7/30/2019 Practical Problems in Transfer Pricing 1203598388238900 3
1/17
PRACTICAL PROBLEMS INTRANSFER PRICING
By
NEERU AHUJA
DELOITTE HASKINS & SELLS
November 2003
7/30/2019 Practical Problems in Transfer Pricing 1203598388238900 3
2/17
2
Contents
Definition of Transfer Pricing Operational Difficulties
Determination of Arms Length Price (ALP)
Associated Enterprise
Databases Benchmarking
Legal Issues Accounting Issues Problems in Documentation Tax Assessments Issues relating to Allied Laws Way Forward
7/30/2019 Practical Problems in Transfer Pricing 1203598388238900 3
3/17
3
Transfer pricing is not an exact science
Transfer pricing
7/30/2019 Practical Problems in Transfer Pricing 1203598388238900 3
4/17
4
Definition of Transfer Pricing
Transfer pricing provisions primarilyrequire any income arising from an
international transaction between two
or more Associated Enterprises (AE) tobe at arms length price and
comparable to similar transactions
between unrelated enterprises.
7/30/2019 Practical Problems in Transfer Pricing 1203598388238900 3
5/17
5
Operational Difficulties
Determination of ALP Some intra-group transactions are so unique that
they can-not be compared
TP reports of two AEs would have conflictingconclusions
No recommended Profit Level Indicator (PLI) widefluctuations may result depending upon each PLI.
Corporates hesitant to disclose information
Major countries do not require rejection of othermethods
7/30/2019 Practical Problems in Transfer Pricing 1203598388238900 3
6/17
6
Operational Difficulties
Associated Enterprise
Whether Section 92A(1) overrides section
92A(2)(a)
Applicability of Section 92A(2)(h) & clause
(i) to trading companies
7/30/2019 Practical Problems in Transfer Pricing 1203598388238900 3
7/17
7
Operational Difficulties
Databases
Time gap in search of Databases
Non availability of recognized databases Lack of comparables
7/30/2019 Practical Problems in Transfer Pricing 1203598388238900 3
8/17
8
Operational Difficulties
Benchmarking No recommended method for benchmarking
Transaction by Transaction
Aggregate of similar Transactions
Based on Functions
For each AE separately
Arms Length Range Vs Arithmetic Mean
Pricing of Intangibles soft targets
Difficulty in justifying adjustments for factors havinga bearing on prices
Insufficient information available for calculating grossmargins
7/30/2019 Practical Problems in Transfer Pricing 1203598388238900 3
9/17
9
Operational Difficulties
Benchmarking
In case of rapidly fluctuating prices, which prices
to compare with
Gift from one enterprise to another Transfers at cost
Capital transaction
Cost Allocation & Cost Sharing Arrangements
Acceptable Band of (+ - 5%)
7/30/2019 Practical Problems in Transfer Pricing 1203598388238900 3
10/17
10
Legal Issues
Rule 10D(2) No documents required
for transactions below 1 Crore, but still
to justifyArms Length basis
Determination of AEs unusual/
irrelevant situations
Whether AO can open previous yearsassessments on the basis of TP report
7/30/2019 Practical Problems in Transfer Pricing 1203598388238900 3
11/17
11
Legal Issues
Whether transactions which do not affect
profitability are covered e.g
reimbursements
Whether Liaison Offices are covered
7/30/2019 Practical Problems in Transfer Pricing 1203598388238900 3
12/17
12
Accounting Issues
Segmental accounts were not
mandatory in India till 2001
How to factor Internal Set-offs Comparability in special circumstances
startup losses, market strategy,
government controls, winding-up.
7/30/2019 Practical Problems in Transfer Pricing 1203598388238900 3
13/17
13
Problems in Documentation
Duplication of Documents in case a
Foreign Company (FC) earns Royalty,
technical fee, interest on ECB etc ie
FC also required to file a ROI, TP report
How to document discussions over
phone and in meetings
7/30/2019 Practical Problems in Transfer Pricing 1203598388238900 3
14/17
14
Tax assessments
Not an exact science Concept of TP is still in its infancy.
Flexibility to apply a method other than
that prescribed or apply a combinationof methods
Use of secret comparables
Confidentiality of informationAuthenticity & reliability of databases
7/30/2019 Practical Problems in Transfer Pricing 1203598388238900 3
15/17
15
Role of Tax Officer
Brief given to the TPO by the tax authorities
Objective in mind
Degree/depth of the review
Overall understanding (general feel) Transactional analysis
Actual documentation review
Assessment Procedure
What level of information/document would beconsidered acceptable.
7/30/2019 Practical Problems in Transfer Pricing 1203598388238900 3
16/17
16
Issues relating to Allied Laws
Whether Customs authorities can take
recourse of valuation in TP report
FERA/FEMA issues on higher valuationin TP report
7/30/2019 Practical Problems in Transfer Pricing 1203598388238900 3
17/17
17
Way Forward
Transfer pricing "band" rather than atransfer pricing "price"
Safe harbour" rules
Procedures for obtaining "AdvancePricing Agreements (APA)
Use of multiple year data
Objective and reasonable approach ofthe tax officer