Transfer Pricing Theory and Practice: Indian Perspective (In 2 Volumes)

The concept of ALP Principle has to change from, “Separate entity approach” to “Group approach”.

• Why TP is considered as a Statistical Game of Mean - Mode – Median?

• Should the under performers have no right to do business with associated entities?

• One has to distinguish TP adjustments, which arises due to problem of income allocation between the AEs or due to tax avoidance or tax evasion.

• The purpose of TP provisions is to avoid shifting of profits, which is not possible unless there is participation in capital. Influence of one enterprise on other in commercial transactions does not result in shifting of profits, hence, TP should not apply.

• The current system of benchmarking under TP can work only in countries having prefect market conditions and is not workable where market conditions are not perfect like the developing countries as India or other countries.

• Business models, compensation models are more important than FAR analysis.

• Ignorance of business model (cost plus model, fixed price model etc.), ignorance of market conditions (prefect market, developing market and under developed market etc.), and heavy reliance on TNMM have led to unnecessary and avoidable adjustments.

• It is important to note that, though, the benchmarking is done between control transactions and uncontrolled transactions, however, comparison has to be made at four different levels. It has to be at Group Level, Enterprise Level, Segment Level and Transaction Level.

• Even under the TNMM, product, function and business model etc. are equally relevant.

• CUP method is not the best method in all situations even the comparables are available. It is seen that in approx. 40 to 50% cases CUP method cannot be applied even comparables are available. Similarly, it is wrong to say that TNMM is method of last resort. In approx. 40 to 50% cases, it can be method of first choice even comparables are available under CUP Method.

• Cases on Captive Service Providers constitutes approx. 25% of total decided cases. We have done as special research analysis on published cases on CSP.

• Almost all cases of captive service providers seem to be decided by wrong benchmarking, where, either the method was wrong or the selection of the comparables was wrong!

• It is interesting to know that even a small transaction of 5% to 10% of total revenue/cost are justified based on TNMM, which is nothing but misapplication of TP provision.

• There should be limit of number of adjustments and % of adjustments required in ALP determination.

• Why 3D analysis (three-dimensional analysis of assessee, AE and Industry’s analysis) should be done before proposing any TP adjustments?

• Transaction by transaction approach without taxpayer's right to adjust its income downward, which is even allowed in the US laws, results in tax on notional income.

• Why burden of proof is always on the taxpayers? Why compliance cost of taxpayers should not be considered before asking for various information.