C h a l l e n g e U s

1. C h a l l e n g e U s

2. Specified Domestic Transactions Budget 2012 BMR & Associates LLP Privileged & confidential

3. Agenda 3

4. Transfer Pricing Concepts BMR & Associates LLP Privileged & confidential

5. What is Transfer Pricing? • Transfer Pricing (TP) is a mechanism for the pricing of goods and services between related entities • Tangible Goods • Intangible Goods – trademarks, trade-names, patents • Services – management, engineering, after-sales services • TP mechanism provides the conceptual framework for pricing intercompany transactions and ensuring an appropriate allocation of income between the various tax jurisdictions (usually) in which a multinational company operates. • TP for tax purposes is governed by local jurisdictional authorities. • More than 50 countries have issued formal rules regulating transfer pricing practices. • The regulations, in most instances, are accompanied by documentation requirements and penalty provisions for non-compliance. • TP Regulations introduced in India in FY 2001-02 for International Transactions. • Specified Domestic transactions included in the scope of TP w.e.f. FY 2012-13 (Finance Bill 2012)

6. Domestic Transactions What has changed BMR & Associates LLP Privileged & confidential

7. Budget 2012 – Scope Of Transfer Pricing Regulations Expanded • Income Tax Act, 1961 (‘IT Act’) already contain provisions to curb claim of excess expenditure / re-compute the income on transactions between related parties • Section 40A(2) disallows excess / unreasonable expenses between related parties • Section 80IA(8) / 80IA(10) – Tax officer empowered to re-compute the income of eligible undertaking based on fair market value if transactions with related parties or other undertakings of same entity is not as per market value • Scope of Transfer Pricing (‘TP’) regulations expanded to include ‘specified domestic transactions’ (‘SDT’) if aggregated value of such transactions exceeds INR 5 crs during the year • ‘Specified domestic transactions’ cover: • Expenses or payments made to domestic related persons as specified in Section 40(A)(2)(b) • Transactions between undertakings of same taxpayer or transactions by taxpayer with closely connected persons for purpose of Chapter VI-A (which includes 80-IA) and Section 10AA • Rationale of applicability of TP regulations to domestic transactions • Objectivity of determining income and reasonable expenditure between related parties TP regulations now applicable to SDT Preparation of Form No. 3CEB and TP study report mandatory

8. Specified Domestic Transactions BMR & Associates LLP Privileged & confidential

9. Specified Domestic Transactions • any expenditure in respect of which payment has been made or to be made to a specified person [section 40A(2)(b)]; • any transaction referred to in section 80A; • any transfer of goods or services referred to in sub-section (8) of section 80-IA; • any business transacted between the taxpayer and other person as referred to in sub-section (10) of section 80-IA; • any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which provisions of sub-section (8) or sub-section (10) of section 80-IA are applicable; or • any other transaction as may be prescribed • Applicability • Applicable where aggregate amount of exceeds INR 5 crores (approximately USD 1 million) in a year. • Applicable from Financial Year (FY) 2012-13 onwards

10. Who are the specified persons - Section 40A(2)(b) • Section 40A(2)(b) - list of persons/ entities to be treated as related parties/ specified persons • Specified persons having substantial interest ( i.e. more than 20% voting power or share in profits) in taxpayer’s business and vice-versa covered • Scope expanded to include sister concerns • Illustrative list of entities/ persons that may be included for a corporate taxpayer (not an exhaustive list): • those holding 20% or more equity in the tax payer; • companies whose 20% or more shares are held by such a company that holds more than 20% equity in the tax payer; • those companies in which the tax payer holds 20% or more equity; • Directors of tax payer company, and relatives of such Directors; • Directors of companies in category (a) above; and relatives of such Directors; • If an individual holds 20% or more equity in the tax payer, then relatives of such an individual; all other companies where such individual is a Director; all other Directors of such a company, and relatives of all such Directors; etc

11. Indirect interest illustrated Related parties as mentioned u/s 40A(2)(b) X • Transactions between sister concerns now covered Direct Interest X1 X2 Indirect Interest X • Coverage - Substantial direct and indirect interest? X1 X2 X3 X4 X3 X4 X5 X6 X7 X8 X5 X7 X6 X8

12. Tax Holiday - Transfer Pricing Test Sub-section (8) of section 80-IA (and similar such provisions in 10AA and Chapter VI-A) Other unit Tax holiday unit Inter unit transfers (goods and services etc.) Not corresponding to market value (adherence to ALP proposed) Sub-section (10) of section 80-IA (and similar such provisions in 10AA and Chapter VI-A Tax holiday company Business transacted (wider than transfer of goods or services) Other person having close connection More than ordinary profits earned by business unit claiming deduction (adherence to ALP proposed) Transactions to be reported in Accountant’s Report and arms’ length nature to be substantiated in the TP Documentation

13. Tax Holiday beneficiaries impacted by Domestic TP

14. Possible Tax Leakages – If ALP Not Followed (Illustrations) X Ltd. (non-tax holiday) X Ltd. (non-tax holiday) X Ltd. (non-tax holiday) Sale at 120 v/s ALP (ie 100) Sale at 120 v/s ALP (100) Sale at 80 v/s ALP (100) Y Ltd. (non-tax holiday) Y Ltd. (tax holiday) Y Ltd. (tax holiday) Disallowance of INR 20 [40A(2)(b)] Double DisallowanceINR 40 [40A(2)(b) and excessive profit] Inefficient pricing structure – Reduced tax holiday benefit

15. Penalties Maintenance of contemporaneous and robust documentation is the key to avoid penalties

16. Way Forward BMR & Associates LLP Privileged & confidential For discussion purposes only

17. Next Steps • Immediate • Identification of: • covered entities and persons • covered transactions • Review of the pricing mechanism for the covered transactions • Planning for corrective steps to be taken: • Functions, Assets and Risk (FAR)analysis • Economic Analysis including Benchmarking for price setting • Ongoing • Review of existing transaction for change in facts and circumstances • Examining any new transactions and reviewing the pricing mechanism for such transaction • Year end compliance • Preparation of Transfer Pricing Documentation (TP Report): • Covered persons • Covered transactions • Nature and quantum of transactions • Arm’s length pricing of all such transactions using Prescribed methods • Filing of Accountant’s Report in [Form No. 3CEB] within the prescribed time limit i.e. 30th November of the relevant assessment year

18. TP Regime in India and the approach to be adopted BMR & Associates LLP Privileged & confidential

19. Transfer Pricing Documentation – Sec 92D / Rule 10D Transaction related Entity related Price related • Transaction terms • Functional analysis (functions, assets and risks) • Economic analysis (method selection, comparable benchmarking) • Forecasts, budgets, estimates • Profile of industry • Profile of group • Profile of taxpayer • Profile of associated enterprises • Agreements • Invoices • Pricing related correspondence (letters, emails etc) • Contemporaneous documentation requirement – Rule 10D • Documentation to be retained for 9 years • No specific documentation requirement if the value of specified transactions is less than one crore rupees.

20. Accountants Report – Sec 92E / Rule 10E • To be obtained by every person entering into a specified domestic transaction • To be filed by the due date for filing return of income (no e-filing) • Opinion whether prescribed documents have been maintained the particulars in the report are “true and correct” • Review is limited to specified domestic transaction conducted by assessee • Relevant annexures and appendices be attached • Inputs: • Related party ledgers extracts • Related party Schedule under AS-18 • Sample Invoices/ Vouchers / DN / CN • Relevant intra-group agreements • CUP information Form No. 3CEB [See rule 10E] Report from an accountant to be furnished under section 92E relating to international transaction(s) 1. We have examined the accounts and records of ENTITY NAME AND POSTAL ADDRESS - PAN No. relating to the international transactions entered into by the assessee during the previous year ending on 31st March 2012. 2. In our opinion proper information and documents as are prescribed have been kept by the assessee in respect of the international transaction (s) entered into so far as appears from our examination of the records of the assessee. 3. The particulars required to be furnished under section 92E are given in the Annexure to this Form. In our opinion and to the best of our information and according to the explanations given to us, the particulars given in the Annexure are true and correct. Place : Chennai Date : For B S R & Co. Chartered Accountants

21. Computation of Arm’s Length Price – Section 92C of the Act • Determination of ALP using one of the Prescribed methods – • Best suited to the facts and circumstances of each particular specified domestic transaction and • Provides the most reliable measure of an arm’s length price in relation to the specified domestic transaction shall be “Most Appropriate Method” • Where more than one ALP is determined, the arithmetic mean of such prices is taken to be the ALP Prescribed Methods Traditional Transaction Method Transactional Profit Method CUP Method & Sixth Method RPM Method CPLM Method PSM Method TNMM Method No hierarchy or preference of methods prescribed under the Act

22. Summary of Methods

23. BMR Approach BMR & Associates LLP Privileged & confidential

24. Transfer Pricing Process Stage 5 Stage 4 Stage 3 Stage 2 Stage 1 Issuance of Transfer Pricing Documentation Functional analysis - Information gathering Comparable data / Industry Analysis Economic Analysis Pre-project planning • Preparation of project plan • Interviews • Questionnaires • Discussions with Management • Characterisation of each entity • Agreement reviews • Search strategy • Access to local & global database • Analysis of internal comparables • Judicious identification of arm’s length range • Understand existing costing mechanism • Determination of billing methodology • Consultation with management • Finalization of Transfer pricing documentation

25. TP Documentation Methodology 2 1 Functional Analysis Information Gathering 3 Economic Analysis/ Benchmarking 4 5 Documentation Accountant’s Report This exercise will assist in meeting the taxpayer’s requirements from a TP perspective

26. TP Documentation Methodology – Detailed steps STEP 1 – Information Gathering Entity Related Transaction Related Price Related • Transaction terms, forecasts and budget estimates • Market Profile • Functional analysis – functions performed, assets used & risk assumed • Economic Analysis - method selection & benchmarking • Industry profile • Taxpayer‘s profile • AE’s profile • Agreements • Invoices • Pricing related correspondence – letters, e-mails, etc. Sequential progression

27. TP Documentation Methodology – detailed steps (contd...) STEP 2 – Functional Analysis • Functional analysis based on information gathered in Step 1 • Audit of the functions performed, assets utilised and risks assumed by Taxpayer for the specified domestic transactions being tested • Conduct interviews with company management and business personnel to understand the business/ strategic objectives from a TP perspective • Document the functional analysis • STEP 3 – Economic Analysis/ Benchmarking • Select the ‘most appropriate method’ based on functional interview and availability of data • Searching for comparable transactions/ companies using internal data and/ or publicly available databases at our disposal • Apply quantitative and qualitative screens with appropriate financial adjustment to the comparables • Conclude if Taxpayer‘s related party transactions comply with the arm’s length standard

28. TP Documentation Methodology – detailed steps (contd...) STEP 4 – Documentation • Preparation of draft TP Documentation that incorporates findings resulting from the above mentioned steps • Discuss these findings with Taxpayer to ensure factual consistency • Incorporate Taxpayer‘s review comments and issue the final TP Documentation • Timelines: Usually 6-8 weeks from the date of receiving required information STEP 5 – Accountant’s Report by a Chartered Accountant Firm • Liaison with Taxpayer‘s personnel, after the close of statutory accounts to arrange for Accountant’s Report completion in the prescribed format • Timelines: Usually 2 weeks from the date of receiving required information

29. Thank You BMR & Associates LLP Privileged & confidential

30. C h a l l e n g e U s