Concept of Transfer Pricing- Case Study on India

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Transfer pricing, A Financial aspect A case study on India
Table of ContentsCHAPTER -1........................................................................................................................................51.0 Introduction................................................................................................................................51.1 Background and overview of the study......................................................................................51.2 Rationale of the study.................................................................................................................81.3 Research aims and objectives.....................................................................................................91.4 Research questions......................................................................................................................91.5 Potential significance of the study..............................................................................................9CHAPTER – 2....................................................................................................................................11Research objective: 1. To investigate the concept of transfer pricing in the context of international corporate scenario......................................................................................................11Research objective: 2 To analyze the dynamic scenario of Indian TP legislations and standard provisions for the recording inter-company transactions...............................................................12Research objective: 3 To critically investigate various methods of transfer pricing that are practically applied by Indian establishments to record their cross-border and inter-company transactions.....................................................................................................................................17Comparable Uncontrolled Price.....................................................................................................17Cost Plus Method............................................................................................................................19Resale pricing method....................................................................................................................20Transaction Net Margin Method (TNMM).....................................................................................21Profit split method (PSM)...............................................................................................................21Research objective: 4. To examine gaps between the local TP laws and international practices by comparing Indian case laws with the cases of European Court of Justice.....................................22CHAPTER - 3.....................................................................................................................................264.0 Introduction..............................................................................................................................264.1 Research philosophy.................................................................................................................264.1.1 Positivism philosophy............................................................................................................264.1.2 Interpretivism philosophy......................................................................................................274.2 Research approach....................................................................................................................274.2.1 Inductive approach.................................................................................................................284.2.2 Deductive approach...............................................................................................................294.3 Research type............................................................................................................................304.3.1 Quantitative research.............................................................................................................304.3.2. Qualitative research..............................................................................................................314.3.3 Mixed research.......................................................................................................................314.4 Research design/strategy..........................................................................................................324.4.1 Descriptive research design...................................................................................................324.4.2 Exploratory research design..................................................................................................324.4.3 Analytical research design.....................................................................................................324.5 Data collection..........................................................................................................................334.5.1 Primary source of data collection..........................................................................................344.5.2 Secondary source of data collection......................................................................................344.6 Data Analysis............................................................................................................................354.7 Limitation of the research.........................................................................................................364.8 Validity and reliability..............................................................................................................364.9 Ethical consideration................................................................................................................37CHAPTER – 4....................................................................................................................................384.0 Introduction..............................................................................................................................384.1 Overview of transfer pricing mechanism in India....................................................................384.2 Indian TP laws and standard provisions for corporate guarantee under the intra-group 2
financing.........................................................................................................................................424.3 Indian TP laws and standard provisions for inter-company loans under the intra-group financing.........................................................................................................................................454.4 Comparison of domestic Indian laws with international practices...........................................474.2 Indian TP laws and standard provisions for corporate guarantee under the intra-group financing.........................................................................................................................................504.3 Indian TP laws and standard provisions for inter-company loans under the intra-group financing.........................................................................................................................................534.4 Comparison of domestic Indian laws with international practices...........................................554.5 Transfer Pricing methods..........................................................................................................564.6 Indian TP laws and standard provisions for corporate capital accounting transactions under the intra-group financing................................................................................................................594.7 OECD TP guidelines and BEPS of transfer pricing in India....................................................60CHAPTER - 5.....................................................................................................................................62Conclusion......................................................................................................................................62Recommendations...........................................................................................................................63REFERENCES...................................................................................................................................643
TABLE OF FIGURESFigure 1 Indian Transfer pricing framework......................................................................................13Figure 2 Indian Transfer pricing regulatory process..........................................................................14Figure 3 Dispute Resolution Panel.....................................................................................................15Figure 4 Concept of Transfer pricing.................................................................................................16Figure 5 Transfer pricing methods.....................................................................................................17Figure 6: Comparable uncontrolled pricing method..........................................................................18Figure 7 Appropriateness of different transfer pricing methods........................................................20Figure 8 Inductive approach of research............................................................................................28Figure 9 Stages of deductive approach...............................................................................................29Figure 10 Different types of research.................................................................................................30Figure 11 Primary and secondary sources of data collection.............................................................34Figure 12 International transactions under Transfer Pricing..............................................................39Figure 13 Difference between international transactions and specified domestic transactions.........40Figure 14 Overview of Indian Transfer pricing legislative framework..............................................41Figure 15 Different types of risk under FAR study............................................................................42Figure 16 Facts and assessee's & revenue's contention of Strides Shasun Ltd..................................464
CHAPTER -1 1.0 IntroductionIt is the beginning section of the entire work that aims at clarifying the broad area of theresearch problem and area in which research is going to be conducted. This section presents theoverview or initial background so that an idea can be gained towards which the study has beencarried out by the scholar. The chapter briefly introduce the concept of transfer pricing and theIndian standard rules and regulation that are applied on reporting the international transactions.Moreover, it presents the major aims & objectives which are the focal points throughout the studyand also present the reason why it has been carried down. Besides this, the potential significance orcontribution of the study has been presented very well. 1.1 Background and overview of the studyTransfer pricing, as name implies, presents the price at which business transacts with theother division. In the corporate sector, establishments have number of divisions or departmentswhich require transacting and dealing with each other like loans, guarantee & capital accounttransactions. As per the financial reporting, companies have to report such transactions in theiraccounts by adhering with the laws and regulations so as to make sure the true and fair presentation.In other words, TP can be been defined as a pricing method that firm use for finding out the pricesfor the transactions undertaken between entities under the common control or ownership1. Moreimportantly, after globalization, the amount of cross-border transactions has been increased whicharose the need for the regulatory bodies to create a standard set of legislative framework so as toharmonise the transfer pricing in mechanism.India witnessed the rapid growth & immense progress during 1990s due to liberalisationwhich put the attention of the regulatory bodies on the transfer pricing in their key agenda. At thattime, Indian Central government created an expert group who was accountable to formulatenecessary legislations and standards on the transfer pricing reporting2. To create the best standard &laws, external agencies, industrialized bodies and representative of the companies have providedtheir extensive assistance. As a result, in taxation act, Indian Income Tax Act 1961, a set of TOP rules and regulations1Rugman, A.M. and Eden, L., 2017.Multinationals and transfer pricing. Routledge.2Rossing, C.P., Cools, M. and Rohde, C., 2017. International transfer pricing in multinationalenterprises.Journal of Accounting Education.5
has been constructed under section 92 to 92F that covers the cross-countries or intra-grouptransactions applicable after 1st April 2001. Before the introduction of such legislation, it was themost important issue that has a wider impact on the multinational organizations who are operatingin various countries around the world. The regulation is exhaustive in various aspects and wascreated on the basis of OECD (Organization for Economic Co-operation and Development)guidelines issued on the transfer pricing for the international businesses3. The legislation presentsvarious method for the recording their cross-divisional transactions & also impose thedocumentation requirement on the establishments that they wants to maintain. Non-compliance withthe laws and principles results in imposing penalties and other lawsuits.As per the Indian statutory rules of pricing code, any income which arises from the crosscountry transaction or certain specified domestic transactions between the AEs (AssociatedEnterprises) must be reported at arm’s length price4. Herein, section 92B presents that internationaltransaction simply means any transactions that has been conducted between two or more AEs suchas sale, leasing tangible or intangible property, borrowing or lending & others. AEs either may benon-residents or one resident and other one non-resident5. Apart from this, it also qualifies a foreignenterprise’s permanent establishment as an AE thus; it means that transactions that are the result ofdealing by an Indian establishment with the foreign or global entity will have to follow the code oftransfer pricing legislations. Till the end of the financial year 2011-12, the rules and regulationswere not have been applied to the domestic transactions, but in the finance act for the year 2012, thestatutory bodies has extended the applicability of the legislation and the provisions of transferpricing mechanism to the specified domestic transactions 6. In such regards, if any deductionclaimed by an entity in finding out the gains from the profession exceeds 5 crore INR. Besides this,if transactions come under the subject of tax incentive like infrastructure development in special3Lohse, T. and Riedel, N., 2013. Do transfer pricing laws limit international income shifting?Evidence from European multinationals. 4Jost, S.P., Pfaffermayr, M. and Winner, H., 2014. Transfer pricing as a tax compliancerisk.Accounting and Business Research.44(3). pp.260-279.5Cooper, J. and et.al., 2017.Transfer Pricing and Developing Economies: A Handbook forPolicy Makers and Practitioners. World Bank Publications.6Beer, S. and Loeprick, J., 2015. Profit shifting: drivers of transfer (mis) pricing and thepotential of countermeasures.International Tax and Public Finance.22(3). pp.426-451.6
economic zone unit & exceed the defined limit then it will come under the regulatory requirementof Transfer pricing mechanism7. The regulatory system of Indian Transfer pricing method presents different methods likeComparable Uncontrolled Price (CUP), Cost plus method (CPM), resale pricing method (RPM),Transaction Net Margin Method (TNMM) and profit split method (PSM) which an entity can use torecord the undertaken transactions for the true and fair reporting system8. Besides this, Income taxAct, 1962’s Rule 10D presents the detailed documentation requirement that a taxpayer mustmaintain broadly segregated into two parts, first covers mandatory documentation need such asownership structure, AEs foreign transactions, specified domestic transactions, financial projection& a comprehensive details of transfer pricing 9. However, the second part covers rule that arenecessary to follow for the proper documentation that has been maintained under part first liketechnical and pricing publications, agreements, contracts and others. An enterprise whose aggregateinternational dealing & specified domestic transactions are reported below the threshold point of 10million INR and 50 million INR are relieved from such documentation requirement10.The thrust of the present paper is to investigate and examine the financial aspect of transferpricing mechanism that an establishment must follow so as to report their international transactionsreporting in their annual accounts. It will present a detailed investigation about the Indianlegislation requirement and different pricing methodologies for determination of arm’s length pricefor the transfer pricing policies. Besides this, the rules and regulations that taxpayers must complyfor the proper and adequate documentation will be investigated. Companies who exceed the valueof global transactions & specified domestic transactions beyond INR 10 million & INR 50 millionare also need to conduct an audit by the expert, transfer pricing officer (TPO) so as to decide the7Raghu, G., 2015. Transfer pricing policy under international taxation law with specialreference to Arms length principle a comparative study of India USA UK and Australia.8Becker, J., Davies, R.B. and Jakobs, G., 2017. The economics of advance pricingagreements.Journal of Economic Behavior & Organization. 134(12). pp.255-268.9Hickman, A., 2016. The Application of Revised Transfer Pricing Rules to Aspects ofBusiness Models.Intertax.44(10). pp.730-734.10Johnson, E., Johnson, N.B. and Pfeiffer, T., 2016. Dual transfer pricing with internal andexternal trade.Review of Accounting Studies.21(1). pp.140-164.7
correct amount of arm’s length price11. Thus, the report will evaluate the taxation audit procedurethat TPO will carry out to scrutinise the case by considering all the relevant facts and figures so asto ensure the appropriateness of the method of TP applied. 1.2 Rationale of the studyAs said earlier that in India, globalization during the period of 1990s with the liberalisationhas founded immense growth and progress in the corporate sector as companies started operatingglobally. It leads to bring controversies in the pricing of the goods, services & technologies that hasbeen transferred in cross-border transactions12. This plethora arisen perplexing issues, called transferpricing issues for the MNCs in the intercompany pricing of the goods and service. Thus, it is themain reason which gained attention & interest of the scholar to investigate the transfer pricingmechanism and policies under the financial reporting of Indian companies. Such policies andregulations regarding TP is of major importance for the movement of fund internationally,controlling tariffs, minimize exchange control quotas and risk in the international dealing and taxesas well13. In the current landscape, India is considered as the centripetal force of the globalizationwhich attracts MNCs to enter into the Indian market. Although, it has systematic international TPpolicies that have been embedded in Finance Bill, 2001 to deal with the pricing issues, however,with the significant change with the global trend in the market, it has made new beginning in TPlegislation which was codified in Finance Act 2001 by considering OECD guidelines. Thus, it is thereason why researcher has decided to investigate the standard legislation & regulation regarding TPand the changes that have been made in this regulatory framework over the period. It will analyzethe CBDT (Central Board of Direct Tax) legislation & Safe Harbour Rules for arm’s length pricesand Dispute Resolution Panel for the litigation. 1.3 Research aims and objectivesResearch aim: The thrust or main target of the dissertation is presented below: 11 XYZ Consulting Group, 2012. Transfer pricing documentation study. [PDF]. Availablethrough: < https://www.wirc-icai.org/material/DOCUMENTATION-STUDY-XYZ.pdf>. [Accessedon 9th May 2017].12Sekhar, G.S., 2016. Transfer Pricing-A Case Study of Vodafone.International Journal ofEngineering Science,6207.13Klassen, K.J., Lisowsky, P. and Mescall, D., 2016. Transfer pricing: Strategies, practices,and tax minimization.Contemporary Accounting Research.8

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