There are various types of international transactions multinational companies engage into within their group. Out of these transactions, there are few which are always under the Eye of Income Tax authorities. One of such transaction is “Intra group services”.
Nowadays is an era of globalization, wherein various departments, functions, services are centrally organised at the headquarter level in a group of companies. Same are utilized by group companies situated in various corners of the world. Often, such services are provided by one of group companies to whole group and cost incurred by service provider is recovered from the recipient companies.
I Co Ltd is an Indian company which is having similar set up of management services (as described above) provided by parent entity F Co Ltd situated in country abroad and providing services to various group companies globally. Basket of management services include support or assistance in various functions such as IT, Human resource, Legal advisory, Technical development of product etc. For this F Co Ltd charges fees per month as per allocation based on appropriate factor such as sales % incurred by all recipient companies.
Challenge
- Income Tax authorities questioned such services for which payments are made by I Co Ltd to F Co Ltd and concerns raised by them are:
- Explain the need of such services for I Co Ltd
- Explain the benefits received by services from F Co Ltd
- Justify the charges allocated to I Co. Ltd
- Based on these issues Tax authorities disallowed the expenses of such payments of I Co Ltd and I Co had to fight the case till Income Tax Appellate level.
What we did
- A. Documentation
- Root cause of the issue was lack of documentation of the said arrangement between group companies. We analysed the facts of the case and suggested few steps to I Co Ltd such as:
- Collate the communication in the form of E-mails, video conference calls, presentations etc for all such services provided by F Co to I Co during the year.
- Understand the workings for allocation of fees to I Co Ltd.
- On collation of such details, we summarised the communication between I Co and F Co in a format which helped Tax authorities to understand the actual services received by I Co from F Co. Further, Detailed summary of such communication along with evidences helped Tax authorities to understand benefits received by I Co through such services and why they were necessary to be received from F Co.
- B. Certification of Costs
- We went through the allocation methodology of group and fees allocated to I Co by F Co Ltd. We discussed the same with the concerned personnel from Indian as well as group company. We verified the factual correctness of the workings and allocation of fees to I Co and certified the same. Such certification helped I Co Ltd before Tax authorities to justify the allocation of costs made by Group.
What we achieved
- Due to such detailed documentation it was quite easy for I Co Ltd to justify and argue their case before the Income Tax appellate authorities. This helped them to easily explain and argue the need of services, benefits of services and justification of charges allocated by F Co Ltd. Based on the same, I Co Ltd won the case before the appellate authorities of Income Tax and got their adjustment deleted.
2. Many a times, company in India is proposing to enter into a new transaction with its foreign affiliate. Such Indian company prefers an advice before actual incurring of transaction instead of post-mortem exercise in the form of Transfer pricing audit. Such an advisory helps to understand issues involved and solutions to resolve the same in advance and to avoid future hassle.
I Co Ltd proposed to start a new line of service with its foreign affiliate F Co Ltd. In this case, I Co Ltd is proposed to provide certain services to F Co Ltd. These services will be provided by set of employees of I Co Ltd situated in India to F Co Ltd situated abroad.
Challenge
- Considering that I Co and F Co were associated enterprises; it was important to decide an appropriate remuneration model for I Co Ltd in a manner to avoid further queries raised by Tax authorities from a Transfer pricing perspective.
What we did
- A. Functional analysis:
- We interviewed employees of I Co Ltd and discussed the type of services proposed to be provided by I Co to F Co. This was important to understand roles performed by each entity in the said transaction. This defined their risk and responsibilities for the same. Accordingly, we have prepared a detailed FAR (Functions/Assets/Risk) analysis for the said transaction of provision of services to F Co.
- B. Benchmarking exercise:
- Depending upon type of service and industry wherein I Co. operates, we have performed a benchmarking exercise to obtain set of companies engaged in similar business. We have summarised set of companies which are broadly similar to I Co functions and suggested a profit margin for services proposed to be provided by I Co. We delivered a detailed Advisory report explaining our findings and conclusions.
What we achieved
- A detailed benchmarking advisory report suggesting an appropriate mark up that can be earned by I Co from provision of said services was a kind of readymade solution to I Co which made their decision making very concrete and easy. As such, the companies agreed margin which was safe from Transfer pricing perspective.