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TP NicheA spectrum of transfer pricing issuesQuarterly Edition: October-December 2016

Foreword 3

Perspective 4

Our experience 7

From the judiciary 9

Tracker 20

Global corner 21

Citations 24

Glossary 25

Table of content

2 | TP Niche February 2017

Foreword

Arun ChhabraDirectorGrant Thornton Advisory Pvt. Ltd.

We are glad to present our quarterly newsletter- TP Niche. Through this newsletter our endeavour is to share our experience on emerging transfer pricing trends and hope to provide our readers valuable insights on the evolving transfer pricing landscape in India.

This issue of TP Niche covers a wide range of transfer pricing topics categorised under five sections viz. ‘Perspective’, ‘Our experience’, ‘From the judiciary’, ‘Tracker’ and ‘Global corner’. The Perspective section of this edition covers Sogo Shosha model and its interplay with the Indian transfer pricing provisions.

In ‘Our Experience’ section, we share our experience of preparing Accountants Report. In this section we have focussed on issues faced at the time of preparation, verification and issuance of Accountants Report in Form 3CEB.

With so many decisions being pronounced by the Tribunal and High Courts on Transfer Pricing issues on regular basis, it is challenging to keep track of fundamental positions emerging from such decisions on peculiar issues. With this in mind, we have summarised the key rulings of Tribunal relating to comparables in IT/ITeS industry in the section - ‘From the judiciary’.

‘Tracker’ section lists key developments in the form of notifications, circulars and other publications touching different legislative and practical aspects of transfer pricing, which the readers may want to have it for their easy reference.

‘Global Corner’ is a section which is designed to highlight the key developments in the TP regimes of some key jurisdictions. In this edition, readers get to know of recent development in TP regime of Japan.

We hope that you will find the edition of TP Niche engaging and informative. In case you have any comment or query, please reach out to us. Your feedback is important to us. We look forward to receiving it.

TP Niche February 2017 | 3

Perspective

OverviewOne of the most widely litigated business model in transfer pricing is “Sogo Shosha” which can be described as a “Diversified Trading Conglomerate”. A Sogo Shosha deals in wide variety of products and services and operates on both purchase and sale side. This business model is unique to the Japanese economy.

Characteristics of Sogo Shosha entitiesFollowing are the key features of Sogo Shosha entities:

• Deals in variety of products and services (not defined by any specific product and service) i.e. they are middlemen, brokers, intermediaries, distributors or trader for different product and services

• Trade volumes are enormous

• Do not maintain stock of goods they only have flash tittle of the goods

• Sale/purchase of goods is against confirmed order

Indian Sogo Shosha subsidiaries – facing Indian TP challenges

The Sogo Shosha entities have a global network through which they operate. These entities have setup their subsidiaries in India. The Indian subsidiaries are remunerated either by way of cost plus (purchases and sales are not routed through the profit and loss account) or a commission based model (purchases and sales are not routed through the profit and loss account) or fixed profit model (purchases and sales are routed through the profit and loss account) depending on the functions performed by it. These subsidiaries generally perform the following functions:

• Identifying potential customers/vendors• Market analysis

• Logistics management • Having flash title of goods • Act as an intermediary between buyer and seller without

having any decision making rights

The Sogo Shosha business model though applauded for its contribution to the Japanese economy was disputed in India by the transfer pricing authorities until the Delhi High Court ruled in favour of the Sogo Shosha’s in line with the international and Japanese consensus on this subject. The issues which arose in the Indian scenario were as under:

Economic characterisation: Under the Sogo Shosha model, the functional profile and characterisation of various entities had been questioned by Indian Tax Authorities. The Sogo Shosha’s in their transfer pricing analysis, characterise themselves as service providers while the transfer pricing officers characterised it as a trader. In this regard, argument of the taxpayer was that the risk profile of the taxpayer is different from a trader and that it is akin to a service provider. In order to understand the difference in functional profile of a Sogo Shosha entity and trader one needs to analyse the following:

It is imperative to highlight that the vital differentiating factor between a trader and Sogo Shosha company is tittle of goods. Sogo Shosha entity takes only flash tittle of goods and purchase/ sales are recorded only against confirmed order. On the other hand, a routine trader maintains inventory levels, negotiates pricing and bears risk associated

The section discusses the features of “Sogo Shosha” model and its interplay with the Indian transfer pricing (“TP”) provisions in light of the judicial precedence.

Functions Sogo Shosha Trader

Identification of customer/vendor ü ü

Coordination/ liaising ü üWarehousing/ Inventory management û ü

Negotiation û ü

Full Fledged Marketing û ü

Title of Goods û (Takes only flash tittle of goods) ü


with the same order. On the other hand, a routine trader maintains inventory levels, negotiates pricing and bears risk associated with the same.

The Hon’ble Delhi Income Tax Appellant tribunal (ITAT) in the case of Mitsubishi Corporation India Private Limited for AY 2006-07 classified the activities of Sogo Shosha entities as “akin to a trading activity”. It characterised the taxpayer as a trader. Although, Hon’ble Delhi High Court (HC) in instant case upheld the observation of the ITAT however, it observed that the selection of comparables should depend on the functional, risk profile and working capital exposure of the taxpayer.

The Hon’ble ITAT while passing its ruling for the same taxpayer for AY 2007-08 deciphered HC ruling and held that the HC contended that Sogo Shosha company is not a pure distributor/trader as it characterised the activities “as akin to a trader”. It further observed as under:

• A Sogo Shosha cannot be equated with a general trading company in all material respects

• Taxpayer’s activities are akin to trading activities and are not trading activities therefore appropriate adjustments need to be made.

• A vital difference between normal trading and Sogo Shosha trading is that there are no inventories in Sogo Shosha trading. Hence appropriate PLI (“Profit Level Indicator”) should be selected to eliminate the difference between Sogo Shosha and other trading entities.

Based on the aforesaid discussion, the Hon’ble ITAT through its order for AY 2007-08 reversed the judgement of the same bench for preceding year and concluded that a Sogo Shosha entity is blend of both a trader and a commission agent but is closer to a trader.

Appropriateness of Berry ratio in case of Sogo Shosha business model: As highlighted above, the Sogo Shosha entity does not take title to the goods and also does not bear any risk associated with the same. Therefore, the same may not be included in the cost base when determining the cost. This can be done using Berry ratio as Profit Level Indicator for benchmarking Soga Shosha entity’s profitability.

Berry ratio is financial ratio which measures the remuneration for value added functions i.e. gross profit (GP) in relation to operating expenses (OE)/Value added expenses (VAE). It is the brainchild of Charles H Berry, an American economist who was entrusted to testify the case of E.I DuPont de Nemours v/s United States (608 F.2d 445).

Berry Ratio has been acknowledged and accepted by both Organisation for Economic Corporation and Development and United Nations - Practical Manual on Transfer Pricing.

However, it elucidates the condition under which the same can be applied:

• Functions performed are directly proportionate the operating expenses incurred,

• Functions performed and risk assumed are not influenced by the value of goods and

The taxpayer does not perform, in the controlled transactions, any other significant function (e.g. manufacturing function) that should be remunerated using another method or financial indicator

Though the concept of berry ratio has been accepted globally, the Indian tax authorities have disregarded the same on the following grounds:

– Since the taxpayer takes title of the goods, it cannot be considered as service provider and hence the remuneration should be based on the value of goods handled;

– The PLI has not been recognised under Rule 10B(1)(e)(i) of the Rules and;

– Cannot be applied in case of Sogo Shosha companies as unique intangibles are involved

– Unworkable adjustment due to different accounting policies

However, the ITAT via its ruling in the case of Mitsubishi Corporation India Private Limited (AY 2007-08) echoed internationally accepted opinion and upheld the use of berry ratio on the following grounds

– Since Sogo Shosha companies does not maintain any inventory level nor does it bear risk associated with the same therefore its remuneration should only be based on the valued added expenses.

– Rule 10B(1)(e)(i) of the Rules provides an illustrative list of financial ratios and ends with “or having regard to any other relevant base” therefore, berry ratio is covered under the Indian Income tax Act, 1961 (“the Act”)

The Delhi High Court in the case of Sumitomo Corporation India echoed the observations of the Delhi ITAT and explained that berry ratio should be used when the profitability is dependent on the nature of operating expenses and is not influenced by value of goods.

Location savings : The transfer pricing officers while disregarding the remuneration earned by the Indian counter parts of Sogo Shosha entities were also contending that the associated enterprises earn location saving and the benefit of the same was not passed on to the taxpayer.


However, the ITAT in the case of Mitsubishi Corporation India Private Limited for AY 2007-08, held that Location savings can be derived only when an MNE relocates its activities to someplace where the rates are cheaper to those where the activities are initially performed. Locations savings have to be in respect of activities performed and not with respect to cost of purchases. It is also observed that the benefit of location savings will arise to the ultimate customer and not to those assisting such buying by acting as an intermediary. The ITAT held that the adjustment on account of location savings is unwarranted as the benefit of location savings is derived by the ultimate customer only.

ConclusionThe Higher Appellate Authorities have acknowledged the use of Berry Ratio in case of Sogo Shosha entities, which is in line with the international principles. However, needless to mention here that one needs to do a detailed functional analysis so as to substantiate the business and pricing model of these Soga Shosha entities. The remuneration model of Sogo Shosha entity should commensurate with the intensity of the functions performed, risk assumed and the working capital exposure of the taxpayer.


I. General

1. Contents of Form 3CEB – where standard notes need to be altered

The e-utility is an un-editable format and allows users to insert relevant data in restricted tabs only. This poses a challenge where the contents of the Form 3CEB (“the Form”) need to be changed to mention certain facts in addition to / different from the prescribed content.

Specific notes in such situations can be mentioned in the hard copy of the AR owing to the restrictions of the e-utility. Also, the hard copies of the AR can be filed with the tax authorities in addition to the e-filing utility,

wherever the same are accepted by the tax authorities. It needs to be noted that filing of Form 3CEB in hard copy is not mandatory as per regulations.

It would be pertinent to note that from AY 16-17 onwards, a separate box has been provided below point 3 of the main form in the utility which provides a window to include any additional points, however, the option to alter the standard notes in the prescribed format is still not available. Further, even though a separate box has now been provided, since

Our experience

This section focuses on Grant Thornton India LLP (“Grant Thornton”/“GTILLP”) accountant’s report (“AR”) experience. It concentrates on issues faced at the time of preparation, verification and issuance of AR in Form 3CEB for the financial year (“FY”) 2015-16.

there are no regulations in this regard, any additional points may be mentioned in the space provided only out of abundant caution as a practical approach.

II. International transactions

1. Determining the nature of relationship where section 92A(2) of the Act is not applicable

While verifying the AR, we often encountered situations of determining the relationship between two associated enterprises (“AEs”) when provisions of section 92A(2) of the Income Tax Act, 1961 (“the Act”) are not applicable and section 92A(1) of the Act comes into play.

One such instance is where the AR is prepared for the branch office of a foreign entity in India. The nature of relationship between the head office and its branch cannot be determined under section 92A(2) of the Act as they are considered AE under section 92A(1) of the Act.

However, owing to the restrictions of the prescribed format, for reporting purposes the head office can be shown as an AE under clause (a) of section 92A(2) of the Act and specific notes in this regard can be mentioned under the respective clause.

2. Free of cost assets received - where entity level transactional net margin method (“TNMM”) is adopted

Captive units providing services to AE(s) often receive free of cost assets from their AE(s) during the course of their business operations. Where the transaction of provision of such services is benchmarked using TNMM as the most appropriate method and profitability of the captive at entity level is analysed for the said purposes, depreciation amount of any free of cost assets received would not form part of the cost base. Further, the mark-up charged by the captive entity from its AE on the operating costs would also not include mark-up on the depreciation amount of such assets as they have been provided free of cost.In such a scenario, it may be disputed by the tax authorities that assets have been transferred free of cost with the sole intention of not charging the deprecation amount along with the applicable mark-up thereby resulting in lower income received from the AE for the rendition of services. It has also been observed that the tax authorities may assign a notional cost to such assets in order to determine the purported arm’s length remuneration.Hence, adequate precautions should be taken regarding such transactions and the reasons for obtaining such assets

Situations where standard notes need to be altered

• Flipside Form 3CEB

• Revision of Form 3CEB

• International transactions less than one crore

• Reliance on unsigned / qualified financials


without any charges should be documented in order to safeguard the interest of the client at the time of the assessment proceedings.

3. Treatment of prior period items

Where prior period items are identified in the financial statements, it is necessary to verify whether or not such items were benchmarked and reported in the earlier years. Where,• The transaction was benchmarked and reported in the AR

of the previous year, one needs to consider whether any additional treatment is required in the current year.

• The transaction was not reported in the earlier year or only part of the amount was reported, the impact of the prior period item on the earlier year needs to be analysed in detail to understand whether the AR needs to be revised.

4. Form 3CEB of foreign entity

While preparing the Form 3CEB of the foreign entities, the taxpayer usually relies on the books of account as maintained by the Indian AE. At the time of verification, one may observe that the amount of the international transaction undertaken as appearing in the books of account of the Indian AE may be different from that appearing in the computation of income of the foreign entity. This may happen due to the differences in accounting methods e.g. Cash based accounting used by foreign entity vis – a- vis accrual based accounting policy by Indian entity. Also, one needs to match the foreign entity Form 3CEB figures with those appearing in Form 26AS to ensure that transactions are not missed.


From the judiciary

I. Software Development Companies

This section focusses on some of the comparables discussed in the recent cases wherein the tested party was engaged in IT/ ITeS industry, disputed at the ITAT in the last quarter i.e. October– December 2016

S no. Name of comparable Case Law AY Selected by Included/excluded

Reason of rejection/selection by ITAT

1 Accel Transmatic Ltd. Microchip Technology (India) Pvt. Ltd

2005-062007-08

TPO Excluded • Dissimilar function - engaged in ACCEL IT and ACCEL animation services for 2D and 3D animation

• Substantial related party transactions(“RPT”)

Logica Pvt. Ltd. 2006-07 TPO Excluded RPTs more than 15%

2 Ace Software Exports Ltd

Sutherland Healthcare Solutions Ltd

2004-05 Taxpayer Included Clears RPT filter (No RPT)

3 Allsec Technologies Ltd Sutherland Healthcare Solutions Ltd

2004-05 TPO Excluded Loss making company

4 Avani Cincom Technologies Ltd.

Tektronix Engineering Development (India) Pvt. Ltd.

2008-09 TPO Excluded Dissimilar function - engaged in product development.

Microchip Technology (India) Pvt. Ltd

2005-06 TPO Excluded Company earns abnormal profits


2007-08 TPO Excluded • Abnormal profits

• Dissimilar function - engaged in product development

5 Aztec Software Ltd. Logica Pvt. Ltd. 2006-07 Taxpayer Excluded Fails RPT filter of 15%

6 Bodhtree consulting Ltd (Seg)

July Systems & Technologies Pvt. Ltd.

2005-06 TPO Excluded • RPTs of more than 25%

• Dissimilar function -engaged in product development



Reason of rejection/ selection by ITAT


2005-06 TPO Excluded Dissimilar function - engaged in product development

CDC Software India Pvt.


Conexant Systems Private Limited


Syncchronoss Technologies (1) Pvt. Ltd

2005-06 TPO Excluded • Substantial RPTs

• Dissimilar function - engaged in e paper solutions, data cleansing software, website development and other customised software

e4e Tech Support (India) Pvt. Ltd.

2005-06 TPO Excluded • Dissimilar function -engaged in information technology enabled services(“ITeS”)

• RPTs are more than 25%.

7 Celestial Bio Labs Ltd. Tektronix Engineering Development (India) Pvt. Ltd.

2008-09 TPO Excluded Dissimilar function - engaged in product development.


2007-08 TPO Excluded • Dissimilar function – engaged product and biotechnology

• Significant R&D expenditure and intangibles


2005-06 TPO Excluded Dissimilar function - engaged in diverse business and it also owns intellectual property rights (“IPR”)


2007-08 TPO Excluded Dissimilar function -engaged in clinical research and bio products.

8 Comp U-Learn Tech India Ltd



9 E-Zest Solutions Ltd. Microchip Technology (India) Pvt. Ltd

2007-08 TPO Excluded Dissimilar function -engaged in providing KPO services


2005-06 TPO Excluded Dissimilar function -company engaged in providing Knowledge Process Outsourcing (“KPO”) services

Tektronix Engineering 2008-09 TPO Excluded Dissimilar function - engaged in product development

10 E-clerx Services Ltd. Acusis Software India Pvt. Ltd

2007-08 TPO Excluded Dissimilar function -company engaged in providing KPO services

Marlabs Software Pvt. Ltd.

2007-08 TPO Excluded Functionally dissimilar - company renders high end services involving specialised knowledge and domain expertise

11 E-Infochips Bangalore Ltd Labvantage Solution Pvt. Ltd.

2010-11 TPO Excluded Dissimilar function - company engaged in ITeS

Saxo India Pvt. Ltd 2011-12 TPO Excluded Dissimilar function - engaged in product development




12 Exensys Software Solutions Ltd.






2005-06 TPO Excluded Extraordinary profits by way of amalgamation


2005-06 TPO Excluded Functionally dissimilar

e4e Tech Support (India) Pvt. Ltd.,

2005-06 TPO Excluded Extraordinary profits by way of amalgamation

13 Fine Line circuits Flextronics Technologies (India) Pvt Ltd

2006-07 TPO Included Not a persistent loss making company and was considered as a comparable in subsequent year

14 Flextronics Software Systems (seg)


2007-08 TPO Excluded High turnover - more than 10 times the turnover of the taxpayer


2005-06 TPO Excluded • Dissimilar function - engaged in product development.

• substantial R&D expenses


2005-062007-08

TPO Excluded High turnover - more than 10 times the turnover of the taxpayer

Logica Pvt. Ltd. 2006-07 Taxpayer Excluded Substantial R&D expenditure


2005-06 TPO Excluded Company incurred high R&D and marketing expenditure

15 Fortune Infotech Ltd Sutherland Healthcare Solutions Ltd

2004-05 TPO Excluded Owns unique intangibles

16 Four Soft Ltd July Systems & Technologies Pvt. Ltd.






17 Geometric Ltd. (Seg) Microchip Technology (India) Pvt. Ltd

2007-08 TPO Excluded RPTs more than 15%





2005-06 TPO Excluded High turnover - more than 10 times the turnover of the Taxpayer

Logica Pvt. Ltd. 2006-07 TPO Excluded RPTs more than 15%





18 Goldstone Teleservices Ltd


2004-05 TPO Referred back to AO / TPO

Export turnover of this company was less than 25% however due to insufficient information the same was referred to Transfer Pricing Officer (“TPO”) to find the correct turnover.

19 Helios & Matheson Information Technology Ltd


2007-08 TPO Excluded • Dissimilar function – engaged in product development

• High turnover - more than 10 times the turnover of the taxpayer

20 iGate Global Solutions Microchip Technology (India) Pvt. Ltd

2005-062007-08


Logica Pvt. Ltd. 2006-07 Taxpayer Included Company's turnover is within the range of 10 times the turnover of the taxpayer






2005-06 TPO Included Functionally similar and turnover of company is within 10 times the turnover of taxpayer.

21 Infinite Data Systems Pvt Ltd (Merged)

Labvantage Solution Pvt. Ltd.

2010-11 TPO Excluded Dissimilar function - engaged in providing technical consulting, design and development of software, maintenance, system integration, implementation, testing and infrastructure management

22 Infosys BPO Ltd Marlabs Software Pvt. Ltd.

2007-08 TPO Excluded • Dissimilar function - engaged in software product

• owns IPRs plus has brand value

23 Infosys Ltd Microchip Technology (India) Pvt. Ltd


Fiserv India P. Ltd. 2010-11 TPO Excluded • Dissimilar function - company engaged in diverse activities

• owns brand intangibles





2009-10 TPO Excluded • Dissimilar function -engaged in software product development

• owns significant intangibles

Logica Pvt. Ltd. 2006-07 TPO Excluded High turnover - more than 10 times the turnover of the taxpayer


2005-06 TPO Excluded • Dissimilar function- engaged in product development

• high turnover and

• brand name

Novell Software Development India Pvt Ltd


24 Infosys Technologies Ltd Syncchronoss Technologies (1) Pvt. Ltd



2005-06 TPO Excluded Dissimilar function -engaged in product development.

Tektronix EngineeringDevelopment (India) Pvt. Ltd.

2008-09 TPO Excluded • Dissimilar function -engaged in software product development

• owns significant intangibles

Electronic Arts Games India Pvt Ltd

2010-11 TPO Excluded • Dissimilar function - engaged in diversified activities of both the software development services and product development

• high turnover


2005-06 TPO Excluded • Functionally dissimilar,

• high turnover and brand name

25 KALS Info Systems Ltd. Tektronix Engineering Development (India) Pvt. Ltd.


Wabco TVS Ltd 2010-11 TPO Excluded Dissimilar function - engaged in product development












Logica Pvt. Ltd. 2006-07 Taxpayer Excluded Dissimilar function - engaged in product development

26 Larsen & Toubro infotech ltd



Electronic Arts Games India Pvt Ltd

2010-11 TPO Excluded Dissimilar function at entity level and segmental data not available


2005-06 TPO Included Turnover within the range of 10 times the turnover of the taxpayer.





Saxo India Pvt. Ltd 2011-12 Taxpayer Excluded Dissimilar function - engaged in software product sales and software technology services and segmental data not available

27 Ishir Infotech Ltd. Microchip Technology (India) Pvt. Ltd

2005-06 2007-08

TPO Excluded Employee cost is less than 25% of turnover

28 Lucid Software Ltd Microchip Technology (India) Pvt. Ltd


29 Megasoft Ltd Logica Pvt. Ltd. 2006-07 TPO Excluded Fails RPT filter of 15%

30 Mindtree Ltd Syncchronoss Technologies (1) Pvt. Ltd




31 Mold Tek Technologies Ltd

Acusis Software India Pvt. Ltd

2007-08 TPO Excluded Dissimilar function - engaged in providing KPO services


2007-08 TPO Excluded Dissimilar function - highly technical and specialised engineering services

32 Persistent Systems Ltd. Fiserv India P. Ltd. 2010-11 TPO Excluded • Dissimilar function - engaged in sale of software products

• owns significant intangibles.







2010-11 TPO Excluded Dissimilar function - company engaged in diversified activities.


2005-062007-08


Logica Pvt. Ltd. 2006-07 TPO Excluded Dissimilar function - engaged in product development

Tektronix EngineeringDevelopment (India) Pvt. Ltd

2005-06 TPO Included Turnover within the range of 10 times the turnover of the taxpayer.


2009-10 TPO Excluded Dissimilar function - company engaged in product development and product design services

33 Quintegra Solutions Ltd Tektronix Engineering Development (India) Pvt. Ltd.

2008-09 TPO Excluded • Functionally dissimilar - engaged in product development and

• substantial R&D expenses and

• IPRs.

• undertook acquisition.

34 Rangsons Electronics Pvt Ltd

Flextronics Technologies (India) Pvt Ltd

2006-07 TPO Excluded Dissimilar function- company renders prototype manufacturing services.

35 R S Software (India) Ltd. Microchip Technology (India) Pvt. Ltd


36 Sasken Communication Technologies Ltd


2007-08 TPO Excluded High Turnover - more than 10 times the turnover of the Taxpayer

M/s. Microchip Technology (India) Pvt. Ltd


Saxo India Pvt. Ltd 2011-12 Taxpayer Excluded Dissimilar function - engaged in product development


2007-08 TPO Excluded Dissimilar function - highly technical and specialised engineering services

37 Sankhya Infotech Ltd July Systems & Technologies Pvt. Ltd.










2005-06 TPO Excluded Functionally dissimilar- engaged in product and services as well as software training.

38 Satyam Computers Ltd Microchip Technology (India) Pvt. Ltd

2005-06 TPO Excluded High Turnover - more than 10 times the turnover of the Taxpayer


2005-06 TPO Excluded Less reliable financial data


2005-06 Taxpayer Excluded Less reliable financial data

39 Softsol India Ltd. Tektronix Engineering 2009-10 TPO Excluded Dissimilar function - company engaged in product development and product design services

40 Spry Resources India Pvt Ltd

Wabco TVS Ltd 2010-11 TPO Excluded Fails turnover filter of less than 10%

M/s. Labvantage Solution Pvt. Ltd.

2010-11 Taxpayer Excluded Dissimilar function - engaged in software consultancy services.

41 Taksheel Solutions Ltd. Wabco TVS Ltd 2010-11 TPO Excluded Substantial difference in employees cost to turnover of company and taxpayer

42 Tata Elxsi Ltd Tektronix Engineering 2007-08 TPO Excluded High Turnover - more than 10 times the turnover of the Taxpayer

43 Thinksoft Global Services Ltd


2009-10 TPO Excluded Functionally dissimilar

44 Thirdware Solutions Ltd July Systems & Technologies Pvt. Ltd.



2005-06,2007-08

TPO Excluded Dissimilar function - engaged in product development


2009-10 TPO Excluded Dissimilar function - engaged in product development and purchase and sale of licenses.






2005-06 TPO Excluded • Dissimilar function - engaged in sale of software license and related services and has extra ordinary profits.

• It also owns intangibles.




45 Vishal Information Technologies Ltd


2007-08 TPO Excluded Employee cost less than 25% of the turnover


2006-07 TPO Excluded • Employee cost less than 25% of the turnover and

• functionally dissimilar - company has outsourced its activities








2009-10 TPO Excluded Dissimilar function - company engaged in product development and product design services

46 Visual Soft Technologies Ltd. (Seg.)



47 Tata Elxsi Ltd July Systems & Technologies Pvt. Ltd.







2005-06 2007-08



2009-10 TPO Excluded Dissimilar function - company engaged in product development.


2005-06 TPO Excluded • Dissimilar function - engaged in product development.

• Incomparable size


2010-11 TPO Excluded Dissimilar function - engaged in diversified activities.


2005-06 Taxpayer Excluded Dissimilar function - engaged in diversified activities and no segment is available.




48 Wipro Ltd Microchip Technology (India) Pvt. Ltd

2005-06 2007-08

TPO Excluded High turnover - more than 10 times the turnover of the taxpayer and owns intangibles.


2007-08 TPO Excluded • High turnover - more than 10 times the turnover of the taxpayer


2008-09 TPO Excluded • Dissimilar function - engaged in product development

• Owns intangibles


2007-08 TPO Excluded company has significant investment in acquiring new business engaged in R&D activities huge brand value



1 Accentia Technologies Ltd (Seg)


2007-08 TPO Excluded Employee cost is less than 25% of turnover.

2 Bodhtree consulting Ltd (Seg)


2007-08 TPO Excluded Functionally dissimilar - engaged in providing KPO services

3 HCL Comnet Systems & Services Ltd



4 Informed Technologies India Ltd


2007-08 TPO Excluded Employee cost is less than 25% of turnover.

5 Infosys BPO Ltd Acusis Software India Pvt. Ltd


6 Maple E-solutions Ltd Acusis Software India Pvt. Ltd

2007-08 TPO Excluded Fraudulent financial statements

7 Triton Corp Ltd Acusis Software India Pvt. Ltd

2007-08 TPO Excluded Fraudulent financial statements

8 Wipro Ltd Acusis Software India Pvt. Ltd


II. Business process outsourcing companies




1 Apex Knowledge Solutions Ltd.



2 Asit C Mehta Financial Services Ltd


2006-07 TPO Excluded • Functionally dissimilar- engaged in diversified activities and segment information not available

• Amalgamation during the year

3 C.S.Software Enterprise Limited


2004-05 Taxpayer Excluded Fails export turnover filter of 25%

4 Geneysis International Corporation Ltd.


2006-07 Taxpayer Excluded RPT more than 25%

5 Goldstone Teleservices Ltd


2006-07 TPO Excluded Fails export revenue filter of 25%

6 Mercury Outsourcing Management Ltd.


2006-07 Taxpayer Excluded Fails Rs. 1 crore turnover filter

7 Vishal Information Technologies Ltd


2004-05 TPO Excluded Dissimilar function - engaged in outsourcing activities







1 Accentia Technologies Ltd (Seg)

Ameriprise India Pvt. Ltd.

2010-11 TPO Excluded Extra-ordinary event - amalgamation during the year

2 Infosys BPO Ltd Ameriprise India Pvt. Ltd.

2010-11 TPO Excluded Extra-ordinary event - acquisition of another company

3 iGate Global Solutions Ameriprise India Pvt. Ltd.

2010-11 TPO Excluded Extra-ordinary event - amalgamation during the year

III. Medical transcription companies

IV. ITeS


Tracker

A. Notifications/circulars/press release • World Bank publishes handbook to support

implementing effective TP-regime in developing economies

The handbook provides guidance on drafting transfer pricing legislation based on arm’s length principle and outlines the main issues faced by policy makers in protecting their tax base.

• India and Singapore Sign a Third Protocol for amending the Double Taxation Avoidance Agreement (“DTAA”)

The Amendment in the DTAA has inserted provisions, in line with commitment under BEPS action plans and mutual agreement procedure (“MAP”), for relief of double taxation in transfer pricing cases.

B. Advance pricing agreement (“APA”) updates

• CBDT enters into 4 unilateral APA’sCentral Board of Direct Taxes (“CBDT”) has entered into four APA’s some of them having rollback provisions. The four APAs pertain to various sectors of the economy like pharmaceuticals, Information Technology (“IT”) and construction. More than 700 applications (both unilateral and bilateral) have been filed in the last four years.

• CBDT signs off 2016 with two more unilateral APAs taking the toll to 117

CBDT has entered into two more APAs pertaining to IT and Automobile sector, taking the total number 117, as on 29 December 2016. This includes 7 bilateral and 110 unilateral APAs.

• Resolution of more than 100 cases under mutual agreement procedure (“MAP”) and agreement on terms and conditions of first ever Bilateral APA involving India and USA.

The discussions in the India–USA Bilateral competent authority MAP/APA meeting were focussed on resolving MAP cases pending for a long time and to achieve significant developments in bilateral APA process. 66 MAP cases relating to TP issues and 42 MAP cases relating to treaty interpretation issues were agreed to be resolved successfully. The competent authorities of India and USA reached an agreement on terms and condition of first ever bilateral APA

C. Articles published• Associated enterprise” and “international transaction”

– deciphering the evolving law of TPThe article analyses the evolving law of TP in light of recent judgements and also deliberates on the amendments made in Section 92B.

• Grappling with Country-by-Country(“CbC”) reporting under TP Regulations in India

The article is about the implementation and impact of CbC reporting in India.


http://gtw3.grantthornton.in/assets/TP-Niche/notification57_2016.pdf



http://gtw3.grantthornton.in/assets/TP-Niche/Press-Release-India-Singapore-DTAA-Protocol.pdf



http://gtw3.grantthornton.in/assets/TP-Niche/Signing-Four-Unilateral-Advance-Pricing-Agreements-CBDT-23-11-2016.pdf

http://gtw3.grantthornton.in/assets/TP-Niche/CBDT-notification-APA-117.pdf

http://gtw3.grantthornton.in/assets/TP-Niche/CBDT-notification-APA-117.pdf

http://gtw3.grantthornton.in/assets/TP-Niche/Press-Release-India-US-Bilateral-Meeting.pdf




http://gtw3.grantthornton.in/assets/TP-Niche/AE-and-International-transaction--deciphering-the-evolving-law-of-TP-CTCs-Journal.pdf

http://gtw3.grantthornton.in/assets/TP-Niche/AE-and-International-transaction--deciphering-the-evolving-law-of-TP-CTCs-Journal.pdf

http://gtw3.grantthornton.in/assets/TP-Niche/Grappling-with-CBCr.rtf

http://gtw3.grantthornton.in/assets/TP-Niche/Grappling-with-CBCr.rtf

http://gtw3.grantthornton.in/assets/TP-Niche/Fosters-HC.pdf

Global corner

This section highlights the TP environment worldwide to give a wider perspective on what is happening around the world. For this issue we have selected Japan, focusing on the proposal to make TP documentation rules consistent with BEPS Action Plan 13.

A. Country-by-Country reporting in Japan:

1. Japan TP status and regulationsAs a member state of the OECD, Japan’s TP rules are consistent with the OECD’s TP guidelines, and Japan’s rules direct tax examiners to consider consistency with OECD guidelines during audits and assessments.

The Special Taxation Measures Law (“STML”) is the central TP legislation in Japan. Under STML 66-4, when a foreign related transaction is not priced in accordance with the arms-length principle, it will be adjusted to the ALP for corporate tax purposes.

Other key TP regulations include the STML Enforcement Order 39-12 and 39-112 (for companies filing consolidated tax returns), as well as the STML Enforcement Regulations 22-10 and 22-10(2), 22-74 and 22-75, respectively laying out detailed rules on foreign related persons and TP methods, and the TP information regarding to corporations are required to report annually on schedule 17(4) of the corporate tax return.

The STML Circular provides further guidance on control relationships, comparables, and TP methods. The NTA Commissioner’s Directive on the Establishment of Instructions for the Administration of TP Matters (the “Administrative Guidelines”) outlines the various TP administrative procedures.

2. Methods and comparables Japan’s regulations currently specify the following allowed methods for determining an appropriate arm’s-length price:

Traditional methods• The comparable uncontrolled price method;

• The resale price method;

• The cost plus method;

Transactional profit method • The profit split method;

• The TNMM.

• Japan has introduced the “best method” rule, which applies to fiscal years beginning after October 1, 2011.

• Generally, Japanese tax authorities use Bureau van Dijk’s database to value or structure the benchmarking/comparative data.

3. APAs• Both unilateral and bilateral APAs are available. APA

terms vary but generally it is three to five years forward; roll back is available on bilateral APAs.

• Cost sharing agreements

• Japan follows the rules adopted in the administrative guideline.

4. Documentation requirementIn the 2016 tax reform proposal, an amendment to the TP documentation rules was introduced. The proposal is to make the TP documentation rules consistent with BEPS Action Plan 13

CbC reportTA domestic company that is the ultimate parent company of a MNE group is required to file electronically a CbC report in English, within one year of the day following the end of a business year. A MNE group is a corporate group which is required to prepare consolidated financial statements under its applicable accounting standards, and includes enterprises in two or more tax jurisdictions. A MNE group whose gross consolidated revenue is less than JPY 100 bn is exempt from filing a CbC report. The proposed change is scheduled to apply from reporting periods commencing after 31 March 2016.


Master fileA domestic company or a permanent establishment (“PE”) of a foreign corporation which is a member of MNE group is required to prepare and file electronically a master file in Japanese or English, within one year of the day following the end of a business year. Where there are two or more domestic companies or PE in a MNE group, one company representing the group is supposed to file the master file. A MNE group whose gross consolidated revenue is less than JPY 100 bn is exempt from reporting periods commencing after 31 March 2016.

Local file

A company which had transactions with foreign related persons is required to prepare documents necessary to calculate an ALP by its tax return filing date and maintain them for seven years. The documents included in a local file are to be clarified, but will include documents provide for in Article 22-10 of the enforcement regulation of the Special Taxation Measures law and Annex 2 to the proposed OECD TP Guidelines.

The contemporaneous documentation requirement will be exempted where the total amount of transactions with a foreign related person is less than JPY 300 mn. Where documents requested by tax authorities are not duly submitted, the tax authorities are allowed to levy tax by estimating amounts as follows.

Foreign related person transactions subject to the contemporaneous documentation requirement

Where documents for foreign related person transactions subject to the contemporaneous documentation requirement are not submitted by the day specified by the tax auditors may correct the taxable income of the company by estimating an ALP for transactions with foreign related persons.

Where documents related to or supporting the contemporaneous documentation above are not submitted by the day specified by the tax auditors within 60 days from a request, the tax auditors may correct the taxable income of the company by estimating the ALP for transactions with foreign related persons.

Foreign related person transactions not subject to the contemporaneous documentation requirement

Where documents for foreign related person transactions which are not subject to the contemporaneous documentation requirement, but are important to calculate

and ALP are not submitted by the day specified by the tax auditor within 60 days from a request, the tax auditors may correct the taxable income of the company by estimating an ALP for transactions with foreign related persons.

The documents provided for in the enforcement regulations and Annex 2 to the proposed OECD TP Guidelines are as follows:

Documents required under Article 22-10:

• Documents describing details of assets and services in the foreign related person transactions.

• Documents describing the functions performed and risks assumed by the company and the foreign related person transaction

• Documents describing the intangible assets and tangible assets utilised in the foreign elated person transaction.

• Contracts or equivalent documents for the foreign related person transactions.

• Documents describing the method of determining the foreign related person transaction price as well as the negotiation process on how the price was reached.

• Documents describing the profit/loss on the foreign related person transactions for the company and the foreign related persons.

• Documents describing the market analysis of the foreign related person transactions.

• Documents describing the business policy of the company and the foreign related persons.

• Documents describing other transactions that are closely connected to the foreign related person transactions, along with the contents of the transaction.

Documents required under Article 22- 10(1)

• Documents for selecting the TP method and reasons for the selection.

• Details of the selection of comparable transactions employed by the company.

• Documents for calculating the amounts attributed to the company and the foreign related when profit split methods are utilised.

• Reasons for combining multiple transactions into a single transaction and a description of each transaction


Local entity:• A description of the management structure of

the local entity, a local organisation chart, and a description of the individuals to whom local management reports and the country (ies) in which such individuals maintain their principal offices.

• A detailed description of the business and business strategy pursued by the local entity including an indication whether the local entity has been involved in or affected by business restructuring or intangible transfers in the present or immediately past year and an explanation of those aspects of such transactions affecting local entity.

• Key competitors.

Controlled transactions:• For each material category of controlled

transactions in which the entity is involved, provide the following information:

• A description of the material controlled transactions and the context in which such transactions take place

• The amount of intra-group payments and receipts for each category of controlled transactions involving the local entity broken down by tax jurisdiction of the foreign payer or recipient.

• An identification of AEs involved in each category of controlled transactions, and the relationship amongst them.

• Copies of all material inter-company agreements concluded by the local entity.

• A detailed comparability and functional analysis of the taxpayer and relevant AEs with respect to each documented category of controlled transactions, including and changes compared to prior years

• An indication of the most appropriate TP method with regard to the category of transaction and the reasons for selecting that method.

• An indication of which AE is selected as a tested party if applicable, and an explanation of the reason for this selection.

Annex II to Chapter V- Local File • A summary of the important assumptions made in applying the TP methodology.

• If relevant, an explanation of the reasons for performing a multi-year analysis.

• A list and description of selected comparable uncontrolled transactions and information or relevant financial indicators for independent enterprises relied on in the TP analysis, including a description of the comparable search methodology and the source if such information.

• A description of any comparability adjustments performed, and an indication of whether adjustments have been made to the result of the tested party, the comparable uncontrolled transactions, or both.

• A description of the reasons for concluding that relevant transactions were priced on an arm’s length basis based on the application of the selected TP method.

• A summary of financial information used in applying the TP methodology.

• A copy of existing bilateral/ multilateral APAs and other tax ruling to which the local tax jurisdiction is not a party and which are related to controlled transactions described above.

Financial information:• Annual local entity financial accounts for the fiscal

year concerned. If audited statements exist they should be supplied and if not, existing unaudited statements should be supplied.

• Information and allocation schedules showing how the financial data used in applying the TP method may be tied to the annual financial statements.

• Summary schedules of relevant financial data for comparables used in the analysis and the sources from which that data was obtained.

B. Increased IRS focus on subsidiaries of foreign MNCs

The Internal Revenue Service (“IRS”) has increased focus on U.S. subsidiaries of foreign MNCs for any possible non-arm’s length transaction. Large Business and International Division of IRS would focus on certain issues for audit campaigns and re-organise itself into nine practice areas. For inbound distributor there is a need to scrutinise the existing transfer pricing model and maintain robust TP Documentation in anticipation of increased IRS Audit


Citations

Case Laws ITA Citation

3M India Ltd IT(TP)ANo.725/Bang/2011

Acusis Software India Pvt. Ltd (2004-05)

IT(TP)A No.442/Bang/2011


I.T. (T.P) A. No.1287/Bang/2010


IT (TP) A No.1232(Bang) 2011

Acusis Software India Pvt. Ltd(2004-05)


Acusis Software India Pvt. Ltd(2006-07)

I.T. (T.P) A. No.1287/Bang/2010

Acusis Software India Pvt. Ltd(2007-08)Acusis Software India Pvt. Ltd

IT (TP) A No.1232(Bang) 2011

Ameriprise India Pvt. Ltd. (2010-11)

[2016] 66 taxmann.com 246 (Delhi - Trib.)(ITR Citation not available)




ITA No.384/Hyd/2014

Fiserv India P. Ltd. ITA 602/2016 & CM No. 30032/2016


IT(TP)ANo.1398/Bang/2010


IT (TP) A No.1574 (Bang) 2013

M/s e4e Tech Support (India) Pvt. Ltd.,

IT(TP)ANo.1044/Bang/ 2013

M/s Logica Pvt. Ltd. IT(TPA No.1620/Bang/2014

IT(TP) No. 1663/Bang/2014

High Court

M/s Novell Software Development India Pvt Ltd


M/s Syncchronoss Technologies (1) Pvt. Ltd – AY 2005-06

ITA No.4581Bang/2012 Asst. Year 2005-06

M/s Syncchronoss Technologies (1) Pvt. Ltd AY 2007-08

ITA No.104IBang/2013 Asst. Year 2007-08

Case Laws ITA Citation

M/s. Electronic Arts Games India Pvt Ltd

ITA No.380/Hyd/2015

M/s. Labvantage Solution Pvt. Ltd.

I.T.A No. 1051/Kol/2015

I.T.A No. 599/Kol/2015

Intellectual property

M/s. Marlabs Software Pvt. Ltd.


M/s. Microchip Technology (India) Pvt. Ltd – AY 2005-06

I.T. (T.P) A. Nos.1247/Bang/2011 & 34/Bang/2012

M/s. Microchip Technology (India) Pvt. Ltd AY - 2007-08

I.T. (T.P) A. Nos.1247/Bang/2011 & 34/Bang/2012

Mitsubishi Corporation India Private Limited (AY 2006-07)

ITA no. 5147/Del/2010 (AY 2006-07)

Mitsubishi Corporation India Private Limited (AY 2006-07)- HC

ITA 322/2014

Mitsubishi Corporation India Private Limited (AY 2007-08 )

I.T.A. No.: 5042/Del/11

Saxo India Pvt. Ltd ITA 682/2016, C.M. APPL.35744-35746/2016

Sumitomo Corporation India

ITA 381/2013


ITANo.831/Hyd/2009

ITANo.835/Hyd/2009

Indian Income-tax Act, 1961


I.T (T.P) A. No.1318/Bang/2012


I.T (T.P) A. No.1318/Bang/201

Wabco TVS Ltd I.T.A.No.883/Mds./2015


Glossary

Abbreviations Full name

Administrative Guidelines Administration of Transfer Pricing Matters

AE Associated enterprises

ALP Arm’s length price

AO Assessing officer

APA Advance price agreement

AR Accountant’s Report

ATO Australian Taxation Office

AY Assessment year

BEPS Base erosion and profit shifting

CbC Country by country

CBDT Central Board of Direct Taxes

CPM Cost plus method

CUP Comparable uncontrolled price

DRP Dispute resolution panel

DTAA Double Taxation Avoidance Agreement

FAR Functions, assets and risks

FY Financial year

GP Gross profit

Grant Thornton/GTILLP Grant Thornton India LLP

HC High court

IP Intellectual property

IRS Internal Revenue Service

IT Information technology

ITAT Income Tax Appellate Tribunal

Abbreviations Full name

ITeS Information technology enabled services

KPO Knowledge process outsourcing

MAP Mutual agreement procedure

MNE Multinational Enterprise

OE Operating expenses

OECD Organisation for Economic Cooperation and Development

OP Operating profit

PE Permanent establishment

PLI Profit level indicator

RPT Related party transaction

SDT Specified domestic transactions

STML Special Taxation Measures Law

The Act Indian Income-tax Act, 1961

The Form Form 3CEB

The Rules Indian Income-tax Rules, 1962

TNMM Transactional net margin method

TP Transfer pricing

TPO Transfer pricing officer

VAE Value added expenses


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