Director PowerPoint Presentation

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Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013

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Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda

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Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction

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Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background

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Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven

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Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance

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Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India

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Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India

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Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT

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Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision

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Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background

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Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background

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Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions

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Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction

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Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties

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Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants

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Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20%

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Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20%

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Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer Individual Relatives 15% 15%

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Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer Individual Relatives 15% 15% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer 10% Company / Firm / HUF / AOP Director / Partner/ member Relatives Company 10% 10% 10% 10% 10%

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Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer Individual Relatives 15% 15% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer 10% Company / Firm / HUF / AOP Director / Partner/ member Relatives Company 10% 10% 10% 10% 10% 40A(2)(b) – Issues Whether sub-subsidiary and ultimate parent company is relative? Co. A Co. B Co. C Co. X Co. Y

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Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer Individual Relatives 15% 15% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer 10% Company / Firm / HUF / AOP Director / Partner/ member Relatives Company 10% 10% 10% 10% 10% 40A(2)(b) – Issues Whether sub-subsidiary and ultimate parent company is relative? Co. A Co. B Co. C Co. X Co. Y Eligible Units / Undertaking

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Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer Individual Relatives 15% 15% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer 10% Company / Firm / HUF / AOP Director / Partner/ member Relatives Company 10% 10% 10% 10% 10% 40A(2)(b) – Issues Whether sub-subsidiary and ultimate parent company is relative? Co. A Co. B Co. C Co. X Co. Y Eligible Units / Undertaking SDT – Tax Holiday Units

Slide 24 -

Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer Individual Relatives 15% 15% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer 10% Company / Firm / HUF / AOP Director / Partner/ member Relatives Company 10% 10% 10% 10% 10% 40A(2)(b) – Issues Whether sub-subsidiary and ultimate parent company is relative? Co. A Co. B Co. C Co. X Co. Y Eligible Units / Undertaking SDT – Tax Holiday Units SDT – Tax Holiday Units

Slide 25 -

Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer Individual Relatives 15% 15% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer 10% Company / Firm / HUF / AOP Director / Partner/ member Relatives Company 10% 10% 10% 10% 10% 40A(2)(b) – Issues Whether sub-subsidiary and ultimate parent company is relative? Co. A Co. B Co. C Co. X Co. Y Eligible Units / Undertaking SDT – Tax Holiday Units SDT – Tax Holiday Units Domestic Transfer Pricing is applicable only where value of SDT exceeds INR 5 Crore. Important points need to be considered while considering the threshold limit Value of International transactions to be excluded Expense transactions covered in respect of 40A(2)(b) All transactions covered in respect of Chapter VI or 10AA transactions Aggregate amount of all transactions should be considered Once Exceeded 5 crore, all transactions whether significant or not are covered Threshold Limit & Coverage

Slide 26 -

Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer Individual Relatives 15% 15% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer 10% Company / Firm / HUF / AOP Director / Partner/ member Relatives Company 10% 10% 10% 10% 10% 40A(2)(b) – Issues Whether sub-subsidiary and ultimate parent company is relative? Co. A Co. B Co. C Co. X Co. Y Eligible Units / Undertaking SDT – Tax Holiday Units SDT – Tax Holiday Units Domestic Transfer Pricing is applicable only where value of SDT exceeds INR 5 Crore. Important points need to be considered while considering the threshold limit Value of International transactions to be excluded Expense transactions covered in respect of 40A(2)(b) All transactions covered in respect of Chapter VI or 10AA transactions Aggregate amount of all transactions should be considered Once Exceeded 5 crore, all transactions whether significant or not are covered Threshold Limit & Coverage Challenges

Slide 27 -

Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer Individual Relatives 15% 15% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer 10% Company / Firm / HUF / AOP Director / Partner/ member Relatives Company 10% 10% 10% 10% 10% 40A(2)(b) – Issues Whether sub-subsidiary and ultimate parent company is relative? Co. A Co. B Co. C Co. X Co. Y Eligible Units / Undertaking SDT – Tax Holiday Units SDT – Tax Holiday Units Domestic Transfer Pricing is applicable only where value of SDT exceeds INR 5 Crore. Important points need to be considered while considering the threshold limit Value of International transactions to be excluded Expense transactions covered in respect of 40A(2)(b) All transactions covered in respect of Chapter VI or 10AA transactions Aggregate amount of all transactions should be considered Once Exceeded 5 crore, all transactions whether significant or not are covered Threshold Limit & Coverage Challenges Whether parties not engaged in business and profession is covered by the provisions of 40A(2)(b)? Whether following shall be covered – Public Charitable Trust paying remuneration to related persons Trusts created by the companies Co-operative societies Social Clubs having business undertaking Expenses disallowed under other provisions of the act say 40A(3) – whether covered by SDT? Posers

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Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer Individual Relatives 15% 15% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer 10% Company / Firm / HUF / AOP Director / Partner/ member Relatives Company 10% 10% 10% 10% 10% 40A(2)(b) – Issues Whether sub-subsidiary and ultimate parent company is relative? Co. A Co. B Co. C Co. X Co. Y Eligible Units / Undertaking SDT – Tax Holiday Units SDT – Tax Holiday Units Domestic Transfer Pricing is applicable only where value of SDT exceeds INR 5 Crore. Important points need to be considered while considering the threshold limit Value of International transactions to be excluded Expense transactions covered in respect of 40A(2)(b) All transactions covered in respect of Chapter VI or 10AA transactions Aggregate amount of all transactions should be considered Once Exceeded 5 crore, all transactions whether significant or not are covered Threshold Limit & Coverage Challenges Whether parties not engaged in business and profession is covered by the provisions of 40A(2)(b)? Whether following shall be covered – Public Charitable Trust paying remuneration to related persons Trusts created by the companies Co-operative societies Social Clubs having business undertaking Expenses disallowed under other provisions of the act say 40A(3) – whether covered by SDT? Posers In respect of 40A(2)(b) the Law envisages a Corporate Tax Payer to know Whether the individual holding 20% interest is director in other company Identify all directors of the Company of which such individual is a director Relatives of all such directors Further it also envisages to identify the Company or the entity where relative of any director of the Assessee company holds 20% voting rights. Posers

Slide 29 -

Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer Individual Relatives 15% 15% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer 10% Company / Firm / HUF / AOP Director / Partner/ member Relatives Company 10% 10% 10% 10% 10% 40A(2)(b) – Issues Whether sub-subsidiary and ultimate parent company is relative? Co. A Co. B Co. C Co. X Co. Y Eligible Units / Undertaking SDT – Tax Holiday Units SDT – Tax Holiday Units Domestic Transfer Pricing is applicable only where value of SDT exceeds INR 5 Crore. Important points need to be considered while considering the threshold limit Value of International transactions to be excluded Expense transactions covered in respect of 40A(2)(b) All transactions covered in respect of Chapter VI or 10AA transactions Aggregate amount of all transactions should be considered Once Exceeded 5 crore, all transactions whether significant or not are covered Threshold Limit & Coverage Challenges Whether parties not engaged in business and profession is covered by the provisions of 40A(2)(b)? Whether following shall be covered – Public Charitable Trust paying remuneration to related persons Trusts created by the companies Co-operative societies Social Clubs having business undertaking Expenses disallowed under other provisions of the act say 40A(3) – whether covered by SDT? Posers In respect of 40A(2)(b) the Law envisages a Corporate Tax Payer to know Whether the individual holding 20% interest is director in other company Identify all directors of the Company of which such individual is a director Relatives of all such directors Further it also envisages to identify the Company or the entity where relative of any director of the Assessee company holds 20% voting rights. Posers For calculating 20% interest, preference shares or other securities having voting rights to be considered. Preference Shareholders where voting rights are vested under the provisions of Companies Act as consequences of default by Assessee Company. Corresponding Credit for tax neutrality or to avoid double taxation Small value transactions Posers

Slide 30 -

Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer Individual Relatives 15% 15% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer 10% Company / Firm / HUF / AOP Director / Partner/ member Relatives Company 10% 10% 10% 10% 10% 40A(2)(b) – Issues Whether sub-subsidiary and ultimate parent company is relative? Co. A Co. B Co. C Co. X Co. Y Eligible Units / Undertaking SDT – Tax Holiday Units SDT – Tax Holiday Units Domestic Transfer Pricing is applicable only where value of SDT exceeds INR 5 Crore. Important points need to be considered while considering the threshold limit Value of International transactions to be excluded Expense transactions covered in respect of 40A(2)(b) All transactions covered in respect of Chapter VI or 10AA transactions Aggregate amount of all transactions should be considered Once Exceeded 5 crore, all transactions whether significant or not are covered Threshold Limit & Coverage Challenges Whether parties not engaged in business and profession is covered by the provisions of 40A(2)(b)? Whether following shall be covered – Public Charitable Trust paying remuneration to related persons Trusts created by the companies Co-operative societies Social Clubs having business undertaking Expenses disallowed under other provisions of the act say 40A(3) – whether covered by SDT? Posers In respect of 40A(2)(b) the Law envisages a Corporate Tax Payer to know Whether the individual holding 20% interest is director in other company Identify all directors of the Company of which such individual is a director Relatives of all such directors Further it also envisages to identify the Company or the entity where relative of any director of the Assessee company holds 20% voting rights. Posers For calculating 20% interest, preference shares or other securities having voting rights to be considered. Preference Shareholders where voting rights are vested under the provisions of Companies Act as consequences of default by Assessee Company. Corresponding Credit for tax neutrality or to avoid double taxation Small value transactions Posers The tax provisions and it impact on Economy Economy and Tax Provisions Incentivize Encourage Regulate Tax Subsidize

Slide 31 -

Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer Individual Relatives 15% 15% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer 10% Company / Firm / HUF / AOP Director / Partner/ member Relatives Company 10% 10% 10% 10% 10% 40A(2)(b) – Issues Whether sub-subsidiary and ultimate parent company is relative? Co. A Co. B Co. C Co. X Co. Y Eligible Units / Undertaking SDT – Tax Holiday Units SDT – Tax Holiday Units Domestic Transfer Pricing is applicable only where value of SDT exceeds INR 5 Crore. Important points need to be considered while considering the threshold limit Value of International transactions to be excluded Expense transactions covered in respect of 40A(2)(b) All transactions covered in respect of Chapter VI or 10AA transactions Aggregate amount of all transactions should be considered Once Exceeded 5 crore, all transactions whether significant or not are covered Threshold Limit & Coverage Challenges Whether parties not engaged in business and profession is covered by the provisions of 40A(2)(b)? Whether following shall be covered – Public Charitable Trust paying remuneration to related persons Trusts created by the companies Co-operative societies Social Clubs having business undertaking Expenses disallowed under other provisions of the act say 40A(3) – whether covered by SDT? Posers In respect of 40A(2)(b) the Law envisages a Corporate Tax Payer to know Whether the individual holding 20% interest is director in other company Identify all directors of the Company of which such individual is a director Relatives of all such directors Further it also envisages to identify the Company or the entity where relative of any director of the Assessee company holds 20% voting rights. Posers For calculating 20% interest, preference shares or other securities having voting rights to be considered. Preference Shareholders where voting rights are vested under the provisions of Companies Act as consequences of default by Assessee Company. Corresponding Credit for tax neutrality or to avoid double taxation Small value transactions Posers The tax provisions and it impact on Economy Economy and Tax Provisions Incentivize Encourage Regulate Tax Subsidize Case Studies

Slide 32 -

Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer Individual Relatives 15% 15% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer 10% Company / Firm / HUF / AOP Director / Partner/ member Relatives Company 10% 10% 10% 10% 10% 40A(2)(b) – Issues Whether sub-subsidiary and ultimate parent company is relative? Co. A Co. B Co. C Co. X Co. Y Eligible Units / Undertaking SDT – Tax Holiday Units SDT – Tax Holiday Units Domestic Transfer Pricing is applicable only where value of SDT exceeds INR 5 Crore. Important points need to be considered while considering the threshold limit Value of International transactions to be excluded Expense transactions covered in respect of 40A(2)(b) All transactions covered in respect of Chapter VI or 10AA transactions Aggregate amount of all transactions should be considered Once Exceeded 5 crore, all transactions whether significant or not are covered Threshold Limit & Coverage Challenges Whether parties not engaged in business and profession is covered by the provisions of 40A(2)(b)? Whether following shall be covered – Public Charitable Trust paying remuneration to related persons Trusts created by the companies Co-operative societies Social Clubs having business undertaking Expenses disallowed under other provisions of the act say 40A(3) – whether covered by SDT? Posers In respect of 40A(2)(b) the Law envisages a Corporate Tax Payer to know Whether the individual holding 20% interest is director in other company Identify all directors of the Company of which such individual is a director Relatives of all such directors Further it also envisages to identify the Company or the entity where relative of any director of the Assessee company holds 20% voting rights. Posers For calculating 20% interest, preference shares or other securities having voting rights to be considered. Preference Shareholders where voting rights are vested under the provisions of Companies Act as consequences of default by Assessee Company. Corresponding Credit for tax neutrality or to avoid double taxation Small value transactions Posers The tax provisions and it impact on Economy Economy and Tax Provisions Incentivize Encourage Regulate Tax Subsidize Case Studies XYZ Inc, USA is engaged in manufacturing of wide range of Automotive engineering products YZ Ltd. Germany is engaged in R&D and manufacturing of Bearings X Ltd. is manufacturing TYPE A bearings Y Ltd. is manufacturing TYPE B bearings Z Ltd. is manufacturing Clutches – 10AA unit A Ltd. is provided technical services Case - 1

Slide 33 -

Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer Individual Relatives 15% 15% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer 10% Company / Firm / HUF / AOP Director / Partner/ member Relatives Company 10% 10% 10% 10% 10% 40A(2)(b) – Issues Whether sub-subsidiary and ultimate parent company is relative? Co. A Co. B Co. C Co. X Co. Y Eligible Units / Undertaking SDT – Tax Holiday Units SDT – Tax Holiday Units Domestic Transfer Pricing is applicable only where value of SDT exceeds INR 5 Crore. Important points need to be considered while considering the threshold limit Value of International transactions to be excluded Expense transactions covered in respect of 40A(2)(b) All transactions covered in respect of Chapter VI or 10AA transactions Aggregate amount of all transactions should be considered Once Exceeded 5 crore, all transactions whether significant or not are covered Threshold Limit & Coverage Challenges Whether parties not engaged in business and profession is covered by the provisions of 40A(2)(b)? Whether following shall be covered – Public Charitable Trust paying remuneration to related persons Trusts created by the companies Co-operative societies Social Clubs having business undertaking Expenses disallowed under other provisions of the act say 40A(3) – whether covered by SDT? Posers In respect of 40A(2)(b) the Law envisages a Corporate Tax Payer to know Whether the individual holding 20% interest is director in other company Identify all directors of the Company of which such individual is a director Relatives of all such directors Further it also envisages to identify the Company or the entity where relative of any director of the Assessee company holds 20% voting rights. Posers For calculating 20% interest, preference shares or other securities having voting rights to be considered. Preference Shareholders where voting rights are vested under the provisions of Companies Act as consequences of default by Assessee Company. Corresponding Credit for tax neutrality or to avoid double taxation Small value transactions Posers The tax provisions and it impact on Economy Economy and Tax Provisions Incentivize Encourage Regulate Tax Subsidize Case Studies XYZ Inc, USA is engaged in manufacturing of wide range of Automotive engineering products YZ Ltd. Germany is engaged in R&D and manufacturing of Bearings X Ltd. is manufacturing TYPE A bearings Y Ltd. is manufacturing TYPE B bearings Z Ltd. is manufacturing Clutches – 10AA unit A Ltd. is provided technical services Case - 1 Case - 1 Germany India XYZ Inc. USA YZ Ltd. Subsidiary X Ltd Z Ltd (10AA) 90% 25% A Ltd Y Ltd 90% 15% 20%

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Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer Individual Relatives 15% 15% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer 10% Company / Firm / HUF / AOP Director / Partner/ member Relatives Company 10% 10% 10% 10% 10% 40A(2)(b) – Issues Whether sub-subsidiary and ultimate parent company is relative? Co. A Co. B Co. C Co. X Co. Y Eligible Units / Undertaking SDT – Tax Holiday Units SDT – Tax Holiday Units Domestic Transfer Pricing is applicable only where value of SDT exceeds INR 5 Crore. Important points need to be considered while considering the threshold limit Value of International transactions to be excluded Expense transactions covered in respect of 40A(2)(b) All transactions covered in respect of Chapter VI or 10AA transactions Aggregate amount of all transactions should be considered Once Exceeded 5 crore, all transactions whether significant or not are covered Threshold Limit & Coverage Challenges Whether parties not engaged in business and profession is covered by the provisions of 40A(2)(b)? Whether following shall be covered – Public Charitable Trust paying remuneration to related persons Trusts created by the companies Co-operative societies Social Clubs having business undertaking Expenses disallowed under other provisions of the act say 40A(3) – whether covered by SDT? Posers In respect of 40A(2)(b) the Law envisages a Corporate Tax Payer to know Whether the individual holding 20% interest is director in other company Identify all directors of the Company of which such individual is a director Relatives of all such directors Further it also envisages to identify the Company or the entity where relative of any director of the Assessee company holds 20% voting rights. Posers For calculating 20% interest, preference shares or other securities having voting rights to be considered. Preference Shareholders where voting rights are vested under the provisions of Companies Act as consequences of default by Assessee Company. Corresponding Credit for tax neutrality or to avoid double taxation Small value transactions Posers The tax provisions and it impact on Economy Economy and Tax Provisions Incentivize Encourage Regulate Tax Subsidize Case Studies XYZ Inc, USA is engaged in manufacturing of wide range of Automotive engineering products YZ Ltd. Germany is engaged in R&D and manufacturing of Bearings X Ltd. is manufacturing TYPE A bearings Y Ltd. is manufacturing TYPE B bearings Z Ltd. is manufacturing Clutches – 10AA unit A Ltd. is provided technical services Case - 1 Case - 1 Germany India XYZ Inc. USA YZ Ltd. Subsidiary X Ltd Z Ltd (10AA) 90% 25% A Ltd Y Ltd 90% 15% 20% A Ltd. is an Indian company B Inc., USA is 100% subsidiary of A Ltd. C Ltd is an Indian Company, 100% sub. of A Ltd. D Ltd and E Ltd (10AA eligible) are Indian Companies, 100% sub of A Ltd. A Ltd granted interest free loans to B C and D A Ltd granted loan to E Ltd at 18% p.a. interest Case - 2

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Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer Individual Relatives 15% 15% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer 10% Company / Firm / HUF / AOP Director / Partner/ member Relatives Company 10% 10% 10% 10% 10% 40A(2)(b) – Issues Whether sub-subsidiary and ultimate parent company is relative? Co. A Co. B Co. C Co. X Co. Y Eligible Units / Undertaking SDT – Tax Holiday Units SDT – Tax Holiday Units Domestic Transfer Pricing is applicable only where value of SDT exceeds INR 5 Crore. Important points need to be considered while considering the threshold limit Value of International transactions to be excluded Expense transactions covered in respect of 40A(2)(b) All transactions covered in respect of Chapter VI or 10AA transactions Aggregate amount of all transactions should be considered Once Exceeded 5 crore, all transactions whether significant or not are covered Threshold Limit & Coverage Challenges Whether parties not engaged in business and profession is covered by the provisions of 40A(2)(b)? Whether following shall be covered – Public Charitable Trust paying remuneration to related persons Trusts created by the companies Co-operative societies Social Clubs having business undertaking Expenses disallowed under other provisions of the act say 40A(3) – whether covered by SDT? Posers In respect of 40A(2)(b) the Law envisages a Corporate Tax Payer to know Whether the individual holding 20% interest is director in other company Identify all directors of the Company of which such individual is a director Relatives of all such directors Further it also envisages to identify the Company or the entity where relative of any director of the Assessee company holds 20% voting rights. Posers For calculating 20% interest, preference shares or other securities having voting rights to be considered. Preference Shareholders where voting rights are vested under the provisions of Companies Act as consequences of default by Assessee Company. Corresponding Credit for tax neutrality or to avoid double taxation Small value transactions Posers The tax provisions and it impact on Economy Economy and Tax Provisions Incentivize Encourage Regulate Tax Subsidize Case Studies XYZ Inc, USA is engaged in manufacturing of wide range of Automotive engineering products YZ Ltd. Germany is engaged in R&D and manufacturing of Bearings X Ltd. is manufacturing TYPE A bearings Y Ltd. is manufacturing TYPE B bearings Z Ltd. is manufacturing Clutches – 10AA unit A Ltd. is provided technical services Case - 1 Case - 1 Germany India XYZ Inc. USA YZ Ltd. Subsidiary X Ltd Z Ltd (10AA) 90% 25% A Ltd Y Ltd 90% 15% 20% A Ltd. is an Indian company B Inc., USA is 100% subsidiary of A Ltd. C Ltd is an Indian Company, 100% sub. of A Ltd. D Ltd and E Ltd (10AA eligible) are Indian Companies, 100% sub of A Ltd. A Ltd granted interest free loans to B C and D A Ltd granted loan to E Ltd at 18% p.a. interest Case - 2 Case - 2 India A Ltd. USA B Inc. Interest Free Loan C Ltd D Ltd (10AA) E Ltd (10AA) Interest Free Loan Interest Free Loan Loan at 18% ALP 11% Corporate Guarantee (fees at 0.25% is charged) Corporate Guarantee (No fees is charged)

Slide 36 -

Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer Individual Relatives 15% 15% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer 10% Company / Firm / HUF / AOP Director / Partner/ member Relatives Company 10% 10% 10% 10% 10% 40A(2)(b) – Issues Whether sub-subsidiary and ultimate parent company is relative? Co. A Co. B Co. C Co. X Co. Y Eligible Units / Undertaking SDT – Tax Holiday Units SDT – Tax Holiday Units Domestic Transfer Pricing is applicable only where value of SDT exceeds INR 5 Crore. Important points need to be considered while considering the threshold limit Value of International transactions to be excluded Expense transactions covered in respect of 40A(2)(b) All transactions covered in respect of Chapter VI or 10AA transactions Aggregate amount of all transactions should be considered Once Exceeded 5 crore, all transactions whether significant or not are covered Threshold Limit & Coverage Challenges Whether parties not engaged in business and profession is covered by the provisions of 40A(2)(b)? Whether following shall be covered – Public Charitable Trust paying remuneration to related persons Trusts created by the companies Co-operative societies Social Clubs having business undertaking Expenses disallowed under other provisions of the act say 40A(3) – whether covered by SDT? Posers In respect of 40A(2)(b) the Law envisages a Corporate Tax Payer to know Whether the individual holding 20% interest is director in other company Identify all directors of the Company of which such individual is a director Relatives of all such directors Further it also envisages to identify the Company or the entity where relative of any director of the Assessee company holds 20% voting rights. Posers For calculating 20% interest, preference shares or other securities having voting rights to be considered. Preference Shareholders where voting rights are vested under the provisions of Companies Act as consequences of default by Assessee Company. Corresponding Credit for tax neutrality or to avoid double taxation Small value transactions Posers The tax provisions and it impact on Economy Economy and Tax Provisions Incentivize Encourage Regulate Tax Subsidize Case Studies XYZ Inc, USA is engaged in manufacturing of wide range of Automotive engineering products YZ Ltd. Germany is engaged in R&D and manufacturing of Bearings X Ltd. is manufacturing TYPE A bearings Y Ltd. is manufacturing TYPE B bearings Z Ltd. is manufacturing Clutches – 10AA unit A Ltd. is provided technical services Case - 1 Case - 1 Germany India XYZ Inc. USA YZ Ltd. Subsidiary X Ltd Z Ltd (10AA) 90% 25% A Ltd Y Ltd 90% 15% 20% A Ltd. is an Indian company B Inc., USA is 100% subsidiary of A Ltd. C Ltd is an Indian Company, 100% sub. of A Ltd. D Ltd and E Ltd (10AA eligible) are Indian Companies, 100% sub of A Ltd. A Ltd granted interest free loans to B C and D A Ltd granted loan to E Ltd at 18% p.a. interest Case - 2 Case - 2 India A Ltd. USA B Inc. Interest Free Loan C Ltd D Ltd (10AA) E Ltd (10AA) Interest Free Loan Interest Free Loan Loan at 18% ALP 11% Corporate Guarantee (fees at 0.25% is charged) Corporate Guarantee (No fees is charged) A Ltd, B Ltd, C Ltd, and D Ltd are Indian companies C Ltd holds 80% shares of B Ltd. B Ltd holds 100% shares of A Ltd X, Y, Z are the directors of A Ltd. Holds 10% share of D Ltd. Mrs. Y holds 15% and Mr. F son of Z holds 15% of D Ltd. FY is P’ship firm of Mrs. Y and Mr. F Case - 3

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Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer Individual Relatives 15% 15% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer 10% Company / Firm / HUF / AOP Director / Partner/ member Relatives Company 10% 10% 10% 10% 10% 40A(2)(b) – Issues Whether sub-subsidiary and ultimate parent company is relative? Co. A Co. B Co. C Co. X Co. Y Eligible Units / Undertaking SDT – Tax Holiday Units SDT – Tax Holiday Units Domestic Transfer Pricing is applicable only where value of SDT exceeds INR 5 Crore. Important points need to be considered while considering the threshold limit Value of International transactions to be excluded Expense transactions covered in respect of 40A(2)(b) All transactions covered in respect of Chapter VI or 10AA transactions Aggregate amount of all transactions should be considered Once Exceeded 5 crore, all transactions whether significant or not are covered Threshold Limit & Coverage Challenges Whether parties not engaged in business and profession is covered by the provisions of 40A(2)(b)? Whether following shall be covered – Public Charitable Trust paying remuneration to related persons Trusts created by the companies Co-operative societies Social Clubs having business undertaking Expenses disallowed under other provisions of the act say 40A(3) – whether covered by SDT? Posers In respect of 40A(2)(b) the Law envisages a Corporate Tax Payer to know Whether the individual holding 20% interest is director in other company Identify all directors of the Company of which such individual is a director Relatives of all such directors Further it also envisages to identify the Company or the entity where relative of any director of the Assessee company holds 20% voting rights. Posers For calculating 20% interest, preference shares or other securities having voting rights to be considered. Preference Shareholders where voting rights are vested under the provisions of Companies Act as consequences of default by Assessee Company. Corresponding Credit for tax neutrality or to avoid double taxation Small value transactions Posers The tax provisions and it impact on Economy Economy and Tax Provisions Incentivize Encourage Regulate Tax Subsidize Case Studies XYZ Inc, USA is engaged in manufacturing of wide range of Automotive engineering products YZ Ltd. Germany is engaged in R&D and manufacturing of Bearings X Ltd. is manufacturing TYPE A bearings Y Ltd. is manufacturing TYPE B bearings Z Ltd. is manufacturing Clutches – 10AA unit A Ltd. is provided technical services Case - 1 Case - 1 Germany India XYZ Inc. USA YZ Ltd. Subsidiary X Ltd Z Ltd (10AA) 90% 25% A Ltd Y Ltd 90% 15% 20% A Ltd. is an Indian company B Inc., USA is 100% subsidiary of A Ltd. C Ltd is an Indian Company, 100% sub. of A Ltd. D Ltd and E Ltd (10AA eligible) are Indian Companies, 100% sub of A Ltd. A Ltd granted interest free loans to B C and D A Ltd granted loan to E Ltd at 18% p.a. interest Case - 2 Case - 2 India A Ltd. USA B Inc. Interest Free Loan C Ltd D Ltd (10AA) E Ltd (10AA) Interest Free Loan Interest Free Loan Loan at 18% ALP 11% Corporate Guarantee (fees at 0.25% is charged) Corporate Guarantee (No fees is charged) A Ltd, B Ltd, C Ltd, and D Ltd are Indian companies C Ltd holds 80% shares of B Ltd. B Ltd holds 100% shares of A Ltd X, Y, Z are the directors of A Ltd. Holds 10% share of D Ltd. Mrs. Y holds 15% and Mr. F son of Z holds 15% of D Ltd. FY is P’ship firm of Mrs. Y and Mr. F Case - 3 Case - 3 C Ltd. B Ltd 80% 100% A Ltd (Assessee) Mr. X Mr. Y Mr. Z Mrs. Y Mr. F D Ltd 10% 10% 10% 15% Directors of A Ltd. Son of Mr. Z 15% YF (Partnership Firm) 50% 50% Purchase of Raw Material Purchase of Finished Goods Consultancy Fees

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Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer Individual Relatives 15% 15% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer 10% Company / Firm / HUF / AOP Director / Partner/ member Relatives Company 10% 10% 10% 10% 10% 40A(2)(b) – Issues Whether sub-subsidiary and ultimate parent company is relative? Co. A Co. B Co. C Co. X Co. Y Eligible Units / Undertaking SDT – Tax Holiday Units SDT – Tax Holiday Units Domestic Transfer Pricing is applicable only where value of SDT exceeds INR 5 Crore. Important points need to be considered while considering the threshold limit Value of International transactions to be excluded Expense transactions covered in respect of 40A(2)(b) All transactions covered in respect of Chapter VI or 10AA transactions Aggregate amount of all transactions should be considered Once Exceeded 5 crore, all transactions whether significant or not are covered Threshold Limit & Coverage Challenges Whether parties not engaged in business and profession is covered by the provisions of 40A(2)(b)? Whether following shall be covered – Public Charitable Trust paying remuneration to related persons Trusts created by the companies Co-operative societies Social Clubs having business undertaking Expenses disallowed under other provisions of the act say 40A(3) – whether covered by SDT? Posers In respect of 40A(2)(b) the Law envisages a Corporate Tax Payer to know Whether the individual holding 20% interest is director in other company Identify all directors of the Company of which such individual is a director Relatives of all such directors Further it also envisages to identify the Company or the entity where relative of any director of the Assessee company holds 20% voting rights. Posers For calculating 20% interest, preference shares or other securities having voting rights to be considered. Preference Shareholders where voting rights are vested under the provisions of Companies Act as consequences of default by Assessee Company. Corresponding Credit for tax neutrality or to avoid double taxation Small value transactions Posers The tax provisions and it impact on Economy Economy and Tax Provisions Incentivize Encourage Regulate Tax Subsidize Case Studies XYZ Inc, USA is engaged in manufacturing of wide range of Automotive engineering products YZ Ltd. Germany is engaged in R&D and manufacturing of Bearings X Ltd. is manufacturing TYPE A bearings Y Ltd. is manufacturing TYPE B bearings Z Ltd. is manufacturing Clutches – 10AA unit A Ltd. is provided technical services Case - 1 Case - 1 Germany India XYZ Inc. USA YZ Ltd. Subsidiary X Ltd Z Ltd (10AA) 90% 25% A Ltd Y Ltd 90% 15% 20% A Ltd. is an Indian company B Inc., USA is 100% subsidiary of A Ltd. C Ltd is an Indian Company, 100% sub. of A Ltd. D Ltd and E Ltd (10AA eligible) are Indian Companies, 100% sub of A Ltd. A Ltd granted interest free loans to B C and D A Ltd granted loan to E Ltd at 18% p.a. interest Case - 2 Case - 2 India A Ltd. USA B Inc. Interest Free Loan C Ltd D Ltd (10AA) E Ltd (10AA) Interest Free Loan Interest Free Loan Loan at 18% ALP 11% Corporate Guarantee (fees at 0.25% is charged) Corporate Guarantee (No fees is charged) A Ltd, B Ltd, C Ltd, and D Ltd are Indian companies C Ltd holds 80% shares of B Ltd. B Ltd holds 100% shares of A Ltd X, Y, Z are the directors of A Ltd. Holds 10% share of D Ltd. Mrs. Y holds 15% and Mr. F son of Z holds 15% of D Ltd. FY is P’ship firm of Mrs. Y and Mr. F Case - 3 Case - 3 C Ltd. B Ltd 80% 100% A Ltd (Assessee) Mr. X Mr. Y Mr. Z Mrs. Y Mr. F D Ltd 10% 10% 10% 15% Directors of A Ltd. Son of Mr. Z 15% YF (Partnership Firm) 50% 50% Purchase of Raw Material Purchase of Finished Goods Consultancy Fees Transfer Pricing Methods

Slide 39 -

Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer Individual Relatives 15% 15% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer 10% Company / Firm / HUF / AOP Director / Partner/ member Relatives Company 10% 10% 10% 10% 10% 40A(2)(b) – Issues Whether sub-subsidiary and ultimate parent company is relative? Co. A Co. B Co. C Co. X Co. Y Eligible Units / Undertaking SDT – Tax Holiday Units SDT – Tax Holiday Units Domestic Transfer Pricing is applicable only where value of SDT exceeds INR 5 Crore. Important points need to be considered while considering the threshold limit Value of International transactions to be excluded Expense transactions covered in respect of 40A(2)(b) All transactions covered in respect of Chapter VI or 10AA transactions Aggregate amount of all transactions should be considered Once Exceeded 5 crore, all transactions whether significant or not are covered Threshold Limit & Coverage Challenges Whether parties not engaged in business and profession is covered by the provisions of 40A(2)(b)? Whether following shall be covered – Public Charitable Trust paying remuneration to related persons Trusts created by the companies Co-operative societies Social Clubs having business undertaking Expenses disallowed under other provisions of the act say 40A(3) – whether covered by SDT? Posers In respect of 40A(2)(b) the Law envisages a Corporate Tax Payer to know Whether the individual holding 20% interest is director in other company Identify all directors of the Company of which such individual is a director Relatives of all such directors Further it also envisages to identify the Company or the entity where relative of any director of the Assessee company holds 20% voting rights. Posers For calculating 20% interest, preference shares or other securities having voting rights to be considered. Preference Shareholders where voting rights are vested under the provisions of Companies Act as consequences of default by Assessee Company. Corresponding Credit for tax neutrality or to avoid double taxation Small value transactions Posers The tax provisions and it impact on Economy Economy and Tax Provisions Incentivize Encourage Regulate Tax Subsidize Case Studies XYZ Inc, USA is engaged in manufacturing of wide range of Automotive engineering products YZ Ltd. Germany is engaged in R&D and manufacturing of Bearings X Ltd. is manufacturing TYPE A bearings Y Ltd. is manufacturing TYPE B bearings Z Ltd. is manufacturing Clutches – 10AA unit A Ltd. is provided technical services Case - 1 Case - 1 Germany India XYZ Inc. USA YZ Ltd. Subsidiary X Ltd Z Ltd (10AA) 90% 25% A Ltd Y Ltd 90% 15% 20% A Ltd. is an Indian company B Inc., USA is 100% subsidiary of A Ltd. C Ltd is an Indian Company, 100% sub. of A Ltd. D Ltd and E Ltd (10AA eligible) are Indian Companies, 100% sub of A Ltd. A Ltd granted interest free loans to B C and D A Ltd granted loan to E Ltd at 18% p.a. interest Case - 2 Case - 2 India A Ltd. USA B Inc. Interest Free Loan C Ltd D Ltd (10AA) E Ltd (10AA) Interest Free Loan Interest Free Loan Loan at 18% ALP 11% Corporate Guarantee (fees at 0.25% is charged) Corporate Guarantee (No fees is charged) A Ltd, B Ltd, C Ltd, and D Ltd are Indian companies C Ltd holds 80% shares of B Ltd. B Ltd holds 100% shares of A Ltd X, Y, Z are the directors of A Ltd. Holds 10% share of D Ltd. Mrs. Y holds 15% and Mr. F son of Z holds 15% of D Ltd. FY is P’ship firm of Mrs. Y and Mr. F Case - 3 Case - 3 C Ltd. B Ltd 80% 100% A Ltd (Assessee) Mr. X Mr. Y Mr. Z Mrs. Y Mr. F D Ltd 10% 10% 10% 15% Directors of A Ltd. Son of Mr. Z 15% YF (Partnership Firm) 50% 50% Purchase of Raw Material Purchase of Finished Goods Consultancy Fees Transfer Pricing Methods Transfer Pricing Methods

Slide 40 -

Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer Individual Relatives 15% 15% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer 10% Company / Firm / HUF / AOP Director / Partner/ member Relatives Company 10% 10% 10% 10% 10% 40A(2)(b) – Issues Whether sub-subsidiary and ultimate parent company is relative? Co. A Co. B Co. C Co. X Co. Y Eligible Units / Undertaking SDT – Tax Holiday Units SDT – Tax Holiday Units Domestic Transfer Pricing is applicable only where value of SDT exceeds INR 5 Crore. Important points need to be considered while considering the threshold limit Value of International transactions to be excluded Expense transactions covered in respect of 40A(2)(b) All transactions covered in respect of Chapter VI or 10AA transactions Aggregate amount of all transactions should be considered Once Exceeded 5 crore, all transactions whether significant or not are covered Threshold Limit & Coverage Challenges Whether parties not engaged in business and profession is covered by the provisions of 40A(2)(b)? Whether following shall be covered – Public Charitable Trust paying remuneration to related persons Trusts created by the companies Co-operative societies Social Clubs having business undertaking Expenses disallowed under other provisions of the act say 40A(3) – whether covered by SDT? Posers In respect of 40A(2)(b) the Law envisages a Corporate Tax Payer to know Whether the individual holding 20% interest is director in other company Identify all directors of the Company of which such individual is a director Relatives of all such directors Further it also envisages to identify the Company or the entity where relative of any director of the Assessee company holds 20% voting rights. Posers For calculating 20% interest, preference shares or other securities having voting rights to be considered. Preference Shareholders where voting rights are vested under the provisions of Companies Act as consequences of default by Assessee Company. Corresponding Credit for tax neutrality or to avoid double taxation Small value transactions Posers The tax provisions and it impact on Economy Economy and Tax Provisions Incentivize Encourage Regulate Tax Subsidize Case Studies XYZ Inc, USA is engaged in manufacturing of wide range of Automotive engineering products YZ Ltd. Germany is engaged in R&D and manufacturing of Bearings X Ltd. is manufacturing TYPE A bearings Y Ltd. is manufacturing TYPE B bearings Z Ltd. is manufacturing Clutches – 10AA unit A Ltd. is provided technical services Case - 1 Case - 1 Germany India XYZ Inc. USA YZ Ltd. Subsidiary X Ltd Z Ltd (10AA) 90% 25% A Ltd Y Ltd 90% 15% 20% A Ltd. is an Indian company B Inc., USA is 100% subsidiary of A Ltd. C Ltd is an Indian Company, 100% sub. of A Ltd. D Ltd and E Ltd (10AA eligible) are Indian Companies, 100% sub of A Ltd. A Ltd granted interest free loans to B C and D A Ltd granted loan to E Ltd at 18% p.a. interest Case - 2 Case - 2 India A Ltd. USA B Inc. Interest Free Loan C Ltd D Ltd (10AA) E Ltd (10AA) Interest Free Loan Interest Free Loan Loan at 18% ALP 11% Corporate Guarantee (fees at 0.25% is charged) Corporate Guarantee (No fees is charged) A Ltd, B Ltd, C Ltd, and D Ltd are Indian companies C Ltd holds 80% shares of B Ltd. B Ltd holds 100% shares of A Ltd X, Y, Z are the directors of A Ltd. Holds 10% share of D Ltd. Mrs. Y holds 15% and Mr. F son of Z holds 15% of D Ltd. FY is P’ship firm of Mrs. Y and Mr. F Case - 3 Case - 3 C Ltd. B Ltd 80% 100% A Ltd (Assessee) Mr. X Mr. Y Mr. Z Mrs. Y Mr. F D Ltd 10% 10% 10% 15% Directors of A Ltd. Son of Mr. Z 15% YF (Partnership Firm) 50% 50% Purchase of Raw Material Purchase of Finished Goods Consultancy Fees Transfer Pricing Methods Transfer Pricing Methods Transfer Pricing Methods

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Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer Individual Relatives 15% 15% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer 10% Company / Firm / HUF / AOP Director / Partner/ member Relatives Company 10% 10% 10% 10% 10% 40A(2)(b) – Issues Whether sub-subsidiary and ultimate parent company is relative? Co. A Co. B Co. C Co. X Co. Y Eligible Units / Undertaking SDT – Tax Holiday Units SDT – Tax Holiday Units Domestic Transfer Pricing is applicable only where value of SDT exceeds INR 5 Crore. Important points need to be considered while considering the threshold limit Value of International transactions to be excluded Expense transactions covered in respect of 40A(2)(b) All transactions covered in respect of Chapter VI or 10AA transactions Aggregate amount of all transactions should be considered Once Exceeded 5 crore, all transactions whether significant or not are covered Threshold Limit & Coverage Challenges Whether parties not engaged in business and profession is covered by the provisions of 40A(2)(b)? Whether following shall be covered – Public Charitable Trust paying remuneration to related persons Trusts created by the companies Co-operative societies Social Clubs having business undertaking Expenses disallowed under other provisions of the act say 40A(3) – whether covered by SDT? Posers In respect of 40A(2)(b) the Law envisages a Corporate Tax Payer to know Whether the individual holding 20% interest is director in other company Identify all directors of the Company of which such individual is a director Relatives of all such directors Further it also envisages to identify the Company or the entity where relative of any director of the Assessee company holds 20% voting rights. Posers For calculating 20% interest, preference shares or other securities having voting rights to be considered. Preference Shareholders where voting rights are vested under the provisions of Companies Act as consequences of default by Assessee Company. Corresponding Credit for tax neutrality or to avoid double taxation Small value transactions Posers The tax provisions and it impact on Economy Economy and Tax Provisions Incentivize Encourage Regulate Tax Subsidize Case Studies XYZ Inc, USA is engaged in manufacturing of wide range of Automotive engineering products YZ Ltd. Germany is engaged in R&D and manufacturing of Bearings X Ltd. is manufacturing TYPE A bearings Y Ltd. is manufacturing TYPE B bearings Z Ltd. is manufacturing Clutches – 10AA unit A Ltd. is provided technical services Case - 1 Case - 1 Germany India XYZ Inc. USA YZ Ltd. Subsidiary X Ltd Z Ltd (10AA) 90% 25% A Ltd Y Ltd 90% 15% 20% A Ltd. is an Indian company B Inc., USA is 100% subsidiary of A Ltd. C Ltd is an Indian Company, 100% sub. of A Ltd. D Ltd and E Ltd (10AA eligible) are Indian Companies, 100% sub of A Ltd. A Ltd granted interest free loans to B C and D A Ltd granted loan to E Ltd at 18% p.a. interest Case - 2 Case - 2 India A Ltd. USA B Inc. Interest Free Loan C Ltd D Ltd (10AA) E Ltd (10AA) Interest Free Loan Interest Free Loan Loan at 18% ALP 11% Corporate Guarantee (fees at 0.25% is charged) Corporate Guarantee (No fees is charged) A Ltd, B Ltd, C Ltd, and D Ltd are Indian companies C Ltd holds 80% shares of B Ltd. B Ltd holds 100% shares of A Ltd X, Y, Z are the directors of A Ltd. Holds 10% share of D Ltd. Mrs. Y holds 15% and Mr. F son of Z holds 15% of D Ltd. FY is P’ship firm of Mrs. Y and Mr. F Case - 3 Case - 3 C Ltd. B Ltd 80% 100% A Ltd (Assessee) Mr. X Mr. Y Mr. Z Mrs. Y Mr. F D Ltd 10% 10% 10% 15% Directors of A Ltd. Son of Mr. Z 15% YF (Partnership Firm) 50% 50% Purchase of Raw Material Purchase of Finished Goods Consultancy Fees Transfer Pricing Methods Transfer Pricing Methods Transfer Pricing Methods ITA does not provide any specific hierarchy of methods It insists on applying the ‘Most Appropriate Method’ (MAM) MAM means a Method Which is best suited to facts and circumstances of transaction Which is the most reliable measure of an arm’s length price Most Appropriate Method (MAM)

Slide 42 -

Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer Individual Relatives 15% 15% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer 10% Company / Firm / HUF / AOP Director / Partner/ member Relatives Company 10% 10% 10% 10% 10% 40A(2)(b) – Issues Whether sub-subsidiary and ultimate parent company is relative? Co. A Co. B Co. C Co. X Co. Y Eligible Units / Undertaking SDT – Tax Holiday Units SDT – Tax Holiday Units Domestic Transfer Pricing is applicable only where value of SDT exceeds INR 5 Crore. Important points need to be considered while considering the threshold limit Value of International transactions to be excluded Expense transactions covered in respect of 40A(2)(b) All transactions covered in respect of Chapter VI or 10AA transactions Aggregate amount of all transactions should be considered Once Exceeded 5 crore, all transactions whether significant or not are covered Threshold Limit & Coverage Challenges Whether parties not engaged in business and profession is covered by the provisions of 40A(2)(b)? Whether following shall be covered – Public Charitable Trust paying remuneration to related persons Trusts created by the companies Co-operative societies Social Clubs having business undertaking Expenses disallowed under other provisions of the act say 40A(3) – whether covered by SDT? Posers In respect of 40A(2)(b) the Law envisages a Corporate Tax Payer to know Whether the individual holding 20% interest is director in other company Identify all directors of the Company of which such individual is a director Relatives of all such directors Further it also envisages to identify the Company or the entity where relative of any director of the Assessee company holds 20% voting rights. Posers For calculating 20% interest, preference shares or other securities having voting rights to be considered. Preference Shareholders where voting rights are vested under the provisions of Companies Act as consequences of default by Assessee Company. Corresponding Credit for tax neutrality or to avoid double taxation Small value transactions Posers The tax provisions and it impact on Economy Economy and Tax Provisions Incentivize Encourage Regulate Tax Subsidize Case Studies XYZ Inc, USA is engaged in manufacturing of wide range of Automotive engineering products YZ Ltd. Germany is engaged in R&D and manufacturing of Bearings X Ltd. is manufacturing TYPE A bearings Y Ltd. is manufacturing TYPE B bearings Z Ltd. is manufacturing Clutches – 10AA unit A Ltd. is provided technical services Case - 1 Case - 1 Germany India XYZ Inc. USA YZ Ltd. Subsidiary X Ltd Z Ltd (10AA) 90% 25% A Ltd Y Ltd 90% 15% 20% A Ltd. is an Indian company B Inc., USA is 100% subsidiary of A Ltd. C Ltd is an Indian Company, 100% sub. of A Ltd. D Ltd and E Ltd (10AA eligible) are Indian Companies, 100% sub of A Ltd. A Ltd granted interest free loans to B C and D A Ltd granted loan to E Ltd at 18% p.a. interest Case - 2 Case - 2 India A Ltd. USA B Inc. Interest Free Loan C Ltd D Ltd (10AA) E Ltd (10AA) Interest Free Loan Interest Free Loan Loan at 18% ALP 11% Corporate Guarantee (fees at 0.25% is charged) Corporate Guarantee (No fees is charged) A Ltd, B Ltd, C Ltd, and D Ltd are Indian companies C Ltd holds 80% shares of B Ltd. B Ltd holds 100% shares of A Ltd X, Y, Z are the directors of A Ltd. Holds 10% share of D Ltd. Mrs. Y holds 15% and Mr. F son of Z holds 15% of D Ltd. FY is P’ship firm of Mrs. Y and Mr. F Case - 3 Case - 3 C Ltd. B Ltd 80% 100% A Ltd (Assessee) Mr. X Mr. Y Mr. Z Mrs. Y Mr. F D Ltd 10% 10% 10% 15% Directors of A Ltd. Son of Mr. Z 15% YF (Partnership Firm) 50% 50% Purchase of Raw Material Purchase of Finished Goods Consultancy Fees Transfer Pricing Methods Transfer Pricing Methods Transfer Pricing Methods ITA does not provide any specific hierarchy of methods It insists on applying the ‘Most Appropriate Method’ (MAM) MAM means a Method Which is best suited to facts and circumstances of transaction Which is the most reliable measure of an arm’s length price Most Appropriate Method (MAM) MAM is to be determined considering – Nature and class of transaction Functions, assets and risks undertaken assessee and other party Degree of comparability between underlying transaction and uncontrolled transactions Extent to which reliable and accurate adjustments can be made to account for differences, if any Availability, coverage and reliability of data necessary for application of method Nature, extend and reliability of assumptions required to be made in application of method Selection of MAM

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Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer Individual Relatives 15% 15% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer 10% Company / Firm / HUF / AOP Director / Partner/ member Relatives Company 10% 10% 10% 10% 10% 40A(2)(b) – Issues Whether sub-subsidiary and ultimate parent company is relative? Co. A Co. B Co. C Co. X Co. Y Eligible Units / Undertaking SDT – Tax Holiday Units SDT – Tax Holiday Units Domestic Transfer Pricing is applicable only where value of SDT exceeds INR 5 Crore. Important points need to be considered while considering the threshold limit Value of International transactions to be excluded Expense transactions covered in respect of 40A(2)(b) All transactions covered in respect of Chapter VI or 10AA transactions Aggregate amount of all transactions should be considered Once Exceeded 5 crore, all transactions whether significant or not are covered Threshold Limit & Coverage Challenges Whether parties not engaged in business and profession is covered by the provisions of 40A(2)(b)? Whether following shall be covered – Public Charitable Trust paying remuneration to related persons Trusts created by the companies Co-operative societies Social Clubs having business undertaking Expenses disallowed under other provisions of the act say 40A(3) – whether covered by SDT? Posers In respect of 40A(2)(b) the Law envisages a Corporate Tax Payer to know Whether the individual holding 20% interest is director in other company Identify all directors of the Company of which such individual is a director Relatives of all such directors Further it also envisages to identify the Company or the entity where relative of any director of the Assessee company holds 20% voting rights. Posers For calculating 20% interest, preference shares or other securities having voting rights to be considered. Preference Shareholders where voting rights are vested under the provisions of Companies Act as consequences of default by Assessee Company. Corresponding Credit for tax neutrality or to avoid double taxation Small value transactions Posers The tax provisions and it impact on Economy Economy and Tax Provisions Incentivize Encourage Regulate Tax Subsidize Case Studies XYZ Inc, USA is engaged in manufacturing of wide range of Automotive engineering products YZ Ltd. Germany is engaged in R&D and manufacturing of Bearings X Ltd. is manufacturing TYPE A bearings Y Ltd. is manufacturing TYPE B bearings Z Ltd. is manufacturing Clutches – 10AA unit A Ltd. is provided technical services Case - 1 Case - 1 Germany India XYZ Inc. USA YZ Ltd. Subsidiary X Ltd Z Ltd (10AA) 90% 25% A Ltd Y Ltd 90% 15% 20% A Ltd. is an Indian company B Inc., USA is 100% subsidiary of A Ltd. C Ltd is an Indian Company, 100% sub. of A Ltd. D Ltd and E Ltd (10AA eligible) are Indian Companies, 100% sub of A Ltd. A Ltd granted interest free loans to B C and D A Ltd granted loan to E Ltd at 18% p.a. interest Case - 2 Case - 2 India A Ltd. USA B Inc. Interest Free Loan C Ltd D Ltd (10AA) E Ltd (10AA) Interest Free Loan Interest Free Loan Loan at 18% ALP 11% Corporate Guarantee (fees at 0.25% is charged) Corporate Guarantee (No fees is charged) A Ltd, B Ltd, C Ltd, and D Ltd are Indian companies C Ltd holds 80% shares of B Ltd. B Ltd holds 100% shares of A Ltd X, Y, Z are the directors of A Ltd. Holds 10% share of D Ltd. Mrs. Y holds 15% and Mr. F son of Z holds 15% of D Ltd. FY is P’ship firm of Mrs. Y and Mr. F Case - 3 Case - 3 C Ltd. B Ltd 80% 100% A Ltd (Assessee) Mr. X Mr. Y Mr. Z Mrs. Y Mr. F D Ltd 10% 10% 10% 15% Directors of A Ltd. Son of Mr. Z 15% YF (Partnership Firm) 50% 50% Purchase of Raw Material Purchase of Finished Goods Consultancy Fees Transfer Pricing Methods Transfer Pricing Methods Transfer Pricing Methods ITA does not provide any specific hierarchy of methods It insists on applying the ‘Most Appropriate Method’ (MAM) MAM means a Method Which is best suited to facts and circumstances of transaction Which is the most reliable measure of an arm’s length price Most Appropriate Method (MAM) MAM is to be determined considering – Nature and class of transaction Functions, assets and risks undertaken assessee and other party Degree of comparability between underlying transaction and uncontrolled transactions Extent to which reliable and accurate adjustments can be made to account for differences, if any Availability, coverage and reliability of data necessary for application of method Nature, extend and reliability of assumptions required to be made in application of method Selection of MAM Stages of Economic Analysis

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Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer Individual Relatives 15% 15% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer 10% Company / Firm / HUF / AOP Director / Partner/ member Relatives Company 10% 10% 10% 10% 10% 40A(2)(b) – Issues Whether sub-subsidiary and ultimate parent company is relative? Co. A Co. B Co. C Co. X Co. Y Eligible Units / Undertaking SDT – Tax Holiday Units SDT – Tax Holiday Units Domestic Transfer Pricing is applicable only where value of SDT exceeds INR 5 Crore. Important points need to be considered while considering the threshold limit Value of International transactions to be excluded Expense transactions covered in respect of 40A(2)(b) All transactions covered in respect of Chapter VI or 10AA transactions Aggregate amount of all transactions should be considered Once Exceeded 5 crore, all transactions whether significant or not are covered Threshold Limit & Coverage Challenges Whether parties not engaged in business and profession is covered by the provisions of 40A(2)(b)? Whether following shall be covered – Public Charitable Trust paying remuneration to related persons Trusts created by the companies Co-operative societies Social Clubs having business undertaking Expenses disallowed under other provisions of the act say 40A(3) – whether covered by SDT? Posers In respect of 40A(2)(b) the Law envisages a Corporate Tax Payer to know Whether the individual holding 20% interest is director in other company Identify all directors of the Company of which such individual is a director Relatives of all such directors Further it also envisages to identify the Company or the entity where relative of any director of the Assessee company holds 20% voting rights. Posers For calculating 20% interest, preference shares or other securities having voting rights to be considered. Preference Shareholders where voting rights are vested under the provisions of Companies Act as consequences of default by Assessee Company. Corresponding Credit for tax neutrality or to avoid double taxation Small value transactions Posers The tax provisions and it impact on Economy Economy and Tax Provisions Incentivize Encourage Regulate Tax Subsidize Case Studies XYZ Inc, USA is engaged in manufacturing of wide range of Automotive engineering products YZ Ltd. Germany is engaged in R&D and manufacturing of Bearings X Ltd. is manufacturing TYPE A bearings Y Ltd. is manufacturing TYPE B bearings Z Ltd. is manufacturing Clutches – 10AA unit A Ltd. is provided technical services Case - 1 Case - 1 Germany India XYZ Inc. USA YZ Ltd. Subsidiary X Ltd Z Ltd (10AA) 90% 25% A Ltd Y Ltd 90% 15% 20% A Ltd. is an Indian company B Inc., USA is 100% subsidiary of A Ltd. C Ltd is an Indian Company, 100% sub. of A Ltd. D Ltd and E Ltd (10AA eligible) are Indian Companies, 100% sub of A Ltd. A Ltd granted interest free loans to B C and D A Ltd granted loan to E Ltd at 18% p.a. interest Case - 2 Case - 2 India A Ltd. USA B Inc. Interest Free Loan C Ltd D Ltd (10AA) E Ltd (10AA) Interest Free Loan Interest Free Loan Loan at 18% ALP 11% Corporate Guarantee (fees at 0.25% is charged) Corporate Guarantee (No fees is charged) A Ltd, B Ltd, C Ltd, and D Ltd are Indian companies C Ltd holds 80% shares of B Ltd. B Ltd holds 100% shares of A Ltd X, Y, Z are the directors of A Ltd. Holds 10% share of D Ltd. Mrs. Y holds 15% and Mr. F son of Z holds 15% of D Ltd. FY is P’ship firm of Mrs. Y and Mr. F Case - 3 Case - 3 C Ltd. B Ltd 80% 100% A Ltd (Assessee) Mr. X Mr. Y Mr. Z Mrs. Y Mr. F D Ltd 10% 10% 10% 15% Directors of A Ltd. Son of Mr. Z 15% YF (Partnership Firm) 50% 50% Purchase of Raw Material Purchase of Finished Goods Consultancy Fees Transfer Pricing Methods Transfer Pricing Methods Transfer Pricing Methods ITA does not provide any specific hierarchy of methods It insists on applying the ‘Most Appropriate Method’ (MAM) MAM means a Method Which is best suited to facts and circumstances of transaction Which is the most reliable measure of an arm’s length price Most Appropriate Method (MAM) MAM is to be determined considering – Nature and class of transaction Functions, assets and risks undertaken assessee and other party Degree of comparability between underlying transaction and uncontrolled transactions Extent to which reliable and accurate adjustments can be made to account for differences, if any Availability, coverage and reliability of data necessary for application of method Nature, extend and reliability of assumptions required to be made in application of method Selection of MAM Stages of Economic Analysis Selection of Tested Party Comparability Analysis Selection of Tested Party & Comparability Analysis MAM is to be determined considering – Nature and class of transaction Functions, assets and risks undertaken assessee and other party Degree of comparability between underlying transaction and uncontrolled transactions Extent to which reliable and accurate adjustments can be made to account for differences, if any Availability, coverage and reliability of data necessary for application of method Nature, extend and reliability of assumptions required to be made in application of method Selection of MAM

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Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer Individual Relatives 15% 15% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer 10% Company / Firm / HUF / AOP Director / Partner/ member Relatives Company 10% 10% 10% 10% 10% 40A(2)(b) – Issues Whether sub-subsidiary and ultimate parent company is relative? Co. A Co. B Co. C Co. X Co. Y Eligible Units / Undertaking SDT – Tax Holiday Units SDT – Tax Holiday Units Domestic Transfer Pricing is applicable only where value of SDT exceeds INR 5 Crore. Important points need to be considered while considering the threshold limit Value of International transactions to be excluded Expense transactions covered in respect of 40A(2)(b) All transactions covered in respect of Chapter VI or 10AA transactions Aggregate amount of all transactions should be considered Once Exceeded 5 crore, all transactions whether significant or not are covered Threshold Limit & Coverage Challenges Whether parties not engaged in business and profession is covered by the provisions of 40A(2)(b)? Whether following shall be covered – Public Charitable Trust paying remuneration to related persons Trusts created by the companies Co-operative societies Social Clubs having business undertaking Expenses disallowed under other provisions of the act say 40A(3) – whether covered by SDT? Posers In respect of 40A(2)(b) the Law envisages a Corporate Tax Payer to know Whether the individual holding 20% interest is director in other company Identify all directors of the Company of which such individual is a director Relatives of all such directors Further it also envisages to identify the Company or the entity where relative of any director of the Assessee company holds 20% voting rights. Posers For calculating 20% interest, preference shares or other securities having voting rights to be considered. Preference Shareholders where voting rights are vested under the provisions of Companies Act as consequences of default by Assessee Company. Corresponding Credit for tax neutrality or to avoid double taxation Small value transactions Posers The tax provisions and it impact on Economy Economy and Tax Provisions Incentivize Encourage Regulate Tax Subsidize Case Studies XYZ Inc, USA is engaged in manufacturing of wide range of Automotive engineering products YZ Ltd. Germany is engaged in R&D and manufacturing of Bearings X Ltd. is manufacturing TYPE A bearings Y Ltd. is manufacturing TYPE B bearings Z Ltd. is manufacturing Clutches – 10AA unit A Ltd. is provided technical services Case - 1 Case - 1 Germany India XYZ Inc. USA YZ Ltd. Subsidiary X Ltd Z Ltd (10AA) 90% 25% A Ltd Y Ltd 90% 15% 20% A Ltd. is an Indian company B Inc., USA is 100% subsidiary of A Ltd. C Ltd is an Indian Company, 100% sub. of A Ltd. D Ltd and E Ltd (10AA eligible) are Indian Companies, 100% sub of A Ltd. A Ltd granted interest free loans to B C and D A Ltd granted loan to E Ltd at 18% p.a. interest Case - 2 Case - 2 India A Ltd. USA B Inc. Interest Free Loan C Ltd D Ltd (10AA) E Ltd (10AA) Interest Free Loan Interest Free Loan Loan at 18% ALP 11% Corporate Guarantee (fees at 0.25% is charged) Corporate Guarantee (No fees is charged) A Ltd, B Ltd, C Ltd, and D Ltd are Indian companies C Ltd holds 80% shares of B Ltd. B Ltd holds 100% shares of A Ltd X, Y, Z are the directors of A Ltd. Holds 10% share of D Ltd. Mrs. Y holds 15% and Mr. F son of Z holds 15% of D Ltd. FY is P’ship firm of Mrs. Y and Mr. F Case - 3 Case - 3 C Ltd. B Ltd 80% 100% A Ltd (Assessee) Mr. X Mr. Y Mr. Z Mrs. Y Mr. F D Ltd 10% 10% 10% 15% Directors of A Ltd. Son of Mr. Z 15% YF (Partnership Firm) 50% 50% Purchase of Raw Material Purchase of Finished Goods Consultancy Fees Transfer Pricing Methods Transfer Pricing Methods Transfer Pricing Methods ITA does not provide any specific hierarchy of methods It insists on applying the ‘Most Appropriate Method’ (MAM) MAM means a Method Which is best suited to facts and circumstances of transaction Which is the most reliable measure of an arm’s length price Most Appropriate Method (MAM) MAM is to be determined considering – Nature and class of transaction Functions, assets and risks undertaken assessee and other party Degree of comparability between underlying transaction and uncontrolled transactions Extent to which reliable and accurate adjustments can be made to account for differences, if any Availability, coverage and reliability of data necessary for application of method Nature, extend and reliability of assumptions required to be made in application of method Selection of MAM Stages of Economic Analysis Selection of Tested Party Comparability Analysis Selection of Tested Party & Comparability Analysis MAM is to be determined considering – Nature and class of transaction Functions, assets and risks undertaken assessee and other party Degree of comparability between underlying transaction and uncontrolled transactions Extent to which reliable and accurate adjustments can be made to account for differences, if any Availability, coverage and reliability of data necessary for application of method Nature, extend and reliability of assumptions required to be made in application of method Selection of MAM Classification of Methods

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Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer Individual Relatives 15% 15% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer 10% Company / Firm / HUF / AOP Director / Partner/ member Relatives Company 10% 10% 10% 10% 10% 40A(2)(b) – Issues Whether sub-subsidiary and ultimate parent company is relative? Co. A Co. B Co. C Co. X Co. Y Eligible Units / Undertaking SDT – Tax Holiday Units SDT – Tax Holiday Units Domestic Transfer Pricing is applicable only where value of SDT exceeds INR 5 Crore. Important points need to be considered while considering the threshold limit Value of International transactions to be excluded Expense transactions covered in respect of 40A(2)(b) All transactions covered in respect of Chapter VI or 10AA transactions Aggregate amount of all transactions should be considered Once Exceeded 5 crore, all transactions whether significant or not are covered Threshold Limit & Coverage Challenges Whether parties not engaged in business and profession is covered by the provisions of 40A(2)(b)? Whether following shall be covered – Public Charitable Trust paying remuneration to related persons Trusts created by the companies Co-operative societies Social Clubs having business undertaking Expenses disallowed under other provisions of the act say 40A(3) – whether covered by SDT? Posers In respect of 40A(2)(b) the Law envisages a Corporate Tax Payer to know Whether the individual holding 20% interest is director in other company Identify all directors of the Company of which such individual is a director Relatives of all such directors Further it also envisages to identify the Company or the entity where relative of any director of the Assessee company holds 20% voting rights. Posers For calculating 20% interest, preference shares or other securities having voting rights to be considered. Preference Shareholders where voting rights are vested under the provisions of Companies Act as consequences of default by Assessee Company. Corresponding Credit for tax neutrality or to avoid double taxation Small value transactions Posers The tax provisions and it impact on Economy Economy and Tax Provisions Incentivize Encourage Regulate Tax Subsidize Case Studies XYZ Inc, USA is engaged in manufacturing of wide range of Automotive engineering products YZ Ltd. Germany is engaged in R&D and manufacturing of Bearings X Ltd. is manufacturing TYPE A bearings Y Ltd. is manufacturing TYPE B bearings Z Ltd. is manufacturing Clutches – 10AA unit A Ltd. is provided technical services Case - 1 Case - 1 Germany India XYZ Inc. USA YZ Ltd. Subsidiary X Ltd Z Ltd (10AA) 90% 25% A Ltd Y Ltd 90% 15% 20% A Ltd. is an Indian company B Inc., USA is 100% subsidiary of A Ltd. C Ltd is an Indian Company, 100% sub. of A Ltd. D Ltd and E Ltd (10AA eligible) are Indian Companies, 100% sub of A Ltd. A Ltd granted interest free loans to B C and D A Ltd granted loan to E Ltd at 18% p.a. interest Case - 2 Case - 2 India A Ltd. USA B Inc. Interest Free Loan C Ltd D Ltd (10AA) E Ltd (10AA) Interest Free Loan Interest Free Loan Loan at 18% ALP 11% Corporate Guarantee (fees at 0.25% is charged) Corporate Guarantee (No fees is charged) A Ltd, B Ltd, C Ltd, and D Ltd are Indian companies C Ltd holds 80% shares of B Ltd. B Ltd holds 100% shares of A Ltd X, Y, Z are the directors of A Ltd. Holds 10% share of D Ltd. Mrs. Y holds 15% and Mr. F son of Z holds 15% of D Ltd. FY is P’ship firm of Mrs. Y and Mr. F Case - 3 Case - 3 C Ltd. B Ltd 80% 100% A Ltd (Assessee) Mr. X Mr. Y Mr. Z Mrs. Y Mr. F D Ltd 10% 10% 10% 15% Directors of A Ltd. Son of Mr. Z 15% YF (Partnership Firm) 50% 50% Purchase of Raw Material Purchase of Finished Goods Consultancy Fees Transfer Pricing Methods Transfer Pricing Methods Transfer Pricing Methods ITA does not provide any specific hierarchy of methods It insists on applying the ‘Most Appropriate Method’ (MAM) MAM means a Method Which is best suited to facts and circumstances of transaction Which is the most reliable measure of an arm’s length price Most Appropriate Method (MAM) MAM is to be determined considering – Nature and class of transaction Functions, assets and risks undertaken assessee and other party Degree of comparability between underlying transaction and uncontrolled transactions Extent to which reliable and accurate adjustments can be made to account for differences, if any Availability, coverage and reliability of data necessary for application of method Nature, extend and reliability of assumptions required to be made in application of method Selection of MAM Stages of Economic Analysis Selection of Tested Party Comparability Analysis Selection of Tested Party & Comparability Analysis MAM is to be determined considering – Nature and class of transaction Functions, assets and risks undertaken assessee and other party Degree of comparability between underlying transaction and uncontrolled transactions Extent to which reliable and accurate adjustments can be made to account for differences, if any Availability, coverage and reliability of data necessary for application of method Nature, extend and reliability of assumptions required to be made in application of method Selection of MAM Classification of Methods Documentation

Slide 47 -

Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer Individual Relatives 15% 15% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer 10% Company / Firm / HUF / AOP Director / Partner/ member Relatives Company 10% 10% 10% 10% 10% 40A(2)(b) – Issues Whether sub-subsidiary and ultimate parent company is relative? Co. A Co. B Co. C Co. X Co. Y Eligible Units / Undertaking SDT – Tax Holiday Units SDT – Tax Holiday Units Domestic Transfer Pricing is applicable only where value of SDT exceeds INR 5 Crore. Important points need to be considered while considering the threshold limit Value of International transactions to be excluded Expense transactions covered in respect of 40A(2)(b) All transactions covered in respect of Chapter VI or 10AA transactions Aggregate amount of all transactions should be considered Once Exceeded 5 crore, all transactions whether significant or not are covered Threshold Limit & Coverage Challenges Whether parties not engaged in business and profession is covered by the provisions of 40A(2)(b)? Whether following shall be covered – Public Charitable Trust paying remuneration to related persons Trusts created by the companies Co-operative societies Social Clubs having business undertaking Expenses disallowed under other provisions of the act say 40A(3) – whether covered by SDT? Posers In respect of 40A(2)(b) the Law envisages a Corporate Tax Payer to know Whether the individual holding 20% interest is director in other company Identify all directors of the Company of which such individual is a director Relatives of all such directors Further it also envisages to identify the Company or the entity where relative of any director of the Assessee company holds 20% voting rights. Posers For calculating 20% interest, preference shares or other securities having voting rights to be considered. Preference Shareholders where voting rights are vested under the provisions of Companies Act as consequences of default by Assessee Company. Corresponding Credit for tax neutrality or to avoid double taxation Small value transactions Posers The tax provisions and it impact on Economy Economy and Tax Provisions Incentivize Encourage Regulate Tax Subsidize Case Studies XYZ Inc, USA is engaged in manufacturing of wide range of Automotive engineering products YZ Ltd. Germany is engaged in R&D and manufacturing of Bearings X Ltd. is manufacturing TYPE A bearings Y Ltd. is manufacturing TYPE B bearings Z Ltd. is manufacturing Clutches – 10AA unit A Ltd. is provided technical services Case - 1 Case - 1 Germany India XYZ Inc. USA YZ Ltd. Subsidiary X Ltd Z Ltd (10AA) 90% 25% A Ltd Y Ltd 90% 15% 20% A Ltd. is an Indian company B Inc., USA is 100% subsidiary of A Ltd. C Ltd is an Indian Company, 100% sub. of A Ltd. D Ltd and E Ltd (10AA eligible) are Indian Companies, 100% sub of A Ltd. A Ltd granted interest free loans to B C and D A Ltd granted loan to E Ltd at 18% p.a. interest Case - 2 Case - 2 India A Ltd. USA B Inc. Interest Free Loan C Ltd D Ltd (10AA) E Ltd (10AA) Interest Free Loan Interest Free Loan Loan at 18% ALP 11% Corporate Guarantee (fees at 0.25% is charged) Corporate Guarantee (No fees is charged) A Ltd, B Ltd, C Ltd, and D Ltd are Indian companies C Ltd holds 80% shares of B Ltd. B Ltd holds 100% shares of A Ltd X, Y, Z are the directors of A Ltd. Holds 10% share of D Ltd. Mrs. Y holds 15% and Mr. F son of Z holds 15% of D Ltd. FY is P’ship firm of Mrs. Y and Mr. F Case - 3 Case - 3 C Ltd. B Ltd 80% 100% A Ltd (Assessee) Mr. X Mr. Y Mr. Z Mrs. Y Mr. F D Ltd 10% 10% 10% 15% Directors of A Ltd. Son of Mr. Z 15% YF (Partnership Firm) 50% 50% Purchase of Raw Material Purchase of Finished Goods Consultancy Fees Transfer Pricing Methods Transfer Pricing Methods Transfer Pricing Methods ITA does not provide any specific hierarchy of methods It insists on applying the ‘Most Appropriate Method’ (MAM) MAM means a Method Which is best suited to facts and circumstances of transaction Which is the most reliable measure of an arm’s length price Most Appropriate Method (MAM) MAM is to be determined considering – Nature and class of transaction Functions, assets and risks undertaken assessee and other party Degree of comparability between underlying transaction and uncontrolled transactions Extent to which reliable and accurate adjustments can be made to account for differences, if any Availability, coverage and reliability of data necessary for application of method Nature, extend and reliability of assumptions required to be made in application of method Selection of MAM Stages of Economic Analysis Selection of Tested Party Comparability Analysis Selection of Tested Party & Comparability Analysis MAM is to be determined considering – Nature and class of transaction Functions, assets and risks undertaken assessee and other party Degree of comparability between underlying transaction and uncontrolled transactions Extent to which reliable and accurate adjustments can be made to account for differences, if any Availability, coverage and reliability of data necessary for application of method Nature, extend and reliability of assumptions required to be made in application of method Selection of MAM Classification of Methods Documentation Documentation Areas

Slide 48 -

Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer Individual Relatives 15% 15% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer 10% Company / Firm / HUF / AOP Director / Partner/ member Relatives Company 10% 10% 10% 10% 10% 40A(2)(b) – Issues Whether sub-subsidiary and ultimate parent company is relative? Co. A Co. B Co. C Co. X Co. Y Eligible Units / Undertaking SDT – Tax Holiday Units SDT – Tax Holiday Units Domestic Transfer Pricing is applicable only where value of SDT exceeds INR 5 Crore. Important points need to be considered while considering the threshold limit Value of International transactions to be excluded Expense transactions covered in respect of 40A(2)(b) All transactions covered in respect of Chapter VI or 10AA transactions Aggregate amount of all transactions should be considered Once Exceeded 5 crore, all transactions whether significant or not are covered Threshold Limit & Coverage Challenges Whether parties not engaged in business and profession is covered by the provisions of 40A(2)(b)? Whether following shall be covered – Public Charitable Trust paying remuneration to related persons Trusts created by the companies Co-operative societies Social Clubs having business undertaking Expenses disallowed under other provisions of the act say 40A(3) – whether covered by SDT? Posers In respect of 40A(2)(b) the Law envisages a Corporate Tax Payer to know Whether the individual holding 20% interest is director in other company Identify all directors of the Company of which such individual is a director Relatives of all such directors Further it also envisages to identify the Company or the entity where relative of any director of the Assessee company holds 20% voting rights. Posers For calculating 20% interest, preference shares or other securities having voting rights to be considered. Preference Shareholders where voting rights are vested under the provisions of Companies Act as consequences of default by Assessee Company. Corresponding Credit for tax neutrality or to avoid double taxation Small value transactions Posers The tax provisions and it impact on Economy Economy and Tax Provisions Incentivize Encourage Regulate Tax Subsidize Case Studies XYZ Inc, USA is engaged in manufacturing of wide range of Automotive engineering products YZ Ltd. Germany is engaged in R&D and manufacturing of Bearings X Ltd. is manufacturing TYPE A bearings Y Ltd. is manufacturing TYPE B bearings Z Ltd. is manufacturing Clutches – 10AA unit A Ltd. is provided technical services Case - 1 Case - 1 Germany India XYZ Inc. USA YZ Ltd. Subsidiary X Ltd Z Ltd (10AA) 90% 25% A Ltd Y Ltd 90% 15% 20% A Ltd. is an Indian company B Inc., USA is 100% subsidiary of A Ltd. C Ltd is an Indian Company, 100% sub. of A Ltd. D Ltd and E Ltd (10AA eligible) are Indian Companies, 100% sub of A Ltd. A Ltd granted interest free loans to B C and D A Ltd granted loan to E Ltd at 18% p.a. interest Case - 2 Case - 2 India A Ltd. USA B Inc. Interest Free Loan C Ltd D Ltd (10AA) E Ltd (10AA) Interest Free Loan Interest Free Loan Loan at 18% ALP 11% Corporate Guarantee (fees at 0.25% is charged) Corporate Guarantee (No fees is charged) A Ltd, B Ltd, C Ltd, and D Ltd are Indian companies C Ltd holds 80% shares of B Ltd. B Ltd holds 100% shares of A Ltd X, Y, Z are the directors of A Ltd. Holds 10% share of D Ltd. Mrs. Y holds 15% and Mr. F son of Z holds 15% of D Ltd. FY is P’ship firm of Mrs. Y and Mr. F Case - 3 Case - 3 C Ltd. B Ltd 80% 100% A Ltd (Assessee) Mr. X Mr. Y Mr. Z Mrs. Y Mr. F D Ltd 10% 10% 10% 15% Directors of A Ltd. Son of Mr. Z 15% YF (Partnership Firm) 50% 50% Purchase of Raw Material Purchase of Finished Goods Consultancy Fees Transfer Pricing Methods Transfer Pricing Methods Transfer Pricing Methods ITA does not provide any specific hierarchy of methods It insists on applying the ‘Most Appropriate Method’ (MAM) MAM means a Method Which is best suited to facts and circumstances of transaction Which is the most reliable measure of an arm’s length price Most Appropriate Method (MAM) MAM is to be determined considering – Nature and class of transaction Functions, assets and risks undertaken assessee and other party Degree of comparability between underlying transaction and uncontrolled transactions Extent to which reliable and accurate adjustments can be made to account for differences, if any Availability, coverage and reliability of data necessary for application of method Nature, extend and reliability of assumptions required to be made in application of method Selection of MAM Stages of Economic Analysis Selection of Tested Party Comparability Analysis Selection of Tested Party & Comparability Analysis MAM is to be determined considering – Nature and class of transaction Functions, assets and risks undertaken assessee and other party Degree of comparability between underlying transaction and uncontrolled transactions Extent to which reliable and accurate adjustments can be made to account for differences, if any Availability, coverage and reliability of data necessary for application of method Nature, extend and reliability of assumptions required to be made in application of method Selection of MAM Classification of Methods Documentation Documentation Areas What are the Documentation Requirements?

Slide 49 -

Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer Individual Relatives 15% 15% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer 10% Company / Firm / HUF / AOP Director / Partner/ member Relatives Company 10% 10% 10% 10% 10% 40A(2)(b) – Issues Whether sub-subsidiary and ultimate parent company is relative? Co. A Co. B Co. C Co. X Co. Y Eligible Units / Undertaking SDT – Tax Holiday Units SDT – Tax Holiday Units Domestic Transfer Pricing is applicable only where value of SDT exceeds INR 5 Crore. Important points need to be considered while considering the threshold limit Value of International transactions to be excluded Expense transactions covered in respect of 40A(2)(b) All transactions covered in respect of Chapter VI or 10AA transactions Aggregate amount of all transactions should be considered Once Exceeded 5 crore, all transactions whether significant or not are covered Threshold Limit & Coverage Challenges Whether parties not engaged in business and profession is covered by the provisions of 40A(2)(b)? Whether following shall be covered – Public Charitable Trust paying remuneration to related persons Trusts created by the companies Co-operative societies Social Clubs having business undertaking Expenses disallowed under other provisions of the act say 40A(3) – whether covered by SDT? Posers In respect of 40A(2)(b) the Law envisages a Corporate Tax Payer to know Whether the individual holding 20% interest is director in other company Identify all directors of the Company of which such individual is a director Relatives of all such directors Further it also envisages to identify the Company or the entity where relative of any director of the Assessee company holds 20% voting rights. Posers For calculating 20% interest, preference shares or other securities having voting rights to be considered. Preference Shareholders where voting rights are vested under the provisions of Companies Act as consequences of default by Assessee Company. Corresponding Credit for tax neutrality or to avoid double taxation Small value transactions Posers The tax provisions and it impact on Economy Economy and Tax Provisions Incentivize Encourage Regulate Tax Subsidize Case Studies XYZ Inc, USA is engaged in manufacturing of wide range of Automotive engineering products YZ Ltd. Germany is engaged in R&D and manufacturing of Bearings X Ltd. is manufacturing TYPE A bearings Y Ltd. is manufacturing TYPE B bearings Z Ltd. is manufacturing Clutches – 10AA unit A Ltd. is provided technical services Case - 1 Case - 1 Germany India XYZ Inc. USA YZ Ltd. Subsidiary X Ltd Z Ltd (10AA) 90% 25% A Ltd Y Ltd 90% 15% 20% A Ltd. is an Indian company B Inc., USA is 100% subsidiary of A Ltd. C Ltd is an Indian Company, 100% sub. of A Ltd. D Ltd and E Ltd (10AA eligible) are Indian Companies, 100% sub of A Ltd. A Ltd granted interest free loans to B C and D A Ltd granted loan to E Ltd at 18% p.a. interest Case - 2 Case - 2 India A Ltd. USA B Inc. Interest Free Loan C Ltd D Ltd (10AA) E Ltd (10AA) Interest Free Loan Interest Free Loan Loan at 18% ALP 11% Corporate Guarantee (fees at 0.25% is charged) Corporate Guarantee (No fees is charged) A Ltd, B Ltd, C Ltd, and D Ltd are Indian companies C Ltd holds 80% shares of B Ltd. B Ltd holds 100% shares of A Ltd X, Y, Z are the directors of A Ltd. Holds 10% share of D Ltd. Mrs. Y holds 15% and Mr. F son of Z holds 15% of D Ltd. FY is P’ship firm of Mrs. Y and Mr. F Case - 3 Case - 3 C Ltd. B Ltd 80% 100% A Ltd (Assessee) Mr. X Mr. Y Mr. Z Mrs. Y Mr. F D Ltd 10% 10% 10% 15% Directors of A Ltd. Son of Mr. Z 15% YF (Partnership Firm) 50% 50% Purchase of Raw Material Purchase of Finished Goods Consultancy Fees Transfer Pricing Methods Transfer Pricing Methods Transfer Pricing Methods ITA does not provide any specific hierarchy of methods It insists on applying the ‘Most Appropriate Method’ (MAM) MAM means a Method Which is best suited to facts and circumstances of transaction Which is the most reliable measure of an arm’s length price Most Appropriate Method (MAM) MAM is to be determined considering – Nature and class of transaction Functions, assets and risks undertaken assessee and other party Degree of comparability between underlying transaction and uncontrolled transactions Extent to which reliable and accurate adjustments can be made to account for differences, if any Availability, coverage and reliability of data necessary for application of method Nature, extend and reliability of assumptions required to be made in application of method Selection of MAM Stages of Economic Analysis Selection of Tested Party Comparability Analysis Selection of Tested Party & Comparability Analysis MAM is to be determined considering – Nature and class of transaction Functions, assets and risks undertaken assessee and other party Degree of comparability between underlying transaction and uncontrolled transactions Extent to which reliable and accurate adjustments can be made to account for differences, if any Availability, coverage and reliability of data necessary for application of method Nature, extend and reliability of assumptions required to be made in application of method Selection of MAM Classification of Methods Documentation Documentation Areas What are the Documentation Requirements? Indicative Documentation

Slide 50 -

Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer Individual Relatives 15% 15% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer 10% Company / Firm / HUF / AOP Director / Partner/ member Relatives Company 10% 10% 10% 10% 10% 40A(2)(b) – Issues Whether sub-subsidiary and ultimate parent company is relative? Co. A Co. B Co. C Co. X Co. Y Eligible Units / Undertaking SDT – Tax Holiday Units SDT – Tax Holiday Units Domestic Transfer Pricing is applicable only where value of SDT exceeds INR 5 Crore. Important points need to be considered while considering the threshold limit Value of International transactions to be excluded Expense transactions covered in respect of 40A(2)(b) All transactions covered in respect of Chapter VI or 10AA transactions Aggregate amount of all transactions should be considered Once Exceeded 5 crore, all transactions whether significant or not are covered Threshold Limit & Coverage Challenges Whether parties not engaged in business and profession is covered by the provisions of 40A(2)(b)? Whether following shall be covered – Public Charitable Trust paying remuneration to related persons Trusts created by the companies Co-operative societies Social Clubs having business undertaking Expenses disallowed under other provisions of the act say 40A(3) – whether covered by SDT? Posers In respect of 40A(2)(b) the Law envisages a Corporate Tax Payer to know Whether the individual holding 20% interest is director in other company Identify all directors of the Company of which such individual is a director Relatives of all such directors Further it also envisages to identify the Company or the entity where relative of any director of the Assessee company holds 20% voting rights. Posers For calculating 20% interest, preference shares or other securities having voting rights to be considered. Preference Shareholders where voting rights are vested under the provisions of Companies Act as consequences of default by Assessee Company. Corresponding Credit for tax neutrality or to avoid double taxation Small value transactions Posers The tax provisions and it impact on Economy Economy and Tax Provisions Incentivize Encourage Regulate Tax Subsidize Case Studies XYZ Inc, USA is engaged in manufacturing of wide range of Automotive engineering products YZ Ltd. Germany is engaged in R&D and manufacturing of Bearings X Ltd. is manufacturing TYPE A bearings Y Ltd. is manufacturing TYPE B bearings Z Ltd. is manufacturing Clutches – 10AA unit A Ltd. is provided technical services Case - 1 Case - 1 Germany India XYZ Inc. USA YZ Ltd. Subsidiary X Ltd Z Ltd (10AA) 90% 25% A Ltd Y Ltd 90% 15% 20% A Ltd. is an Indian company B Inc., USA is 100% subsidiary of A Ltd. C Ltd is an Indian Company, 100% sub. of A Ltd. D Ltd and E Ltd (10AA eligible) are Indian Companies, 100% sub of A Ltd. A Ltd granted interest free loans to B C and D A Ltd granted loan to E Ltd at 18% p.a. interest Case - 2 Case - 2 India A Ltd. USA B Inc. Interest Free Loan C Ltd D Ltd (10AA) E Ltd (10AA) Interest Free Loan Interest Free Loan Loan at 18% ALP 11% Corporate Guarantee (fees at 0.25% is charged) Corporate Guarantee (No fees is charged) A Ltd, B Ltd, C Ltd, and D Ltd are Indian companies C Ltd holds 80% shares of B Ltd. B Ltd holds 100% shares of A Ltd X, Y, Z are the directors of A Ltd. Holds 10% share of D Ltd. Mrs. Y holds 15% and Mr. F son of Z holds 15% of D Ltd. FY is P’ship firm of Mrs. Y and Mr. F Case - 3 Case - 3 C Ltd. B Ltd 80% 100% A Ltd (Assessee) Mr. X Mr. Y Mr. Z Mrs. Y Mr. F D Ltd 10% 10% 10% 15% Directors of A Ltd. Son of Mr. Z 15% YF (Partnership Firm) 50% 50% Purchase of Raw Material Purchase of Finished Goods Consultancy Fees Transfer Pricing Methods Transfer Pricing Methods Transfer Pricing Methods ITA does not provide any specific hierarchy of methods It insists on applying the ‘Most Appropriate Method’ (MAM) MAM means a Method Which is best suited to facts and circumstances of transaction Which is the most reliable measure of an arm’s length price Most Appropriate Method (MAM) MAM is to be determined considering – Nature and class of transaction Functions, assets and risks undertaken assessee and other party Degree of comparability between underlying transaction and uncontrolled transactions Extent to which reliable and accurate adjustments can be made to account for differences, if any Availability, coverage and reliability of data necessary for application of method Nature, extend and reliability of assumptions required to be made in application of method Selection of MAM Stages of Economic Analysis Selection of Tested Party Comparability Analysis Selection of Tested Party & Comparability Analysis MAM is to be determined considering – Nature and class of transaction Functions, assets and risks undertaken assessee and other party Degree of comparability between underlying transaction and uncontrolled transactions Extent to which reliable and accurate adjustments can be made to account for differences, if any Availability, coverage and reliability of data necessary for application of method Nature, extend and reliability of assumptions required to be made in application of method Selection of MAM Classification of Methods Documentation Documentation Areas What are the Documentation Requirements? Indicative Documentation Indicative Documentation

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Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer Individual Relatives 15% 15% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer 10% Company / Firm / HUF / AOP Director / Partner/ member Relatives Company 10% 10% 10% 10% 10% 40A(2)(b) – Issues Whether sub-subsidiary and ultimate parent company is relative? Co. A Co. B Co. C Co. X Co. Y Eligible Units / Undertaking SDT – Tax Holiday Units SDT – Tax Holiday Units Domestic Transfer Pricing is applicable only where value of SDT exceeds INR 5 Crore. Important points need to be considered while considering the threshold limit Value of International transactions to be excluded Expense transactions covered in respect of 40A(2)(b) All transactions covered in respect of Chapter VI or 10AA transactions Aggregate amount of all transactions should be considered Once Exceeded 5 crore, all transactions whether significant or not are covered Threshold Limit & Coverage Challenges Whether parties not engaged in business and profession is covered by the provisions of 40A(2)(b)? Whether following shall be covered – Public Charitable Trust paying remuneration to related persons Trusts created by the companies Co-operative societies Social Clubs having business undertaking Expenses disallowed under other provisions of the act say 40A(3) – whether covered by SDT? Posers In respect of 40A(2)(b) the Law envisages a Corporate Tax Payer to know Whether the individual holding 20% interest is director in other company Identify all directors of the Company of which such individual is a director Relatives of all such directors Further it also envisages to identify the Company or the entity where relative of any director of the Assessee company holds 20% voting rights. Posers For calculating 20% interest, preference shares or other securities having voting rights to be considered. Preference Shareholders where voting rights are vested under the provisions of Companies Act as consequences of default by Assessee Company. Corresponding Credit for tax neutrality or to avoid double taxation Small value transactions Posers The tax provisions and it impact on Economy Economy and Tax Provisions Incentivize Encourage Regulate Tax Subsidize Case Studies XYZ Inc, USA is engaged in manufacturing of wide range of Automotive engineering products YZ Ltd. Germany is engaged in R&D and manufacturing of Bearings X Ltd. is manufacturing TYPE A bearings Y Ltd. is manufacturing TYPE B bearings Z Ltd. is manufacturing Clutches – 10AA unit A Ltd. is provided technical services Case - 1 Case - 1 Germany India XYZ Inc. USA YZ Ltd. Subsidiary X Ltd Z Ltd (10AA) 90% 25% A Ltd Y Ltd 90% 15% 20% A Ltd. is an Indian company B Inc., USA is 100% subsidiary of A Ltd. C Ltd is an Indian Company, 100% sub. of A Ltd. D Ltd and E Ltd (10AA eligible) are Indian Companies, 100% sub of A Ltd. A Ltd granted interest free loans to B C and D A Ltd granted loan to E Ltd at 18% p.a. interest Case - 2 Case - 2 India A Ltd. USA B Inc. Interest Free Loan C Ltd D Ltd (10AA) E Ltd (10AA) Interest Free Loan Interest Free Loan Loan at 18% ALP 11% Corporate Guarantee (fees at 0.25% is charged) Corporate Guarantee (No fees is charged) A Ltd, B Ltd, C Ltd, and D Ltd are Indian companies C Ltd holds 80% shares of B Ltd. B Ltd holds 100% shares of A Ltd X, Y, Z are the directors of A Ltd. Holds 10% share of D Ltd. Mrs. Y holds 15% and Mr. F son of Z holds 15% of D Ltd. FY is P’ship firm of Mrs. Y and Mr. F Case - 3 Case - 3 C Ltd. B Ltd 80% 100% A Ltd (Assessee) Mr. X Mr. Y Mr. Z Mrs. Y Mr. F D Ltd 10% 10% 10% 15% Directors of A Ltd. Son of Mr. Z 15% YF (Partnership Firm) 50% 50% Purchase of Raw Material Purchase of Finished Goods Consultancy Fees Transfer Pricing Methods Transfer Pricing Methods Transfer Pricing Methods ITA does not provide any specific hierarchy of methods It insists on applying the ‘Most Appropriate Method’ (MAM) MAM means a Method Which is best suited to facts and circumstances of transaction Which is the most reliable measure of an arm’s length price Most Appropriate Method (MAM) MAM is to be determined considering – Nature and class of transaction Functions, assets and risks undertaken assessee and other party Degree of comparability between underlying transaction and uncontrolled transactions Extent to which reliable and accurate adjustments can be made to account for differences, if any Availability, coverage and reliability of data necessary for application of method Nature, extend and reliability of assumptions required to be made in application of method Selection of MAM Stages of Economic Analysis Selection of Tested Party Comparability Analysis Selection of Tested Party & Comparability Analysis MAM is to be determined considering – Nature and class of transaction Functions, assets and risks undertaken assessee and other party Degree of comparability between underlying transaction and uncontrolled transactions Extent to which reliable and accurate adjustments can be made to account for differences, if any Availability, coverage and reliability of data necessary for application of method Nature, extend and reliability of assumptions required to be made in application of method Selection of MAM Classification of Methods Documentation Documentation Areas What are the Documentation Requirements? Indicative Documentation Indicative Documentation Procedures

Slide 52 -

Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer Individual Relatives 15% 15% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer 10% Company / Firm / HUF / AOP Director / Partner/ member Relatives Company 10% 10% 10% 10% 10% 40A(2)(b) – Issues Whether sub-subsidiary and ultimate parent company is relative? Co. A Co. B Co. C Co. X Co. Y Eligible Units / Undertaking SDT – Tax Holiday Units SDT – Tax Holiday Units Domestic Transfer Pricing is applicable only where value of SDT exceeds INR 5 Crore. Important points need to be considered while considering the threshold limit Value of International transactions to be excluded Expense transactions covered in respect of 40A(2)(b) All transactions covered in respect of Chapter VI or 10AA transactions Aggregate amount of all transactions should be considered Once Exceeded 5 crore, all transactions whether significant or not are covered Threshold Limit & Coverage Challenges Whether parties not engaged in business and profession is covered by the provisions of 40A(2)(b)? Whether following shall be covered – Public Charitable Trust paying remuneration to related persons Trusts created by the companies Co-operative societies Social Clubs having business undertaking Expenses disallowed under other provisions of the act say 40A(3) – whether covered by SDT? Posers In respect of 40A(2)(b) the Law envisages a Corporate Tax Payer to know Whether the individual holding 20% interest is director in other company Identify all directors of the Company of which such individual is a director Relatives of all such directors Further it also envisages to identify the Company or the entity where relative of any director of the Assessee company holds 20% voting rights. Posers For calculating 20% interest, preference shares or other securities having voting rights to be considered. Preference Shareholders where voting rights are vested under the provisions of Companies Act as consequences of default by Assessee Company. Corresponding Credit for tax neutrality or to avoid double taxation Small value transactions Posers The tax provisions and it impact on Economy Economy and Tax Provisions Incentivize Encourage Regulate Tax Subsidize Case Studies XYZ Inc, USA is engaged in manufacturing of wide range of Automotive engineering products YZ Ltd. Germany is engaged in R&D and manufacturing of Bearings X Ltd. is manufacturing TYPE A bearings Y Ltd. is manufacturing TYPE B bearings Z Ltd. is manufacturing Clutches – 10AA unit A Ltd. is provided technical services Case - 1 Case - 1 Germany India XYZ Inc. USA YZ Ltd. Subsidiary X Ltd Z Ltd (10AA) 90% 25% A Ltd Y Ltd 90% 15% 20% A Ltd. is an Indian company B Inc., USA is 100% subsidiary of A Ltd. C Ltd is an Indian Company, 100% sub. of A Ltd. D Ltd and E Ltd (10AA eligible) are Indian Companies, 100% sub of A Ltd. A Ltd granted interest free loans to B C and D A Ltd granted loan to E Ltd at 18% p.a. interest Case - 2 Case - 2 India A Ltd. USA B Inc. Interest Free Loan C Ltd D Ltd (10AA) E Ltd (10AA) Interest Free Loan Interest Free Loan Loan at 18% ALP 11% Corporate Guarantee (fees at 0.25% is charged) Corporate Guarantee (No fees is charged) A Ltd, B Ltd, C Ltd, and D Ltd are Indian companies C Ltd holds 80% shares of B Ltd. B Ltd holds 100% shares of A Ltd X, Y, Z are the directors of A Ltd. Holds 10% share of D Ltd. Mrs. Y holds 15% and Mr. F son of Z holds 15% of D Ltd. FY is P’ship firm of Mrs. Y and Mr. F Case - 3 Case - 3 C Ltd. B Ltd 80% 100% A Ltd (Assessee) Mr. X Mr. Y Mr. Z Mrs. Y Mr. F D Ltd 10% 10% 10% 15% Directors of A Ltd. Son of Mr. Z 15% YF (Partnership Firm) 50% 50% Purchase of Raw Material Purchase of Finished Goods Consultancy Fees Transfer Pricing Methods Transfer Pricing Methods Transfer Pricing Methods ITA does not provide any specific hierarchy of methods It insists on applying the ‘Most Appropriate Method’ (MAM) MAM means a Method Which is best suited to facts and circumstances of transaction Which is the most reliable measure of an arm’s length price Most Appropriate Method (MAM) MAM is to be determined considering – Nature and class of transaction Functions, assets and risks undertaken assessee and other party Degree of comparability between underlying transaction and uncontrolled transactions Extent to which reliable and accurate adjustments can be made to account for differences, if any Availability, coverage and reliability of data necessary for application of method Nature, extend and reliability of assumptions required to be made in application of method Selection of MAM Stages of Economic Analysis Selection of Tested Party Comparability Analysis Selection of Tested Party & Comparability Analysis MAM is to be determined considering – Nature and class of transaction Functions, assets and risks undertaken assessee and other party Degree of comparability between underlying transaction and uncontrolled transactions Extent to which reliable and accurate adjustments can be made to account for differences, if any Availability, coverage and reliability of data necessary for application of method Nature, extend and reliability of assumptions required to be made in application of method Selection of MAM Classification of Methods Documentation Documentation Areas What are the Documentation Requirements? Indicative Documentation Indicative Documentation Procedures Transfer Pricing Compliance Timeline – Illustration for March 2013

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Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer Individual Relatives 15% 15% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer 10% Company / Firm / HUF / AOP Director / Partner/ member Relatives Company 10% 10% 10% 10% 10% 40A(2)(b) – Issues Whether sub-subsidiary and ultimate parent company is relative? Co. A Co. B Co. C Co. X Co. Y Eligible Units / Undertaking SDT – Tax Holiday Units SDT – Tax Holiday Units Domestic Transfer Pricing is applicable only where value of SDT exceeds INR 5 Crore. Important points need to be considered while considering the threshold limit Value of International transactions to be excluded Expense transactions covered in respect of 40A(2)(b) All transactions covered in respect of Chapter VI or 10AA transactions Aggregate amount of all transactions should be considered Once Exceeded 5 crore, all transactions whether significant or not are covered Threshold Limit & Coverage Challenges Whether parties not engaged in business and profession is covered by the provisions of 40A(2)(b)? Whether following shall be covered – Public Charitable Trust paying remuneration to related persons Trusts created by the companies Co-operative societies Social Clubs having business undertaking Expenses disallowed under other provisions of the act say 40A(3) – whether covered by SDT? Posers In respect of 40A(2)(b) the Law envisages a Corporate Tax Payer to know Whether the individual holding 20% interest is director in other company Identify all directors of the Company of which such individual is a director Relatives of all such directors Further it also envisages to identify the Company or the entity where relative of any director of the Assessee company holds 20% voting rights. Posers For calculating 20% interest, preference shares or other securities having voting rights to be considered. Preference Shareholders where voting rights are vested under the provisions of Companies Act as consequences of default by Assessee Company. Corresponding Credit for tax neutrality or to avoid double taxation Small value transactions Posers The tax provisions and it impact on Economy Economy and Tax Provisions Incentivize Encourage Regulate Tax Subsidize Case Studies XYZ Inc, USA is engaged in manufacturing of wide range of Automotive engineering products YZ Ltd. Germany is engaged in R&D and manufacturing of Bearings X Ltd. is manufacturing TYPE A bearings Y Ltd. is manufacturing TYPE B bearings Z Ltd. is manufacturing Clutches – 10AA unit A Ltd. is provided technical services Case - 1 Case - 1 Germany India XYZ Inc. USA YZ Ltd. Subsidiary X Ltd Z Ltd (10AA) 90% 25% A Ltd Y Ltd 90% 15% 20% A Ltd. is an Indian company B Inc., USA is 100% subsidiary of A Ltd. C Ltd is an Indian Company, 100% sub. of A Ltd. D Ltd and E Ltd (10AA eligible) are Indian Companies, 100% sub of A Ltd. A Ltd granted interest free loans to B C and D A Ltd granted loan to E Ltd at 18% p.a. interest Case - 2 Case - 2 India A Ltd. USA B Inc. Interest Free Loan C Ltd D Ltd (10AA) E Ltd (10AA) Interest Free Loan Interest Free Loan Loan at 18% ALP 11% Corporate Guarantee (fees at 0.25% is charged) Corporate Guarantee (No fees is charged) A Ltd, B Ltd, C Ltd, and D Ltd are Indian companies C Ltd holds 80% shares of B Ltd. B Ltd holds 100% shares of A Ltd X, Y, Z are the directors of A Ltd. Holds 10% share of D Ltd. Mrs. Y holds 15% and Mr. F son of Z holds 15% of D Ltd. FY is P’ship firm of Mrs. Y and Mr. F Case - 3 Case - 3 C Ltd. B Ltd 80% 100% A Ltd (Assessee) Mr. X Mr. Y Mr. Z Mrs. Y Mr. F D Ltd 10% 10% 10% 15% Directors of A Ltd. Son of Mr. Z 15% YF (Partnership Firm) 50% 50% Purchase of Raw Material Purchase of Finished Goods Consultancy Fees Transfer Pricing Methods Transfer Pricing Methods Transfer Pricing Methods ITA does not provide any specific hierarchy of methods It insists on applying the ‘Most Appropriate Method’ (MAM) MAM means a Method Which is best suited to facts and circumstances of transaction Which is the most reliable measure of an arm’s length price Most Appropriate Method (MAM) MAM is to be determined considering – Nature and class of transaction Functions, assets and risks undertaken assessee and other party Degree of comparability between underlying transaction and uncontrolled transactions Extent to which reliable and accurate adjustments can be made to account for differences, if any Availability, coverage and reliability of data necessary for application of method Nature, extend and reliability of assumptions required to be made in application of method Selection of MAM Stages of Economic Analysis Selection of Tested Party Comparability Analysis Selection of Tested Party & Comparability Analysis MAM is to be determined considering – Nature and class of transaction Functions, assets and risks undertaken assessee and other party Degree of comparability between underlying transaction and uncontrolled transactions Extent to which reliable and accurate adjustments can be made to account for differences, if any Availability, coverage and reliability of data necessary for application of method Nature, extend and reliability of assumptions required to be made in application of method Selection of MAM Classification of Methods Documentation Documentation Areas What are the Documentation Requirements? Indicative Documentation Indicative Documentation Procedures Transfer Pricing Compliance Timeline – Illustration for March 2013 Penalties

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Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer Individual Relatives 15% 15% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer 10% Company / Firm / HUF / AOP Director / Partner/ member Relatives Company 10% 10% 10% 10% 10% 40A(2)(b) – Issues Whether sub-subsidiary and ultimate parent company is relative? Co. A Co. B Co. C Co. X Co. Y Eligible Units / Undertaking SDT – Tax Holiday Units SDT – Tax Holiday Units Domestic Transfer Pricing is applicable only where value of SDT exceeds INR 5 Crore. Important points need to be considered while considering the threshold limit Value of International transactions to be excluded Expense transactions covered in respect of 40A(2)(b) All transactions covered in respect of Chapter VI or 10AA transactions Aggregate amount of all transactions should be considered Once Exceeded 5 crore, all transactions whether significant or not are covered Threshold Limit & Coverage Challenges Whether parties not engaged in business and profession is covered by the provisions of 40A(2)(b)? Whether following shall be covered – Public Charitable Trust paying remuneration to related persons Trusts created by the companies Co-operative societies Social Clubs having business undertaking Expenses disallowed under other provisions of the act say 40A(3) – whether covered by SDT? Posers In respect of 40A(2)(b) the Law envisages a Corporate Tax Payer to know Whether the individual holding 20% interest is director in other company Identify all directors of the Company of which such individual is a director Relatives of all such directors Further it also envisages to identify the Company or the entity where relative of any director of the Assessee company holds 20% voting rights. Posers For calculating 20% interest, preference shares or other securities having voting rights to be considered. Preference Shareholders where voting rights are vested under the provisions of Companies Act as consequences of default by Assessee Company. Corresponding Credit for tax neutrality or to avoid double taxation Small value transactions Posers The tax provisions and it impact on Economy Economy and Tax Provisions Incentivize Encourage Regulate Tax Subsidize Case Studies XYZ Inc, USA is engaged in manufacturing of wide range of Automotive engineering products YZ Ltd. Germany is engaged in R&D and manufacturing of Bearings X Ltd. is manufacturing TYPE A bearings Y Ltd. is manufacturing TYPE B bearings Z Ltd. is manufacturing Clutches – 10AA unit A Ltd. is provided technical services Case - 1 Case - 1 Germany India XYZ Inc. USA YZ Ltd. Subsidiary X Ltd Z Ltd (10AA) 90% 25% A Ltd Y Ltd 90% 15% 20% A Ltd. is an Indian company B Inc., USA is 100% subsidiary of A Ltd. C Ltd is an Indian Company, 100% sub. of A Ltd. D Ltd and E Ltd (10AA eligible) are Indian Companies, 100% sub of A Ltd. A Ltd granted interest free loans to B C and D A Ltd granted loan to E Ltd at 18% p.a. interest Case - 2 Case - 2 India A Ltd. USA B Inc. Interest Free Loan C Ltd D Ltd (10AA) E Ltd (10AA) Interest Free Loan Interest Free Loan Loan at 18% ALP 11% Corporate Guarantee (fees at 0.25% is charged) Corporate Guarantee (No fees is charged) A Ltd, B Ltd, C Ltd, and D Ltd are Indian companies C Ltd holds 80% shares of B Ltd. B Ltd holds 100% shares of A Ltd X, Y, Z are the directors of A Ltd. Holds 10% share of D Ltd. Mrs. Y holds 15% and Mr. F son of Z holds 15% of D Ltd. FY is P’ship firm of Mrs. Y and Mr. F Case - 3 Case - 3 C Ltd. B Ltd 80% 100% A Ltd (Assessee) Mr. X Mr. Y Mr. Z Mrs. Y Mr. F D Ltd 10% 10% 10% 15% Directors of A Ltd. Son of Mr. Z 15% YF (Partnership Firm) 50% 50% Purchase of Raw Material Purchase of Finished Goods Consultancy Fees Transfer Pricing Methods Transfer Pricing Methods Transfer Pricing Methods ITA does not provide any specific hierarchy of methods It insists on applying the ‘Most Appropriate Method’ (MAM) MAM means a Method Which is best suited to facts and circumstances of transaction Which is the most reliable measure of an arm’s length price Most Appropriate Method (MAM) MAM is to be determined considering – Nature and class of transaction Functions, assets and risks undertaken assessee and other party Degree of comparability between underlying transaction and uncontrolled transactions Extent to which reliable and accurate adjustments can be made to account for differences, if any Availability, coverage and reliability of data necessary for application of method Nature, extend and reliability of assumptions required to be made in application of method Selection of MAM Stages of Economic Analysis Selection of Tested Party Comparability Analysis Selection of Tested Party & Comparability Analysis MAM is to be determined considering – Nature and class of transaction Functions, assets and risks undertaken assessee and other party Degree of comparability between underlying transaction and uncontrolled transactions Extent to which reliable and accurate adjustments can be made to account for differences, if any Availability, coverage and reliability of data necessary for application of method Nature, extend and reliability of assumptions required to be made in application of method Selection of MAM Classification of Methods Documentation Documentation Areas What are the Documentation Requirements? Indicative Documentation Indicative Documentation Procedures Transfer Pricing Compliance Timeline – Illustration for March 2013 Penalties Audit Process File tax return and Accountant’s Report (30th November) Reference to be made to TP Officer (‘TPO’) by the Assessing Officer (‘AO’); Compulsory Reference to be made by AO if international transactions exceed INR 1500 million for AY 2005-06 onwards (Internal guidelines) Based on results of above mentioned procedure assessing officer passes the order TP Audit Notice to be issues by the TPO - TPO calls for supporting documents and evidence Rectification application can be made against the order of TPO for apparent mistake Appeal can be made against the order of AO as order of TPO included within the order of the AO DRP Mechanism- Finance Act 2009 Appeal Procedure Appeal to Commissioner of Income Tax Passes an order Income Tax Appellate Tribunal High Court - only on matters related to law Supreme Court Constitutional Bench

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Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer Individual Relatives 15% 15% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer 10% Company / Firm / HUF / AOP Director / Partner/ member Relatives Company 10% 10% 10% 10% 10% 40A(2)(b) – Issues Whether sub-subsidiary and ultimate parent company is relative? Co. A Co. B Co. C Co. X Co. Y Eligible Units / Undertaking SDT – Tax Holiday Units SDT – Tax Holiday Units Domestic Transfer Pricing is applicable only where value of SDT exceeds INR 5 Crore. Important points need to be considered while considering the threshold limit Value of International transactions to be excluded Expense transactions covered in respect of 40A(2)(b) All transactions covered in respect of Chapter VI or 10AA transactions Aggregate amount of all transactions should be considered Once Exceeded 5 crore, all transactions whether significant or not are covered Threshold Limit & Coverage Challenges Whether parties not engaged in business and profession is covered by the provisions of 40A(2)(b)? Whether following shall be covered – Public Charitable Trust paying remuneration to related persons Trusts created by the companies Co-operative societies Social Clubs having business undertaking Expenses disallowed under other provisions of the act say 40A(3) – whether covered by SDT? Posers In respect of 40A(2)(b) the Law envisages a Corporate Tax Payer to know Whether the individual holding 20% interest is director in other company Identify all directors of the Company of which such individual is a director Relatives of all such directors Further it also envisages to identify the Company or the entity where relative of any director of the Assessee company holds 20% voting rights. Posers For calculating 20% interest, preference shares or other securities having voting rights to be considered. Preference Shareholders where voting rights are vested under the provisions of Companies Act as consequences of default by Assessee Company. Corresponding Credit for tax neutrality or to avoid double taxation Small value transactions Posers The tax provisions and it impact on Economy Economy and Tax Provisions Incentivize Encourage Regulate Tax Subsidize Case Studies XYZ Inc, USA is engaged in manufacturing of wide range of Automotive engineering products YZ Ltd. Germany is engaged in R&D and manufacturing of Bearings X Ltd. is manufacturing TYPE A bearings Y Ltd. is manufacturing TYPE B bearings Z Ltd. is manufacturing Clutches – 10AA unit A Ltd. is provided technical services Case - 1 Case - 1 Germany India XYZ Inc. USA YZ Ltd. Subsidiary X Ltd Z Ltd (10AA) 90% 25% A Ltd Y Ltd 90% 15% 20% A Ltd. is an Indian company B Inc., USA is 100% subsidiary of A Ltd. C Ltd is an Indian Company, 100% sub. of A Ltd. D Ltd and E Ltd (10AA eligible) are Indian Companies, 100% sub of A Ltd. A Ltd granted interest free loans to B C and D A Ltd granted loan to E Ltd at 18% p.a. interest Case - 2 Case - 2 India A Ltd. USA B Inc. Interest Free Loan C Ltd D Ltd (10AA) E Ltd (10AA) Interest Free Loan Interest Free Loan Loan at 18% ALP 11% Corporate Guarantee (fees at 0.25% is charged) Corporate Guarantee (No fees is charged) A Ltd, B Ltd, C Ltd, and D Ltd are Indian companies C Ltd holds 80% shares of B Ltd. B Ltd holds 100% shares of A Ltd X, Y, Z are the directors of A Ltd. Holds 10% share of D Ltd. Mrs. Y holds 15% and Mr. F son of Z holds 15% of D Ltd. FY is P’ship firm of Mrs. Y and Mr. F Case - 3 Case - 3 C Ltd. B Ltd 80% 100% A Ltd (Assessee) Mr. X Mr. Y Mr. Z Mrs. Y Mr. F D Ltd 10% 10% 10% 15% Directors of A Ltd. Son of Mr. Z 15% YF (Partnership Firm) 50% 50% Purchase of Raw Material Purchase of Finished Goods Consultancy Fees Transfer Pricing Methods Transfer Pricing Methods Transfer Pricing Methods ITA does not provide any specific hierarchy of methods It insists on applying the ‘Most Appropriate Method’ (MAM) MAM means a Method Which is best suited to facts and circumstances of transaction Which is the most reliable measure of an arm’s length price Most Appropriate Method (MAM) MAM is to be determined considering – Nature and class of transaction Functions, assets and risks undertaken assessee and other party Degree of comparability between underlying transaction and uncontrolled transactions Extent to which reliable and accurate adjustments can be made to account for differences, if any Availability, coverage and reliability of data necessary for application of method Nature, extend and reliability of assumptions required to be made in application of method Selection of MAM Stages of Economic Analysis Selection of Tested Party Comparability Analysis Selection of Tested Party & Comparability Analysis MAM is to be determined considering – Nature and class of transaction Functions, assets and risks undertaken assessee and other party Degree of comparability between underlying transaction and uncontrolled transactions Extent to which reliable and accurate adjustments can be made to account for differences, if any Availability, coverage and reliability of data necessary for application of method Nature, extend and reliability of assumptions required to be made in application of method Selection of MAM Classification of Methods Documentation Documentation Areas What are the Documentation Requirements? Indicative Documentation Indicative Documentation Procedures Transfer Pricing Compliance Timeline – Illustration for March 2013 Penalties Audit Process File tax return and Accountant’s Report (30th November) Reference to be made to TP Officer (‘TPO’) by the Assessing Officer (‘AO’); Compulsory Reference to be made by AO if international transactions exceed INR 1500 million for AY 2005-06 onwards (Internal guidelines) Based on results of above mentioned procedure assessing officer passes the order TP Audit Notice to be issues by the TPO - TPO calls for supporting documents and evidence Rectification application can be made against the order of TPO for apparent mistake Appeal can be made against the order of AO as order of TPO included within the order of the AO DRP Mechanism- Finance Act 2009 Appeal Procedure Appeal to Commissioner of Income Tax Passes an order Income Tax Appellate Tribunal High Court - only on matters related to law Supreme Court Constitutional Bench Questions

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Transfer Pricing Specified Domestic Transactions Study Circle Baroda Branch of WIRC 14th May 2013 Introduction Transfer Pricing in India Background Snapshot of Indian Regulation Specified Domestic Transactions Related Party Transactions & Eligible Units Case Studies TP Methods and Documentations Procedures & Penalties Agenda Introduction Since liberalization – Companies from developed or developing countries Collaborations with Indian entities by MNEs Setting up 100% subsidiaries in India Backdoor transfer of Profits Indian Government was losing revenue in form of Tax Finance Act, 2001 has introduced Transfer Pricing with effect from Assessment Year 2002-03 Transfer Pricing - Background Tax Avoidance - International Co. A Co. C India Co. B Dubai USA Co. B is 100% sub. Of Co. A Co. A Sells at Rs. 100 to B Co. B Sells at Rs. 120 to Co. C Profit by B is Rs. 20 (Tax Free) Maximum tax to Co. A of Rs. 3.5 Tax Heaven Tax Avoidance - Domestic Unit – 1 (Gujarat) Unit – 2 (Baddi) Unit -1 Manufactures radiators sells to Unit – 2 in Knocked Down Condition for Rs. 100 Unit -2 Assembles and sells to customers for Rs. 120 Profit of Unit – 2 is tax free u/s 80IB. Company pays tax only on profit of Rs. 10 under Unit -1. Tax Avoidance 7 Transfer Pricing in India Transfer Pricing Litigation in India Snapshot of Indian Regulation Transfer Pricing introduced from AY 2002-03 for international transactions Extended to Specified Domestic Transactions [SDT] from AY 2013-14 Sections 92 to 92F amended to include reference to SDT However, similar amendments to Rules 10 to 10E yet to be carried out Methodology to compute ALP is primarily provided in Rules It is expected that appropriate amendments would be carried out in Rules to apply broadly same methods and principles to SDT as well Discussion in this presentation is primarily based on ALP computation mechanism applicable to ‘international transactions’ assuming that the same would be applied to SDT Snapshot of TP Provision Decision of the Appex Court in the case of Glaxo Smithkline Asia (P) Ltd [236 CTR 113] The H’ble Supreme Court while deciding on the issue of section 40A(2) made some of the important observations as under: The present Transfer Pricing Regulations does not apply to domestic transactions. CBDT should examine possibility of extending TP provisions to such transactions SDT - Background In domestic transactions, under-invoicing and over-invoicing will be revenue neutral, except in two circumstances: where one of the related entities is loss making or where one of the related entities is liable to pay tax at a lower rate and the profits are shifted to such entity Concept of ALP is preferred over FMV to test the reasonableness of the controlled or related party transactions. SDT - Background Section – 92BA is inserted with effect from 01-04-2013, defines “Specified Domestic Transactions”. Under SDT these transactions are covered Expenditure under transactions with Related Party [Section- 40A(2)(b)] Any Transactions referred in Section – 80A Any transfer of goods or services referred to u/s 80IA(2) Any business transaction with person as referred u/s 80IA(10) Any transactions under for claiming deductions under chapter – VIA or 10AA where Section – 80IA(8) /(10) is applicable Other transaction as may be prescribed. Specified Domestic Transactions Related Party Transaction Only expense side is covered and i.e. only revenue expenditure and not items of income. In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller Definition of related party is restrictive compared to Associated Enterprise Multi-fold issues in identification of related parties 40A(2) – Payments to related Parties 40A(2)(b) – Definition of Related party Individual Assessee Assessee Husband / Wife Sister Brother Where Assessee has substantial Interest Lineal ascendants descendants 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% 40A(2)(b) – Definition of Related party Tax Payer = Company, HUF, Firm, AOP Tax Payer Director / Partner/ member Relatives b(ii) b(ii) Individual Relatives b(iii) b(iii) >20% Company / Firm / HUF / AOP >20% Director / Partner/ member Relatives Company >20% b(iv) b(iv) b(iv) b(iv) All companies where such individual is director / partner / member b(v) Other Director / Partner/ member Relatives Person b(v) b(v) >20% Person Person b(vi) b(vi) b(vi) >20% >20% >20% Company / entity >20% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer Individual Relatives 15% 15% 40A(2)(b) – Issues Tax Payer = Company, HUF, Firm, AOP Tax Payer 10% Company / Firm / HUF / AOP Director / Partner/ member Relatives Company 10% 10% 10% 10% 10% 40A(2)(b) – Issues Whether sub-subsidiary and ultimate parent company is relative? Co. A Co. B Co. C Co. X Co. Y Eligible Units / Undertaking SDT – Tax Holiday Units SDT – Tax Holiday Units Domestic Transfer Pricing is applicable only where value of SDT exceeds INR 5 Crore. Important points need to be considered while considering the threshold limit Value of International transactions to be excluded Expense transactions covered in respect of 40A(2)(b) All transactions covered in respect of Chapter VI or 10AA transactions Aggregate amount of all transactions should be considered Once Exceeded 5 crore, all transactions whether significant or not are covered Threshold Limit & Coverage Challenges Whether parties not engaged in business and profession is covered by the provisions of 40A(2)(b)? Whether following shall be covered – Public Charitable Trust paying remuneration to related persons Trusts created by the companies Co-operative societies Social Clubs having business undertaking Expenses disallowed under other provisions of the act say 40A(3) – whether covered by SDT? Posers In respect of 40A(2)(b) the Law envisages a Corporate Tax Payer to know Whether the individual holding 20% interest is director in other company Identify all directors of the Company of which such individual is a director Relatives of all such directors Further it also envisages to identify the Company or the entity where relative of any director of the Assessee company holds 20% voting rights. Posers For calculating 20% interest, preference shares or other securities having voting rights to be considered. Preference Shareholders where voting rights are vested under the provisions of Companies Act as consequences of default by Assessee Company. Corresponding Credit for tax neutrality or to avoid double taxation Small value transactions Posers The tax provisions and it impact on Economy Economy and Tax Provisions Incentivize Encourage Regulate Tax Subsidize Case Studies XYZ Inc, USA is engaged in manufacturing of wide range of Automotive engineering products YZ Ltd. Germany is engaged in R&D and manufacturing of Bearings X Ltd. is manufacturing TYPE A bearings Y Ltd. is manufacturing TYPE B bearings Z Ltd. is manufacturing Clutches – 10AA unit A Ltd. is provided technical services Case - 1 Case - 1 Germany India XYZ Inc. USA YZ Ltd. Subsidiary X Ltd Z Ltd (10AA) 90% 25% A Ltd Y Ltd 90% 15% 20% A Ltd. is an Indian company B Inc., USA is 100% subsidiary of A Ltd. C Ltd is an Indian Company, 100% sub. of A Ltd. D Ltd and E Ltd (10AA eligible) are Indian Companies, 100% sub of A Ltd. A Ltd granted interest free loans to B C and D A Ltd granted loan to E Ltd at 18% p.a. interest Case - 2 Case - 2 India A Ltd. USA B Inc. Interest Free Loan C Ltd D Ltd (10AA) E Ltd (10AA) Interest Free Loan Interest Free Loan Loan at 18% ALP 11% Corporate Guarantee (fees at 0.25% is charged) Corporate Guarantee (No fees is charged) A Ltd, B Ltd, C Ltd, and D Ltd are Indian companies C Ltd holds 80% shares of B Ltd. B Ltd holds 100% shares of A Ltd X, Y, Z are the directors of A Ltd. Holds 10% share of D Ltd. Mrs. Y holds 15% and Mr. F son of Z holds 15% of D Ltd. FY is P’ship firm of Mrs. Y and Mr. F Case - 3 Case - 3 C Ltd. B Ltd 80% 100% A Ltd (Assessee) Mr. X Mr. Y Mr. Z Mrs. Y Mr. F D Ltd 10% 10% 10% 15% Directors of A Ltd. Son of Mr. Z 15% YF (Partnership Firm) 50% 50% Purchase of Raw Material Purchase of Finished Goods Consultancy Fees Transfer Pricing Methods Transfer Pricing Methods Transfer Pricing Methods ITA does not provide any specific hierarchy of methods It insists on applying the ‘Most Appropriate Method’ (MAM) MAM means a Method Which is best suited to facts and circumstances of transaction Which is the most reliable measure of an arm’s length price Most Appropriate Method (MAM) MAM is to be determined considering – Nature and class of transaction Functions, assets and risks undertaken assessee and other party Degree of comparability between underlying transaction and uncontrolled transactions Extent to which reliable and accurate adjustments can be made to account for differences, if any Availability, coverage and reliability of data necessary for application of method Nature, extend and reliability of assumptions required to be made in application of method Selection of MAM Stages of Economic Analysis Selection of Tested Party Comparability Analysis Selection of Tested Party & Comparability Analysis MAM is to be determined considering – Nature and class of transaction Functions, assets and risks undertaken assessee and other party Degree of comparability between underlying transaction and uncontrolled transactions Extent to which reliable and accurate adjustments can be made to account for differences, if any Availability, coverage and reliability of data necessary for application of method Nature, extend and reliability of assumptions required to be made in application of method Selection of MAM Classification of Methods Documentation Documentation Areas What are the Documentation Requirements? Indicative Documentation Indicative Documentation Procedures Transfer Pricing Compliance Timeline – Illustration for March 2013 Penalties Audit Process File tax return and Accountant’s Report (30th November) Reference to be made to TP Officer (‘TPO’) by the Assessing Officer (‘AO’); Compulsory Reference to be made by AO if international transactions exceed INR 1500 million for AY 2005-06 onwards (Internal guidelines) Based on results of above mentioned procedure assessing officer passes the order TP Audit Notice to be issues by the TPO - TPO calls for supporting documents and evidence Rectification application can be made against the order of TPO for apparent mistake Appeal can be made against the order of AO as order of TPO included within the order of the AO DRP Mechanism- Finance Act 2009 Appeal Procedure Appeal to Commissioner of Income Tax Passes an order Income Tax Appellate Tribunal High Court - only on matters related to law Supreme Court Constitutional Bench Questions Thank You