FICCI-KPMG-Report-13-FRAMES

The power of a billion: Realizing the Indian dream 195
With the introduction of the ‘Other method’, the
taxpayers may have a little more flexibility to use
tender documents, third party bids, proposals,
valuation reports, standard rate cards, price
quotations and commercial and economic business
models etc. to demonstrate arm’s length intent.
The application of the ‘Other method’ would be
particularly helpful in cases where the application
of the other five specific methods is not possible
due to difficulties in obtaining comparable data due
to uniqueness of transactions such as intangible
transfers etc.
Proper documentation specifying the reasons
for rejection for non-application of the other five
prescribed methods and the appropriateness
of the ‘Other method’ based on the facts and
circumstances of the case should be maintained
by taxpayers in case of application of this ‘Other
method’. Being a new method, one needs to wait
and watch its application by the tax payers and its
acceptance by the revenue authorities.
• Recent developments
——
Introduction of Advance Pricing Agreements
(APAs)
With a view to address the increasing TP litigation in
India; the Indian Government through the Finance
Act 2012 introduced APA provisions with effect from
1 July 2012. The arm’s length price as determined
under the APA provisions will be valid for a maximum
period of 5 consecutive years unless there is a
change in the provisions or the facts having bearing
on the international transaction. With the introduction
of detailed rules providing a framework for the APA
regime in India in August 2012, the APA program
is seen as one of the more positive amendments
introduced by the Finance Act 2012, which should
assist taxpayers to obtain certainty on their crucial
transfer pricing matters, if they so desire. If properly
implemented, APAs would provide certainty on
tax issues of covered transactions during the APA
term. In relation to the M&E industry, the option of
APAs can be explored in case of complex and high
value transactions or where the company is already
undergoing TP audit scrutiny and hence would be
selected for audits again or where the company
needs financial certainty with regard to future tax
implications. APAs would reduce the need for
documentation and costs associated with audit and
appeals over APA term and facilitate TP planning.
Double taxation can be avoided in case of Bilateral/
Multilateral APAs
——
Scope of TP expanded to include ‘Specified
Domestic Transactions’
Finance Act 2012 included ‘specified domestic
transactions’ under the ambit of TP (including
procedural and penalty provisions). This has been
done with the aim of preventing an erosion of the
tax base. Thus, the applicability of TP regulations
(including procedural and penalty provisions) have
been extended to transactions between domestic
related parties where tax holiday is claimed under
chapter VIA, Special Economic Zones, etc. and
payments (expenditure) to domestic related parties.
The above shall apply in cases where the aggregate
amount of all such domestic transactions exceeds
INR 50 million (approximately USD 1 million) in a year.
This amendment will come into effect from financial
year (FY) 2012-13 onwards.
“Specified domestic transaction” in case of a
taxpayer means any of the following transactions, not
being an international transaction, namely:
• Expenditure in respect of which payment has been
made or is to be made to persons/entities referred
to in section 40A(2)(b);
• Any transaction referred to in section 80A;
• Any transfer of goods or services referred to in
section 80-IA(8);
• Any business transacted between the taxpayer
and other person as referred to in section 80-
IA(10);
• Any transaction, referred to in any other section
under Chapter VI-A or section 10AA, to which
provisions of section 80-IA(8) or 80-IA(10) are
applicable;
• Any other transaction as may be prescribed by the
CBDT.
Affected taxpayers would now be required to
structure their TP policies based on sound business
rationale and commercial substance and also
maintain robust underlying documentation to enable
them to successfully defend their transfer prices
during a TP audit.
——
Enlargement/ Clarification of definition of
‘International Transaction’
The term ‘international transaction’ has been
retrospectively amended by the Finance Act, 2012
to include guarantees, any debt arising during the
course of business (for example, credit period on
outstanding receivables), business reorganizations or
restructuring, irrespective of whether the same has
an impact on current year’s profits, income, losses
or assets. Intangible properties have been defined in
great detail to include marketing intangibles, human
assets, technology related intangibles, location
related intangibles, customer related intangibles,
data processing, engineering, customer, contract,
goodwill related intangible assets and also includes
methods, programmes, systems, campaigns,
surveys, studies, forecasts, customer lists, etc. or
any other similar item that derives its value from its
intellectual content rather than its physical attributes.
This expansion will impact transactions to be
analyzed from a transfer pricing perspective in the
industry, especially in view of intangibles being
exhaustively defined. Proper transfer pricing
analysis would have to be carried out for all kinds
of intangibles being transferred/ licensed from one
entity to another in view of this amendment.
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