Report of the Expert Group on Transfer Pricing Guidelines

1          Background and Terms of Reference

In April 2002, the Central Government constituted an Expert Group to recommend transfer pricing guidelines for companies for pricing their products in connection with the transactions with related parties and transactions between different segments of the same company. The composition of the Expert Group is given in Annexure 1.

The terms of reference of the Group were as follows:

“The Expert Group shall deliberate upon the scope and extent of the comprehensive transfer pricing guidelines under the provisions of Companies Act, 1956 in the context of related party transactions. The above guidelines shall also encompass segmental transfers within the same corporate entity. The Expert Group shall identify and develop the form of these guidelines and shall particularly consider:

(a) whether the desired objective of laying down of  comprehensive transfer pricing guidelines could be achieved  within the framework of the existing provisions of the  Companies Act, 1956;  or

(b) if (a) above is not considered feasible,  suggest such  legislative framework  and contents thereof, as may be  necessary to achieve the desired objective.

The Group may take into account similar guidelines relating to transfer pricing as enshrined in other tax statutes such as Income Tax Act, 1961, Central Excise Act, 1944 and Customs Act etc. The prevalent practices in this regard in the global scenario may also guide the Group in its endeavour in prescribing the most practical methodologies for pricing of such transfers.”

The Group held four meetings during the course of its deliberations. In addition, the members interacted extensively through the medium of email. Moreover, several subgroups had their own meetings and interactions while preparing the initial drafts that formed the basis for the Group’s deliberations.

Dr. Ashok Haldia disagrees with several aspects of this report. His note of dissent is attached to and forms part of this report.

2          The Group’s Approach and Procedure

2.1     Acknowledgements

The Group would like to acknowledge the valuable contribution of the Institute of Chartered Accountants of India, the Institute of Company Secretaries of India and the Institute of Cost and Works Accountants of India in providing valuable research support to the Group through their representatives on the Group. The Group would also like to thank the Institute of Company Secretaries of India and the Institute of Cost and Works Accountants of India for their hospitality when the meetings of the Group were held in their premises.

The Group would like to place on record its appreciation of the outstanding support provided by its member-secretary, Mr. I. P. Singh and his colleagues in the Department of Company Affairs. Mr. Singh displayed an extraordinarily high level of dedication and commitment.

The Group would also like to thank the various subgroups that helped the Group to complete its task.

2.2     Current Regulatory Regime in India and Globally

The Group began by studying the laws and practices relating to transfer pricing in India and abroad. Annexure 2 summarises the provisions relating to transfer pricing under the various Indian laws and regulations in the form of a comparative chart. Annexure 3 summarises the global legal regimes relating to transfer pricing.

The following conclusions can be drawn from these two annexures.

(a)    Indian and global tax authorities have armed themselves with substantial powers to plug the tax evasion that arises from creative transfer pricing.

(b)   Transactions between related parties come under the ambit of Accounting Standard AS 18 in India and IAS 24 internationally. These standards require disclosure of certain aspects of such transactions.

(c)    Neither in India nor elsewhere in the world have company law authorities prescribed transfer pricing methods or disclosures.

(d)   The methodologies for determining arm’s length transfer prices (Comparable Uncontrolled Price, Resale Price Method etc.) are broadly the same in India and abroad.

(e)    There is a great deal of diversity in the definition of related party.

2.3     Current Corporate Practices in India

The Group also looked at current corporate practices related to transfer pricing in India. While some Indian companies have no doubt set high standards of corporate governance and fairness in this area, many Indian companies have more to do. Several members of the Group observed that in the course of their professional life, they had come across companies that have resorted to unhealthy practices in the area of transfer pricing. Considerable anecdotal evidence is also found in the financial press. Annexure 4 summarises some of the transfer pricing abuses that have given rise to concerns among shareholders, creditors and other stakeholders about transfer pricing regulation.

2.4     Adequacy of Accounting Standard AS 18

It was pointed out in 2.2 above that as far as shareholders and creditors are concerned, the only protection against transfer pricing abuses is the accounting standard on related parties. It thus becomes necessary to evaluate whether Accounting Standard AS 18 on related party disclosures is adequate to deal with the problem of transfer pricing in India.

The Group recognises that the introduction of AS 18 last year has greatly enhanced the quality of disclosure about transfer pricing and thereby potentially limited the abuses in this area. The principal provision dealing with pricing in AS 18 is Paragraph 25:

“Paragraph 23 (v) requires disclosure of ‘any other elements of the related party transactions necessary for an understanding of the financial statements’. An example of such a disclosure would be an indication that the transfer of a major asset had taken place at an amount materially different from that obtainable on normal commercial terms.”

This is a major step forward in that it does require some gross transfer price abuses to be disclosed. However, the Group is of the view that it would be useful to impose a positive obligation on the part of the company to use an arm’s length transfer price. It would also be useful to have a more elaborate adequate mechanism to determine whether transfer prices are fair or not.

2.5     Global Best Practices and Beyond

This analysis suggests the need for a transfer price guideline under the Companies Act to ensure the fairness of transfer prices from a shareholder/creditor perspective. At the same time, the Group is well aware that the current regulatory regime in India is similar to that elsewhere in the world. In most jurisdictions in the world, the company law is yet to regulate transfer prices. All over the world, this appears to have been left to company management alone to determine in accordance with the business judgement rule.

In today’s environment where we are attempting to incorporate global best practices in all our laws and regulations, introducing a new regulation that is yet to be introduced anywhere else in the world is not something to be done lightly. The Group debated this issue at length. A number of factors swung the Group’s thinking in favour of such a guideline despite this concern:

1.      There is global dissatisfaction with corporate governance and corporate disclosure practices in the wake of some well publicized corporate failures during 2001 and 2002 in the United States and elsewhere. Regulators in many jurisdictions are rethinking their approach towards regulation and contemplating measures to tighten the laws regarding corporate abuses. In this situation where global regulatory practices are evolving, there is scope for countries like India to innovate and set new standards of disclosure and transparency that leapfrog current global best practices.

2.      There have been corporate governance abuses in India too. Many observers believe that violations of investor and creditor rights have damaged the financial system severely. On the one hand, the erosion of investor confidence has dealt a body blow to our capital markets. On the other hand, mounting corporate delinquencies have debilitated the banking system. In this situation, it could be argued that there is a case for a regulatory regime to check transfer-pricing abuses.

2.6     Transfer Pricing Guidelines under the Companies Act

After extensive discussion and deliberations, the Group came to the conclusion that transfer pricing guidelines should be framed under the Companies Act. The Group noted that the Companies Act (S 209 and S 211) requires that the books of account of the company as well as its Balance Sheet and Profit and Loss Account present a true and fair view of the affairs of the company. The Group believes that the “true and fair view” obligation requires substantial disclosures of transfer pricing policies. It also requires a mechanism to ensure that transfer prices approximate arm’s length prices.

The need for transfer pricing guidelines therefore arises for all users of the financial statements of the company who rely on these statements for a true and fair view:

·        shareholders who wish to evaluate the performance of the company management and assess the future prospects of the company

·        creditors who wish to ascertain the credit worthiness of the company and monitor compliance with debt covenants

·        revenue authorities who may rely partly or wholly on the financial statements to determine tax liability

·        other government authorities who may rely on the financial statements to monitor compliance with various laws and regulations (for example, exchange control) or for statistical purposes (for example, price indices or GDP statistics)

·        other stakeholders (for example, employees, customers, suppliers) who may use the financial statements for various purposes

For some of these purposes the requirement of arms length transfer prices applies to inter-divisional transfers within the same legal entity. For example, shareholders need a true and fair view of segment revenues and profits as different valuation and performance benchmarks may apply to different segments. Revenue authorities may also require this when different tax rates apply to different segments.

The Group has attempted to keep the needs of all these users in mind while framing the transfer pricing guidelines.

3          Transfer Pricing Guidelines: Core Principles

The Group recommends that the proposed transfer pricing guidelines be guided by the following core principles:

3.1     Requirement of arm’s length transfer prices

All transactions between a company and a related party or between two business segments of a company shall be at arm’s length transfer prices except as provided below.

Remarks: It must be emphasised that even a transfer price more favourable to the company than an arm’s length price is problematic. This is so because (a) valuation is impacted by the possibility that the related party may demand an arm’s length price in the future and (b) the threat to charge an arm’s length price in future could become a form of poison-pill/blackmail.

3.2     Exceptions to arm’s length transfer price

In exceptional cases, the company may decide to use a non-arm’s length transfer price provided:

·        the Board of Directors as well as the audit committee of the Board are satisfied for reasons to be recorded in writing that it is in the interest of the company to do so, and

·        the use of a non-arms length transfer price, the reasons therefor, and the profit impact thereof are disclosed in the annual report

Remarks:  Examples of such exceptional cases could be a company giving an interest free loan to a loss making subsidiary or a company accepting the offer of a controlling shareholder to work as the CEO on a nominal salary.

3.3     Transfer Price Policy Statement and Implementation Report

The company shall prepare a Statement on Transfer Price Policy (the “Policy Statement”) and a Report on Implementation of Transfer Price Policy (the “Implementation Report”).

·        The Policy Statement would explain the specific transfer pricing methods used for different classes of transactions with different parties with special emphasis on those transactions where a Comparable Uncontrolled Price/Transaction (CUP/CUT) method could not be adopted.

·        The Implementation Report would document the compliance with the Policy Statement and would include the actual detailed computation of an arm's length price for every material transaction with a related party or internal business segment.

·        The Implementation Report would be audited by an independent Chartered Accountant or Cost Accountant.

·        The Policy Statement and the Implementation Report would be placed before the Audit Committee for approval

·        The Policy Statement would also be placed before the Board for approval

·        Related party transactions should be undertaken only after the Policy Statement relating to that party has been approved by the Audit Committee and the Board.

Remarks: The Policy Statement is the primary responsibility of management. The Implementation Report is subject to audit.

The Implementation Report could contain commercially confidential information that is not suitable for wider disclosure. The Policy Statement while not compromising commercially confidentiality would provide sufficient information for an evaluation of the adequacy and fairness of the transfer price policy in the company.

CUP/CUT is a reliable and objective method in those cases where it is applicable. Cases where no comparable uncontrolled price is available present a greater challenge for transfer pricing. Highlighting these cases and explaining the transfer pricing policy in these cases is important from a disclosure point of view.

3.4     Disclosures in Annual Report

a)      The Transfer Pricing Policy Statement would be annexed to and form part of the Directors’ Report.

b)      The Directors’ Report would also certify that the Transfer Pricing Guidelines have been complied with and that transactions entered into are at arm’s length unless otherwise stated and are not prejudicial to the company.

c)      The Directors’ Report would disclose any use of a non-arms length transfer price, the reasons therefor, and the profit impact thereof.

d)      The Auditors would certify that they have examined the implementation of the transfer pricing policy and found it to be in conformity with the Transfer Pricing Guidelines and with the Policy Statement.

e)      The Annual Report would contain the disclosures required under the Transfer Pricing Guidelines as well as the disclosures required in AS 18. These disclosures would appear together in the Annual Report in order to be more meaningful and to enhance ease of understanding.

Remarks: Though the Implementation Report is not disclosed to the shareholders, the auditors’ certification, which is based on their audit of the Implementation Report, provides substantial comfort to them.

The revenue authorities and other regulatory/governmental agencies could call for the audited Implementation Report where needed and might in most cases be able to rely on it without carrying out their own transfer pricing study.

The disclosures required under AS 18 include the following:

·        Name of the related party and nature of the related party relationship where control exists should be disclosed irrespective of whether or not there have been transactions between the related parties.

·        If there have been transactions between related parties, during the existence of a related party relationship:

·        the name of the transacting related party;

·        a description of the relationship between the parties;

·        a description of the nature of transactions;

·        volume of the transactions either as an amount or as an appropriate proportion;

·        any other elements of the related party transactions necessary for an understanding of the financial statements;

·        the amounts or appropriate proportions of outstanding items pertaining to related parties at the balance sheet date and provisions for doubtful debts due from such parties at that date; and

·        amounts written off or written back in the period in respect of debts due from or to related parties.

4          Legal Foundation for the Transfer Pricing Guidelines

After extensive deliberations, the Group is of the view that a new clause (e) should be inserted in section 209(1) of the Companies Act specifically empowering the Central Government to frame rules or guidelines on transfer pricing. Such a legislative measure would invest the Guidelines with unambiguous statutory force. The Group recommends the insertion of the following clause in the Companies Act:

“209(1)(e) Every company, which enters into any transaction either with related party or within its segments per se, shall maintain such books of account and other records as shall enable the ascertainment of arm's length price of such transaction. The arm's length price shall be determined based on such guidelines as may be issued by the  Central Government from time to time.”

However, the Group recognizes that a legislative amendment is potentially time consuming and that it would be desirable to consider alternative mechanisms that could be put it place faster. The Group therefore recommends:

·        Government may consider whether the Guidelines could be issued under the residuary powers vested in it under section 642(1)(b) of the Companies Act.

·        Most of the Group’s recommendations pertaining to additional disclosures could also be implemented by incorporating them in Schedule VI of the Companies Act. This could be done by the Central Government in the exercise of the powers conferred on it under section 641(1) of the Companies Act.

If the legislative process of amending the Companies Act is likely to be time consuming, it would be desirable in the interim for the Government to implement the recommendations of the Group to the extent possible by resorting to its powers under section 641 and/or section 642.

5          Draft Guidelines

The Group recommends that the following draft guidelines be issued under the proposed Section 209(1)(e):

DRAFT TRANSFER PRICING GUIDELINES

In exercise of the powers conferred by sub-section (1) of section 642, read with clause (e) of sub-section (1) of section 209 of the Companies Act, 1956 (1 of 1956), the Central Government hereby makes the following guidelines, namely ;-

1.   Short title and Commencement.-

(1)   These guidelines may be called “Transfer Pricing Guidelines, 2002”.

(2)   These guidelines shall come into force on the date of their publication in the official gazette.

2.    Application.-

These guidelines shall apply to such transactions, which a company may enter into with its related party or within its segments per se.

Provided that nothing contained herein shall apply to those transactions where the transaction price is fixed by any Government department or authority pursuant to any Law or Act of Parliament.

3.      Definitions.-

In these guidelines, unless the context otherwise requires - 

(1)   “arm’s length price” means the price, which is applied in a transaction between persons other than related party in uncontrolled  conditions. 

(2)    “related party”, in relation to a company, means an entity -

(a)       which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of such company or vice versa; 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 who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of such company or vice versa.

An entity shall be deemed to be a related party in relation to a company if, at any time during the previous year -

(a)       the entity holds, directly or indirectly, shares carrying not less than twenty-six percent of the voting power in such company or vice versa; or

(b)      any person or entity holds, directly or indirectly, shares carrying not less than twenty-six percent of the voting power in each of the entities; or

(c)       a loan advanced by the entity to the company constitutes not less than fifty-one percent of the book value of the total assets of the company or vice versa; or

(d)      the entity guarantees not less than fifty-one percent of the total borrowings of the company or vice versa; or

(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 the entity, are appointed by the company or vice versa ; or

(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 entity and the company are appointed by the same person or persons; or

(g)       the manufacture or processing of goods or articles or business carried out by the entity 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 company is the owner or in respect of which the company has exclusive rights or vice versa; or

(h)       ninety percent or more of the raw materials and consumables required for the manufacture or processing of goods or articles carried out  by the entity, are supplied by the company, or by persons specified by the company, and the prices and other conditions relating to the supply are influenced by such company or vice versa; or

(i)         the goods or articles manufactured or processed by the entity, are sold/transferred to the company or to persons specified by the company, and the prices and other conditions relating thereto are influenced by such company or vice versa; or

(j)        where the entity is controlled by an individual, the other company is also controlled by such individual or his relative or jointly by such individual and relative of such individual; or

(k)      where an entity has the power to direct, by statute or agreement, the financial and operating policies of the company or vice versa;

(l)         there exists between two entities, any relationship of mutual interest as may be prescribed provided one of them is a company.

(3)  “entity”.- the term “entity” means an individual or a Hindu undivided family or a  partnership firm or an association of persons or a trust or a company.

(4)  “relative”.- A person shall be deemed to be a relative of another; if, and only if,-

(a)       they are members of a Hindu undivided family; or

(b)      they are husband and wife; or

(c)       the one is related to the other in the manner indicated in Schedule  I A of the Companies Act, 1956.

(5)  “segment” means any business segment for which financial results are prepared either for the purpose of segmental reporting or for complying with or availing benefits under the provisions of  any of the Acts or Laws.

(6) “transaction” includes any sale, purchase, transfer, arrangement, understanding or action, whether formal or informal, whether oral or in writing, whether legally enforceable or not with respect to :

(a)       raw materials, process materials, utilities like water, steam, gas, air, power, effluent treatment facility, finished products and rejected goods including scraps, etc;

(b)      utilisation of plant facilities and technical know-how;

(c)       rendering or receiving of  services including deputation of man power;

(d)      administrative, technical, managerial or any other consultancy services;

(e)       capital goods including plant and machinery;

(f)        lease of tangible or intangible property;

(g)       provision of finance (including loans, advances and equity or other contribution in cash or in kind);

(h)       agency and distribution arrangements;

(i)         leasing or hire purchase arrangements;

(j)        transfer of or sharing of the benefits of research and development;

(k)      licence or know-how agreements;

(l)         guarantees and collaterals;

(m)     management contracts;

(n)       any work in pursuance to a contract;

(o)      any other sharing or provision of resources or undertaking of obligations between or on behalf of related parties regardless of whether or not a price is charged.

 

4.  Transactions to be at arm’s length price

All transactions between a company and a related party or between two business segments of a company shall be at arm’s length transfer prices determined in accordance with Clause 5.

Provided that in exceptional cases, the company may decide to use a non-arm’s length transfer price if the Board of Directors as well as the audit committee of the Board are satisfied for reasons to be recorded in writing that it is in the interest of the company to do so. In all such cases, the use of a non-arms length transfer price, the reasons therefor, and the profit impact thereof shall be disclosed in the annual report.

5.   Methods Of Computation Of Arm’s Length Price

The arm’s length price shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction, namely :- 

(1)   Comparable Uncontrolled Price Method

(2)   Resale Price Method

(3)   Cost Plus Method

(4)   Profit Split Method

(5)   Transactional Net Margin Method

(6)   Any other basis approved by the Central Government,  which has the effect of valuing such transaction at arm’s length price. 

(1)         Comparable Uncontrolled Price (CUP) Method :

The price charged or paid in a comparable uncontrolled transaction or a number of such transactions shall be identified. Such price shall be adjusted to account for differences, if any, between the related party transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market. The adjusted price shall be taken as arm’s length price.

The uncontrolled transaction means a transaction between independent enterprises other than related parties and shall cover goods or services of a similar type, quality and quantity as those between the related parties and relate to transactions taking place at a similar time and stage in the production/distribution chain with similar terms and conditions applying.

      (2)   Resale Price Method :

The price at which the goods purchased or services obtained from a related party is resold or is provided to an unrelated entity shall be identified. Such resale price shall be reduced by the amount of a normal gross profit margin accruing to the enterprise or to an unrelated enterprise from the purchase and resale of the same or similar goods or services in a comparable uncontrolled transaction or a number of such transactions. The price so arrived at shall be further reduced by the expenses incurred by the enterprise in connection with the purchase of goods or services. Such price shall be further adjusted to take into account the functional and other differences including differences in accounting practices, if any, between the related party transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the amount of gross profit margin in the open market. The adjusted price shall be taken as arm’s length price in respect of goods purchased or services obtained from the related party.

The resale price method would normally be adopted where the seller adds relatively little or no value to the product or where there is little or no value addition by the reseller prior to the resale of the finished products or other goods acquired from related parties. This method is often used when goods are transferred between related parties before sale to an independent party.

     (3) Cost Plus Method :

The total cost of production incurred by the enterprise in respect of goods transferred or services provided to a related party shall be determined. The amount of a normal gross profit mark-up to such costs arising from the transfer of same or similar goods or services by the enterprise or by an unrelated enterprise in a comparable uncontrolled transaction or a number of such transactions, shall be determined. The amount of a normal gross profit mark-up shall be  adjusted to take into account the functional and other differences, if any, between the related party transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market. The total cost of production referred to above increased by the adjusted profit mark-up shall be taken as arm’s length price. It is also important here to ensure that the cost base to which mark-up is applied is comparable to the cost base of the third party transaction which serve as comparable. For example, it may be necessary to make an adjustment to cost where one person leases its business assets while other owns its business assets.

The cost plus method would normally be adopted if CUP method or resale price method cannot be applied to a specific transaction or where goods are sold between associates at such stage where uncontrolled price is not available or where there are long term buy and supply arrangements or in the case of provision of services or contract manufacturing.

    (4) Profit Split Method :

The combined net profit of the related parties arising from a transaction in which they are engaged shall be determined. This combined net profit shall be partially allocated to each enterprise so as to provide it with a basic return appropriate for the type of transaction in which it is engaged with reference to market returns achieved for similar types transactions by independent enterprises. The residual net profit, thereafter, shall be split amongst the related parties in proportion to their relative contribution to the combined net profit. This relative contribution  of the  related parties shall be evaluated on the basis of the function performed, assets employed or to be employed and risks assumed by each enterprise and on the basis of reliable market data which indicates how such contribution would be evaluated by  unrelated enterprises performing comparable functions in similar circumstances. The combined net profit will then be split amongst the enterprises in proportion to their relative contributions. The profit so apportioned shall be taken into account to arrive at an arm’s length price

This  method would normally be adopted in those transactions where integrated services are provided by more than one enterprise or in  the case multiple inter-related transactions which cannot be separately evaluated.

    (5) Transactional Net Margin Method :

The net profit margin realised by the enterprise from a related party transaction shall be computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base.  The net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions, shall also be computed having regard to the same base.  This net profit margin shall be adjusted to take into account the differences, if any, between the related party transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect such net profit margin in the open market. The cost of production referred to above increased by the adjusted profit mark-up shall be taken as arm’s length price. The adjusted net profit margin shall be taken as arm’s length price.

This method would normally be adopted in the case of transfer of semi finished goods.; distribution of finished products where resale price method cannot be adequately applied; and transaction involving provision of services.

6. Authentication of the documents provided by the company

The information/documents provided by the company to the auditor for certification as provided in clause 7 hereof shall be signed on behalf of the Board by the Company Secretary and at least one Director of the company. In the absence of Company Secretary in the company, the same shall be signed by at least two Directors of the company on behalf of the Board.

7. Certification of Related Party Transactions

A report on the compliance of the transfer pricing guidelines in respect of transactions with related parties shall be obtained from an independent Chartered Accountant in whole-time practice or Cost Accountant in whole-time practice in the format prescribed hereunder. Such audit report shall be published in the annual report of the company in the event of any qualification or disagreement with the Board of Directors on any transaction.

(i)    I/We^* have audited the accompanying Schedule A – Record of transactions entered into by the company with related parties.  This schedule is the responsibility of the Company’s management.  My/Our^* responsibility is to express an opinion on this schedule based on our audit.

(ii)       The Report on Implementation of Transfer Pricing prepared under clause 10 has been furnished by the company and has been examined and verified by me/us^*.

(iii)   I/We^* conducted our audit in accordance with auditing standards generally accepted in India.  Those standards require that I/we^* plan and perform the audit to obtain reasonable assurance about whether the record of transactions entered into with related parties is free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the schedule of accounts receivable.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall schedule presentation.  I/We^* believe that my/our^* audit provides a reasonable basis for our opinion.

 (iv)  In my/our^* opinion, the record of transactions entered into with related parties referred to above presents fairly, in all material respects, the related party transactions of the company in conformity with accounting principles generally accepted in India.

(v)   The financial information given in the above statement is in agreement with the records and documents furnished to me/us^*, and the same has been incorporated in the books of accounts maintained by the company.

(vi)   I/We^* are not a related party of the company as defined in the Transfer Pricing Guidelines

Signature and Stamp/Seal of the

Chartered Accountant /Cost Accountant

Name of the Signatory, Membership No. and Full Address

Place :

Date  :

^*Delete whichever is not applicable.

9.      Directors’ Certificate on Transfer Pricing Guidelines

The Directors’ Report shall contain a certificate in the following format:

To the Members

It is certified that the company has complied with the Transfer Pricing Guidelines issued under Section 209(1)(e) of the Companies Act, 1956. The information pursuant to these Guidelines is given in Annexure ‘A’ to this Certificate. We believe that the record of transactions entered into with related parties during the period from _________ through _________ are at arm’s length and not prejudicial to the interests of the company.  These transactions are entered into on the basis of a transfer pricing policy adopted by the company.  All transactions have been submitted to the independent auditors for audit. [No adverse remarks have been made in their report on the audit of such transactions]/[The auditors have qualified their report and the audit report is attached] ^*.

Date: 

                                                                  For and on behalf of

Place :                                                                    Board of Directors

^*Delete whichever is not applicable.

9.   Disclosures in the Directors’ Report

The Directors’ Report shall contain the following disclosures relating to transfer pricing:

·        The record of transactions entered into with related parties in the format specified in Schedule A.

·        Transfer Pricing Policy Statement describing the strategies and policies influencing the determination of transfer price in a format as close to Schedule B as may be practicable.

·        Management perception of risk factors involved, if any.

·        The amounts or appropriate proportions of outstanding items pertaining to related parties balances and provisions for doubtful debts due from such parties as on Balance sheet date.

·        Any other material information pertaining to related party transactions that are necessary for understanding of the financial statements or are required to be disclosed under any other law or under any accounting standard. The disclosures required under these guidelines as well as the disclosures regarding related party transactions required under other laws or under accounting standards would appear together in the Annual Report in order to be more meaningful and to enhance ease of understanding.

10.  Transfer Price Implementation Report

The company shall prepare a Report on Implementation of Transfer Pricing documenting the compliance with the Guidelines and the Transfer Price Policy Statement. This report shall be placed before the Audit Committee of the Board of Directors for approval. It shall also be submitted to the independent auditor appointed under clause 7. This report shall include the following information:

·        List of related parties with whom the Company has entered into transactions with the following details :

(i)                  General information of related party such as name, trade name, address etc.

(ii)                Nature of relationship with the related party.

(iii)               Brief description of the business carried on by the   related party.

(iv)              If the related party is a foreign party, the name, trade name and address of their permanent establishments located abroad.

·        Nature and Description of the transaction carried/undertaken by related party, specifying the category of transactions in terms of the list given in clause 3(6). 

(This has to be given along with volume of the transaction.  In case this is not possible, then, approximate value of the transaction should be given).

·        Terms and conditions of the transaction undertaken by the company with the related parties and the quantity purchased/sold.

·        Method adopted for determining transfer price.  In case there is an established price for an unrelated party, then, how much is the difference, by adopting different method, for related party.

·        Detailed assumptions and estimates underlying the transfer price and the details of the computation of the transfer price.

·        The following additional information in respect of lending or borrowing:

(i)                      Nature of financing agreement.

(ii)                    Currency in which loan/advance granted/received.

(iii)                   Interest rate charged/paid in respect of each loan/advance.

·        If the company has entered into any transaction with a related party by way of a mutual agreement or arrangement for the allocation of or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such entrepreneurs, description of such mutual agreement or arrangement.

·        Any other material information pertaining to related party transactions necessary for understanding of the financial statements.

 

Schedule A – Record of transactions entered into with related parties

 

Name of related party	Nature of transaction	Amount (Rs.)	Transacted at arm’s length basis (Yes/No)	Remarks* (in case of exceptions to arm’s length basis of trading)

^* If the company has not followed the method prescribed under the guidelines in pricing of the transaction with any related party, the impact thereof on the profits/losses of the company shall be indicated here.

 

Schedule B: Illustrative Statement on Transfer Pricing Policy

 

Objective

1.                  The primary objective of this Statement on Transfer Pricing Policy (the “Statement”) is to ensure that all transactions between the company and related parties or between two business segments of the company are ordinarily at arm’s length transfer prices.  The Board of Directors (“BOD”) believes that this process enhances the transparency, integrity and quality of financial reporting and would comply with regulatory requirements in this regard.

Scope

2.                  This Statement applies to all transactions where a related party relationship exists between the company and that other transacting party as also transactions between two business segments of the company.

3.                  This Statement will not be applied in respect of transactions between the company and its consolidated subsidiaries, in respect of consolidated financial statements, since such transactions will be eliminated during the consolidation process. Provided that if the subsidiary or subsidiaries constitute a business segment, this Statement will apply to that subsidiary or those subsidiaries as it does to other business segments.

Definitions

4.                  For the purposes of this Statement, the terms “transactions”, “arm’s length”, “related party” and “business segment” have the meanings assigned to them under the Transfer Pricing Guidelines issued under Section 209(1)(e) of the Companies Act, 1956.

Statement of Policy

5.                  All transactions between the company and its related parties or between any two or more business segments of the company shall normally be contracted on an arm’s length basis as required under the Transfer Pricing Guidelines issued under Section 209(1)(e) of the Companies Act, 1956.

6.                  For each related party, a statement shall be recorded disclosing the basis/methodology for various transactions and shall form the basis on which transactions are entered into.

7.                  In respect of each such transaction with each related party, a record shall be maintained giving the following particulars:

·        Name of the contracting party;

·        Nature of the transaction;

·        Terms and conditions of the transaction undertaken including the amount of consideration received or given up;

·        Basis or methodology of determining such consideration;

·        Detailed assumptions and estimates underlying the transfer price and the details of the computation of the transfer price.

·        A statement whether, in management’s opinion, such consideration is at an arm’s length basis with specific reference to a comparable uncontrolled price or a comparable uncontrolled transaction.  Such statement can be prepared and presented annually; and

·        This record may also be maintained for a group of similar transactions

8.                  The policy on entering into a transaction with a related party shall be placed before the BOD/independent audit committee of the BOD for approval before any such transactions are entered into.

9.                  The records of all such transactions with each such related party shall be placed before the Board of Directors at each Board meeting for formal approval/ratification.

10.              Where an officer of the company (as defined under the Companies Act, 1956) possesses knowledge that a transaction may not be consummated on an arm’s length basis due to certain specific circumstances, he/she shall inform the BOD within ____ business days, also giving reasons for deviation from an arm’s length basis of pricing.

11.              The BOD has discretionary authority to formally approve such exceptional transactions.  It should also place such transactions together with reasons for deviations from the policy before the independent audit committee for their ratification.

12.              The records of all such related party transactions (including exceptional transactions) shall also be placed before the independent audit committee of the company at each meeting of the audit committee for their approval.

13.              It should be appreciated that the record of related party transactions contains commercially confidential information that is not appropriate for wider disclosure.

14.              At the end of every financial reporting period (quarterly, half-yearly or annual), an Implementation Report shall be prepared and presented before the Board of Directors for their approval.  (This can form part of the Directors Responsibility Statement, signed by the Managing Director and Chairman and placed before the BOD together with the audit report referred to in paragraph 17 below)

15.              The record of related party transactions shall be audited on a (quarterly/half yearly/annual) basis by an independent auditor as required under the Transfer Pricing Guidelines issued under Section 209(1)(e) of the Companies Act, 1956.  The audit report shall be taken on record at the meeting of the Board of Directors.  Such audit report shall be published in the annual report of the company in the event of any qualification or disagreement with the BOD on any transaction.

16.              Any amendments to this Statement shall be effective only if taken on record and approved by the independent audit committee and the Board of Directors of the company.

17.              This Statement was taken on record and approved by the independent audit committee at their meeting held on ________ __, 20XX.

18.              This Statement was taken on record and approved by the Board of Directors at their meeting held on ________ __, 20XX.

 

6          Review of This Report

The Group recognizes that transfer pricing regulation is a relatively new area worldwide and that it has been evolving continuously. It would therefore be desirable to review the recommendations of the Group after a period of three years with a view to improving them and updating them in line with emerging developments in India and elsewhere.

 

 

 

Jayanth R. Varma                        T. V. Mohandas Pai                    J. K. Puri      

 

 

 

Suraj Bhan Nain                          A. K. Prasad                              K. Narasimha Murthy  

 

 

 

Ashok Haldia                       V. Kalyanaraman                        S. P. Narang 

 

 

 

D. K. Mittal                                I. P. Singh     

Annexure 1

 

Composition of the Expert Group on Transfer Pricing

 

S. No	Names
1	Prof.  J.R.Varma  (IIM)	Chairman
2	Shri T.V.Mohandas Pai (Infosys)	Member
3	Shri J.K.Puri (Ministry of Finance)	Member
4	Shri Suraj Bhan Nain (CBDT)*	Member
5	Shri A.K.Prasad (CBEC)	Member
6	Shri K.Narasimha Murthy (IDBI)	Member
7	Shri Ashok Haldia (ICAI)	Member
8	Shri V.Kalyanaraman (ICWAI)	Member
9	Dr. S.P.Narang (ICSI)	Member
10	Shri D.K.Mittal (Tariff Commission)	Member
11	Shri I.P.Singh (Department of Company Affairs)	Member-Secretary

 

*          Nominated in place of Shri  A.J.Majumdar, Joint Secretary, Department of Revenue.