Transcript Associated-Enterprises-CA-Ganesh-Rajgopalan-26th-Oct
CA Ganesh Rajgopalan Intensive Workshop on Transfer Pricing JB Nagar CPE Study Circle jointly with the WIRC 26 th October, 2012
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Transfer pricing provisions
International transactions Specified domestic transactions
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Association for International Transactions
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Whether AE?
International
Transaction?
TP provisions apply CA Ganesh Rajgopalan October 26, 2012 4
“For the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises,….” [Sec. 92B]
Characteristics-
◦ a transaction ◦ ◦ Between two or more AE At least one of whom is a NR
Excluded-
◦ Transactions between non-AEs ◦ transaction presumed at arm’s length Transactions between AEs where both (all) are residents Transactions between foreign PEs of Residents?
◦ Non-business transactions?
Between individuals/HUF CA Ganesh Rajgopalan October 26, 2012 5
A person (including a permanent establishment of such person)
Engaged-
◦ ◦ ◦
In any specified activity, or in investment, or providing loan or in business of acquiring, holding, underwriting or dealing with securities
whether such activity or business is carried on, directly or through one or more of its unit/divisions/subsidiaries, or
whether such unit/division/subsidiary located at the same or different place
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In common parlance ◦ ◦ ◦ ◦ Economic activity capable of producing profits Exercised in an independent manner Consisting of well defined actions Having economic character Enterprise and business -synonymous “Engaged in” – ◦ connotes doing more than one act, ◦ continuity of action “Enterprise” signifies activity as also the organisation Person and enterprise distinct terms ◦ ◦ Personal investments not amounting to business whether enterprise?
Personal transactions whether covered?
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92A. (1) For the purposes of this section and and 92F sections 92 , 92B , 92C , 92D , 92E , "associated enterprise", in relation to another enterprise, means an enterprise— (a) which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; or (b) in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise.
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◦ ◦ ◦
Sub-section (1)(a)
◦ An enterprise which participates Directly or indirectly or through intermediaries in management or control or capital of another enterprise ◦ ◦ ◦
Sub-section (1)(b)
◦ One or more persons participates Directly or indirectly or through intermediaries in management or control or capital of two enterprises Refers not to a transaction/business but to the enterprise itself “Participate” – to take part “Directly or indirectly” CA Ganesh Rajgopalan October 26, 2012 9
Sec. 92A(1)(a)
A B C
AEs
A-B B-C A-C A
Sec. 92A(1)(b)
D B E C
AEs
C-D C-E CA Ganesh Rajgopalan October 26, 2012 10
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Deemed instances [sub-section (2)]
By reason of substantial holding of voting power substantial lending substantial functional involvement Control/interest ◦
Does not create a fiction
Only includes what is obvious when one enterprise in a position to control the other At any time during the year Condition absent in sub-section (1) Whether AE for period before condition is satisfied or after condition ceases?
Essential condition for AE?
Owning one share – participation in capital?
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Amendment vide Finance Act 2002
Memorandum explaining the provisions of Finance Bill
“It is proposed to amend sub-section (2) of the said section to clarify that the mere fact of participation by one enterprise in the management or control or capital of the other enterprise, or the participation of one or more persons in the management or control or capital of both the enterprises shall not make them associated enterprises, unless the criteria specified in sub-section (2) are fulfilled.
”
◦ Note on Clauses
“Clause 38 seeks to amend section 92A of the Income-tax Act relating to meaning of associated enterprise.
It is proposed to amend the said sub-section (2) so as to insert the words “For the purposes of sub-section (1)”. The proposed amendment is of clarificatory nature.”
◦ CBDT Circular Example about 100% of non-voting capital-not an AE CA Ganesh Rajgopalan October 26, 2012 12
Memorandum
• •
not an external aid for construction?
“usually not an accurate guide of the final Act… In the Explanatory Memorandum, headings are fairly wide and matters collected under the same heading may be diverse not giving a true indication of the object of the legislation” [Shashikant Laxman Kale v Union of India (1990) 185 ITR 104 (SC)]
Whether deeming criteria mandatory or circumscribed by Sub-sec. (1)
Bank lending to an enterprise without participation in management, control or capital
Sanchez Capital Services [26 taxmann.com 61]
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Facts ◦ Assessee subsidiary of FCo. ZCo (which was 20% shareholder) was shown as AE in Form 3CEB for the past three years. Adjustment made in AY 2008-09. Revenue’s contentions ◦ shareholding structures and relationships between Z and F groups remain unexplained ◦ No minimum threshold prescribed; even 1% shareholding participation sufficient ◦ When two enterprises AE u/s 92A(1), no need to consider deeming provisions in s.sec (2) Assessee’s contentions ◦ submitted Form No.3CEB by way of abundant precaution ◦ sub-section 1 & 2 to be read together to identify whether AE relationship exists; Memorandum explaining the provisions in the Finance Bill, 2002 relied on Ruling ◦ Just filing Form 3CEB cannot result in these two as AEs unless sec. 92A are satisfied ◦ Detailed explanations given how these provisions [sec. 92(2)] not applicable. ◦ However, not clear from records whether there is any relationship as prescribed u/s 92A(1)(a)(b). Hence remanded.
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“(a) one enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in the other enterprise; (b) any person or enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in each of such enterprises”
Directly or indirectly ◦ Registered holder or beneficial owner Indirectly – ◦ Proportionate?
Convertible instruments ◦ Potential equity interest to be considered?
Voting power ◦ May not apply to non-corporate entities A 60% B 40% C CA Ganesh Rajgopalan October 26, 2012 15
“(c) a loan advanced by one enterprise to the other enterprise constitutes not less than fifty-one per cent of the book value of the total assets of the other (receiving) enterprise; (d) one enterprise guarantees not less than ten per cent of the total borrowings of the other enterprise;”
Lender participation in management or control or capital required?
Percentage ◦ at the time of advancing of loan or at any time the loan subsists Total assets not defined ◦ Fixed assets at gross or net block ◦ ◦ ◦ Revalued amount in books or historical cost Net of current liabilities or otherwise Deferred revenue expenditure/ P & L debit Guarantee ◦ Performance guarantee ◦ Guarantee relating to trade payables CA Ganesh Rajgopalan October 26, 2012 16
(e) more than half of the board of directors or members of the governing board, or one or more executive directors or executive members of the governing board of one enterprise, are appointed by the other enterprise; (f) more than half of the directors or members of the governing board, or one or more of the executive directors or members of the governing board, of each of the two enterprises are appointed by the same person or persons;
Actual appointment relevant, not power to appoint Only year of appointment or later years?
◦ Instances where JV partners take turns in appointing ED ◦ Where the Board strength undergoes change
Appointing CEO/top executives whether covered?
Applies to entities other than companies
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the manufacture or processing of goods or articles or business carried out by one enterprise is wholly dependent on the use of know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights;
Also covers services Whether enterprise carrying on single activity or multiple activities Whether activity for which IPR, etc is used is primary activity
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Whether IPR owner participates in management or control
appointment of strategic personnel CA Ganesh Rajgopalan October 26, 2012 18
(h) ninety per cent or more of the raw materials and consumables required for the manufacture or processing of goods or articles carried out by one enterprise, are supplied by the other enterprise, or by persons specified by the other enterprise, and the prices and other conditions relating to the supply are influenced by such other enterprise; (i) the goods or articles manufactured or processed by one enterprise, are sold to the other enterprise or to persons specified by the other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprise;
Does not apply to services Global supply contracts with third party supplies covered Price & other conditions influenced how determined No percentage stipulated for goods sold
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(j) where one enterprise is controlled by an individual, the other enterprise is also controlled by such individual or his relative or jointly by such individual and relative of such individual; (k) where one enterprise is controlled by a Hindu undivided family, the other enterprise is controlled by a member of such Hindu undivided family or by a relative of a member of such Hindu undivided family or jointly by such member and his relative; (l) where one enterprise is a firm, association of persons or body of individuals, the other enterprise holds not less than ten per cent interest in such firm, association of persons or body of individuals;
No percentage specified in (j) & (k)
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One person (non-individual) controlling two enterprises
Clause (k) & (l) ◦ ◦
Control-
Management /operational/ownership control?
“interest” implies ownership CA Ganesh Rajgopalan October 26, 2012 20
(2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, - if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or - the terms of the relevant transaction are determined in substance between such other person and the associated enterprise.
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B is interposed and the terms of the transactions are determined between AE 2 and B. U/s 92B(2), AE 1 and B are AEs.
Global sourcing arrangements AE 2 AE 1 Sale at 365 days credit B Sale at 30 days credit CA Ganesh Rajgopalan October 26, 2012 22
Association for Specified Domestic Transactions
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Does not cover all domestic transactions
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Coverage
Sec. 40A(2)(b) Sec. 80A Sec. 80(IA) Other provisions of Chapter VIA
Sec. 80-IAB, 80-IB, 80-IC, 80-ID, 80-IE
Sec. 10AA Other transactions prescribed
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◦
Transactions with non-residents covered?
For instance, A Ltd holds shares of B Ltd carrying 21% voting power
For the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non residents..….[S. 92B]
For the purposes of this section and sections 92, 92C, 92D and 92E, "specified domestic transaction" in case of an assessee means any of the following transactions, not being an international transaction…[S. 92BA]
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◦ ◦ Expenditure incurred between
which is excessive or unreasonable having regard to ◦ Fair market value of goods, services or facilities
(no disallowance if ALP)
, or legitimate needs of the business
(Disallowance possible even if ALP)
or benefit derived or accruing therefrom
(Disallowance possible even if ALP)
. Does not cover income of the taxpayer ◦
Durga Rice & Gen Mills vs. AO [TS-446-ITAT-2012 (Chandi)]
Capital expenditure – applicability Deductions in respect of which heads of income ◦ Deduction u/s 57 – applicability [s. 58(2)] Substantial interest defined ◦ Beneficial owner of shares carrying not less than 20% voting power ◦ Beneficially entitled to not less than 20% of profits of business
only covered defined CA Ganesh Rajgopalan October 26, 2012 26
Beneficial owner vs. indirect holding
A A B C A-B - Y B-C - Y A-C - N D B E C A-D - Y D-E - Y B-D - Y C-D - N C-E - N CA Ganesh Rajgopalan October 26, 2012 27
Taxpayer Individual Company Firm AOP HUF Any assesse carrying on business or profession Any assesse carrying on business or profession Any assesse carrying on business or profession Payee
Relative Director/relative Partner/relative Member/relative Member/relative Individual who has substantial interest in assessee’s business Relative Company having SI in assessee’s business or its director or relative of director Another company carrying on business or profession where the first co. has SI.
Firm/AOP/HUF having substantial interest in assessee’s business or its partner/member or their relative CA Ganesh Rajgopalan October 26, 2012
Clause of s. 40A(2)(b)
(i) (ii) (ii) (ii) (ii) (iii) (iv) (iv) 28
Taxpayer Payee Any assesse carrying on business or profession
If such individual is director/partner/ member of company/ firm/AOP/HUF, Such a company/firm/ AOP/HUF Directors/partners/members Their relatives
Individual Company Firm/AOP/HUF
A person in whose business assesse or his relative has substantial interest A person in whose business assesse-co. or its director or relative has substantial interest A person in whose business assesse-firm/AOP/HUF or its partner/member or relative has substantial interest
Clause of s. 40A(2)(b)
(v) (vi)(A) (vi)(B) (vi)(B) CA Ganesh Rajgopalan October 26, 2012 29
Sec. 2(41) Not specified Spouse Father Mother Son Daughter Father’s father Father’s mother Mother’s mother Mother’s father Son’s son Son’s daughter Daughter’s son Daughter’s daughter Brother Sister Sec. 56(2)(vi) Expln
Member of HUF Spouse Father Mother Son Daughter Father’s father Father’s mother Mother’s mother Mother’s father Son’s son Son’s daughter Daughter’s son Daughter’s daughter Brother Sister
Sec. 6, Companies Act
Member of HUF Spouse Father Mother (including step-mother) Son (including step-son) Daughter (including step-daughter) Father’s father Father’s mother Mother’s mother Mother’s father Son’s son Son’s daughter Daughter’s son Daughter’s daughter Brother (including step-brother) Sister (including step-sister)
AS 18
Not specified Spouse Father Mother Son Daughter Brother Sister CA Ganesh Rajgopalan October 26, 2012 30
Sec. 2(41) Not specified Father’s father Father’s mother Mother’s mother Mother’s father Son’s son Son’s daughter Daughter’s son Daughter’s daughter Sec. 56(2)(vi) Expln
Member of HUF Father’s father Father’s mother Mother’s mother Mother’s father Son’s son Son’s daughter Daughter’s son Daughter’s daughter Brother or sister of spouse Brother/sister of either parents of the individual Lineal ascendant/ descendant of spouse Spouse of brother or sister
Sec. 6, Companies Act
Member of HUF Father’s father Father’s mother Mother’s mother Mother’s father Son’s son Son’s daughter Daughter’s son Daughter’s daughter Brother’s wife Sister’s husband Spouse of brother/sister of spouse Spouse of brother/sister of either parents Spouse of any lineal ascendant/ descendant Son’s wife, Daughter’s husband, Son’s son’s wife, Son’s daughter’s husband, Daughter’s son’s wife, Daughter’s daughter’s husband Spouse of any lineal ascendant/ descendant of spouse
AS 18
Not specified CA Ganesh Rajgopalan October 26, 2012 31
Whether applies to govt companies where President of India or Governor of a State holds majority of shares and exercises or controls voting rights Where the registered shareholder does not hold the beneficial interest in the shares Whether payment of expenditure to a subsidiary covered ◦ Held not covered under clause (iv) of Sec. 40A(2)(b) [V.S. Dempo & Co. (P.) Ltd. [2011] 196 TAXMAN 193 (Bom.)] CA Ganesh Rajgopalan October 26, 2012 32
Sec. 80-IA(8) / Sec. 80A(6)
◦ Applies to goods and services ◦ Deals with two units of same enterprise Internal transfers
Sec. 80-IA(10) Steps-
◦ Due to a close connection between the assessee and any other person, there exists a course of business; and ◦ AO determines that transaction is so arranged to produce more than ordinary profits for the tax holiday unit ◦ the transaction price will be substituted by ALP Close connection Not defined Can one apply association defined under Sec. 40A(2)(b) or sec. 92A?
Could cover relative u/s 56(2)(vii) CA Ganesh Rajgopalan October 26, 2012 33
Thank you!
Email: [email protected]
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