Description
This is a presentation describes transfer pricing structure in India, transfer price regulations. different methods of transfer pricing.
Group 3
? Transfer pricing refers to the pricing of contributions
(assets, tangible and intangible, services, and funds) transferred in between related parties.
? For example, goods from the production division may be
sold to the marketing division, or goods from a parent company may be sold to a foreign subsidiary.
? Since the prices are set within an organization (i.e.
controlled), the typical market mechanisms that establish prices for such transactions between third parties may not apply.
Transfer Pricing Structures in India
2
? The choice of the transfer price will affect the allocation of
the total profit among the parts of the company.
? This is a major concern for fiscal authorities who worry that
MNCs may set transfer prices on cross-border transactions to reduce taxable profits in their jurisdiction.
? This has led to the rise of transfer pricing regulations and
enforcement, making transfer pricing a major tax compliance issue for multi-national companies.
Transfer Pricing Structures in India
3
Parent Company its 5 Subsidiaries S-I S-2 S-3 S-4 S-5 Transfer Prices to Subsidiaries 200 280 300 400 500 Cost to Parent 100 100 100 100 100 SP for Subsidiaries 300 300 300 300 300 Tax Rate for Parent 20% Tax Rate for Subsidiaries 60%
Transfer Pricing Structures in India
4
SP Cost PBT Tax PAT
Parent 200 100 100 20 80
S-1 Subsid. 300 200 100 60 40
Total 500 300 200 80 120
S-4 Subsid. 300 400 -100
Parent 280 100 180 36 144
S-2 Subsid. 300 280 20 12 8
Total 580 380 200 48 152
Parent 300 100 200 40 160
S-3 Subsid. 300 300 0 0 0
Total 600 400 200 40 160
SP Cost PBT Tax PAT
Parent 400 100 300 60 240
Total 700 500 200 60 240
Parent 500 100 400 80 320
S-5 Subsid. 300 500 -200
Total 800 600 200 80 320
Transfer Pricing Structures in India
5
Transactions
Internal
(Within the country)
External
(outside the country)
Inter Company
Intra Company
Inter Comapny
Intra Company
Revenue Profit Capital Gain Royalty
Control System Non-Related: cost centres Profit/Dividend/Royalty revenue centres Forex Fluctuations profit/Investment centre Accounting
Related Profit/Dividend/Royalty
Transfer Pricing
Forex/Accounting
Control Systems Forex Fluctuations Accounting Transfer Pricing
6
Transfer Pricing Structures in India
International ? OECD formulated “Guidelines on transfer pricing”. They serve as generally accepted practices by the tax authorities
India ? The Finance Act 2001 introduced the detailed TPR w.e.f. April 1, 2001.
? The Income Tax Act
Transfer Pricing Structures in India
7
? Finance Act 2001 substituted the old section of 92
of the ITA by sections 92, 92A to 92 F. ? These sections are the backbone of Indian TPR. ? These sections define the meaning of related parties, international transactions, pricing methodologies etc.
Transfer Pricing Structures in India
8
92.Computation of income from international transaction having regard to arm’s length price.
(1) Any income arising from an international transaction shall be computed having regard to the arm’s length price.
Explanation.-For the removal of doubts, it is hereby clarif ied that the allowance for any expense or interest arising from an international transaction shall also be determined having regard to the arm’s length price.
(2) Where in an international transaction, two or more associated enterprises enter into a mutual agreement or arrangement for the allocation 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 enterprises, the cost or expense allocated or apportioned to, or, as the case may be, contributed by, any such enterprise shall be determined having regard to the arm’s length price of such benefit, service or facility, as the case may be.
(3) The provisions of this section shall not apply in a case where the computation of income under sub-section (1) or the determination of the allowance for any expense or interest under that sub-section, or the determination of any cost or expense allocated or apportioned, or, as the case may be, contributed under sub-section (2), has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction was entered into.
92A. Meaning of associated enterprise.—
(1) For the purposes of this section and sections 92, 92B, 92C, 92D, 92E and 92F,
“associated enterprise”, in relation to another enterprise, means an enterprise— (a) which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; 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 persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise.
(2) Two enterprises shall be deemed to be associated enterprises if, at any time during the previous year,— (a) one enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in the other enterprise; or (b) any person or enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in each of such enterprises; or (c) a loan advanced by one enterprise to the other enterprise constitutes not less than fifty-one per cent of the book value of the total assets of the other enterprise; or (d) one enterprise guarantees not less than ten per cent of the total borrowings of the other enterprise; 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 one enterprise, are appointed by the other enterprise; 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 two enterprises are appointed by the same person or persons; or (g) 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, trade-marks, 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 the other enterprise is the owner or in respect of which the other enterprise has exclusive rights; or (h) ninety per cent or more of the raw materials and consumables required for the manufacture or processing of goods or articles carried out by one enterprise, are supplied by the other enterprise, or by persons specified by the other enterprise, and the prices and other conditions relating to the supply are influenced by such other enterprise; or
(i) the goods or articles manufactured or processed by one enterprise, are sold to the other enterprise or to persons specified by the other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprise; or (j) 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; or (k) 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; or (l) where one enterprise is a firm, association of persons or body of individuals, the other enterprise holds not less than ten per cent interest in such firm, association of persons or body of individuals; or (m) there exists between the two enterprises, any relationship of mutual interest, as may be prescribed.
? Direct Control/Control through intermediary
? Holding 26% of voting power
? Advance of not less than 51% of the total assets of
borrowing company. ? Guarantees not less than 10% on behalf of borrower ? Appointment of more than 50% of the BoD ? Dependence for 90% or more of the total raw material or other consumables
Transfer Pricing Structures in India
15
92B. Meaning of international transaction.—
(1) For the purposes of this section and sections 92, 92C, 92D and 92E, “international transaction” means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation 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 enterprises.
(2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise; or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise.
? Transaction between two or more AE of which either
both or anyone is a non-resident. ? Transactions:
? Purchase/Sale/Lease ? Provision of service ? Lending or borrowing
Transfer Pricing Structures in India
18
92C. Computation of arm’s length price.— (1) The arm’s length price in relation to an international transaction 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 or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely:— (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board.
(2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm’s length price, in the manner as may be prescribed: Provided that where more than one price may be determined by the most appropriate method, the arm’s length price shall be taken to be the arithmetical mean of such prices. (3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that— (a) the price charged or paid in an international transaction has not been determined in accordance with sub-sections (1) and (2); or (b) any information and document relating to an international transaction have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf; or
(c) the information or data used in computation of the arm’s length price is not reliable or correct; or (d) the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D, the Assessing Officer may proceed to determine the arm’s length price in relation to the said international transaction in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him:
Provided that an opportunity shall be given by the Assessing Officer by serving a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the arm’s length price should not be so determined on the basis of material or information or document in the possession of the Assessing Officer. (4) Where an arm’s length price is determined by the Assessing Officer under sub-section (3), the Assessing Officer may compute the total income of the assessee having regard to the arm’s length price so determined: Provided that no deduction under section 10A or section 10B or under Chapter VI-A shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under this sub-section :
?
Provided further that where the total income of an associated enterprise is computed under this sub-section on determination of the arm’s length price paid to another associated enterprise from which tax has been deducted under the provisions of Chapter XVIIB, the income of the other associated enterprise shall not be recomputed by reason of such determination of arm’s length price in the case of the first mentioned enterprise.
? CUP method compares the price transferred in a
controlled transaction to the price charged in a comparable un-controlled transaction. ? CUP method is the most direct and reliable way to apply the arm’s length principle.
Transfer Pricing Structures in India
24
? The resale price method begins with the price at which
a product is resold to an independent enterprise (IE)by an associate enterprise.
? X sold to AE at Rs. 1000 (profit: 300) ? AE sold to an IE at Rs. 2000 ? (profit of Rs. 500 for relevant IE) ? Arms length price = 2000 - 500 = 1500
Transfer Pricing Structures in India
25
? PSM is used when transactions are inter-related and is
not possible to evaluate separately. ? PSM first identifies the profit to be split for the AE. The profit so determined is split between the AE on the basis of the functions performed/assets/CE
Transfer Pricing Structures in India
26
? In CP method, first the cost incurred is determined.
An appropriate cost plus mark-up is then added to the cost to arrive at an appropriate profit. The resultant figure is the arm’s length price.
Transfer Pricing Structures in India
27
Some Transactions subject to ALP
• Purchase at little or no cost. • Payment for services never rendered. • Sales below MP/ Purchase above MP • Interest free borrowings • Exchanging property • Selling of real estate at a price different from MP • Use of trade names or patents at exorbitant rates even after their expiry.
28
Transfer Pricing Structures in India
92D. Maintenance, keeping of information and document by persons entering into an international transaction.—
(1) Every person who has entered into an international transaction shall keep and maintain such information and document in respect thereof, as may be prescribed.
(2) Without prejudice to the provisions contained in sub-section (1), the Board may prescribe the period for which the information and document shall be kept and maintained under that sub-section.
(3) The Assessing Officer or the Commissioner (Appeals) may, in the course of any proceeding under this Act, require any person who has entered into an international transaction to furnish any information or document in respect thereof, as may be prescribed under sub-section (1), within a period of thirty days from the date of receipt of a notice issued in this regard: Provided that the Assessing Officer or the Commissioner (Appeals) may, on an application made by such person, extend the period of thirty days by a further period not exceeding thirty days.
? Documents to be prescribed by Govt. [92D(1)] ? To be furnished within 30 days of the notice [92D(3)] ? 30 days may be relaxed upto 60 days ? To be kept and maintained for 8 years from A.Y. [Rule
10D(5)]
Transfer Pricing Structures in India
31
Primary Records (U/R 10D(1)
1. Ownership details 2. Relationship, addresses, legal status and country details of AE 6. Details of functions, risks & assets used by taxpayer & AE 7. Uncontrolled transactions considered for determining price and their terms. 8. Market analysis, forecasts, budgets & financial estimates with divisional and product split having bearing on international transactions
3. Business description of taxpayer and AE
4. Nature, terms & value of International transaction 5. Details of properties and services of Intl. Transaction
Transfer Pricing Structures in India
32
9.
Relevant data collected and analysed for uncontrolled transactions for comparability
12. Assumptions, policies, price negotiations which have critical effect
10. Method considered and applied 13. Other supporting data or with reasoning for individual or document for price class of transactions & determination justification 11. Comparable data used and comparison with other enterprises and adjustments made for difference
Exemption if aggregate transactions value Rs. 1 Cr
? Official / Govt. publications & reports, studies or database ? Market Research studies or technical publications by reputed
institutions
? Published market prices (Exchanges) ? Published accounts & financial statements ? Agreements & Contracts with AE & others for similar transactions ? Letters & other correspondence on negotiations ? Transaction documents as per accounting practice
Penal Provisions
?
Non Maintenance of Records :
? 2% of the transaction value (u/s 271AA)
?
Non submission of information / Records :
? 2% of the transaction value (u/s 271G)
?
Non submission of Report u/s 92E :
? Rs. 1 lakh (u/s 271BA)
Above penalty need not be levied if reasonable cause for failure is proved u/s 273B
Penal Provisions
?
Addition / Disallowance u/s 92C(4) is deemed to be income concealed u/s 271(1)(c)
? Onus on assessee to prove good faith & due diligence to
the satisfaction of the AO / CIT(A)
? Penalty 100% to 300% of the tax on disputed income
92E. Report from an accountant to be furnished by persons entering into international transaction.—Every person who has entered into an international transaction during a previous year shall obtain a report from an accountant and furnish such report on or before the specified date in the prescribed form duly signed and verified in the prescribed manner by such accountant and setting forth such particulars as may be prescribed.
92F. Definitions of certain terms relevant to computation of arm’s length price, etc.—In sections 92, 92A, 92B, 92C, 92D and 92E, unless the context otherwise requires— (i) “accountant” shall have the same meaning as in the Explanation below sub-section (2) of section 288; (ii) “arm’s length price” means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions;
(iii) “enterprise” means a person (including a permanent establishment of such person) who is, or has been, or is proposed to be, engaged ? in any activity, relating to the production, storage, supply, distribution, acquisition or control of articles or goods, or know-how, patents, copyrights, trade-marks, 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 the other enterprise is the owner or in respect of which the other enterprise has exclusive rights, or the provision of services of any kind, or in investment, or providing loan or in the business of acquiring, holding, underwriting or dealing with shares, debentures or other securities of any other body corporate, whether such activity or business is carried on, directly or through one or more of its units or divisions or subsidiaries, or whether such unit or division or subsidiary is located at the same place where the enterprise is located or at a different place or places;
?
(iv) “specified date” means,— (a) where the assessee is a company, the 31st day of October of the relevant assessment year; (b) in any other case, the 31st day of July of the relevant assessment year; (v) “transaction” includes an arrangement, understanding or action in concert,— (A) whether or not such arrangement, understanding or action is formal or in writing; or (B) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceeding.’.
Some Cases
• Cargill India Pvt.Ltd.
– Parent: Cargill Mauritius Limited which in turn is a wholly owned subsidiary of Cargill Inc., USA. - Assessment Year 2003-04 - Levy of penalty of Rs 40,46,41,376/-
Transfer Pricing Structures in India
41
Some Cases
• Kinetic Honda Motors
– Collaborator: Honda Motor Co. Ltd Japan and their Subsidiary Honda Trading Corpn. Japan
• Hero Honda Motors Ltd.
– Parent: Honda Motor Co. Ltd Japan and their Subsidiary Honda Trading Corpn. Japan
Transfer Pricing Structures in India
42
doc_792071106.pptx
This is a presentation describes transfer pricing structure in India, transfer price regulations. different methods of transfer pricing.
Group 3
? Transfer pricing refers to the pricing of contributions
(assets, tangible and intangible, services, and funds) transferred in between related parties.
? For example, goods from the production division may be
sold to the marketing division, or goods from a parent company may be sold to a foreign subsidiary.
? Since the prices are set within an organization (i.e.
controlled), the typical market mechanisms that establish prices for such transactions between third parties may not apply.
Transfer Pricing Structures in India
2
? The choice of the transfer price will affect the allocation of
the total profit among the parts of the company.
? This is a major concern for fiscal authorities who worry that
MNCs may set transfer prices on cross-border transactions to reduce taxable profits in their jurisdiction.
? This has led to the rise of transfer pricing regulations and
enforcement, making transfer pricing a major tax compliance issue for multi-national companies.
Transfer Pricing Structures in India
3
Parent Company its 5 Subsidiaries S-I S-2 S-3 S-4 S-5 Transfer Prices to Subsidiaries 200 280 300 400 500 Cost to Parent 100 100 100 100 100 SP for Subsidiaries 300 300 300 300 300 Tax Rate for Parent 20% Tax Rate for Subsidiaries 60%
Transfer Pricing Structures in India
4
SP Cost PBT Tax PAT
Parent 200 100 100 20 80
S-1 Subsid. 300 200 100 60 40
Total 500 300 200 80 120
S-4 Subsid. 300 400 -100
Parent 280 100 180 36 144
S-2 Subsid. 300 280 20 12 8
Total 580 380 200 48 152
Parent 300 100 200 40 160
S-3 Subsid. 300 300 0 0 0
Total 600 400 200 40 160
SP Cost PBT Tax PAT
Parent 400 100 300 60 240
Total 700 500 200 60 240
Parent 500 100 400 80 320
S-5 Subsid. 300 500 -200
Total 800 600 200 80 320
Transfer Pricing Structures in India
5
Transactions
Internal
(Within the country)
External
(outside the country)
Inter Company
Intra Company
Inter Comapny
Intra Company
Revenue Profit Capital Gain Royalty
Control System Non-Related: cost centres Profit/Dividend/Royalty revenue centres Forex Fluctuations profit/Investment centre Accounting
Related Profit/Dividend/Royalty
Transfer Pricing
Forex/Accounting
Control Systems Forex Fluctuations Accounting Transfer Pricing
6
Transfer Pricing Structures in India
International ? OECD formulated “Guidelines on transfer pricing”. They serve as generally accepted practices by the tax authorities
India ? The Finance Act 2001 introduced the detailed TPR w.e.f. April 1, 2001.
? The Income Tax Act
Transfer Pricing Structures in India
7
? Finance Act 2001 substituted the old section of 92
of the ITA by sections 92, 92A to 92 F. ? These sections are the backbone of Indian TPR. ? These sections define the meaning of related parties, international transactions, pricing methodologies etc.
Transfer Pricing Structures in India
8
92.Computation of income from international transaction having regard to arm’s length price.
(1) Any income arising from an international transaction shall be computed having regard to the arm’s length price.
Explanation.-For the removal of doubts, it is hereby clarif ied that the allowance for any expense or interest arising from an international transaction shall also be determined having regard to the arm’s length price.
(2) Where in an international transaction, two or more associated enterprises enter into a mutual agreement or arrangement for the allocation 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 enterprises, the cost or expense allocated or apportioned to, or, as the case may be, contributed by, any such enterprise shall be determined having regard to the arm’s length price of such benefit, service or facility, as the case may be.
(3) The provisions of this section shall not apply in a case where the computation of income under sub-section (1) or the determination of the allowance for any expense or interest under that sub-section, or the determination of any cost or expense allocated or apportioned, or, as the case may be, contributed under sub-section (2), has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction was entered into.
92A. Meaning of associated enterprise.—
(1) For the purposes of this section and sections 92, 92B, 92C, 92D, 92E and 92F,
“associated enterprise”, in relation to another enterprise, means an enterprise— (a) which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; 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 persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise.
(2) Two enterprises shall be deemed to be associated enterprises if, at any time during the previous year,— (a) one enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in the other enterprise; or (b) any person or enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in each of such enterprises; or (c) a loan advanced by one enterprise to the other enterprise constitutes not less than fifty-one per cent of the book value of the total assets of the other enterprise; or (d) one enterprise guarantees not less than ten per cent of the total borrowings of the other enterprise; 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 one enterprise, are appointed by the other enterprise; 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 two enterprises are appointed by the same person or persons; or (g) 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, trade-marks, 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 the other enterprise is the owner or in respect of which the other enterprise has exclusive rights; or (h) ninety per cent or more of the raw materials and consumables required for the manufacture or processing of goods or articles carried out by one enterprise, are supplied by the other enterprise, or by persons specified by the other enterprise, and the prices and other conditions relating to the supply are influenced by such other enterprise; or
(i) the goods or articles manufactured or processed by one enterprise, are sold to the other enterprise or to persons specified by the other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprise; or (j) 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; or (k) 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; or (l) where one enterprise is a firm, association of persons or body of individuals, the other enterprise holds not less than ten per cent interest in such firm, association of persons or body of individuals; or (m) there exists between the two enterprises, any relationship of mutual interest, as may be prescribed.
? Direct Control/Control through intermediary
? Holding 26% of voting power
? Advance of not less than 51% of the total assets of
borrowing company. ? Guarantees not less than 10% on behalf of borrower ? Appointment of more than 50% of the BoD ? Dependence for 90% or more of the total raw material or other consumables
Transfer Pricing Structures in India
15
92B. Meaning of international transaction.—
(1) For the purposes of this section and sections 92, 92C, 92D and 92E, “international transaction” means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation 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 enterprises.
(2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise; or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise.
? Transaction between two or more AE of which either
both or anyone is a non-resident. ? Transactions:
? Purchase/Sale/Lease ? Provision of service ? Lending or borrowing
Transfer Pricing Structures in India
18
92C. Computation of arm’s length price.— (1) The arm’s length price in relation to an international transaction 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 or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely:— (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board.
(2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm’s length price, in the manner as may be prescribed: Provided that where more than one price may be determined by the most appropriate method, the arm’s length price shall be taken to be the arithmetical mean of such prices. (3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that— (a) the price charged or paid in an international transaction has not been determined in accordance with sub-sections (1) and (2); or (b) any information and document relating to an international transaction have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf; or
(c) the information or data used in computation of the arm’s length price is not reliable or correct; or (d) the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D, the Assessing Officer may proceed to determine the arm’s length price in relation to the said international transaction in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him:
Provided that an opportunity shall be given by the Assessing Officer by serving a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the arm’s length price should not be so determined on the basis of material or information or document in the possession of the Assessing Officer. (4) Where an arm’s length price is determined by the Assessing Officer under sub-section (3), the Assessing Officer may compute the total income of the assessee having regard to the arm’s length price so determined: Provided that no deduction under section 10A or section 10B or under Chapter VI-A shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under this sub-section :
?
Provided further that where the total income of an associated enterprise is computed under this sub-section on determination of the arm’s length price paid to another associated enterprise from which tax has been deducted under the provisions of Chapter XVIIB, the income of the other associated enterprise shall not be recomputed by reason of such determination of arm’s length price in the case of the first mentioned enterprise.
? CUP method compares the price transferred in a
controlled transaction to the price charged in a comparable un-controlled transaction. ? CUP method is the most direct and reliable way to apply the arm’s length principle.
Transfer Pricing Structures in India
24
? The resale price method begins with the price at which
a product is resold to an independent enterprise (IE)by an associate enterprise.
? X sold to AE at Rs. 1000 (profit: 300) ? AE sold to an IE at Rs. 2000 ? (profit of Rs. 500 for relevant IE) ? Arms length price = 2000 - 500 = 1500
Transfer Pricing Structures in India
25
? PSM is used when transactions are inter-related and is
not possible to evaluate separately. ? PSM first identifies the profit to be split for the AE. The profit so determined is split between the AE on the basis of the functions performed/assets/CE
Transfer Pricing Structures in India
26
? In CP method, first the cost incurred is determined.
An appropriate cost plus mark-up is then added to the cost to arrive at an appropriate profit. The resultant figure is the arm’s length price.
Transfer Pricing Structures in India
27
Some Transactions subject to ALP
• Purchase at little or no cost. • Payment for services never rendered. • Sales below MP/ Purchase above MP • Interest free borrowings • Exchanging property • Selling of real estate at a price different from MP • Use of trade names or patents at exorbitant rates even after their expiry.
28
Transfer Pricing Structures in India
92D. Maintenance, keeping of information and document by persons entering into an international transaction.—
(1) Every person who has entered into an international transaction shall keep and maintain such information and document in respect thereof, as may be prescribed.
(2) Without prejudice to the provisions contained in sub-section (1), the Board may prescribe the period for which the information and document shall be kept and maintained under that sub-section.
(3) The Assessing Officer or the Commissioner (Appeals) may, in the course of any proceeding under this Act, require any person who has entered into an international transaction to furnish any information or document in respect thereof, as may be prescribed under sub-section (1), within a period of thirty days from the date of receipt of a notice issued in this regard: Provided that the Assessing Officer or the Commissioner (Appeals) may, on an application made by such person, extend the period of thirty days by a further period not exceeding thirty days.
? Documents to be prescribed by Govt. [92D(1)] ? To be furnished within 30 days of the notice [92D(3)] ? 30 days may be relaxed upto 60 days ? To be kept and maintained for 8 years from A.Y. [Rule
10D(5)]
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Primary Records (U/R 10D(1)
1. Ownership details 2. Relationship, addresses, legal status and country details of AE 6. Details of functions, risks & assets used by taxpayer & AE 7. Uncontrolled transactions considered for determining price and their terms. 8. Market analysis, forecasts, budgets & financial estimates with divisional and product split having bearing on international transactions
3. Business description of taxpayer and AE
4. Nature, terms & value of International transaction 5. Details of properties and services of Intl. Transaction
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9.
Relevant data collected and analysed for uncontrolled transactions for comparability
12. Assumptions, policies, price negotiations which have critical effect
10. Method considered and applied 13. Other supporting data or with reasoning for individual or document for price class of transactions & determination justification 11. Comparable data used and comparison with other enterprises and adjustments made for difference
Exemption if aggregate transactions value Rs. 1 Cr
? Official / Govt. publications & reports, studies or database ? Market Research studies or technical publications by reputed
institutions
? Published market prices (Exchanges) ? Published accounts & financial statements ? Agreements & Contracts with AE & others for similar transactions ? Letters & other correspondence on negotiations ? Transaction documents as per accounting practice
Penal Provisions
?
Non Maintenance of Records :
? 2% of the transaction value (u/s 271AA)
?
Non submission of information / Records :
? 2% of the transaction value (u/s 271G)
?
Non submission of Report u/s 92E :
? Rs. 1 lakh (u/s 271BA)
Above penalty need not be levied if reasonable cause for failure is proved u/s 273B
Penal Provisions
?
Addition / Disallowance u/s 92C(4) is deemed to be income concealed u/s 271(1)(c)
? Onus on assessee to prove good faith & due diligence to
the satisfaction of the AO / CIT(A)
? Penalty 100% to 300% of the tax on disputed income
92E. Report from an accountant to be furnished by persons entering into international transaction.—Every person who has entered into an international transaction during a previous year shall obtain a report from an accountant and furnish such report on or before the specified date in the prescribed form duly signed and verified in the prescribed manner by such accountant and setting forth such particulars as may be prescribed.
92F. Definitions of certain terms relevant to computation of arm’s length price, etc.—In sections 92, 92A, 92B, 92C, 92D and 92E, unless the context otherwise requires— (i) “accountant” shall have the same meaning as in the Explanation below sub-section (2) of section 288; (ii) “arm’s length price” means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions;
(iii) “enterprise” means a person (including a permanent establishment of such person) who is, or has been, or is proposed to be, engaged ? in any activity, relating to the production, storage, supply, distribution, acquisition or control of articles or goods, or know-how, patents, copyrights, trade-marks, 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 the other enterprise is the owner or in respect of which the other enterprise has exclusive rights, or the provision of services of any kind, or in investment, or providing loan or in the business of acquiring, holding, underwriting or dealing with shares, debentures or other securities of any other body corporate, whether such activity or business is carried on, directly or through one or more of its units or divisions or subsidiaries, or whether such unit or division or subsidiary is located at the same place where the enterprise is located or at a different place or places;
?
(iv) “specified date” means,— (a) where the assessee is a company, the 31st day of October of the relevant assessment year; (b) in any other case, the 31st day of July of the relevant assessment year; (v) “transaction” includes an arrangement, understanding or action in concert,— (A) whether or not such arrangement, understanding or action is formal or in writing; or (B) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceeding.’.
Some Cases
• Cargill India Pvt.Ltd.
– Parent: Cargill Mauritius Limited which in turn is a wholly owned subsidiary of Cargill Inc., USA. - Assessment Year 2003-04 - Levy of penalty of Rs 40,46,41,376/-
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Some Cases
• Kinetic Honda Motors
– Collaborator: Honda Motor Co. Ltd Japan and their Subsidiary Honda Trading Corpn. Japan
• Hero Honda Motors Ltd.
– Parent: Honda Motor Co. Ltd Japan and their Subsidiary Honda Trading Corpn. Japan
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doc_792071106.pptx