"Transfer pricing" refers to the prices of transactions between related parties like the Holding and subsidiary, which may take place under the conditions differing from those taking place between independent enterprises. The transfer price between relevant parties may not be at par when compared to the transfer price on transactions with unrelated parties. Suppose, a company X purchased the good for Rs. 100 and sells it to its associated company Y in another country amounted for Rs. 200, who in turn sells in the open market for Rs. 400. If company X had sold it directly in the latter country, it would have made a profit of Rs. 300. But by routing it through company Y, it restricted the profit to Rs. 100, permitting company Y to appropriate the balance. The transactions between X and Y is arranged and are not governed by market forces. The profit amounting to Rs. 200 is, thereby, shifted to country of Y. The goods are transferred on a price (transfer price) which is arbitrary or dictated (Rs. 200), but not on the market price (Rs. 400). To protect interests of the revenue, the Income Tax department framed specific provisions. The basic principle enunciated through such provisions is to be considered "arm's length price" for the international transactions. Almost every entity associated with an international entity faces the issue of transfer price regulation in India. We help those entities in determining the correct transfer pricing in India in the form of providing transfer pricing reports for Indian companies within the timeframe adopting complete legal framework.
Applicability of Transfer Pricing Provisions
Transfer pricing applies to two types of transactions:
- International Transactions
- Specified Domestic Transactions
Transfer Pricing Provisions applies to international transactions undertaken between associated enterprises without any threshold while these provisions apply to domestic transactions with threshold of Rs. 20 Crores
Transactions subject to Transfer pricing
The following are some of the typical international transactions which are governed by the transfer pricing rules:
- Sale of finished goods;
- Purchase of raw material;
- Purchase of fixed assets;
- Sale or purchase of machinery etc.
- Sale or purchase of Intangibles.
- Reimbursement of expenses paid/received;
- IT Enabled services;
- Support services;
- Software Development services;
- Technical Service fees;
- Management fees;
- Royalty fee;
- Corporate Guarantee fees;
- Loan received or paid
Two enterprises shall be deemed to be associated enterprise if at any time during the previous year –
- which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; or
- 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
Arm’s Length Price:
Arm’s Length Price is a price charged or proposed to be charged in a transaction between persons other than the associated enterprises in uncontrolled circumstances. The price at which the transaction between two associated enterprises takes place should be at Arm’s length price, which can be calculated using any of the following methods –
* Comparable Uncontrollable Price (CUP) Method
* Resale Price Method or Resale Minus Method
* Cost Plus Method
* The Comparable Profits Method
* The Profit Split Method
It is compulsory for all assessees to obtain an independent accountant’s report, Form 3CEB, regarding all international transactions between associated enterprises and submit it to the Income Tax department. In TP Report, entities need to demonstrate that their international transactions have been carried out at Arm’s length.
This report, i.e., Form 3CEB, must be furnished on or before 31stOctober following the relevant financial year.
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