Transfer Pricing Consultants, Study and Audit in India
Transfer Pricing Study and Audit
What it means?
Transfer pricing refers to the price at arm's length required to be adopted in accounting for transfer of goods or services from one responsibility centre to another or from one company to another, which belongs to the same group. It is a mechanism for distributing revenue between different divisions which jointly develop, manufacture and market products and services.
Transfer pricing requires each segment or division to have relevant information in respect of its part of transaction inferable from the decision taken for the organization as a whole; to promote goal congruence - that is, actions by divisional managers to optimize divisional performance, which should automatically optimize the firm's performance, and facilitate measuring divisional performances.
The fundamental principle is that the transfer price should be similar to the price, that would be charged, if the product were to be sold to an outside customer of purchase from an outside vendor.
The OECD defines "transfer pricing" as the price at which an enterprise transfers physical goods and intangibles or provides services to associated enterprises.- Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration, OECD,2010.
"Transfer pricing", therefore, refers to the setting of prices at which transactions occur involving the transfer of property or services between associated enterprises, forming part of a multinational group of enterprises. These transactions are also referred to as "controlled" transactions, as distinct from "uncontrolled" transactions between companies that are not associated and can therefore, be assumed to operate independently ("on an arm's length basis") in framing the terms of such transactions.
Transfer pricing analysis involves domestic enterprises and foreign enterprises. The treaties contain specific article on "Associated Enterprises" for the application of arm's length principle.
UN Model and OECD Model have included the definition of associated enterprise in Article 9. Paragraphs 1 and 2 are identically worded in both the Models and would include any enterprise which participated directly or indirectly in the management, control or capital of an enterprise of the other Contracting State or even where same persons participate similarly in both the enterprises of the two Contracting States. The Article further mentions that if as a result of special relation between the enterprises, a true taxable profit is not reflected, appropriate adjustments may be made in such circumstances. The UN Model also has a Paragraph 3, which provides that the adjustments in the manner required in the paragraph would not be required, where judicial, administrative or other legal proceedings have resulted in fraud, negligence or willful default for one of the enterprises concerned and there is liability for penalty. It follows that the price will be determined de hors the rule in the paragraph.
Transfer Pricing in India
Indian Law of transfer pricing- An overview
Comprehensive legislations and regulations have been introduced in various countries in order to prevent the erosion of tax bases by multinational enterprises (MNEs). Accordingly, India has also introduced a comprehensive legislation on transfer pricing. The salient features of the same are listed in section 92 to 94A in Chapter X of the Income-tax Act, 1961.
Section 92(1) provides that any income from an international transaction would be computed having regards to the arm's length price. Explanation to this sections clarifies that the allowance of expenses and interest would be determined having regard to the arm's length price. Sub-section (2) provides that where two or more associated enterprises enter into mutual agreement or arrangement for the allocation or apportionment of expenses incurred in connection with a benefit, service etc. then the same is required to be done having regard to the arm's length price.
Section 92A gives in detail the meaning of associated enterprise wherein subsection (1) provides for two situations. In one situation, one enterprise directly or indirectly participated in the management control or capital of the other enterprise. In the second situation, when the same person directly or indirectly participated in the management or control or capital of two enterprises, then the two enterprises would be associated enterprises. Sub-section (2) is a deeming provision, which supplements the above definition by listing the various situations under which the two enterprise would be deemed to be associated enterprise.
Section 92B covers the definition of "international transaction" . This definition as covered in this section Is very wide and attempts to cover a wide variety of the transactions. It includes transactions relating to tangible and intangible property, provision of servicers, lending or borrowing money, any mutual agreement or arrangement on allocation or apportionment or any contribution of cost or expenses and any other transaction having a bearing on the profits, income, losses or assets. Sub-section (2) extends the scope of the definition of international transaction by providing that transactions between associated enterprises in substance would also be international transactions. Explanation to the section has provided clarification for the expression "international transaction".
With the insertion of section 92BA of the Act, transfer pricing provisions have been extended to "specified domestic transactions" in respect of payments made to a person referred to in section 40A(2)(b), any transaction referred to in section 80A, any transfer of goods or services referred to in section 80IA(8), any business transacted between the assesses and other person under section 80IA(10),any transaction under section 10AA or any other transaction which may be prescribed, The legislation and amendments have been driven by the suggestion of the Supreme Court in CIT v. Glaxo Smithkline Asia (P.) Ltd.  195 Taxman 35 (SC). However, the compliance and administrative burdens have been restricted to the monetary limit beyond Rs. 5o million.
Section 92C read with rule 10C of the Income-tax Rules, 1962 refers to the most appropriate method of calculating the arm's length price (ALP) in relation to an international transaction having regard to the nature or class of transactions. The following methods have been prescribed in relation to the same:
Transfer Pricing consultant
|Neeraj Bhagat, FCA
Mobile :+ 91 98101 58561
Tel: + 91 11 28543739