Transfer pricing can be defined as the value which is attached to the goods or services transferred between related parties. It applies when parties enter into transactions with common control entities. It involves use of specialized software for drafting a transfer pricing study and calculation of ALP.
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 –
- One enterprise holds directly or indirectly shares carrying not less than twenty six-percent of the voting power in the other enterprise; or
- Any person or enterprise holds directly or indirectly shares carrying not less than twenty six percent of the voting power in each of such enterprises; or
- A loan advanced by one enterprise to the other enterprises constitutes not less than fifty one percent of the book value of the total assets of other enterprises; or
- One enterprise guarantee not less than ten percent of the total borrowings of that enterprises; or
- More than half of directors or members of the governing body or one or more of the executive directors or members of the governing body of each of the two enterprises are appointed by the same person.
- 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 trademarks, licenses, 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 other enterprises is the owner or in respect of which the other enterprise has exclusive rights; or
- Ninety per cent or more of the raw materials and consumables required for the manufacture or processing of good or article carried out by one enterprise are supplied by the other enterprises or by persons specified by the other enterprise and the price and other conditions relating to the supply are influenced by such other enterprise.
- The goods or article manufactured or processed by one enterprise are sold to the other enterprise or to person specified by the other enterprise and the prices and other condition relating thereto are influenced by such other enterprise
- 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
- 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
- Where one enterprise is a firm, association of person or body of individuals the other enterprise holds not less than ten percent interest in such firm, association of person or body of individuals
- There exists between the two enterprises any relationship of mutual interest as the case may be prescribed.
So if any enterprise enters into any international transaction with associated enterprise or any SDT with related party then such entity needs to get a TP Study prepared.
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