Pvt. Ltd. - (Mumbai ITAT) ITA No. 8753/Mum/2010 - HR, Treasury, various support services

o Need Test : Tax authorities cannot question the commercial expediency, In house presence of team does not stop AE to take specialised service

o Evidence Test : Contemporaneous documentation submitted – 300 pages

o Benefit Test : TPO did trend analysis of growth in the business (being first year of service) and in absence of increase in growth contented that the service was not required – not accepted by Tribunal

o Separation of transaction and benchmarking it not possible and TNMM accepted as most appropriate method

Contd…


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TNS India Pvt Ltd (HYD ITAT) ITA No 944/HYD/2007 – Evidence test accepted based on detailed submission of functions performed by AE without corroborated documentation

Contd…


Gemplus India Pvt. Ltd. (Bangalore ITAT) ITA No.352/Bang/2009

Marketing and sales and other support, customer

No details available on record in respect of services rendered Taxpayer has not proved any commensurate benefits against the payments of service charges to its Singapore affiliate Cost must be allocated on actual basis and not on pre determine basis

Knorr-Bremse India Pvt. Ltd.(Delhi ITAT) ITA No. 5097/Del/2011

SAP implementation fees CUP method rejected

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AWB India Pvt. Ltd.(Delhi ITAT) ITA No. 4454/Del/2011

o Not possible to document every receipt of the service in question

o Tax authorities cannot question the commercial expediency

o CUP method applied by the TPO cannot be considered in view of non-availability of CUP data

Avery Dennison India Private Limited v. ACIT (Delhi ITAT) (ITA No.4868/Del/2014)

o The HC held in the case of the taxpayer that mere profitability or benefit cannot be the basis for determination of ALP for intra-group service fee payments.

o The Tribunal, has observed that the intra-group services, if part of a composite contract, cannot be unbundled for the purpose ALP determination, and thereby allowed aggregation of the transaction under TNMM.

Contd…



BEPS GUIDELINES – ACTION PLAN 10

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LOW VALUE ADDED INTRA-GROUP SERVICES The guidance defines LVAS are services which are:

o are supportive in nature,o are not part of the core business of the group,o do not use or create unique and valuable intangibles, ando do not involve significant risk.


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Specific areas to be considered:

o Has a service been provided? : Service that provides economic or commercial value and that the recipient would have paid for the activity or else performed the service itself.

o Cost pools: Calculate pool of all costs incurred by all members of the group in performing low value-adding intra-group services. Reduce specific cost and Shareholder costs From it.

o Invoicing: Invoices are often not available where the costs attributed are internally apportioned direct or indirect costs. In those circumstances an explanation of the logic and process applied to arrive at the attributed costs will be needed.

o Allocation keys: Different rationales will be applied in deciding upon the allocation key. What is important is that any allocation key can be justified, consistently applied and reviewed on a regular basis.

o Mark-up considerations: As it concerns low value added services, only a modest mark up to an appropriate cost base should be applied. The Guidelines indicate that typically agreed profit elements tend to falling a range between 3-10%, often around 5%.

Contd…


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STEPS TO BE ADOPTED WHEN DEALING WITH INTRA-GROUP SERVICES

Identify whether a service has been performed, the type of service that has been performed and the value of the service.

Identify the benefits to the service recipient.

Identify shareholders’ activities, service duplication and whether the service recipient would have paid a third party to provide the service.

Determine which income or cost to be charged.

Identify costs that could be charged directly.

Determine an allocation key for charging indirect costs.

Determine the arm’s length price by calculating an appropriate mark-up.


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INTRAGROUP SERVICES

IGS

Chargeable service

LVAS

TP Simplified

HVAS

Full TP

Non chargeable

service

Shareholder Duplication Incidental


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DETERMINATION OF ALPMinimum price

acceptable for provider

Maximum price acceptable for recipient

Range of AL Prices


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QUESTIONS


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CA. Darshak Shah S N & CoChartered Accountantso Tax o Audit o Consulting

Borivali (w) :::: Sion (w)Tel No. 022-28910968 +91-9699915474Website: www.snco.in Email Id: [email protected]

http://www.snco.in/

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Transfer pricing_Intra group service

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