Case Studies

PwC

Case Study I

• Holding company receivesservice fees from :

F Co.(WOS)

overseas

- INR 6 crores from ICo 1

- INR 4 crores from ICo 2

India- INR 8 crores from F Co.

Holding Co. Implications

Applicability of domestic TPprovisions to

a) Holding Co

I Co. 1 I Co. 2 b) I Co. 1

c) I Co. 2

d) F Co.

Tax Free Entity Taxable EntityTax Free Entity

Expense

Income

Transactions Between

Coverage Check Point Conclusion

Holding Co. to ICo1.

• Two Different Entity• Taxable to Tax free• 80 IA(8) – N.A.• 80 IA (10) - Applicable

• Close Connection• Ordinary Profit• Threshold Limit

H Co. • SDT N.A.

because income is not covered in SDT

ICo.1• SDT is applicable

Holding Co. to ICo2.

• Two Different Entity• Taxable to Taxable • 80 IA(8) – N.A.• 80 IA (10) – N.A.• 40A(2)(b) - Applicable

• Income/Expense• Threshold Limit

H Co.• SDT N.A.

because income is not covered in SDT

ICo.2• SDT is N.A. as

threshold limit does not exceeds.

Implication

Case Study II

• Holding company makespayment for services to:

F Co.(WOS)

overseas

- INR 2 crores - ICo 1

- INR 2 crores - ICo 2

India- INR 2 crores - F Co.

Holding Co. Total services payment – 6crores

Implications

Whether Domestic TP would applyto the Holding Company

I Co. 1 I Co. 2

Taxable EntityTax Free Entity

Expense

Income

Transactions Between

Coverage Check Point Conclusion

Holding Co. to ICo1.

• Two Different Entity• Taxable to Tax free• 80 IA(8) – N.A.• 80 IA (10) - Applicable

• Close Connection• Ordinary Profit

H Co. • SDT is applicableICo.1• SDT is N.A.

Holding Co. to ICo2.

• Two Different Entity• Taxable to Taxable • 80 IA(8) – N.A.• 80 IA (10) – N.A.• 40A(2)(b) - Applicable

• Income/Expense H Co.• SDT is applicableICo.2• SDT is N.A.

However, SDT is not applicable to even Holding Co. because aggregate value of transaction to Holding Co. is below threshold limit.

Implication

Case Study IIIMarket price v/s Arm‟s length price

• ICo 2 acts as a contract manufacturer for ICo 1

ICo 1 purchases a fixed quantity of goods fromICo 2 every year – assured commitment

In order to utilise entire manufacturing capacity,ICo 2 also manufactures, and sells goods to thirdparties

ICo 2 charges same rate for the products sold tothird parties and to ICo 1

Prior to the amendment: Price charged tothird parties arguably was considered as marketprice and since the price paid by ICo 1 correspondto market price, there has been no 40A(2)(b)challenge

Post amendment, whether INR 100 would bethe right arm‟s length price for the purchasesmade by ICo 1?

Can sale price by ICo 2 to ICo 1 be compared withsale price by ICo 2 to Third Parties on account ofcertain differences viz. difference in functionalprofile?

FCo•

•

•100%

INR 100 p.u

Sale of goods

100%

•

ICo 1 ICo 2

Sale of goodsINR 100 p.u

•

Third Parties

•

Terms Of AgreementParticulars [AE] [ Non AE]

Sale FOB FOBFree Warranty Offered NA 6 months

[cost ofRs 150]

Free Gift Benefits offered due to large volume of orders placed

10 ----

Quantity Discount 20 ----Cash/Credit 1 month.

[Cost of credit 1.5% pm]

Cash basis

• Even though price charged to related party & unrelated party are same, question of determination of Arm’s Length must have to be established.

• Terms of Agreement must have to be seen. For e.g.

Implication

Case Study IVDeduction under section 80IC

Company A

Overall Profitmargin 15%

• Company A has three units: Unit A and UnitB (Manufacturing units) and Head Officeunit

Head Office performs functions of R&D,marketing and distribution of goodsproduced by the manufacturing units

•

HO

Unit - ATax

Holidayu/s 80IC

Unit - BNon-Tax

Holiday

• Profitability is ascertained by allocating theexpenses incurred by the Head Office in anappropriate ratio between Unit A and Unit B

Whether the reported profitability of the taxholiday undertaking can be varied by the taxauthorities on the grounds that:

― HO is separate undertaking; and

•

Owns Brands, performsR&D and marketing

activities, etc― Costs allocable to Unit A should be

charged using mark up or alternativelyimputing a royalty cost?

Case Study VI

Unit A

Unit B (Power Generation Unit)

Expenses incurred

of Rs. 7 Crore

Expenses incurred for F.Y. 12-13 for which Unit A raised Debit Note to Unit B.

Unit B has not yet commenced the operation.

Hence, no profit is generated for F.Y. 2012-13.

It may or may not start operation in F.Y. 2013-14.

Whether the nature of transaction covered under the purview of Domestic Transfer Pricing?

If yes then still it be applicable under Domestic Transfer Pricing as no profit is generated by Unit B in that year to take exemption u/s 80IA(8)?

FACTS

Case Study VII : Specified Domestic Transactions

A Ltd.

B Ltd. C Ltd.

X Inc. Y Inc. Z Inc.

35% 22%23%

60%40%

• A, B, C ltd are Indian companies• X,Y, Z Inc. are foreign companies • Value of each transaction exceeds 5

crore. They are as under:

1. A ltd sells goods to Z Inc.2. A ltd has borrowed interest bearing

loan from X Inc.3. B ltd pays royalty to A ltd for use of

brand4. B ltd purchases goods from C ltd5. Y Inc. provides managerial services

to A ltd6. C ltd received technical services

from X Inc.

Which of the above transactions are regarded as SDT???

A Ltd.

Z Inc.

23% holding

1. A ltd sells goods to Z Inc.

Sells goods

Income

Expense

Transactions Between

Coverage Check Point Conclusion

A Ltd. & Z Inc. • Two Different Entity

• Taxable to Taxable• 80 IA(8) – N.A.• 80 IA (10) – N.A.• 40A(2)(b) -

Applicable

• Income / Expenses

• Threshold

A Ltd.• SDT is

N.A.Z Inc.• SDT is

N.A.

Neither Domestic nor International Transfer Pricing will apply.

2. A ltd has borrowed interest bearing loan from X Inc.

A Ltd.

X Inc.

35% holding Expense

Income

International Transfer Pricing will apply & hence Domestic Transfer Pricing will not applicable.

Transactions Between

Coverage Check Point Conclusion

A Ltd. & X Inc.

• Two Different Entity

• Taxable to Taxable

• 80 IA(8) – N.A.• 80 IA (10) – N.A.• 40A(2)(b) -

Applicable

• Income / Expenses

• Threshold

A Ltd.• SDT is

N.A.

X Inc.• SDT is

N.A.

A Ltd.

B Ltd.

40% holding

3. B ltd pays royalty to A ltd for use of brand

Royalty

Income

Expense

Transactions Between

Coverage Check Point Conclusion

A Ltd. & B Ltd.

• Two Different Entity

• Taxable to Taxable

• 80 IA(8) – N.A.• 80 IA (10) – N.A.• 40A(2)(b) -

Applicable

• Income / Expenses

• Threshold

A Ltd.• SDT is

N.A.

B Ltd.• SDT is

Applicable

Domestic Transfer Pricing will apply.

4. B ltd purchases goods from C ltd

A Ltd.

B Ltd. C Ltd.

60% Holding

40% Holding

IncomeExpense Transactions Between

Coverage Check Point Conclusion

B Ltd. & C Ltd. • Two Different Entity

• Taxable to Taxable

• 80 IA(8) – N.A.• 80 IA (10) –

N.A.• 40A(2)(b) -

Applicable

• Income / Expenses

• Threshold

B Ltd.• SDT is

Applicable

C Ltd.• SDT is

N.A.

Common Holding

Domestic Transfer

Pricing will apply.

A Ltd.

Y Inc.

22%Holding

5. Y Inc. provides managerial services to A ltd

Income

Expense

Transactions Between

Coverage Check Point Conclusion

Y Inc. & A Ltd. • Two Different Entity

• Taxable to Taxable

• 80 IA(8) – N.A.• 80 IA (10) – N.A.• 40A(2)(b) -

Applicable

• Income / Expenses

• Threshold

Y Inc.• SDT is N.A.

A Ltd.• SDT is

Applicable

International Transfer Pricing will not apply. However, Domestic Transfer Pricing will apply

A Ltd.

C Ltd.

X Inc.

35% Holding

60% Holding

6. C ltd received technical services from X Inc.

Transactions Between

Coverage Check Point Conclusion

C Ltd. & X Inc. • Two Different Entity

• Taxable to Taxable

• 80 IA(8) – N.A.• 80 IA (10) – N.A.• 40A(2)(b) -

Applicable

• Income / Expenses

• Threshold

C Ltd.• SDT is

Applicable

X Inc.• SDT is N.A.

Income

Expense

Domestic Transfer Pricing will apply.

Case Study VIII : Aggregation for the purpose of determining SDT

X Ltd.

Sister Concern 1Eligible for 80IC

Sold goods of Rs 1 Crore

Unit A of X Ltd.(Power Generation Unit)

Eligible for 80IA

Unit B of X Ltd.(Manufacturing steel in

Himachal Pradesh)Eligible for 80IC

Power generated by unit A is

used by Unit B Sister Concern 2

X Ltd.

25% holdin

g

X ltd purchas

es power

for Unit B worth

Rs. 1 Crore

• Whether foregoing transactions would constitute SDT u/s 92 BA?• If transaction between X Ltd. & sister concern 2 is worth Rs. 2 Crore, then whether

Answer would change accordingly?

Transaction Value

Rs. 2 Crore

Case Study IX : Value for the purpose of aggregation,Where no entry is made in books of account

Y Ltd.

Brick manufacturin

g

Engaged in business of

Generation of steam and

power by use of coal

Eligible for deduction u/s

80IA (Tax Free)

Fly Ash is produced during generation of steam which is used by brick manufacturing unit.

No specific cost is attached to Fly ash (being a by-product).

Hence transfer from power unit to brick unit has not been recognized in books of accounts.

FACTS

• What value of the fly ash would be considered for purpose of determining whether the value of transaction exceeds a sum of Rs 5 crore as required under section 92BA of the Act?

FLY ASH(by product generated)

Case Study X : Inter-unit transfer of stores and spares

Whether the stores and spares purchased by Z ltd and used by the eligible unit would e covered u/s 80-IA(8) of the Act;

If yes, what would be the ALP for the same?

A Ltd.

Eligible unit u/s 80IC

Various other units

FACTS

Z ltd engaged in manufacturing of various products through various units.

Out of various units, one is eligible unit u/s 80-IC.

Purchase of Stores/spares done at one place and then the same is used by different units as per the requirement.

Purchase Centralized

Purchaseutilization

Case Study XI : DTP in case of loss making unit in SEZ

I Ltd.

SEZ Unit

Engaged in the business of computer software development

During the year, I. Ltd. has entered into Software Development contract with its sister concerns.

The concerned financial year is the first financial year of the Unit and has resulted in an overall loss from its operations.

Accordingly, no deduction has been claimed by the company under Section 10AA for the said year.

Whether DTP provisions, relating to Section 10AA, would apply to the SEZ unit for the relevant year?

FACTS

Case Study XII : Applicability of DTP provisions before the “initial assessment year’ of an eligible unit

Whether the DTP provisions relating to Section 80IA (8) / 80IA (10) would apply to W Ltd. for the first 5 years of the power business, when it would not be claiming any deduction under Section 80IA?

Whether the position would be different, if the power undertaking is incurring losses in these five years and the profits generated by other business undertaking of W Ltd. are adequate to absorb the losses so incurred by the power undertaking?

Whether DTP provisions would apply in the 6th year, if even in that year, the power undertaking continues to incur losses?

Whether DTP provisions would apply if after commencement of the initial assessment year, the power undertaking incurs losses?

Commence business of generation and distribution of power

Eligible for Deduction u/s 80IA (4)(iv)

Quantum of Deduction : 100% of the profits and gain derived from such business for 10 consecutive years

As per Section 80IA (2), deduction can be claimed for any 10 consecutive assessment years out of 15 years beginning from the year in which the undertaking generates power.

W Ltd. has decided to start claiming deduction only from the 6th assessment year.

QUERYFACTS

Case Study XIII: Section 40A(2) and section 80-IA(10)

A Pvt. Ltd.

B Pvt. Ltd.

Manufactures cement in the state of Uttaranchal,

Profit is eligible for deduction u/s 80IC

Purchases limestone of Rs. 6 Crore

Group company

35% holding

• Whether Section 40A(2) of the Act would apply to such purchases?

• Whether section 80-IA (10) of the Act would apply to such purchases?

• Whether such transactions would be regarded as SDT’s ?

• If yes, what would be the implications on the assessee

QUERY

Case Study XIV : Director’s Remuneration

Unit A

Mr. ABC

Public limited company

Ms DEF

Executive Directors

Remuneration

Mr. XYZ

Non-Executive Directors

Sitting fees and

comm

ission

Which would be the most appropriate method of determining the ALP

Case Study XV : Allocation of head office expenses

P Ltd.

One of the activity is construction of housing project(Eligible for

deduction u/s 80-IB(10)

Head OfficePays remuneration to whole time directors and managers

Will the provision of Section 80A(6)/80-IA(8) and in turn the DTP regulations apply for the purpose of allocation of a part of the managerial remuneration to the housing project while computing the eligible profits form the housing project.

QUERY

• Whether SDT Provision will be applicable or not?

• If yes, which method should be adopted for determining ALP ?

Y Pvt. Ltd.Y Pvt. Ltd. Raw Material

X Pvt. Ltd.X Pvt. Ltd.

Further Process

Supplies to

Makes& send back to

Directors of Both the Companies are

from same family.

Directors of Both the Companies are

from same family.

Transactions exceeds Rs. 5 Crore

Case Study XVI : Further Processing of goods

Sold goods @ Rs. 90

Sold goods

@

Rs. 100

Whether the provisions of Specified Domestic transactions are applicable to Firm ABC or not?

Now if answer is NO, how to report & what to report? If firm ABC is able to establish that all sale are bona fide transactions with closely connected

firm XYZ and results in NO tax avoidance and / or claiming higher deduction u/s 80-IC by it, can it argue that since charging provisions are not applicable, SDT provisions dealing with valuation should not apply and thus Chapter X does not apply to it?

Case Study XVII : SDT between P’ship Firms

ISSUES

Is provisions of SDT would be applicable to insurance

companies whose computation of profit as per section 44 of the Act is to be

computed as per first schedule?

Whether section 40(A)(2)(b) would be applicable on two

state government companies who entirely

have different business but they have transactions inter

se?

ISSUES

ISSUES

Whether transaction between two related

companies whereby sales is made by profit making

company at a lower rate to loss making company would

attract SDT provisions?

ISSUES

Can higher profit earned by the company be considered

as ‘ more than ordinary profits’ under section

80IA(10)?

ISSUES

What is the appropriate approach for the company

to demonstrate that section 80IA(10) should not apply?

ISSUES

Can the tax authorities restrict the tax holiday claim to the extent of the average

profits earned by the comparable companies in

the light of amendments in Finance Act, 2012 related to

domestic transactions?