VISION STATEMENT
“The Chamber of Tax Consultants (The Chamber) shall be a powerhouse of knowledge in the field of fiscal laws in the global economy. The Chamber shall contribute to the development of law and the profession through research, analysis and dissemination of knowledge. The Chamber shall be a voice which is heard and recognised by all Government and Regulatory agencies through effective representations. The Chamber shall be pre-eminent in laying down and upholding, among the professionals, the tradition of excellence in service, principled conduct and social responsibility”
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ABOUT THE CHAMBER OF TAX CONSULTANTS The Chamber of Tax Consultants (The Chamber) was established in 1926 and is one of the oldest voluntary non-profit making professional organisations. It is the voice of more than 4,000 professionals on a pan-India basis. Its members comprise of Advocates, Chartered Accountants, Company Secretaries, Cost Accountants, Corporates, Tax Consultants and Students. The Chamber, despite its vintage, is a young dynamic organisation having a glorious past and undisputedly ambitious future. The Chamber is a well-respected institution with a tradition of high integrity, independence and professionalism. The Chamber acts as a power house of knowledge in the field of fiscal law, always proactive in contributing to the development of law and profession through research and analysis, dissemination of knowledge and proactive interaction with policy makers. The Chamber also provides professionals several networking opportunities through interactive meetings and seminars. Professional luminaries like Late Shri B. C. Joshi, Late Shri V. H. Patil, Dr. Y. P. Trivedi, Shri S. E. Dastur, Late Shri D. M. Harish, Late Shri Narayan Varma, Dr. K. Shivaram, Shri S. N. Inamdar, have been The Chamber’s Presidents. For The Chamber education is the supreme power and spread of education is its motto. The Chamber Strives to be pre-eminent in upholding among the Professionals a Tradition of Excellence in Service and Principled Conduct with Social Responsibility Knowledge sharing initiatives The Chamber disseminates knowledge by holding high quality Workshops, Seminars, Lecture Meetings, Study Circles and Study I-v
Transfer Pricing - A Compendium
Group Meetings, Outstation Conferences, etc., for the benefit of members which keeps them up-to-date with the latest developments in the field of tax and commercial laws. Keeping in pace with the technological revolution, The Chamber also holds webinars on various professional subjects especially for members outside its area of physical presence. Through its various orientation and advance courses in new and emerging areas of practice, it equips young professionals to build their careers in unconventional practice areas. It functions through effective subcommittees in addition to its Managing Council which have about 300 core group members. The Chamber also holds three offsite Residential Refresher Courses (RRCs) annually on Direct Tax, Indirect Tax and International Tax. In-depth study and close fellowship and bonding make the RRCs a ‘must attend’ for loyal enthusiasts and eager new learners alike. The Chamber’s Journals and CTC Newsletter “The Chamber’s Journal” which is its mouthpiece is very popular amongst the professionals and Corporates as well, mainly because of in-depth analysis on topical issues (theme based). These special issues have found a permanent place in libraries of leading tax professionals. The CTC publishes a monthly newsletter called ‘The CTC News’. This newsletter contains details of upcoming events, short details of in-house publications which are on sale and various activities to be taken up by The Chamber along with material on professional topics. International Tax Journal “The International Tax Journal” is a quarterly magazine containing insightful analysis on subjects of International tax, a practice area that has picked up significantly in the recent past and which is expected to significantly grow in future. Representations before Regulatory Authorities and Public Interest Litigations The Chamber has always stood up for its members and also the taxpayers at large by making effective representations before the Government and Regulatory Authorities. Its voice is respected in
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About the Chamber of Tax Consultants
Government Departments and Ministries. Professionals look upon The Chamber as an institution which can take their grievances to the Court of Law, when required. Every year, The Chamber makes at least 25 representations on issues of tax and allied laws which cause or are likely to cause hardship to the public.The Chamber was successful in getting favourable order for the Writ Petition filed before Delhi High Court, challenging, inter alia, issuance of Income Computation & Disclosure Standards (ICDS) by the CBDT and the circular thereafter. The Chamber also filed a Writ petition in the Bombay High Court against the proposal by the Central Board of Direct Taxes (CBDT) to reward appellate authorities for ‘quality’ orders which ultimately led to the proposal being shelved. Recently the Chamber had filed a Public Interest Litigation (PIL) before the Hon’ble Bombay High Court against the fundamental flows in the Faceless Appeal Scheme 2020 as notified by the Central Government. This has resulted in the Faceless Appeal Scheme being completely revamped and a new scheme - Faceless Appeal Scheme 2021 has been now notified on 28-12-2021. Most of the issues raised by the Chamber in its petition has been addressed by the Central Government while framing the new scheme. The Chamber inter alia makes effective representation through pre and post Budget memoranda and need based representations on burning issues. The Chamber’s Library and Website The Chamber Library at Aayakar Bhavan and which is widely used by tax professionals. The library have more than 4,000 titles and subscribe to all leading tax journals/magazines and books. The members of The Chamber enjoy a unique bond of fellowship and brotherhood which is evident in all its activities and programmes. The website www.ctconline.org has a lot of information of use to its members and is kept updated on recent developments. Delhi Chapter and Pune, Bengaluru and Hyderabad Study Circles The Chamber has a vibrant Chapter at Delhi and insightful Study Circles at Pune, Bengaluru and Hyderabad which are aimed at increasing its pan India presence. The Chamber is actively looking at setting up its footprint in more cities towards this objective.
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Transfer Pricing - A Compendium
Initiatives for Student Members The Student Committee of The Chamber organises many events for students. The Dastur Essay Competition, which is an annual feature, is one of such activities where students across India and even from outside India participate with great enthusiasm. The final shortlisted Essays are ranked by Judges of Bombay High Court or Members of Income Tax Appellate Tribunal. This competition endeavours to keep the writing habit alive amongst the students who are the future torch bearers of the profession. In order to promote and encourage mooting activities among law students, The Chamber also organises. The Chamber of Tax Consultants National Moot Court Competition, an inter college moot court hosted together with the Government Law College, Mumbai. The Dastur Debate Competition organised by the Chamber provides an excellent opportunity to students to express their thoughts on contemporary topics in a meaningful manner and developing the skill of debating amongst the students. “Jignyasa” - a dedicated quarterly journal for students is the new initiative by the Chamber. The articles in this journal are contributed by students under able guidance of professionals as mentors. This is truly a journal for the students, by the students and of the students.
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PRESIDENT AND CHAIRMAN MESSAGE 2021-22
KETAN L. VAJANI, President
RAJESH P. SHAH, Chairman-International Taxation Committee
The Chamber of Tax Consultants has always been pioneer in coming out with various useful publications on topics which has immense value in the current professional world. The publications of the Chamber are always exhaustive, accurate and contemporary. With the object of serving the profession in the optimum manner, the first edition of Compendium on Transfer Pricing was published in the year 2014. With the passage of time and evolution of law worldwide over the period of years, a need was rightly felt to revisit the earlier publication and upgrade the same to match up with the current scenario. So here it is. The International Tax Committee of the Chamber of Tax Consultants is pleased to place before the readers, the most awaited publication Transfer Pricing – A Compendium. We feel proud and privileged to bring it in two volumes containing more than 2800 pages of well researched education material for the benefit of all the professionals.
The publication is a landmark in itself, as it contains 75 articles written by more than 150 authors, who are experts in their own right in the subject of Transfer Pricing. We are confident that this publication will provide the much required guidance and support to fellow professionals to understand intricate issues which has always remain contentious and challenging. The authors, with their immense experience, have extensively covered the subject in greater detail with practical examples wherever necessary. The world has become a small village over the period of the years and we are all citizen of a global village. Transfer pricing is a critical tax
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Transfer Pricing - A Compendium
issue for multinational enterprises around the globe. These provisions were introduced in Indian Income Tax Law in Financial Year 2001-02 and since then have undergone immense changes both in respect of substantive and procedural laws and thus paved the way for increase in tax litigation. The variety of judicial precedents on this subject has evolved over the years. Even after two decades, with improved technology and digitization, transfer pricing provisions in India are still evolving. Even on the international front one can witness several initiatives taken by the Organization for Economic Co-operation and Development (“OECD”) and United Nations (“UN”) aiming to provide for clearer guidance on the policy and administrative aspects of applying transfer pricing. Both OECD and UN have updated their guidelines on transfer pricing. Initiatives such as the Base erosion and profit shifting (BEPS) Action Plans in 2015 address “various tax planning strategies that are used by multinational enterprises to exploit gaps and mismatches in tax rules” that enable erosion of tax bases. OECD also aims to address the tax Challenges of the Digital Economy by adopting a two pillar approach. Further to the first publication ‘Practical guide to Indian Transfer Pricing’ in 2010 and second publication ‘Transfer Pricing - An Industry & Technical Perspective’ in 2014 released by the Chamber of Tax Consultants (Chamber), that covered various technical and legal issues while taking into consideration industry specific challenges, the Chamber has felt that it was timely to present a third publication on transfer pricing which is a compendium of advanced transfer pricing contributions by renowned expert authors dealing with the relevant subject matter expertise of the issue or sector concerned. Accordingly, this publication covers advanced significant technical issues, major developments (both in India and globally) and key transfer pricing challenges in various industries. Subject of Transfer Pricing has become the need of the hour in today’s globalised world. 1/3rd of the Indian companies have cross border transactions and many of the companies have set up related or associated entities worldwide. Similar is the case with global corporate giants making inbound investments in India in various forms and through complex structures. Globalization has led to strong growth in cross-border trade flows. This has brought with it complexities, higher tax adjustments and an increasing litigation
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President & Chairman Message 2021-22
Transfer pricing provisions introduced by the government has the primary object of allowing the government to closely monitor an international transaction and ensuring that the corporates do not misuse the favourable tax provisions in different countries depriving the nation of its legitimate share of tax. These provisions allow the government to keep a check on the transactions, which are insisted to be carried out at Arm’s Length, for the goods and services exchanged between subsidiaries, affiliates, or commonly controlled companies that are part of large corporate conglomerate. Though the intention can certainly not be undermined, at times many practical difficulties arise in implementation of the provisions and huge additions are made by the revenue authorities on account of these provisions. A tug of war, therefore, always go on between the corporates and revenue authorities so as to achieve their respective objects, which are certainly at different ends. In order for Multinational Enterprises to comply with international regulations and standards like the OECD BEPS, they need to meet the arm’s length principle when it comes to the transactions with their Associated Enterprises. The arm’s length principle ensures that an MNE’s tax obligations cannot be lessened or avoided through strategic internal trading. With the rise of globalization, the implementation of the arm’s length principle is being recognized as essential and unavoidable by economists, tax regulators and the business community alike. Considering the above, this publication will certainly be bringing a great value to its readers. The wisdom of eminent authors and their rich experience will be available handy for a professional to deal with the complex subject in an efficient manner with greater degree of confidence. This publication was conceptualised by the lnternational Tax Committee for the year 2020-21 and spearheaded under the leadership of CA Anish Thakkar, CA Rajesh L Shah and CA Kirit Dedhia, with team members CA Namrata Dedhia, CA Heena Khajanchi, CA Ujjwal Thakrar, and ably supported by CA Hinesh Doshi, CA Bhavesh Dedhia, CA Sagar Wagh, CA Vaishali Mane and CA Shreyansh Shah without whose effort, it would not have been possible to come out with this Publication. They have meticulously reviewed the chapters of the book with valid suggestions to improve the quality and the reliability. But as the saying goes “Rome was not built in a day”, the publication, which is a masterpiece for sure, had taken some additional time to
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Transfer Pricing - A Compendium
come out. The pandemic which had troubled the entire world also had its role to play for the delay. However, the zeal of the team members was strong enough to overcome the challenges and continue moving in the correct direction. The current year’s team inherited the project and continued the mammoth task with the same vigour and enthusiasm. Commendable efforts have been put in by the current team including CA Kartik Badiani and CA Isha Sekhri. We express our sincere gratitude to the team for both the years for putting in their heart and soul in this prestigious project of the Chamber. We are also immensely grateful to our mentor CA Vispi T. Patel and CA Karishma Phatarphekar, who have played very vital role in detailing and categorising the contents. We are really thankful to all the learned authors, who have shared their knowledge and disseminated their experience through the pages of this publication with a selfless motive serving the cause of education. We are blessed to have the Forward to the publication by one of the most respected tax professionals of the country and past president of the Chamber Senior Advocate Shri S. E. Dastur Sir. Shri Dastur has been kind to accept our request immediately and has spent time out of his extremely busy schedule to go through the articles of this publication. It is the blessing of such senior tax professional which motivates the Team Chamber to keep on performing better and better over the period of years. We eagerly look forward to your feedback and suggestions on the publication. Your comments will certainly be of great value to us and will help us improve in our future endeavours. Please feel free to communicate your thoughts, including criticism if any. We wish our dear readers a thoroughly informative and educative reading experience.
Ketan L. Vajani President
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Rajesh P. Shah Chairman – International Taxation Committee
FOREWORD
In income tax law new concepts are introduced and older ones revised (sometimes repealed) with unfailing regularity compared to other enactments (even other tax enactments). This exercise is performed every year through the mechanism of the Finance Acts. On a conservative estimate a Finance Act comprises of over 70 sections which annually alter existing provisions and Shri S.E. Dastur introduce new ones in the Income-tax Act (the Act). In addition, so as to keep the professional on his toes and the assessee a little more confused, an amending Act, making further changes in the income-tax law, is some times passed! The optimist will, of course say that one has to be grateful for such changes as, otherwise, there may not have been an occasion for the present publication! Sub-section (2) of section 42 of the Indian Income-tax Act, 1922, contained a somewhat elementary transfer pricing provision though not labelled as such. This provision has been analysed in the case of Mazagaon Dock Ltd.-first, by the High Court at Bombay in (1955) 28 ITR 35 and then, on appeal by the assessee, by the Supreme Court in (1958) 34 ITR 368. The Supreme Court’s ruling was within three years of the appeal having been filed by the assessee against the decision of the High Court. Compared to today’s position concerning the number of years a litigant has to wait in queue for his appeal to be heard, the time lag of only 3 years seems unbelievable. When the 1961 Act was enacted section 92 thereof was similar to section 42(2) in the 1922 Act. The Finance Act, 2001, substituted, with effect from the assessment year 2002-03, the then existing section 92 (which was devoid of sub-sections) by a new section 92 (with three sub-sections) and new sections 92A to 92F. The Finance Minister, Mr. Yashwant Sinha, whilst introducing the Finance Bill, 2001, stated, in paragraph 176 of his speech, that the introduction of
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Transfer Pricing - A Compendium
the new provisions was to counteract the “ability” of multi-national enterprises to allocate profits in different jurisdictions (248 ITR 1, 34 (st.)). The Finance Act, 2012, has extended the scope of transfer pricing to “specified domestic transactions”, and has defined this term in section 92BA. The present publication is in pursuance of the Chamber’s Vision Statement “to contribute to the development of law ... through research, analysis and dissemination of knowledge.” According to the information conveyed to me the present publication is the forty - first publication parented by the Chamber over the last twenty one years, i.e., from 2001. Indeed, a very distinguished achievement. It deals exhaustively with the subject of “Transfer Pricing”. Reference is made, very perceptively and appropriately, to the OECD and UN guidelines on the subject as well as to prevailing international practices, not to mention the latest case laws. The publication is in two volumes and comprises of seventy - five Chapters covering about 2700 pages. What makes it unique is that it has articles on every conceivable transfer pricing issue authored by over 130 learned professionals (lawyers and chartered accountants) and even some top Revenue officers. Some of the contributors of articles have themselves individually written books on “Transfer Pricing” which have been very warmly received. The fact that most of the articles are authored by more than one person ensures that the reader benefits from their collective wisdom on each of the very relevantly chosen subjects. The Chamber is presently in the 96th year of its existence (it was founded on 27th September, 1926). Within less than 5 years it will be celebrating its centenary and I am sure that the Managing Committee, in co-ordination with the Chamber’s several distinguished members, has already commenced preparations to celebrate the unique occasion by drawing up a five year plan in this behalf, even though the Indian Government has now discontinued its earlier practice of framing such plans. I am sure one of the objectives of the plan will be to increase the number of publications to the credit of the Chamber, in all probability taking the Chamber’s post 2000 publication parenthood to the awesome figure of fifty, i.e., there will be a publication golden jubilee in the centenary year!
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S.E. Dastur
MANAGING COUNCIL 2021-22
Designation President Vice-President Hon. Jt. Secretaries Hon. Treasurer Imm. Past President Members
Name Ketan L. Vajani Parag S. Ved Neha R. Gada Mehul R. Sheth Vijay U. Bhatt Anish M. Thacker Ashok L. Sharma Atul T. Mehta Bhavik R. Shah Dharan V. Gandhi Dinesh B. Poddar Hinesh R. Doshi Jayant P. Gokhale Kishor D. Vanjara Mahendra B. Sanghvi Maitri P. Savla Nilesh S. Vikamsey Nishtha M. Pandya Paras K. Savla Paresh P. Shah Rahul K. Hakani Rajesh P. Shah Tejas J. Parikh
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Transfer Pricing - A Compendium
Designation
Special Invitees
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Name Vipul K. Choksi Vipul B. Joshi Vitang N. Shah Gopal Kandarpa Hitesh R. Shah
INTERNATIONAL TAXATION COMMITTEE 2021-22
Designation Chairman Co-Chairperson Vice-Chairmen
Ex-Officio Convenors
Past President Advisors
Office Bearer Imm. Past Chairman Mg. Council Member Members
Name Rajesh P. Shah Isha Sekhri Kartik Badiani Kirit Dedhia Shabbir Motorwala Ketan L. Vajani Parag S. Ved Kartik Mehta Monika Wadhani Niraj Chheda Ronak Doshi Hinesh Doshi Dilip Thakkar Rashmin Sanghvi T. P. Ostwal Mehul Sheth Rajesh L. Shah Atul Mehta Ameya Kunte Anish Thacker Anuj Shah Anup Shah Bhaumik Goda Chirag Vajani I-xvii
Transfer Pricing - A Compendium
Designation
Name D. S. Sharma Devendra Mehta Ganesh Rajgopalan Harshal Bhuta Heena Khajanchi Jimit Devani Karishma Phatarphekar Krutika Fadnis Manoj Shah Namrata Dedhia Naresh Ajwani Natwar Thakkar Nilesh Kapadia Paresh P. Shah Prerna Peshori Priti Shah Rajvi Mehta Sanjay Sanghvi Shreyas Shah Siddharth Parekh Sudhir Nayak Tarun Singhal Ujwal Thakrar Vispi Patel
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CONTENTS Volume I Chapter Subject and Authors No.
Page No.
1.
Indian Transfer Pricing, OECD and UN Framework - CA Rajesh L. Shah..................................................................... 1-51
2.
Introduction to Transfer Pricing Provisions in India - CA Sagar Wagh........................................................................ 52-82
3.
Transfer Pricing Methods - CA Shreyas Shah...................................................................... 83-95
4.
Transfer Pricing Documentation and its Critical Importance in Practice - CA Karishma R. Phatarphekar.............................................. 96-209
5.
Implementation of BEPS Recommendations CA Sagar Wagh...................................................................... 210-235
6.
Accountant’s Report under section 92E in Form No. 3CEB - CA Natwar Thakrar and CA Ujwal Thakrar......... 236-281
7.
Limitation on interest deduction - Section 94B - CA Vaishali Mane and CA Ajay Kering........................... 282-306
8.
Appeal/Dispute Resolution Process - CA Vispi T. Patel and CA Suresh Dhoot.......................... 307-361
9.
Penalty Provisions - CA Bhavesh Dedhia and CA Ruchira Shah....................... 362-382
10. Arm’s Length Price and Future of Arm’s Length Price - CA Vispi T. Patel and CA Kejal P. Savla......................... 383-426
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Transfer Pricing - A Compendium
Chapter Subject and Authors No.
Page No.
11. FAR analysis and Comparability analysis in benchmarking - CA Maulik Doshi................................................................. 427-496 12. Economic Adjustments - Dr. Shanto Ghosh and Richa Gupta................................... 497-529 13. Nuances around Deemed International Transactions - CA Bhavesh Dedhia and CA Shreya Dhadda.................... 530-547 14. Importance of timing in contemporaneous documentation including the concept of Range - CA Namrata Dedhia............................................................ 548-570 15. Cost Sharing Arrangements - CA Pankil Sanghvi and CA Ketan Maru.......................... 571-598 16. Cost Contribution Arrangements - Indian perspective - Dr. Hasnain Shroff and CA Vinita Chakrabarti................ 599-623 17. Corporate Guarantees - CA Hitesh D. Gajaria and CA Poonam Rao Shah............ 624-645 18. Benchmarking of loans/financial Instruments (Issues in Connection with Capital Financing) - CA Heena Khajanchi............................................................ 646-676 19. IP Planning and Migration - CA Kunj Vaidya and CA Amitava Sen............................. 677-692 20. Interplay between Presumptive Tax and section 92 - CA Prakash Kotadia and CA Vinay Deshmane................. 693-711 21. Profit Split Method - CA Uday Ved and Pratik Manani...................................... 712-769 22. Business Restructuring - CA Sanjay Tolia and CA Jatin Gajjar................................ 770-785 23. Attribution of Profits to Permanent Establishment - Advocate Mukesh Butani and CA Seema Kejriwal Jariwala.................................................................................... 786-826
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Contents
Chapter Subject and Authors No.
Page No.
24. Valuation of shares and intangible assets - CA Sujal Shah and CA Sagar K. Mehta........................... 827-847 25. Safe Harbour Rules - CA Vishal Gada and CA Himanshu Bhandari.................. 848-878 26. Transfer Pricing, Customs & GST - CS K.Vaitheeswaran............................................................. 879-902 27. General Anti-Avoidance Rules – Interplay between GAAR and TP - CA Akshay Kenkre and CA Mit Gaglani.......................... 903-935 28. Specified Domestic Transactions CA Harpreet Singh................................................................. 936-956 29. Analysis of Secondary Adjustment Provisions under Indian Transfer Pricing Regulations - CA Gaurav Shah and CA Vandana Shah.......................... 957-991 30. Country-by-Country Reporting & Master File regulations in India - CA Anand Kankani and Tarun Mirchandani.................. 992-1032 31. Impact of IND AS on Transfer Pricing - CA Poonam Ghelani and CA Ajit Vishwanath............. 1033-1058 32. Advance Pricing Agreement (‘APA’) Regime in India - Legal Framework, Practical Considerations and Statistics - CA Vaishali Mane and CA Ajay Kering....................... 1059-1092 33. Mutual Agreement Procedure and Developments - Rajat Bansal...................................................................... 1093-1101 34. United Nations Practical Manual on Transfer Pricing - CA T.P. Ostwal and CA Siddharth Banwat.................. 1102-1112 35. Effect of BEPS on evolution of Transfer Pricing - Dr. Sanjay Kumar and CA Jigna P Talati .............................................................................................. 1113-1174
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Transfer Pricing - A Compendium
Chapter Subject and Authors No.
Page No.
36. Transfer Pricing and Employee Stock Option Plans (‘ESOPs’) - CA Karishma R. Phatarphekar and CA Jigna P. Talati.................................................................................... 1175-1203 37. Combat COVID-19 impact through APAs - Kuldeep Sharma................................................................ 1204-1218
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CONTENTS Volume II Chapter Subject and Authors No.
Page No.
38. TP compliance and Issues surrounding taxable income earned by non-resident - CA Jaiman Patel and CA Harshita Pincha.............................. 1-36 39. Legal Issues in Transfer Pricing - CA Sanjay Sanghvi.................................................................. 37-66 40. Transfer Pricing Rulings - Dr. (CA) Sunil Moti Lala..................................................... 67-146 41. Landmark transfer pricing cases on few important issues - CA Paras S. Savla and CA Harsh R. Shah .................................................................................................. 147-173 42. Permanent Establishment’s Deemed Independence: A Recent UK Decision - Fair Play or Treaty Override? - Dr. Amar Mehta................................................................... 174-181 43. Recent controversies on Capital Account Transactions - CA Ronak Doshi and CA Jinal Jain................................... 182-204 44. POEM & Transfer Pricing: Interplay of the AntiAvoidance Regulations - CA Jiger Saiya and CA Deepa Suresh............................... 205-221 45. Governance and Transfer Pricing - CA Rajeshree Sabnavis and CA Mansi Parekh................. 222-253 46. Automotive Sector - CA Samir Gandhi and CA Pramod Joshi........................... 254-288
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Transfer Pricing - A Compendium
Chapter Subject and Authors No.
Page No.
47. Banking - Anis Chakravarty and Anushree Jagiani............................ 289-329 48. Contract Research & Development (R&D) (Inbound & Outbound) - Dr. Suhas Kulkarni.............................................................. 330-366 49. Diamond, Gems and Jewellery Industry - CA Rukhsar P. Sidhwa........................................................ 367-418 50. Foreign Investment Funds - CA Arati Amonkar and CA Hemang Mehta..................... 419-435 51. Hotel Industry - CA Vinita Chakrabarti and CA Saurabh Damani............. 436-473 52. Insurance Business - CA Waman Y. Kale and CA Bipin M. Dodhia................. 474-494 53. Information Technology Enabled Services Industry and Transfer Pricing - CA Manisha Gupta and CA Suchint Majmudar.............. 495-532 54. Knowledge Process Outsourcing - CA Fatema Hunaid and CA Ajay Kering.......................... 533-565 55. Logistics Industry - CA Bipin Pawar and CA Arun Saripalli........................... 566-577 56. Intra-group services - CA Vispi T. Patel and CA Anwesha Bandyopadhyay...... 578-610 57. Oil and Gas Industry - CA Paresh Parekh and CA Mansi Agrawal...................... 611-639 58. Financial Services - CA Manisha Jain.................................................................. 640-671 59. Life sciences including Pharma & Healthcare Industry - CA Karishma R. Phatarphekar and CA Shefali Shah........ 672-740
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Contents
Chapter Subject and Authors No.
Page No.
60. Power Sector - S. Gayathri and Shweta Mhatre.......................................... 741-749 61. Shipping Industry - CA Hinesh R. Doshi and CA Hiresh U. Desai................. 750-774 62. Software Industry - CA Rishi Harlalka and CA Sugandha Dutt Giri.............. 775-819 63. Telecasting and Broadcasting Industry - CA Sachin Shah and CA Priyanka Jain............................. 820-847 64. Telecommunication Industry - CA Amod Khare and CA Sonali Kotak.............................. 848-877 65. Trading Sales - CA Rajesh S. Athavale......................................................... 878-902 66. Digital and E-commerce - CA Rajendra Nayak............................................................. 903-913 67. Media and Entertainment Industry - CA Munjal Almoula and CA Dhaval Shah....................... 914-933 68. Contract Manufacturing & Toll Manufacturing - CA Rahul K Mitra............................................................... 934-949 69. Aircraft financing and leasing industry - CA Bharat Jain and CA Bipin M. Dodhia......................... 950-975 70. Fast-Moving Consumer Goods Industry - CA Sanjay L. Kapadia......................................................... 976-990 71. Country-wise TP regulations -Vishaka Saraf and Trina Maitra......................................... 991-1202 72. Impact of COVID and other uncertain events on transfer pricing including on APA and Dispute resolution -Sobhan Kar........................................................................ 1203-1219 73. Recent Developments in Select Jurisdictions - CA Hitesh Sharma and CA Shivangi Doshi.................. 1220-1239
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Transfer Pricing - A Compendium
Chapter Subject and Authors No.
Page No.
74. OECD Pillar One - CA Radhakishan Rawal and Madhu Agarwal............... 1240-1306 75. OECD Pillar Two - CA Radhakishan Rawal and Madhu Agarwal............... 1307-1375 TABLE OF CASE LAWS.............................................................. 1377-1442
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Chapter 4
Transfer Pricing Documentation and its Critical Importance in Practice
Karishma R. Phatarphekar is a CA and lawyer by profession and a Partner with Deloitte Touche Tohmatsu India LLP and leads the Tax Controversy Management team. She has more than two decades of experience in TP with extensive experience on dispute resolution, global compliances and consulting on complex transfer pricing issues. Shefali Shah* (L.L.B, MBA (Finance), M.A. (Economics)) is a Director in Deloitte Touche Tohmatsu India LLP, Transfer Pricing. She has over 15 years of niche Transfer Pricing experience in advising MNCs on end-to-end transfer pricing solutions including transfer pricing planning opportunities, BEPS, TP documentation, APA, TP Litigation etc.
Synopsis Particulars
Page No.
1.1
Background....................................................................................................97
1.2
Importance of TP Documentation.............................................................98
1.3
What are the documentation requirements as per Indian transfer pricing regulations?....................................................................100
1.4
Approach to Documentation....................................................................105
1.5
Manufacturer model..................................................................................114
1.6
Distributor model.......................................................................................161
1.7
Service Provider model.............................................................................166
1.8
Conclusion...................................................................................................179
1.9
Crucial aspects of documenting the economic analysis.....................179
1.10
Benchmarking of unique transactions....................................................182
1.11
Documentation to be maintained by Non-resident entities..............196
1.12
Penalties for Documentation related non–compliance........................198
1.13
Transfer Pricing Documentation-Master File........................................198
1.14
Transfer Pricing Documentation – Country-by-Country (CbC) report................................................................................................202
1.15
Conclusion...................................................................................................208
*Authors are assisted by Pravin Gamare (M.Com (I), ACA) who is a Deputy Manager in Deloitte Touche Tohmatsu India LLP.
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Transfer Pricing Documentation and its Critical Importance in Practice
1.1
Background
1.1.1 Transfer Pricing has evolved as a focus area of tax authorities to garner tax revenue. The tax authorities have always looked at transfer pricing from suspicious lens. This is mainly due to buzz about Multi-National Enterprises (“MNEs”) using transfer pricing as a tool to shift profits to lower tax jurisdiction. Over a period of time, the importance of transfer pricing has garnished attention globally. Similarly, in order to demonstrate the arm’s length nature of transfer prices, preparation and maintenance of required information and details is a must. MNEs need to make reasonable efforts to establish transfer prices in compliance with the arm’s length principle which is also required mandatorily by the tax regulations of the respective countries in which the MNEs operate. 1.1.2 OECD Guidelines has enumerated three-tiered of documentation approach consisting of the following: l
l
l
Master file: A document containing standardized information relevant for all members of a multinational enterprise (MNE) group; Local file: A document referring specifically to material transactions of the local taxpayer; and Country-by-Country (CbC) report: A document containing certain information relating to the MNE group’s income and taxes, together with certain indicators of the location of economic activity within the MNE group.
1.1.3 Following the footsteps of OECD, various countries have adopted three-tiered documentation approach suggested by OECD. Being one of the active members of the Base Erosion and Profit Shifting (“BEPS”) initiative by OECD, in 2016, India adopted the three-tier transfer pricing documentation structure as prescribed by the OECD under BEPS Action 13. The relevant Transfer Pricing provisions are contained in Chapter X of the Income-tax Act, 1961 (“the Act”) under section 92 read along with Rules 10A to 10E of the Income-tax Rules, 1962 (“the Rules”) [collectively referred to as the “transfer pricing
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regulations” or “the Regulations”]1. The TP documentation related provisions are specifically covered under section 92D read along with Rule 10D. 1.1.4 Objective of transfer pricing documentation (referred to as “the Documentation”) – The intent of transfer pricing regulations is to prevent taxpayer from entering into transaction with associated enterprises which is not at arm’s length. Therefore, the main objective of the regulations is that the taxpayer is required to maintain appropriate documentation at the time of entering into intercompany transactions to show that the transactions undertaken are at arm’s length. Also, upon request, producing such documents in a timely manner to the Transfer Pricing Officer (“TPO”) helps the taxpayer to discharge the burden of proof cast upon him by the law. 1.1.5 According to the OECD, following are the main objectives of transfer pricing documentation: • To ensure that taxpayers give appropriate consideration to transfer pricing requirements in establishing prices and other conditions for transactions between associated enterprises and in reporting the income derived from such transactions in their tax returns; • To provide tax administrations with the information necessary to conduct an informed transfer pricing risk assessment; and • To provide tax administrations with useful information to employ in conducting an appropriately thorough audit of the transfer pricing practices of entities subject to tax in their jurisdiction, although it may be necessary to supplement the documentation with additional information as the audit progresses. 1.2
Importance of TP Documentation
1.2.1 Over the period, since the time Indian transfer pricing regulations came into existence, the documentation has been the 1 All references to Sections are Sections contained in the Income-tax Act, 1961 unless otherwise indicated. Similarly, all references to Rules are to Rules contained in the Income-tax Rules, 1962 unless otherwise indicated.
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most crucial aspect in evaluating the arm’s length nature of the transaction. The Indian tax authorities have given due importance to the documentation prepared and maintained by the taxpayer before concluding the arm’s length nature of the inter-company transaction. The Delhi High Court in case of Maruti Suzuki India Limited2 held that during transfer pricing proceedings, the revenue authority can reject the ALP computed by the taxpayer and determine it only when the revenue authority finds that the taxpayer has not discharged its responsibility of computing ALP in consonance with the relevant provisions of the Act. Therefore, maintaining TP documentation is important from various perspective such as: a. Demonstrate at ALP: The ultimate endeavour of the taxpayer is to demonstrate that the intercompany transactions are undertaken in accordance with the arm’s length principle. Hence, in order to demonstrate intercompany transactions to be at ALP, the taxpayer need to document analysis undertaken, assumptions made and detailed and methodological search process to substantiate comparable data. b. Discharge burden of Proof: Prima facie, it provides an assurance to the tax authorities that the taxpayer has maintained required documentation as mandated and duly undertaken required analysis to come to conclusion that the intercompany transaction is at arm’s length. c. Syncing various TP documentation - Another important aspect is to align the information shared through various compliance requirements. The taxpayer needs to ensure that the information presented in Documentation is in sync with Form 3CEB as well as with master file and CbC report. Further, wherever possible a reference of specific clauses of master file or CbC report can be given in the Documentation against relevant information. d. Different regulations pertaining to inter-company transactions: The transfer pricing regulations in India co-exist with the provisions under the Excise and Customs Regulations, the Companies Act, 2013 and the SEBI Guidelines. One of the intents of these regulations is to ensure transactions between related parties are at arm’s length. Hence, the importance of preparation and maintenance of appropriate documentation to demonstrate arm’s length nature of such transactions is manifold. 2
W.P.(C) 6876/2008.
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1.3
What are the documentation requirements as per Indian transfer pricing regulations?
1.3.1 TP Documentation/Local File: Section 92D(1) provides that every person who has undertaken an international transaction or specified domestic transaction shall keep and maintain such information and documents in respect of such transactions as may be prescribed. This information requirement is in line with the local file recommended by OECD BEPS Action 13. 1.3.2 Master File and Country by Country Reporting: Further Section 92D was amended to provide for maintaining of the Master File by every constituent entity of an International Group (IG) and filing of CbC report to align with OECD three-tiered documentation approach. Section 92D(2) emphasize on the information and documents to be maintained by the constituent entity3 of an international group4 in respect of an international group. 1.3.3 The ensuing chapter first discusses the documentation requirements for local file i.e. TP Study Report. The Master file and CbC documentation requirements have been discussed subsequently in this chapter. A.
Transfer Pricing Documentation (TP Study/Local File)
1.3.4 The documentation to be maintained has been prescribed under Rule 10D. Rule 10D(1) enunciated different types of documents and information to be maintained by the taxpayer in respect of its international transactions whereas Rule 10D(3) list down the
3
4
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“constituent entity” means,— (i) any separate entity of an international group that is included in the consolidated financial statement of the said group for financial reporting purposes, or may be so included for the said purpose, if the equity share of any entity of the international group were to be listed on a stock exchange; (ii) any such entity that is excluded from the consolidated financial statement of the international group solely on the basis of size or materiality; or (iii) any permanent establishment of any separate business entity of the international group included in sub-clause (i) or sub-clause (ii), if such business unit prepares a separate financial statement for such permanent establishment for financial reporting, regulatory, tax reporting or internal management control purposes; “international group” means any group that includes,— (i) two or more enterprises which are resident of different countries or territories; or (ii) an enterprise, being a resident of one country or territory, which carries on any business through a permanent establishment in other countries or territories;
Transfer Pricing Documentation and its Critical Importance in Practice
documents to be maintained in support of the same. In summary, the Rule 10D provides for 13 items of mandatory documentation and an additional 7 items of supporting documentation to be maintained by the taxpayer, which inter alia include: l
Ownership structure of the taxpayer;
l
Profile of multinational group;
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Broad description of the business/industry profile;
l
l
Nature and terms (including price) of international transactions; Description of functions performed, risks assumed, and assets employed;
• Records of economic and market analysis (economic analysis), forecasts, budget etc.; • A record of uncontrolled transactions for analysing comparability with international transactions; • A record of analysis performed to evaluate comparability of uncontrolled transactions vis-à-vis international transaction; • Description of method considered with reasons of rejection of other methods; • A record of the actual working carried out to determine arm’s length price, most appropriate method, and adjustments, if any; • The assumptions, policies, and price negotiations if any; • Details of assumptions, policies, negotiations, etc. that have affected the determination of arm’s length price; • Details of adjustment made to transfer prices to align with arm’s length price. 1.3.5 Diagrammatic Representation: Interdependency between the various aspects of the mandatory documentation requirements noted above is presented by way of the following chart:
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1.3.6 Supporting Documentation: The supporting documentation to be maintained as per Rule 10D(3) includes information regarding official publications, reports, studies, and data bases from the Government of the country of residence of the associated enterprise, reports of market research studies carried out and technical publications, price publications, published accounts and financial statements relating to the business affairs of the associated enterprises, agreements and contracts entered into with associated enterprises or with unrelated enterprises in respect of transactions similar to the international transactions, letters and other correspondence between taxpayer and the associated enterprise, etc. 1.3.7 Aggregate Value Limit of ` 1 Crore: The Rules [Rule 10D(2)] specify that every person who has entered into an international transaction, the aggregate value of which exceeds ` 1 crore, is required to keep, and maintain information and documents as prescribed. In a case where the aggregate value as recorded in the books of account, of international transactions entered into by the taxpayer does not exceed ` 1 crore, the information, and documents as specified are not required to be maintained. However, the taxpayer shall be required to substantiate, on the basis of material available with him, that income arising from international transactions entered into by him has been computed in accordance with section 92, i.e. it is at arm’s length price. 1.3.8 Time Limit for Maintenance: The Rules further specify that the information and documents maintained under the Act should be contemporaneous and should exist latest by the specified date
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referred to in clause (iv) of section 92F i.e. one month before due date for furnishing of return of income under section 139(1) for the relevant assessment year. Further the documentation should be kept and maintained for a period of 8 years as per Rule 10D(5) from the end of the assessment year to which the Documentation relates. 1.3.9 Obtaining and filing Accountant’s report by the due date: The need to maintain Documentation on a contemporaneous basis is underscored by the requirement under the Regulations to obtain and file an Accountant’s Report in Form 3CEB5. The Form inter alia requires an opinion to be expressed by the signing Accountant as to whether the prescribed Documentation is maintained and whether it is appropriate and complete. 1.3.10 Accountant: The Accountant shall have the same meaning as in the Explanation below sub-section (2) of Section 288 [Section 92F(i)] and it is not necessary that the Accountant’s Report to be issued under the Act is to be issued by the statutory auditor of the taxpayer. However, Form 3CEB mentions that the report from an accountant to be furnished under section 92E relating international transaction(s) and specified domestic transaction(s) has to be signed by; (i) a chartered accountant; or (ii) any person who, in relation to any State, is, by virtue of the provisions in sub-section (2) of section 226 of the Companies Act, 1956 (1 of 1956), entitled to be appointed to act as an auditor of companies registered in that State. 1.3.11 Onus to demonstrate ‘arm’s length nature’: The onus is on the taxpayer to determine an arm’s length price in accordance with the Rules, and to substantiate the same with the prescribed documentation. Where such an onus is discharged by the taxpayer and the data used for determining the arm’s length price is reliable and correct, there can normally be no intervention by the TPO. Apart from mandatory requirements, the taxpayer should bear in mind that once the taxpayer has fulfilled its responsibility of maintaining and furnishing the transfer pricing documentation in respect of the international transactions entered into by it, the TPO will then examine the appropriateness of the documentation as well as the determination of the arm’s length price of the international transactions. Therefore, to avoid any difference in opinion by the TPO on the determination of the arm’s length price, the taxpayer should follow adequate record keeping practices and voluntary 5
Rule 10E read with Section 92E
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production of documents. This approach would also increase the persuasiveness of its case before the TPOs. Further, it is important to note that, greater the complexity of the taxpayer’s case, greater is the significance of adequate and robust Documentation. 1.3.12 During the course of any proceedings under the Act, the TPO may require any person who has undertaken an international transaction to furnish any of the information and documents specified under the said Rule within a period of thirty days from the date of receipt of notice issued in this regard, and such period may be extended by a further period not exceeding thirty days. 1.3.13 Extent of Documentation: If one is to have a cursory look at the Documentation requirements prescribed under the Indian Transfer Pricing Regulations, one could see that the documents/ information required to be maintained by the taxpayer are detailed and same will help the taxpayer in supporting its case that the international transactions are at arm’s length. Further, maintaining adequate documentation also acts as a safeguard against rigorous penalty provisions. The taxpayer while maintaining documentation, and the tax authorities while requiring the production thereof, are therefore required to adopt a pragmatic approach. On more than one occasion the Income-tax Appellate Tribunal (ITAT) has underscored the need to adopt a pragmatic approach in this regard. The ITAT in its ruling in case of Cargill India (P.) Ltd.6 has stated that only documentation which has a bearing on the international transaction are required to be maintained and taxpayer cannot be penalized for not maintaining all the documents stated in Rule 10D of the Rules, if they are not relevant for determining the arm’s length price of the international transactions undertaken by the taxpayer. 1.3.14 The justification of arm’s length standard includes in its fold a multitude of factors. Even though one may have considered the aforementioned factors, documenting the same assumes prominence from a justification as well as transfer pricing audit perspective. Transfer Pricing Regulations around the world have tried to address the issue of justification of the transfer pricing by requiring detailed documentation and India is no exception to it. 1.3.15 The OECD Guidelines heavily stresses on the importance of maintaining documentation to support the determined ALP, and that 6.
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300 ITR (AT) 223.
Transfer Pricing Documentation and its Critical Importance in Practice
tax administrations should be able to verify, from such documentation maintained, the arm’s length nature of the international transaction in question. To summarize, the following principles are advocated by the OECD Guidelines in connection with documentation to be maintained by the taxpayer: l
l
l
l
Documentation should be maintained and be made available by the taxpayer in order to establish the arm’s length nature of the international transaction; Tax administrations must be rational and reasonable in their approach while advocating upon the extensiveness of the documentation that should be maintained to justify the arm’s length nature of the international transaction; Documentation should be in line with the existing business management principles followed by the taxpayer while evaluating a certain business decision; and The requirement to maintain documentation should not result in high cost and an administrative burden for the taxpayer, especially in situations where the requirement results in preparation of documentation that would not have otherwise been prepared by the taxpayer.
1.3.16 The Documentation requirements prescribed under the Indian Transfer Pricing Regulations touch upon a multitude of factors and issues. This chapter endeavours to touch upon the most basic as well as the most intricate requirements/issues vis-à-vis documentation requirements under the Regulations and its practical importance. Further, at the end of the Chapter, sample Documentation formats relevant for various business models are also provided, which could provide a high level guidance for the manner in which the Documentation could be maintained. 1.4
Approach to Documentation
Although the Regulations do not specify any particular format in which the Documentation is to be maintained by the taxpayers, over the years, since the implementation of the Regulations in India, TPOs have favoured an organized and systematic approach to maintenance of Documentation. The most pragmatic approach to Documentation is to collate it in the form of a Report that starts
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with the most basic and generic information, building a context for the specific international transaction of the taxpayer during the year under review and then delving into the more specific aspects such as functional and risk analysis, the determination of the arm’s length price(s) and concluding finally with the comparability analysis between the arm’s length prices so determined with the transfer prices of the taxpayer. The general flow of transfer pricing documentation has been depicted as below: Conclusion
Executive Summary
1.4.1
Company/ Group Analysis
Interc company transaction
In ndustry An nalysis
Fun nctional Ana alysis
Econ nomic Analysis
Executive Summary
1.4.1.1 The objective of transfer pricing analysis is to support the arm’s length nature of international transactions and specified domestic transactions entered into by the taxpayer. Therefore, the essence of the transfer pricing documentation and all major observations and findings has to be summarily discussed at the start of the report. 1.4.1.2 The executive summary should clearly enumerate the gist of the detailed analysis and information captured in transfer pricing Documentation Report, such as: l l
l
l
l
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The business overview of the group and the taxpayer; Relationship between the taxpayer and its associated enterprise; Characterization of the entities based on functional and risk analysis; List of international transactions or specified domestic transactions along with the value of the transactions and methodology used to benchmark the transactions; and Summary of economic analysis undertaken.
Transfer Pricing Documentation and its Critical Importance in Practice
1.4.1.3 Also, it is important to mention the fact that the results obtained in the transfer pricing Documentation, are pertinent to that financial year and the results may need to be updated based on latest financials result, change in functional and risk profile or the level of tangible/intangible asset owned (i.e. the need to review and update the transfer pricing policy/arrangement to reflect change in market conditions). 1.4.2
Company/Group Overview
1.4.2.1 GROUP STRUCTURE AND OWNERSHIP LINKAGES: The taxpayer should appropriately document its shareholding structure as well as the overall group structure, to the extent relevant to the Indian taxpayer and its international transactions. The ownership linkages among the group entities should also be mentioned, as the same would enable one to easily identify the entities within the group which would qualify as “associated enterprise” (“AEs”) as specified in section 92A(2), under which the two become associated enterprises. Further, in view of specific requirements of Rule 10D of the Rules, it is imperative to mention the name, address, legal status, and country of tax residence country of tax residence of each of the AEs. 1.4.2.2 DIAGRAMMATIC REPRESENTATION: The aforesaid information, if presented in the form of a chart or a table would provide a better optical view of the group structure and would be easy to comprehend. An illustrative presentation of the group structure of an MNC group is presented below: ABC Inc, USA
ABC Pte, Singapore
ABC India
ABC UK
ABC Malaysia
ABC Germany
1.4.2.3 BUSINESS OVERVIEW OF THE GROUP: The Documentation should contain an overview of the business of the MNE group of which the taxpayer is a member. This section should also include the
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overview of the business operations of the taxpayer, especially, its activities in relation to which international transactions have been entered into with its AEs, a brief background (date of incorporation, employee base, global presence etc.), short description of the business segments, financial performance of the entity, activities performed/ services offered under each segment and the product profile. The information in this regard could be obtained from and linked to the information contained in the Director’s Report, company’s/ group website and other publicly available authentic data. This information would give an overall understanding of the business operations of the Indian entity within the overall group structure. This would also form a base for carrying out an analysis of the functions performed, assets employed, and risks assumed (“FAR analysis”) and also the economic analysis. 1.4.2.4 BUSINESS OVERVIEW OF THE TRANSACTING AES: Lastly, a brief business description of each of the AEs with whom the taxpayer has international transactions including section reference as per which it becomes an AE, should also be included in the Documentation. This enables an easy understanding of the business activities of the AEs and gives an overview of the relevance of the activity of each of the entities within the group. 1.4.2.5 SUMMARY: In summary, the group overview section could contain information such as: l l
l
l
the lines of business in which the MNE group is engaged; key products dealt-in by the group and its market leadership; global positioning in terms of presence in various countries, number of employees in the group; major historical events like global mergers or acquisitions, if any;
l
a snapshot of the key financial numbers;
l
description of transactions entered into with AE; and
l
awards and recognitions etc.
1.4.2.6 BUSINESS OVERVIEW OF THE TAXPAYER: The documentation should also include a brief description of the business of the Indian company with respect to the year under review. I-108
Transfer Pricing Documentation and its Critical Importance in Practice
1.4.2.7 The different aspects which can be included are as under: l
l
l
l
organization structure –a high level diagrammatic representation would be advisable; business activities carried out by the Indian entity i.e., whether it is a manufacturer, trader, or a services provider; products and services offered by the taxpayer and the industry in which such products are used;
l
the geographical presence of the entity;
l
manufacturing facilities;
l
number of employees;
l
l l
l
1.4.3
the historical background of the company’s operations like date of incorporation, significant events like mergers and acquisitions etc.;
research and development (R&D) activity, if any, carried out by the company; key customers; any key event during the year under consideration which would have impacted the business as a whole; and the industry in which the goods manufactured/distributed, service provided by the taxpayer is consumed, can also be mentioned to establish the dependence of the taxpayer’s business on any particular industry.
Industry Analysis
1.4.3.1 REQUIREMENT : Rule 10D(1)(c) requires a taxpayer to prepare an overview of the industry in which the entity operates. The industry overview should be drawn from relevant industry associations or other authentic sources and should more specifically discuss conditions prevailing in the market during the year under consideration both from a global as well as domestic perspective. 1.4.3.2 For instance, recently the outburst of novel corona virus (COVID-19), has not only impacted day to day lives but also led to shutting down business due to nationwide lockdown. Some
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industries were operating under essential services, therefore were not impacted much by the pandemic. However, for majority of industries, business was shut for few months. The pandemic changed ways of doing business wherein business had to incur various cost to go the digital way. The pandemic impacted top line/bottom line of various businesses whereas the fixed cost remained at Pre-Covid level. In case of some industries, the cost savings due to work from home nullified the impact of Covid on the bottom line. 1.4.3.3 Such events which are correlated to industry, economic situation in particular, are required to be taken into consideration while documenting the industry overview. Appropriate documentation of industry overview will help to justify the potential impact on the arm’s length analysis. 1.4.3.4 OBJECTIVITY: The industry overview should be objective and should bring out the nuances affecting the players in the taxpayer’s business. The same should also discuss the value drivers of the taxpayer’s industry which enables one to understand the criticality of the functions performed by the taxpayer and the AEs in the scheme of overall business operations. 1.4.3.5 DETAILS TO BE COVERED: Further, certain industries are highly regulated, in which case the relevant regulatory framework and its impact on the pricing of the international transaction, if any, should also be discussed. In case there are certain critical factors which distinguish the taxpayer from the industry at large, the same could form the basis of making appropriate economic adjustments while carrying out the benchmarking analysis and hence, should be highlighted. For example, in case the taxpayer is a new entrant in the industry as compared to other established players operating in the industry, the said fact can be used to demonstrate that the results of the taxpayer would be impacted by such difference and could form the basis for appropriate economic adjustments on account of being a new entrant in the industry. The industry overview may also include a list of the taxpayer’s competitors. Further, a link can also be drawn to the comparables selected while benchmarking the international transactions of the taxpayer. 1.4.3.6 SOURCE: The industry overview can be sourced from both internal and external sources. The internal source could be taxpayer’s internal records like Director’s Report, Management Discussion, and analysis, etc. External sources could be industry reports prepared by
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Transfer Pricing A Compendium AUTHOR PUBLISHER DATE OF PUBLICATION EDITION ISBN NO PAGE NO. BINDING TYPE
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