Indian legislation on transfer pricing
In an era of liberalization and globalization of trade and investment and the emergence of e-commerce, increase the results in the considerable number of cross-border transactions, the speed, complexity and lack of transparency, can be managed with the global business were. There is a general belief that multinationals used in an attempt to manage and minimize their overall tax drain, creative approaches to have a transfer pricingUnder the flow of goods, services, funds, assets, etc.
When the operations are independent companies that the fee is determined by market forces, therefore, between. However, if affiliated companies operate with each other, it is possible that the financial and commercial transactions are not affected by external market forces, but are determined on the basis of internal forces. In such a situation, if the transfer prices betweenaffiliates do not reflect market forces and length principle normal market value, profit from operations, tax liabilities of the subsidiaries and consistent tax revenues of the host countries could be distorted.
The existence of different tax rates and regulations in different countries provides a potential incentive for multinationals to manipulate prices to their transfer to lower income taxes recognized in countries with higherVote and vice versa. This can increase the total value of taxes from multinational and after tax returns for distributions to shareholders.
In India, the law had not previously addressed this issue in detail. The first attempts to § 92, the amount of profits which are reasonably to be inferred from 'activity between resident and non resident, who is due to the close connection between them mayarranged to be done for the residents, is not useful or less ordinary profits that could probably arise in this business.
The Finance Act 2001 introduced the regulation of transfer pricing (TPR) in India, with effect from 1 April 2001 assessment year under Section 2002-03.The 92 to 92F and 10A to 10E rule and sections 271 ( 1) (c), AA 271, 271 and 271 BA change G. Some rules on transfer pricing in accordance with the assessment made 2003/04. The power of amendment is to disagreements, administrative problems and inconvenience to remove more than widening the tax base.
In line with the international income, the Finance Act 2001 introduced transfer pricing provisions of the Income Tax Act 1961 under Chapter X and sections 92 to 92F. The new TP rules differ little from that of 'Organization for Economic Cooperation and Development (OECD) in its Report on Transfer Pricing and MultinationalCompanies.
§ 92 Finance Act 2002 provides that all income arising from an international transaction or where the international transaction comprise only an output, the compensation for the costs of such interest or international business will be determined by reference to market prices. The provisions do not apply where the application of the normal price results in decrease in the overall incidence of the tax burden in Indiain relation to the parties involved in international trade.
The term "associates" act under section 92A des After paragraph (1), a company that is an intermediary, directly or indirectly or through one or more, management or control or capital of another company, led companies in the report be considered.
Similarly, a society in which one or moreCapital Management, persons or control or participate directly or indirectly through one or more agents are the same people, companies participating in a similar manner in the management or control or capital of other companies will be made in this report.
Associated companies
MANAGEMENT: – appointment of more than half of the Board of Directors / Board / One or
More ExecutiveDirectors / Board Members:
– Other companies
– The same person in both companies.
CAPITAL: – holding at least 26% of the voting rights, directly or indirectly
– In other companies
– In each of these societies.
Control: –
– Loans> = 51% of the total book value of assets
– Guarantees> = 10% of total loans
– Use of know-how, patents
– Acquisition of> 90% of raw materialsunder controlled conditions
– Review by the same person
– Sale of or under the supervision and direction of the dominant party
International Transaction
The term "business" in clause (v) of § 92F, defined according to: –
"(V) transaction includes an agreement, understanding or acting in concert;
(I) if such an agreement, understanding or action is formal or in writing or
(Ii) if such an agreement, understanding or action isis a final
Procedures. "
The definition is a broad definition and is therefore broader. According to this definition, a settlement agreement, understanding or action, whether formal or informal, written or oral, whether legally or not.
The definition of international business, after the transfer pricing legislation is very broad and includes it in the nature of the transaction:
i. purchases,Sale or lease of tangible or intangible, or
ii. Provide services, or
iii. Borrowing money, or
iv. Any other transaction with an impact on profits, income, assets or losses of such companies.
It also contains a mutual agreement or arrangement between two or more associated enterprises for the allocation or distribution of any contribution or costs or expenses or be associated with the, Or service made available for companies to be made available to benefit, such as one or more.
Any transaction between a company and a company connected with such person is given a situation like his business associate, pursuant to paragraph (2) of section 92B, under certain. This appeal provision is to cover cases where an independent third party affiliates can still be played by twotransfer pricing provisions of the law.
Under paragraph (2) of section 92B, an operation between a company and an independent person, a report shall be deemed to be related to a transaction between the companies in this business, if-
i. There is an agreement between another entity and its associates, or
ii. Terms of the transaction are substantially between such an independent person and determinedAffiliates.
Difference between international and cross border transaction:
For a transaction to be an international business, must meet the following two conditions:
a) There must be a transaction between two related companies and
b) At least one company must be a resident of a third.
A transaction will be included as a cross-border transaction, whether born in a country and get indoorsanother country. A cross-border transaction may or may not of an international transaction under Chapter X of the Act. Similar sentiments were expressed a business that is not a cross-border operation or an international transaction for the purposes of this Chapter, if the scope of the definition of "international business".
Arm length price:
In the long price boom business vocabulary is a price at which independent enterprises deal with eachothers, where conditions are usually calculated for their commercial and financial relations by market forces. § 92F (ii) of the Act, however, defines the length of the price boom as a price that is proposed or implemented, companies are assigned to be applied in a transaction between different people in uncontrolled conditions.
The procedure for the determination of the normal market price can be integrated summarized as follows:
I. Identification of 'internationalOperation ";
ii. Identification of an "uncontrolled transaction" rule 10A (a);
iii. Identification and comparison of specific properties in international business transactions and operations carried out uncontrolled – Article 10b (2);
iv. Find out if the operations are not controlled and international trade can be compared, through reconciliation and resolution of differences, where appropriate, Article 10 ter (3);
c. determine the most appropriate to apply the test set of rules10C;
vi. Determination of price competition, applying the method chosen, Article 10b (1).
Uncontrolled transaction:
Rule 10A (a) defines a "controlled operation" as meaning "a transaction between associated companies other than companies, resident or not." In other words, that "transactions between the companies that the companies are autonomous in relation to each other." A transaction may therefore not controlledbe between:
A resident and non-resident or
A resident and domiciled, or
A non-resident and non-residents.
If a transaction was entered into uncontrolled, one could say that in a "state of uncontrolled" is assigned.
Transfer Pricing Study in India
Methods of calculating the arm's length price:
The different methods of calculating the market price shall be established by Rule 10b. To this end, a term defined in Article10A as under:
For the purposes of this Article and Regulation 10B 10E, –
a) "controlled operation, a transaction between associated enterprises other than companies, resident or not;
Includes goods b) "ownership", articles or things, and intangible assets;
c) "service" includes financial services;
d) "transaction" includes a series of closely related.
Article 10 b defines the methods for determining the armLength. For the same explanation is as follows:
Price comparison methods (CUP) method:
The method of comparing prices is one of the traditional methods considered in determining the price of free competition.
The other two traditional methods are list prices and the cost plus method.
Are typical operations in which the method of price comparison can be used are:
a) transfer of property;
b) innovationServices;
c) intangible assets;
d) loans, the provision of financial resources.
The OECD notes in their transfer pricing guidelines as under:
"This method is especially when an independent company selling the same product or service as a company sells between two connections.
"The operations are not controlled products should reflect the nature, quality and quantity as those between affiliated companies, and relate transactions take place on a similar time and stage equipment for the production / distribution chain, for similar conditions. "
The steps involved in the application of this method are:
1. Identify the price charged or transfer of property or services paid in comparable uncontrolled
Transaction or series of such transactions;
2. Imagine such a price, taking into account any differences between international trade and
comparable uncontrolled transaction, or betweenBusinesses that this transaction could
substantially affect the price on the open market;
3. price adjustment at arm's length price;
4. arm's length price has changed over the price of international transaction;
5. If the price is charged in international affairs, less than the market price or the price paid in
international business is higher than the market price of an adaptationbe made on the price
paid or payable in international affairs with the amount of variance.
The following points are noted:
1. All accommodation following the application of this method are, will be charged the price of uncontrolled
Transaction. The presence or absence of particular features of the transaction compared to uncontrolled
the international operation must be regulated. These functions are evaluatedIn mathematics
or absolute numbers. This is a subjective process based on objective facts.
2. only the differences, which largely determine the price on the free market should be regulated. L '
Concept of "materiality" is not defined. Therefore, the significance would need to be evaluated in light of the various
Circumstances settlement. However, if there are many adjustments that individually
not appear material, but seems to be collectivelyMaterials that require the same should be amended.
3. If there are more independent operations, which are comparable, this method was applied
a reasonable number of transactions. An adjustment has to pay the price paid or
uncontrolled transactions.
4. It is not possible, only one or some of the uncontrolled transactions to adjust each elect
the convenience of the parties.
5. If, after theAdjustment operations are not controlled a series of numbers, an arithmetic
average range of these figures must have come to and accepted as arm's length price.
6. The adjusted price of the transaction will be applied in the international uncontrolled. L '
Total revenue for the tax from the assesse need to be offered will be adjusted accordingly.
7. The term "free market", but is not defined, it could mean a transactionbetween an expert and
prepared and willing buyer, willing seller, in which none applies or forced
to act in a particular way.
8. It should be noted that, on average, is allowed to be when a full set of prices has come under state
a specific procedure.
Resale Price Method (RPM):
Transaction in which the selling price method can be adopted, are sales of finished products or other goods for which no orLittle value addition.
The OECD guidelines transfer their prices, as noted below: "It 's generally accepted among most financial authorities that the method of the list price is used, and where the company's preferred basis of sales, marketing and sales duties in ( ie where there is little or no value. charged by the dealer before the resale of goods from related companies). The method is also associated with differences in products, until the functionsbe performed similarly. And 'less useful if the goods are processed or incorporated into other products. "
The steps involved in application of the method are:
1. Identify the purchase transaction in goods or services;
2. Because of the price at which those goods or services sold or provided to an independent party;
3. Less normal gross profit margin derived from real estate companies in the resale price of theseor
Services. The normal gross profit margin, the margin of society would gain by purchasing
like product by an independent party and the resale of the same for other independent party.
4. Less well as expenses associated with the purchase of goods resulting from the price so arrived;
5. Adjust the rates for the differences between the transaction costs and uncontrolled international
Transaction. These differences couldfunctional and other differences, including differences in accounting
Practices. Other differences should be, because that is the amount of gross profit
Margin free market;
6. The adjusted price of the purchase price of the arm length for the property or service will;
7. Replace the full price charged for the price of international transactions and adjustments
back according to income.
Note: -In steps (ii) and (iii) above mentioned are only comparable inside. A company may also use external comparable and do the calculation.
The following points are noted:
1. The fixed price method is to help companies be accepted only if products purchased are connected by a
sold to unrelated parties. For sales to a related company, this method is not applicable. To
sale to a related company,the method of comparing prices or any other
appropriate method should be established. Thus, two different methods can be applied to transactions that
together can be part of an entrepreneurial activity;
2. The gross margin percentage can be or-
a) transaction that the company completed the sale of identical or similar goods or abandonment
b) What is earned from the sale to an independent companysame or a similar property in an uncontrolled transaction.
3. The reference is to gross profit margin from the sale of identical goods or similar derivatives. The reference is to
Therefore, not all gross margin, but the gross profit margin on each transaction. You can
difficult to ascertain and the gross profit margin on each transaction;
4. You need to get to the normal gross profit margin. It may be situations in which some will be normalGross
Income derived from comparable uncontrolled transactions arise. In such a case would be the right approach, apply
none of that gross profit margin in the international transaction and the purchase price within reach length.
The average price of purchasing a full price would be reached.
5. The rule provides that the gross profit margin of each transaction entered into by the company or legal
independent firmsuncontrolled transactions. If there is a change in the gross profit margin of these
The companies, the gross profit margin of society is preferable to be an internal comparable;
6. The cost of property incurred by the company relating to the purchase of the will in the near
reduced. The gross profit margin can be reached after consideration of these costs. L '
The purpose of this method is to comeThe price of the length of the purchases. In this method, this purchase
The price is based on the initial price of the bond and the reduction came from the normal gross profit margin
as the first step. If the price of free competition is the purchase price came in interrupting this step, also
resulting amount should include the costs incurred by enterprises have been taken to be
Account in arriving at gross profit. It is therefore necessaryCheck the price of full-adjusted
to further reduce these costs.
7. Adjustments must be made to the account, apart from functional and other differences. Some
differences in accounting may be because:
a) Purchases and sales taxes are included or accounted for net of tax;
b) the price of goods, ie, FOB or CIF basis;
c) fluctuations in foreign exchange markets.
8. In general, it is expectedthat the gross profit margin would be higher risk, increasing functions
and assets.
Cost Plus Method (CPM):
Transactions in which the costs can be made more method:
a) the provision of services;
b) contracts for the facilities;
c) transfer of semi-finished products;
d) long-term purchase and sales arrangements.
The OECD guidelines of his transfer price are as follows:
"This method is particularly useful when semi-finished products are soldamong employees, where to buy long-term care, or in the case of services or contract manufacturing, particularly if this device or of a subsidiary nature. "
The steps involved in the application of this method are:
1. Determine the direct and indirect costs of production in relation to goods or services transferred to an affiliated company.
2. Causes a comparable uncontrolled transaction or aSeries of transactions with an unrelated party for the same or similar property or service.
3. The determination of gross profit mark-up over the same period of the uncontrolled transaction.
4. Make the change in gross mark-up for the functional differences and other links between international business and comparable uncontrolled transaction.
5. The direct and indirect costs of production in international trade should be increased by appropriate gross profit mark-up.
6. L 'resulting amount is the arm's length price;
7. The actual price in international trade has been loaded, compared according to the price of free competition and the regulation of income.
The following points are noted:
1. In this method, the direct and indirect costs of production are identified. The term "direct" or "indirect" costs are not defined. A reference is therefore to engage the industry and the ads are inICAI for a sector. Any departure from the company made ICAI compared to industry practice or the promulgation of the will is justified.
2. Identifying and defining the direct and indirect costs, the following factors should be considered:
a) the use of the system, for example, when the plant was by the method of absorption of fixed costs should be adjusted accordingly;
b) to include the cost method, full cost accounting Method is usually preferred.
c) In exceptional situations, para-cost principles should be applied, as high levels of under-utilization of the facilities. Sun incremental cost or marginal cost can be used as a basis, whether the transactions constitute a sale of marginal functions.
3. This method is the name of the company to be accepted only if the supply of goods or services in one.
This method is not applicable if the '> The company is the owner of goods or services to a
Affiliates.
4. Even under this method, the gross profit mark-up is adjusted for differences in accounting standards
Adoption by enterprises.
5. To determine the equivalent, must depend more on the similarities between the functions performed
similarities and less on product or service.
Profit Split Method (PSM):
Transactions in which the profit-split method canare used for transactions with:
a) Company's integrated services provided by more than one;
b) the transfer of intellectual property only;
c) a number of related transactions, which can not be assessed separately.
The observation of the OECD Guidelines in its transfer pricing in this method as follows:
"This method is to determine what the allocation of independent company's total profit is expected reports on the issue.The profits, the parties should be divided by sound economic basis from which reflects the features and risks of each. To apply this method, you must identify the 'All proceeds from the transactions with related parties and divisions, the profit between the parties according to their respective contributions. "
The steps involved in the application of this method are:
1. Determine the net total profit of all firms associatedinternational transactions;
2. Contribution rate for each of them made in relation to:
a) the function is executed;
b) the goods are used;
c) risk taken;
d) reliable data on the foreign market shows how this contribution will be evaluated.
3. Divide net income combined than the relative contribution of equity.
4. Profit is taken as the market price to come in relation to international trade.
Adistribution of two classes can be made as follows:
i. Allocation of the net profit to any enterprise, in order to return a key to the type of operation undertaken at international level;
ii. The rest of the net profit according to the assessment of fees shall be allocated and made
iii. The net income of approximately two terms is intended to go to the market price in relation tointernational affairs.
The following points are noted:
1. This is to profit from a transaction with the member companies, are the needs identified. If there are other operations that will contribute to profits, profits from operations may need some convergence on arrival.
2. The same rule provides an alternative method for arriving at arm's length price with the separation of profit in two classes Method;
3. If one of the alternatives is a series of data are available, the arithmetic average of these figures are estimated at market prices. However, it may not be possible to take the arithmetic mean of the two alternatives.
4. In two split-phase method, the fundamental return, companies can be chosen having regard to income, as compared to the net. Such returns can not constantly connected to all theParties> in the transaction.
5. This is the only method for which the same rule prescribed two types of transactions that may be applicable.
6. Even if the calculation is with profits from a transaction, the goal is to just go on arm's length price for the transaction. It 's only with the introduction of price competition for the price of international transaction, an adjustment to income can be madereturned.
Transactional net margin method (TNM):
Operation that can be used in the transactional net margin method are:
a) the provision of services;
b) the distribution of finished products in which the pricing method can not be properly addressed;
c) transfer of semi-finished products.
The steps involved in the application of this method are:
1. Identify net margin achieved by the company of an international transaction. The net profit margin maycalculated in relation to costs incurred or sales effected or assets employed or useful to other bases;
2. Identify the net profit margin of a comparable uncontrolled transaction or a series of such operations seen in the same way;
3. The net profit margin is identified as appropriate in the light of the differences, if a transaction between the international and the comparable uncontrolled transaction. The difference would be those that could significantly affect thenet profit margin on the open market;
4. The adjusted net profit margin is taken into account in arriving at arm's length price in relation to the international transaction.
The following points are in the application of the transactional net margin method to follow:
Fundamentals of difference the arrival of net income to be recognized. The same basis to reach the net profit margin is the assumption from year to year, if circumstances justify a different basis adopted.This ensures consistency and comparability would be worthwhile;
Regardless of the basis for the determination of net profit margin was selected in an international transaction, the same procedure to arrive at net profit margin will be adopted in comparable uncontrolled transactions;
The net profit is not a derivative of the product or service alone, but a derivative of the different processes, namely the nature of the market, the practices of cost, the cost of intangible property, etc. Therefore, it would be veryimportant that appropriate comparative data are identified for this method.
Net income for example, a number of factors, some of which may be affected:
v threat of new entrants
v Management Efficiency
individual strategies v
v cost of capital
v Business Experience
v Change obsolescence due to the demand / technology
v The method of depreciation
The selection of comparable transactions, therefore, very important, and the consistency iscriticism;
The accounting treatment of costs and depreciation are also critical in finding a similar way. Contrary to previous procedures, if the provision does not expressly provide for the adjustment because of different accounting practices. However, this need may be considered different practices;
Some of the key figures that can be used to determine the price of free competition within the framework of the method;
V ratio of pre-tax sales
V ratio of earnings beforeIncome and sales taxes
V ratio of cash profit to sales
V ratio of profit before tax on shareholders' equity
V ratio of net profit before interest and taxes on capital
v Berry Ratio – Ratio of operating expenses to operating revenues.
most appropriate method:
1. For the purposes of paragraph (1) of § 92C, then the best method is the method that best
appropriate to the facts and circumstances of each particular international transactionthat the most reliable
Measurement of arm's length price in relation to the international transaction.
2. In choosing the most appropriate method, as specified in sub-rule (1), the following factors are considered,
namely: –
v type and class of international activities;
v the class or classes of associated companies carrying out the operation and functions take into account or used goodsand used, risks assumed by such companies;
v is the range of availability and reliability of data for the application of the method, the degree of comparability between international and trading subsidiary and the company to take such steps;
V, as a reliable and precise adjustment made to account for differences, if any, between the
International Affairsthe comparable uncontrolled transactions or between the company and enter into
such operations;
v the nature, extent and reliability of assumptions that must be performed pursuant to a method. [Article 10c]
Documentation: § 92D provides that any person who is an international taxation is made and kept such information and documents, as specified by board rules.
In addition, each person has 92nd §entered into an international transaction during the previous year, a report request from an auditor and submit them by the date specified in the prescribed manner.
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