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TP Minds Asia, 2017 Singapore

Mukesh Butani

Transfer Pricing Litigation Landscape in India

Current Audit Areas

Government Initiatives

Select Case Law Updates

India BEPS Update – Overview

India BEPS Update – Action by Action

Update on Alternative Dispute Resolution Mechanisms

Contents

TRANSFER PRICING LITIGATION LANDSCAPE IN

INDIA

Key Highlights related to Transfer Pricng (‘TP’) Litigation in India

o India contributes significantly to global TP litigation

o Since the introduction of TP in the year 2002, India has witnessed a steep escalation in disputes and adjustments

o Almost half of the taxpayers selected for TP audit in India subjected to TP adjustment

o FY 2014-15 witnessed TP adjustments to the tune of USD 7.35 billion, in approximately 2,353 cases

o Key issues - Choice of appropriate methodology, selection of comparables, marketing intangibles, location savings, management services, etc.

o An estimated USD 62.55 billion of tax revenue locked up in litigation before Courts and Appellate authorities (budget speech 2014-15)

o Over 1,800 TP jurisprudence cases has been reported in India

Litigation Trend

Year 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15

Quantum of Adjustments (USD billion)

1.70 3.76 6.96 10.94 9.32 7.35

No of TP audits completed 1,830 2,368 2,638 3,171 3,617 4,290

No of adjudicated cases 813 1,207 1,343 1,686 1,920 2,353

CURRENT AUDIT AREAS

Trademarks and trade names that aid in the commercial exploitation of a product or service, distribution channels, customer lists etc.

Indian Revenue has been identifying excessive Advertisement, Marketing and Promotion (‘AMP’) expenses, applying a markup on such excess expenses to allege that the taxpayer was providing a service to the foreign brand owner

Incurring of excess AMP expenses towards brand that is legally owned by the Foreign Associated Enterprise (‘AE’) constituted an ‘international transaction’

Question of law - Whether AMP is an international transaction or not, is currently pending before Apex Court

Before High Court, the question of law has been answered in affirmative (distributors and manufacturers distinguished)

ABC India

Excessive AMP

expenses

ABC Singapore

Owner of brand ‘ABC’

Brand Creation/ Marketing Intangible

In India

Outside India

Marketing Intangible – Concept & Issue

Before Income Tax Appellate Tribunal (‘ITAT’ or ‘Tribunal’)

AMP – not an International Transaction Remanded to lower authorities AMP - International Transaction

• Delhi Bench Goodyear India Ltd (M) Honda Siel Power Product Ltd (M/D) Bausch and Lomb Eyecare (India) Pvt Ltd (M/D)

• Delhi Bench Bacardi India Pvt Ltd (M/D) Bose Corporation India Pvt Ltd (D) Nikon India Pvt Ltd (D) Louis Vuitton India Retail Pvt Ltd

(Retailer) Le Passage To India Tour & Travels Pvt

Ltd (Service Provider) Liugong India Pvt Ltd (D) Rayban Sun Optics India Ltd (M/D) Haier Appliances India Pvt Ltd (D) Swarovski India Pvt Ltd (Trader) Daikin Airconditioning India Pvt Ltd (D) Casio India Co. Pvt Ltd (D) Reebok India Company (D) Luxoticca India Eyewear Pvt Ltd (D)

• Chennai Bench TVS Motor Company Ltd (M)

• Chandigarh Bench Widex India Pvt Ltd (D)

• Bangalore Bench Nike India Pvt Ltd (D)

• Mumbai Bench Thomas Cook (India) Ltd (Service provider) L’Oréal India Pvt Ltd (M/D) Heinz India Pvt Ltd (M) Diageo India Pvt Ltd (M) Mondelez India Foods Pvt Ltd (M)

• Chennai Bench Hyundai Motor India Ltd (M) Nippon Paint India Pvt Ltd (M/D)

• Mumbai Bench Molson Coors Cobra India Pvt Ltd (M/D)

M=Manufacturer, D = Distributer

Marketing Intangible – Judicial Trends

Before Delhi High Court (‘HC’)

Adjudicating legal question Remanded to lower authorities

Remanded to ITAT post Maruti Suzuki (HC)

Upholding remand to lower authorities by ITAT

• Sony Ericson Mobile Communications India Pvt Ltd (D)

• Maruti Suzuki India Ltd (M) • Baush & Lomb Eyecare India Pvt Ltd

(M/D) • Whirlpool of India Ltd (M/D) • Honda Siel Power Product Ltd (M/D) • Goodyear India Ltd (Revenue’s

appeal dismissed) (M)

• Yum Restaurants India Pvt Ltd (M/ Restaurant Service provider)

• Daikin Airconditioning India Pvt Ltd (D)

• Sony Ericson Mobile Communications India Pvt Ltd (Subsequent year) (D)

• Pepsico India Holding Pvt Ltd (M)

• Le Passage to India Tour & Travels Pvt Ltd (Service provider)

• Casio India Co. Pvt Ltd (D)

• Haier Appliances India Ltd • Toshiba (Revenue’s appeal

against the remand dismissed) (D)

• Rayban Sun Optics India Ltd (M/D)

• Bose Corporation India Pvt Ltd (D)

• Toshiba India Pvt Ltd (D)


M=Manufacturer, D = Distributer

Before Supreme Court (‘SC’)

Special Leave Petitions (‘SLPs’) of Revenue and taxpayers admitted

Appeals have been tagged in two batches (a) Canon (distributors) and (b) Maruti Suzuki (manufacturers)

Cases in Canon Cases in Maruti Suzuki

• Canon India Private Limited (Lead case) (D)

• Daikin Airconditioning India Private Limited (D)

• Sony Ericsson Mobile Communications India Pvt Ltd (D)

• Casio India Co. Pvt Ltd (D)

• Sharp Business Systems (India) Pvt Ltd (D)

• Reebok India Co. Ltd (D)

• Stryker India Pvt Ltd (D)

• Discovery Communication India (Distributor of rights)

• Amadeus India Pvt Ltd (service provider)

• Haier Appliances India Pvt Ltd (D)

• Bausch and Lomb Eyecare India Pvt Ltd (M/D)

• Avery Dennision India (M/D)

• Toshiba India Pvt Ltd (D)

• Maruti Suzuki (Lead case) (M)

• Honda Siel Power Product Ltd (M/D)


Intra-group services provided to group entities are under Revenue’s radar

Most common and litigated form of intra-group services are management support services / cross charges

Illustrative list of management support services are :

o Finance, Accounting & Legal o Human Resources o Information Technology o Internal Audit o Tax Planning and Management o Market Risk Management

Revenue challenges determination of arm’s length price for such services and in most cases computes the price as ‘Nil’

Revenue challenges the need and actual receipt of services, commensurate benefits derived by the Indian entity from such services, basis of cost allocation and arm’s length mark-up

Management Charges

Robust / exhaustive documentation demanded as evidence :

o Need Test; o Benefit Test; o Rendition Test; o Basis of allocation; o Not duplicative; and o Not a shareholder service

Jurisprudence on legal principles is in favour of taxpayers. Majority remanded back to the lower authorities for examining exhaustive back-up documentation submitted in support of such services

Mindset of Revenue is that management charge are used for profit repatriation

Benefits Payout

Management Charges

Transaction Net Margin Method (‘TNMM’) upheld

Commercial expediency not to be looked at by lower authorities

Detailed documentation not required Detailed documentation required

McCann Erickson India Private

Limited

[(Delhi ITAT) ITA No. 5871/Del/2011]

Cushman & Wakefield India Private Limited

[TS-150-HC-2014(DEL)-TP]

TNS India Pvt. Ltd.

[(Hyderabad ITAT) ITA No.

944/Hyd/2007]

Gemplus India Private Limited

[(Bangalore ITAT) ITA

No.352/Bang/2009]

Dresser Rand India Private Limited

[(Mumbai ITAT) ITA No.

8753/Mum/2010]

McCann Erickson India Private Limited


GE Money Financial Services Private

Limited

[ITA No. 5882/Del/2010]

Knorr-Bremse India Private Limited

[(Delhi ITAT) ITA No.

5097/Del/2011]

AWB India Pvt. Ltd.


Dresser Rand India Private Limited

[(Mumbai ITAT) ITA No. 8753/Mum/2010]

AWB India Pvt. Ltd.


Volvo India Private Limited

[384/Bang/2013]

TNS India Pvt. Ltd.

[(Hyderabad ITAT) ITA No.

944/Hyd/2007]

AWB India Pvt. Ltd.


TNS India Pvt. Ltd.

[(Hyderabad ITAT) ITA No. 944/Hyd/2007]

Volvo India Private Limited

[384/Bang/2013]

Management Charges – Judicial Trends

Domestic definition of Royalty - use or right to use any Intangible property, such as the right to use industrial know-how, patents, trademarks, trade names, designs or models

Key Aspects

Usefulness/ Uniqueness of the brand/ technical know-how shared?

Valuation of the Intangibles uncertain at the time of entering into a transaction

Identifying what independent enterprises would have done in analogous circumstances

The difference between royalty rate based on the value of the Intangible and actual rate based on the value of Intangible depending on its success

Choosing the most appropriate method to benchmark royalty transaction

Comparable/ third party transaction analysis for the aforesaid transaction, use of suitable databases (royalty stat, etc.)

Intangibles/ Royalty

RBI approval is a sufficient benchmark

TNMM upheld Commercial expediency not to be

looked at by lower authorities Comparable Uncontrolled Price Method (‘CUP’) to be applied

Chiron Behring Vaccines Private

Limited

[TS-90-ITAT-2011(Mum)-TP]

Toyota Kirloskar Auto Parts Private

Limited

[TS-415-ITAT-2014(Bang)-TP]

EKL Appliances

[TS-395-ITAT-2011(DEL)-TP]

Syngenta India Limited

[TS-209-ITAT-2013(Mum)-TP]

SGS India Private Limited

[TS-569-HC-2015(BOM)-TP]

Royalty – Judicial Trends

Rate benchmarking analysis comprise of two components – Credit rating of the borrower; and identifying comparable lending

arrangements between third parties with comparable terms and credit ratings

Process to determine an arm’s length interest return and challenges:

Credit worthiness of the borrower

Adjusting risk factors for Specific debt characteristics

Determining arm’s length interest rate range

Corroboration by using available market data

Step

s

Availability of comparable data

Adjustment on account of risk profiles

Thin capitalization provisions

Appropriate interest rate (PLR/Deposit rate/ LIBOR/ Base Rate)

Issues

Interest on Loans

Contract Research & Development (‘R&D’)- Levels of mark-ups are contended - the tax authorities classifies the services as ‘high value’ services and sought to apply Profit Split Method (‘PSM’) for performing TP adjustment, rather than the traditional approach of applying a mark-up on costs. Circular 6/2013 by Cental Board of Direct Taxes (‘CBDT’) outlines guidelines for identifying a development centre as a Contract R&D service provider with insignificant risks. Guidance principally in line with BEPS guidance. For details, refer Annexure 1

1

Location Savings - Cost savings realized from relocation of processes to low cost jurisdiction. However, the computation of amount pertaining to location due to difference in labour productivity and production volume is unable to account for. It was held in GAP International Sourcing India (P.) Ltd (2012 25 taxmann.com 414) and Watson Pharma (P.) Ltd (2015 54 taxmann.com 88) that no separate / additional allocation is called for on account of location savings, since the benefit is passed onto customer in a competitive market scenario. India chapter updated in UN Manual 2017, directs arm’s length analysis of good local comparables to take into account benefit of location saving (Similar view upheld in the case of Syngenta India Private Limited [TS-988-ITAT-2016(Mum)-TP]). However, absence of such comparable or selection of foreign AE as tested party could still leave the issue open ended.

2

Other Litigation Issues

Corporate Guarantees - Debate as to whether corporate guarantee is an international transaction or not is still ongoing with court rulings favoring both revenue and taxpayer. Corporate guarantee fee paid is also commonly challenged by lower authorities 4

Other Litigation Issues

Selection of tested party - Selection of foreign AE as the tested party has been a contentious issue, with judgements both in favour and against the contention. Revenue’s approach is in disagreement with UN Model and OECD leading to widespread litigation Favorable Outcomes - General Motors India Private Limited (TS-215-ITAT-2013(Ahd)), IDS Infotech Limited (TS-184-ITAT-2017(CHANDI), Ranbaxy Laboratories (TS-173-ITAT-2016(DEL)-TP) Unfavorable Outcomes - GE Money Financial Services Pvt. Ltd. (TS-457-ITAT-2016(DEL), Onward Technologies Limited [TS-94-ITAT-2013(Mum)-TP] and Aurionpro Solutions Ltd [TS-75-ITAT-2013(Mum)-TP]

3

Penalty Provisions

New penalty clause introduced in relation to TP adjustment, effective FY 2016-17 onwards-

New Section 271AA, imposing penalty of 2 percent of value of each transaction also introduced, in case of: - Failure to keep and maintain information and documents a required by Section 92D(1) and (2) - Failure to report such transactions; or - Maintains or furnishes an incorrect information or document

Existing Provisions New Provisions

100-300 percent of tax on TP adjustment, in absence of good faith and due diligence

No penalty where TP documentation is maintained, transactions declared and material facts disclosed

Penalty of 50 percent of tax on TP adjustment where TP documentation not maintained

Penalty of 200 percent of tax on TP adjustment where transactions not declared or material facts not disclosed

GOVERNMENT INITIATIVES

Audit Related

Measures

Taxpayer contentions have been heard at higher forum on critical issues such as share valuation, sogo shosha companies (Japan trading house), marketing intangibles, etc.

Internal Guidance/ Circulars

Range Rules & Multiple Year

Data

APA Program

Safe Harbour Guidelines

Risk based approach

Favourable rulings on Key

Issues

Issuance of guidance note/ clarificatory circulars on critical TP Issues (e.g. AMP, Contract R&D, etc.)

Safe harbour rates were levelled down recently to gain wider acceptance, Introducing receipt of Low value adding Intra Group Services (‘LVIGS’) under safe harbour in consensus with BEPS guidance

Introduction of risk based approach for selection of TP cases instead of compulsory audit based on criteria of threshold limit (for international transactions) of INR 150 million and above

APA program for 9 years of certainty for over 150 taxpayers across industries facing litigation on myriad issues

With a view to end prolonged litigation and in line with international guidance, range rules and multiple year data concept were introduced in the legislation

Government Initiatives

SELECT CASE LAW UPDATES

Sun Pharmaceuticals Industries Limited

Sun Pharmaceuticals Industries Limited (‘SPIL’) - Contract

Manufacturer entity

Sun Pharma Advance Research Company Limited (‘SPARC’)

Sun Pharma Global BVI (‘SPG BVI’) – Owner of IPR & Technical Know

how

Caraco Limited (Caraco)

Dem

erge

d

Div

isio

n I

India United States

100%

70%

De

mer

ged

D

ivis

ion

II

Sale of Pantoprazole - 21.57% margin

Sale of Pantoprazole – >95% margin

Transfer of patent related to Pantoprazole

tablet

Transfer of R&D relating to

Pantoprazole pursuant to demerger

Transaction Flow

Ownership Structure

Agreement for the sale was entered by SPIL; SPIL being the ultimate parent entity entered

into all arrangements with its AEs on behalf of the Group

Facts of the case

ITAT Ruling – Sun Pharmaceuticals

Revenue’s Contention

Bone of contention was that margin earned by SPG BVI on further sale to Caraco (over 95%) was disproportionately higher than margin earned by SPIL on sale to SPG BVI

SPIL is not solely a contract manufacturer but performed substantial functions and assumed equal risks

Apply PSM on the basis that SPIL and SPG BVI are engaged in undertaking complex integrated activities involving use of intangibles

Adjustment of USD 59.82 million by attributing combined profits in equal ratio

ITAT’s Observations

Upheld TNMM over PSM while appreciating the business mechanics of the entire transaction

SPIL was engaged in performing manufacturing function, while SPG BVI was the owner of the IPR rights having biggest risk of litigation and technology obsolescence

Taxpayer was exposed to litigation claim settlement to the extent of USD 550 million (out of which USD 506 was paid by SPG BVI) on account of infringement claim made by a third party supported that the risks were borne by the AE

Apex court ruling in the case of Vodafone International Holdings B.V. which recognized that MNCs constitute subsidiaries in furtherance to their objects in a competitive world

ITAT Ruling – Sun Pharmaceuticals

Facts of the case

Indian AE of Instrumentarium Corporation Limited, Finland (‘Instrumentarium Finland’) incurred losses

Revenue contended income escapement to Taxpayer

Revenue alleged that Foreign AE should have charged an arm’s length interest from its Indian AE

Taxpayer pleaded base erosion theory – i.e. overall tax reduction in India. Since resident AE of taxpayer was chargeable to tax at 36.75%, while taxpayer was taxed at treaty rate of 10%

Principles

Does a non-resident Foreign Permanent Establishment (‘PE’) has to comply with the Indian TP provisions (where income is taxable)?

Can an international transaction be justified at arm’s length even in the case that will lead to outflow of funds for Indian AE?

Will the answer to questions will depend upon the income/loss situation of resident AE?

Special Bench of Tribunal – Instrumentarium Corporation

Special Bench Ruling

Law provides determining of impact on profit/ loss for the year under consideration, & not for considering the impact on subsequent years

Law is applicable to taxpayer & not the AEs

No provision under Indian TP regulations to provide corresponding deduction/ adjustment

Law provides a bar against lowering income of the non-resident AE, as a result of lowering of deduction in hands of the Indian AE - & not vice-versa

Literal interpretation is unambiguous

No point of base erosion arises as Indian AE was incurring losses – Obiter Dicta

Held against the Appellant – though the quantum of adjustment not deliberated by the Tribunal, while rejecting the contentions of the taxpayer

Special Bench of Tribunal – Instrumentarium Corporation

INDIA BEPS UPDATE - OVERVIEW

Equalisation levy Imposed (@ 6 percent) on consideration for certain digital transactions received by non-resident from India tax resident or from non-resident having PE in India

Patent box Reduced tax rate for qualifying royalties relating to patents developed and registered in India at 10% effective April 1, 2016

Thin capitalisation rules Limit deduction of interest paid or payable to associated enterprise

Unilateral action taken to adopt some of the recommendations of OECD BEPS Action plans:

In line with BEPS Action plan 1


In line with BEPS Action plans 4

Country-by-Country Report (‘CbCR’) Three-tiered documentation regime comprising of Local File and Master File


BEPS Update - India

Multilateral Instruments (‘MLI’) Signed on June 7, 2017 and to implement treaty related BEPS measures in relation to BEPS minimum standards

In line with BEPS Action plans 15

INDIA BEPS UPDATE – ACTION BY ACTION

First country to introduce the concept of equalisation levy

Outside the existing Indian tax laws (i.e. not part of Income-tax Act, 1961)

Charge: On consideration by Non Resident (‘NR’) for specified services from:

o Indian resident carrying on business or profession or o PE of a NR

Effective rate – 6 percent (functionality akin to withholding tax)

Scope of specified services – online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement and any other service as may be notified by Indian Government

Applicability – Only to B2B transactions

Non-applicability:

o NR providing specified services has a PE and such services are effectively connected with that PE or o Aggregate consideration for specified services in a year is upto INR 0.1 million etc

India reserves right – to enhance the scope of specified services via notification

BEPS Action Plan 1 – Equalization Levy

Place of Effective Management (‘PoEM’):

India does not have a CFC regime. Finance Act 2015 had enacted the concept of PoEM for the purpose of determining tax residency

On December 23, 2015, a draft guidance seeking to define PoEM that resemble CFC-type rules.

PoEM provisions applicable with effect from 1 April 2016 aim to tighten India’s corporate tax residency status rules, so as to prevent companies from avoiding tax residency status in India by shifting insignificant or isolated control and management roles or functions outside India.

BEPS Action Plan 3 – Controlled Foreign Company (‘CFC’) Rules

Applicable from April 1, 2017

Limiting Base Erosion on account of tax deductibility of interest and similar costs

Introduces a ceiling on interest deduction (against business income) provided following conditions are cumulatively fulfilled –

Permissible interest cost deduction –

o Total interest paid / payable in excess of 30 percent of EBITDA (Earnings before Interest, taxes and depreciation and amortization); or

o Interest paid/ payable to AE, whichever is less

Excess interest is disallowed and carried forward for 8 years; such interest is eligible for set off against business income of future (8) years, subject to limit on interest deduction for such year/s

Condition 1

• Borrower is an Indian company or a PE of foreign company

Condition 2

• Borrower incurs interest, or similar consideration, exceeding INR 10 mn

Condition 3

• Interest incurred in respect of debt issued by NR AE, or third party debt guaranteed by AE

BEPS Action Plan 4 – Limiting Base Erosion

Concessional taxation regime for patents developed and registered in India

Introduction of section 115BBF in Indian tax laws. Key features:

o Taxability of royalty income @ 10 percent on gross basis

o No deduction of any expense/ allowance while computing the royalty income

o Option given to taxpayers to either choose section 115BBF vis-à-vis normal provisions of Indian tax laws

o Option once exercised is to be followed for next 5 consecutive years (In case of breach, the option under section 115BBF cannot be availed for next five consecutive years)

BEPS Action Plan 5 – Patent Box Regime

Actions Plans 8 - 10 of the BEPS Action Plan require development of TP rules which create TP outcomes in line with value creation

Action Plan 8, 9 and 10 deal with development of rules to prevent BEPS by:

o moving intangibles among group members

o transferring risks among, or allocating excessive capital to group members

o engaging in transactions that would not or would very rarely occur between third parties

LVIGS – Specific guidance has been given for IGS that can be characterized as below:

o Services are supportive in nature

o Services do not form part of core business of the Multinational Enterprise (‘MNE’)

o Services do not require the use of or lead to creation of valuable and unique intangibles

o Services do not lead to control or creation of significant risk.

India recently updated its chapter in UN TP Manual which is principally aligned to BEPS Action Plan 8 to 10

Also, safe harbour for receipt of LVIGS was introduced recently with a cap of INR 10 Million on transaction value

BEPS Action Plan 8 to 10 – TP

Finance Act, 2016 legislated CbCR standards advocated by OECD as part of BEPS Action Plan 13

o Effective from April 1, 2016 and covering MNE groups having aggregate revenue equal to or more than EUR 750 million (~ INR 5,395 crores approx.) in the last completed year

Every constituent entity needs to notify to the Income tax authority in a prescribed form whether:

o It has been nominated as the alternate reporting entity of the international group; or

o Provide details of the parent entity or the alternate reporting entity along with the country / territory where the entities are resident

If the parent company is an Indian entity, the first CbCR filing becomes due by November 30, 2017 for financial year ending March 31, 2017

65 countries** (including India) has signed Multilateral Competent Authority Agreement (‘MCAA’) on automatic exchange of country-by-country report

MCAA will facilitate time and resource efficient exchange of information between tax administrations, which would aid tax administrations to better assess transfer pricing and other BEPS risks, and consequently identify the key focus areas for audits.

*Detailed rules are yet to be prescribed **As on July 6, 2017

BEPS Action Plan 13 – Country by Country Report

Implementation of BEPS necessitates numerous changes, one of which is relating to amendments in the bilateral tax treaties

Action Plan 15, aims to overcome practical difficulties arising in the course of modifying the tax treaties and within a set time frame

MLI is a convention which will be signed by several countries, and would bring necessary changes in the bilateral tax treaties executed by said countries

Signing of the convention by countries involved would amount to expression of consent and will make the MLI binding in nature

Post application of MLI, treaty provisions will have to be read in consonance with the corresponding provisions in MLI along with any reservations expressed by countries

On June 07, 2017, India along with 66 other nations has signed MLI

Consent accorded to BEPS minimum standards on Action Plan 2 (Hybrid Mismatch arrangement), Action Plan 6 (Prevention of treaty abuse), Action Plan 7 (Artificial avoidance of PE status) and Action Plan 14 (Dispute Resolution and MAP)

India has not consented to binding arbitrary provisions as also envisaged under Action 14

Refer Annexure 2 for summary of India’s MLI position

BEPS Action Plan 15 – MLI

UPDATE ON ALTERNATIVE DISPUTE RESOLUTION MECHANISMS

Advance Pricing Agreements – Recent Developments

APA transactions concluded

IT enabled services (“ITes”)

Engineering design services

Software development services

Distribution of manufactured goods

Royalty payment

Corporate guarantee

Interest payment

Contract Pharmaceutical Manufacturing

Administrative and business support services

Banking

Automobile

Sogo Shosha trading

APAs filed – 800+

APAs concluded 162* Unilateral

+ 13 Bilateral

APAs*

*Source: Press Release dated September 4, 2017

Services transactions (e.g. IT/ITeS) is one of the most litigated sector in the area of Transfer Pricing and hence majority of the APA applications relate to such transactions

Introduced in 2012, Advance Pricing Agreement (‘APA’) allows MNEs to discuss and agree on inter-company prices / margins in India (and abroad) / methodology, for a cumulative period of 9 years

APA – Outcomes and Other Issues

Outcomes

Definition of pricing policy for administrative

implementation

Definition of cost base

Progressive mark up for

services Change in approach

from arithmetic mean to

percentile

Pricing policy – Cost plus v/s

hourly rate

Re characterization – High value v/s low value

Other issues

Level of Interaction/

Dialogues between

government

Secondary adjsutment

Interplay with other Laws such

as GST Policy to be adopted in the interim

period

Approach for open matters

Correlative relief clause

in DTAA

Mutual Agreement Procedure

Mutual Agreement Procedure (‘MAP’) Update o India US corridor – More than 100 tax disputes involving tax demand of approx. USD 800 million resolved through MAPs

recently

o Most MAP applications received for transactions with USA, UK, Japan and Canada

o Transactions with other key countries such as Germany, France, Singapore, etc. could not be covered under MAP

Amendments in international tax treaties

o India’s commitment under BEPS to meet the minimum standard of providing MAP access in TP cases to be met through MLI

o Treaties with South Korea and Singapore amended to allow corresponding adjustments in the other tax jurisdiction as a result of a tax on profits in one country, paving the way for Bilateral APA and MAP on TP matters

Contacts

DISCLAIMER: This presentation transmitted to the recipient is confidential and intended solely for the use of the individual or entity to whom they are addressed. If you are not the intended recipient, you are notified that disclosing, copying, distributing or taking any action in reliance on the contents of this information is strictly prohibited under the law and the sender shall not be liable for any losses. Please notify the sender immediately by email if you have received this by mistake, and immediately delete this from your system.

Mukesh Butani +91 981 113 2000 [email protected]

mailto:[email protected]

ANNEXURES

Annexure 1

Circular 6 / 2013 [Issued by CBDT] – Clarifications on functional Profile of Contract R&D centres

Foreign AE to perform economically significant functions including conceptualization and design

Funds / capital /assets

Significant functions

Foreign AE to provide for funds / capital and economically significant assets for the R&D

R&D centre does not assume or has no economically significant realized risks. Actual conduct to supersede the contractual term with the foreign AE

The foreign AE control / supervise the R&D function through its strategic decision to perform core function as well as monitor activities

The contract R&D centre has no ownership right (legal/economic) on the outcome of the research

If foreign AE is in a low / no tax jurisdiction, it will be presumed that foreign AE is not controlling risk. However, this might be rebutted by the taxpayer

Points for consideration

Ownership of rights

Tax jurisdiction

Supervision Risks

Annexure 2

Particulars Position (Opted In/ Out)

Article 3 (Transparent entities) Out

Article 4 (Dual resident entities) In

Article 5 (Elimination of double taxation) Out

Article 6 (Prevention of treaty abuse – changes to Preamble) In

Article 7 (Prevention of treaty abuse) In (Simplified LOB with PPT)

Article 8 (Dividend transfer transaction) In (except Portugal)

Article 9(1) (Capital gains from alienation of shares or Interest if Entities deriving their value principally from immovable property)

In

Article 12 (Artificial avoidance of PE Status through commissionaire arrangements and similar strategies)

In

Article 13 (Artificial avoidance of PE Status through the specific activity exemption) In

Article 16 (Mutual Agreement Procedure) In

Article 17 (Corresponding relief) In

Following is a summary of opt ins and opt outs adopted by India:

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