IFA Conference Recent Amendments in Transfer Pricing Rahul K Mitra 6 th July, 2012 Mumbai

PwC Recent amendments in Transfer Pricing 6 th July, 2012 Page 2 Agenda A Transfer Pricing (TP) Scenario in India B Amendments in International TP by Finance Act, 2012

PwC Recent amendments in Transfer Pricing 6 th July, 2012 Page 3 TP scenario India Seven rounds of TP audits completed in 2011 Aggregate TP adjustments in 2011 audit cycle [FY 2007–08]  Rs 45,000 crore appx; cumulative TP adjustments in first six audit cycles  Rs 50,000 crore appx India contributes > 70% litigation in TP globally (volume) at level of Tribunal/ Tax Courts or above  should taxpayers & Revenue continue to litigate ? Generally two broad categories of TP litigation – ―Pure comparability issue (IT & ITeS companies)  requires fundamental reforms in Indian TP regulations [“inter-quartile range” & “multiple year data” concepts] ―Complex transactions on fundamentals of TP  requires significant improvement for all constituents [taxpayers, to start with]

PwC Recent amendments in Transfer Pricing 6 th July, 2012 Page 4  Presently only emphasis on comparables, less on fundamentals of TP  FAR analysis  Characterisation  “Tested party”  TP Method  Select Comparables  MNC Group’s overall profile & global TP policy to be considered  Taxpayers open to adopt fresh TP method/ strategy before DRP/ Tribunal  Vital points : ―Setting of pricing policy  “test what is set” ―Robust documentation, capturing FAR & economic analyses ―Inter-company agreement ―TP policy/ planning  documentation  audit defense ―Share information of Foreign AEs Getting things right

PwC Recent amendments in Transfer Pricing 6 th July, 2012 Amendments in International TP by Finance Act, 2012 Introduction of Advance Pricing Agreements (APAs) effective 1 st July, 2012 Clarification re “international transactions” & “intangibles” Clarification re powers of Transfer Pricing Officer (TPO) Clarification re 5% range around arithmetic mean (AM) for arm’s length price (ALP) Limitation of range to 3% around AM effective FY (AY ) TP compliance extended to certain domestic transactions Page 5

PwC Recent amendments in Transfer Pricing 6 th July, 2012 International Transactions Page 6 Illustrative definition wref AY Clarificatory in nature No possible extra liability on taxpayers Financial Transactions (e.g. guarantees) included  always there Business Restructuring/ Reorganisation included : - Mere portability of profit potential on flight of functions to attract exit cost ? - Transfer of intangibles/ impairment of contractual rights pre-requisite for exit cost ? - OECD Model & ATO guidelines vs. German regulations - What would India adopt ?

PwC Recent amendments in Transfer Pricing 6 th July, 2012 Intangibles Page 7 Illustrative definition wref AY Clarificatory in nature Source of legislation : - Website ( - US TP Regulations (Section 482-4)(Section 482-4) No possible extra liability on taxpayers Revenue’s continued focus on niche areas Recognition of human intangibles  impact on portability of functions outside India OECD’s draft guidelines on intangibles  emphasis on FAR for intangible related returns

PwC Recent amendments in Transfer Pricing 6 th July, 2012 Powers of TPOs Page 8 Judicial rulings  TPO cannot adjudicate any issue unless expressly referred to by AO Finance Act, 2011  sub-section (2A) to section 92CA : - Post 1 st June, 2011, TPO can adjudicate any issue even if not referred to by AO Finance Bill, 2012  sub-section (2B) of section 92CA : - If no Form 3CEB filed with respect to any “international transaction”, TPO can adjudicate any issue coming to his notice during TP assessment - Wref 1 st June, Not to impact closed assessments as on 1 st July, 2012 How to read harmoniously ? Taxpayers advised (always) to pursue fundamentals of TP than legal arguements

PwC Recent amendments in Transfer Pricing 6 th July, % range around AM for ALP Page 9 Prior to amendment by Finance Act, 2009, scope for interpretation  whether standard deduction (SD) available, even if taxpayer’s transfer price (TP) fell outside 5% range on ALP Conflicting views of Tribunals Finance Act (No 2) Act, 2009 : - 5% range around taxpayer’s TP & no SD - Applicable to pending TP assessments as on 1 st October, 2009 [Object’s Clause] Tribunals still ruled amendment as applicable from AY [ignoring Object’s Clause]

PwC Recent amendments in Transfer Pricing 6 th July, % range around AM for ALP …. contd Page 10 Finance Act, 2011 : - AY onwards  CBDT to notify varying ranges on TP; & no SD Finance Bill, 2012 : - Assessments completed up to 30 th September 2009  5% range on ALP & no SD - Wref AY Not to impact closed assessments as on 1 st October, Assessments pending on 1 st October, 2009 to AY  5% range on TP & no SD - AY onwards  CBDT to notify varying ranges on TP; not exceeding 3%; & no SD No range notified for AY ; fiscal year completed What would taxpayers do for FY (AY ) ? Operate above AM ? Same fate for FY (AY ) ?

PwC Recent amendments in Transfer Pricing 6 th July, 2012 Concept of Inter-quartile Range vs. AM Page 11 Extreme results indicate abnormal business conditions  generally excluded from arm’s length range AM  results distorted due to extreme values (outliers)  inter-quartile range automatically eliminates outliers Median  less susceptible to distortion on account of extreme values, as outliers removed through upper/ lower quartiles  better measure of central tendency Inter-quartile range encapsulates 50% actual observations, vis-à-vis (+/-) 5% range around AM or any other artificial range, which has limited statistical rationale OECD recommends inter-quartile range 15 countries (both developed & developing economies) follow inter-quartile range Inter-quartile range  mitigate 50% litigation in TP in India re comparability analysis Empirical evidence for AY (case studies)  ITeS & ITITeSIT

Thank you The information contained in this presentation is of a general nature only. It is not meant to be comprehensive and does not constitute legal or tax advice. PricewaterhouseCoopers ("PwC") has no obligation to update the information as law and practice change. The application and impact of laws can vary widely based on the specific facts involved. No reader should act or refrain from acting on the basis of any material contained in this presentation without obtaining advice specific to their circumstances from their usual PwC client service team or their other advisers. The materials contained in this presentation were assembled in June 2010 and were based on the law enforceable and information available at that time. © 2010 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. Rahul K Mitra National leader, Transfer Pricing PwC India New Delhi Office Mobile :

PwC Recent amendments in Transfer Pricing 6 th July, 2012 Page 13 Source of definition of Intangible Property

PwC Recent amendments in Transfer Pricing 6 th July, 2012 Page 14 US TP regulations [Section 482 – 4] - Patents, inventions, formulae, processes, designs, patterns, or knowhow; - Copyrights and literary, musical, or artistic compositions; - Trademarks, trade names, or brand names; - Franchises, licenses, or contracts; - Methods, programs, systems, procedures, campaigns, surveys, studies, forecasts, estimates, customer lists or technical data; - Other similar items that derives its value not from its physical attributes but from its intellectual content Source of definition of Intangible Property …. contd

PwC Recent amendments in Transfer Pricing 6 th July, 2012 ITeS case study for AY Page 15 ParticularsOP/TC XYZ Ltd. - Tax payer 15.00% Average (AM) 30.21% Lower limit under 92C(2)24.01% Lower Quartile12.62% Median27.31% Upper limit under 92C(2)35.25% Upper Quartile35.25%

PwC Recent amendments in Transfer Pricing 6 th July, 2012 Page 16 IT case study for AY ParticularsOP/TC PQR Ltd. - Tax payer 15.00% Average (AM) 25.04% Lower limit under 92C(2)19.08% Lower Quartile14.19% Median23.18% Upper limit under 92C(2)32.71% Upper Quartile35.25%