1. INDIAN MERCHANTS’ CHAMBER
Domestic Transfer Pricing
And
Advance Pricing Arrangements
September 21, 2012
Presentation by:
Yogesh Thar
Chartered Accountant

2. Domestic Transfer Pricing
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3. Need for DTP
Genesis of DTP provisions: CIT v. Glaxo Smithkline Asia P. Ltd. (2010) 195 Taxman 35 (SC). The Apex Court gave suggestions, in order to “reduce litigation” to consider amendments in the law with a view to:
Make it compulsory for the tax payer to maintain books and documentation on the lines of Rule 10D;
Obtain audit report from a CA;
Reflect the transactions between related entities at arms’ length price;
Apply the generally accepted methods specified in TP regulations.
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4. Legislative action
The above suggestions have been duly carried out by the legislature through FA 2012
The Explanatory Memorandum (“EM”) recognises the suggestions of the Supreme Court.
EM says:
“for the purposes of section 40A, Chapter VI-A and section 10AA”.
“to provide applicability of transfer pricing regulations to domestic transaction for the purposes of computation of income, disallowance of expenses etc. as required under provisions of sections 40A, 80-IA, 10AA, 80A, sections where reference is made to section 80-IA, or to transactions as may be prescribed by the Board…”. 
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5. Fundamental propositions
DTP provisions are computation provisions and are neither charging provisions nor disallowance provisions;
DTP provisions have limited applicability to specified provisions of the Act;
DTP provisions, in addition to governing computation, impose administrative burden of maintaining documentations and getting accounts audited.
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6. Need for amendment/clarification?
The word “expenditure” in section 92BA (i) should not include “capital expenditure” and hence depreciation cannot be disallowed by invoking this provision;
The provisions of section 92BA(i) are not applicable to determine cost of acquisition of an asset for computing capital gains when the asset is transferred;
This provision will not apply to, say, interest paid to related party which is allowable u/s. 24 of the Act
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7. Corresponding Adjustments in 40A(2)
SC in Glaxo’s case refused to interfere “as the entire exercise is revenue neutral” and accordingly dismissed the SLP filed by the Revenue.
Is there, therefore, any need to amend the law so as to provide that:
The provisions of section 40A(2) should apply only where there is a tax arbitrage; and/or
Provisions should be made for allowing ‘corresponding adjustments’ in the hands of the other assessee?
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8. Directors’ Remuneration
Whether Companies Act provisions / approval – a valid benchmark?
If ‘no’, then how to administer DTP requirement for directors’ remuneration?
CUP can’t apply because all are “controlled” transactions;
Other methods are clearly NA;
Whether the sixth method can be applied?  
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9. Partner’s Remuneration
Whether the limits prescribed u/s. 40(b) should be considered valid even for DTP compliance? Is that not an inbuilt TP provision?
 If ‘no’, same questions as for directors’ remuneration will have to be answered.
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10. S. 80IA etc. Accounting v. Tax
S. 80IA(8): “for the purposes of the deduction under this section, the profits and gains of eligible business shall be computed as if the transfer…had been made at the market value…”
Thus, no need to pass any notional entry in the books of account.
Entries may be passed at, say, standard cost – it does not reflect market price.
Still, market value based computation is made and return is filed accordingly.
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11. Accounting v. Tax (cont’d)
Such cases, profits computed based on market value will be different. Thus, the “income computed on the basis of entries passed in the books of account” would be different than the income computed based on the mandatory requirement of section 80IA(8), i.e. based on market price.
Section 92(3) says that TP chapter shall not apply where the chapter has the effect of reducing the income or increasing the loss “computed on the basis of the entries made in the books of account”.
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12. Accounting v. Tax (cont’d)
Does it mean that in such cases, the ALP is not to be considered for computing the deduction?
In such a case, the original concept of market value (i.e. open market price) continues to apply in view of clause (i) to the Explanation to section 80IA(8) and the TP chapter is not applicable?
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13. S. 80IA(10): Close Connection
Invoking section 80IA(10) is a prerogative of the AO. The AO can recompute the profits eligible for tax holiday if the tax payer having business with another party of “close connection” earns more than ordinary profits because of such “close connection” or “for any other reason”.
 Now, a transaction between such persons is regarded as a SDT.
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14. Close Connection (cont’d)
Consequently, in view of the proviso to section 80IA(10) read along with section 92(2A), the profits from such SDT are to be computed having regard to ALP.
No objective criteria to decide “close connection”.
Also, “any other reason” – a subjective term
Legislative intent of providing freedom to the AO to examine all facts and circumstances of the case and decide.
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15. Close Connection - Issue
Now, the new law casts the onus on the assessee and the auditors to identify and report such transactions.
How to comply with such a requirement in absence of any objective criteria to determine the persons having “close connection”.
Also, how to report cases of “any other reason”?
Does this need an amendment?
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16. Advance Pricing Agreements
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17. Dichotomy between S.92CC/92CD/Rule 10G
S. 92CC(1) – APA in relation to international transaction “to be entered into”.
Rule 10G – any person who “has undertaken” or “is contemplating to undertake” an international transaction, shall be eligible to enter into APA.
S. 92CD contemplates that even before an APA is signed, the assessee could have filed his ROI and that post APA the ROI may be modified. This means that an APA can be signed after the transaction is entered into.
Should the language of S. 92CC be amended?
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18. TPO – Compliance Audit
Rule 10-O requires the applicant to file annual compliance report with the DGIT;
Rule 10-P requires TPO to conduct a compliance audit
Powers of TPO to call for details / explanations from the assessee to substantiate compliance
TPO to file compliance audit report to DGIT (for UAPA) and to Competent Authority (CA) (for BAPA and MAPA)
Q: Is this excessive delegation of powers? Should this be curtailed?  
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19. Rule 10T: During APA process TP assessments as usual
Mere filing of an APA application shall not prevent TP assessment as usual
Does this not lead to duplication of time and efforts on the part of assessee and also the Authorities?
Is there any better way of dealing with this situation?
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20. “Critical assumptions”
Means factors and assumptions that are so critical and significant that neither party entering into APA will continue to be bound if any factor/assumption is changed
Change in critical assumption may lead to revision of the APA
If assessee does not agree to the revision, APA can be cancelled
What safeguards necessary to ensure that “critical assumptions” are not left to the interpretation of the TPO when he makes his compliance audit report?
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21. Need for limited “confidentiality”
In APA proceedings, the assessee may have to provide his confidential business related information (business secrets) to substantiate his claims to the APA team.
There is no provision requiring confidentiality of such information.
Information flow to APA team is a one way traffic. It can go even to the AO/TPO who can use it for benchmarking other assessees and hence divulge the information to the competitors.
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22. Need for limited “confidentiality”
Q: Should the assessee not be permitted to provide certain information with a condition that no copies will be retained after the APA is finalised or it fails? Should there not be a confidentiality clause binding the tax APA authorities in law so that if any such business secrets are leaked out, the Department should be held liable under the general law.
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23. Let’s discuss…
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