Transfer Pricing – Section 92A to 92F & Rules 10A to 10E

Article explains Section 92 (Computation of Income from International transactions at Arm’s Length Price), Section 92A (Associated Enterprises), Section 92B (International Transaction), Section 92C (Methods of Calculation Arm’s Length Price) and Methods of calculating Arms length price under Transfer pricing regulations, Transfer Pricing Documentation, Section 92E (Audit under Transfer Pricing), Filing under Section 92 of Income Tax act, 1962 and Transfer Pricing Between India and SVG.

Section 92A to Section 92F of Income Tax Act, 1961 & Income Tax Rules 10A to Rule 10E  are Applicable on all International Transactions and specified domestic transactions

# Transfer Pricing ensured that transaction between related parties is at the same price as compared to transaction between unrelated parties.

1. Section 92 (Computation of Income from International transactions at Arm’s Length Price)

All International transactions and specified domestic transactions entered between associated enterprises for the purpose of allocation of cost or expense incurred/to be incurred for benefit, service or facility undertaken or to be undertaken then such cost or expense must be according to Arm’s Length Price.

The concept of Arm’s Length was invented so that controlled transactions are done at market rates. Reason for such invention was as follows:

Multinational enterprises shift profits from high tax countries to lower ones so that such transaction leads to profit and low tax deposit. Example of such transactions are Providing financial or consultancy service to subsidiary company by holding company or manufacturing branch supply Finished Goods to Distributing Branch.  Such transactions are controlled internally in terms of prices and other conditions which results in more profit and low tax rates. In order to prevent such influence, Arm’s Length concept was invented.

2. Section 92A (Associated Enterprises)

Associated enterprise, in relation to another enterprise, shall mean an enterprise:

a. Participating (directly/indirectly) in control or management of other enterprise.

b. Person participating directly or indirectly in control or management of one enterprise also does same for other enterprise.

Enterprises are called associated enterprises in following situations:

1. Enterprise holds shares with not less than 26% voting power in other enterprise

2. Individual holds shares with not less than 26% voting power in each enterprise

3. Loan advanced by one enterprise to another contributes not less than 51% Book Value of total assets

4. Guarantee provided is not less than 10% of overall borrowing of other enterprise

5. More than half of the Board is appointed in one enterprise by other

6. One enterprise owns all IPR rights such as trademarks, patent, know-how, drawings related to model, design or inventions and other enterprise is dependent on such enterprise for using these rights for manufacturing of goods.

7. 90% or more raw material is supplied by other enterprise and price of such supply is controlled by such other enterprise

8. Goods required by one enterprise are supplied by other enterprise and prices or other conditions are influenced by such other enterprise.

9. One enterprise is controlled by individual and same individual or his relative has control over other enterprise

10. One enterprise is controlled by HUF and other enterprise is controlled by member of such HUF or relative of member of such HUF.

11. One enterprise is Firm, AOP or BOI and other enterprise holds not less than 10% interest in such Firm, AOP or BOI.

3. Section 92B (International Transaction)

Any transaction between associated enterprises wherein atleast one enterprise is Non-Resident is known as international transaction. Such transactions may include;

1. Purchase, Sale, Lease of intangible or tangible asset,

2. Provision of Services,

3. Borrowing or lending of money,

4. Any such transaction having material effect on profit or income or lose or asset of enterprise and parties agreed to apportion cost or expense of such transaction.

4. Section 92C (Methods of Calculation Arm’s Length Price)

Section 92C provides methods to calculate Arm’s Length Price which are as follows:

i. Comparable Uncontrolled Price Method

This is most preferred method where compared data is available in database. Compare price and condition of controlled transaction with uncontrolled transaction.

This method can be adopted in following cases:

1. Transfer of Goods

2. Provision of Services

3. Intangibles

4. Loan and Provision of Financial Services

This method should be used if goods/services are highly comparable.

Guidelines to use CUP method:

1. Associated Enterprises sells same product or service as is sold to third party

2. Differences between international Transaction or specified Domestic Transaction and comparable uncontrolled transaction doesn’t affect pricing mechanism

3. In case pricing mechanism is affected due to such difference then accurate adjustments to be made to eliminate such difference.

ii. Resale Price Method (‘RPM’)

Resale Price is the price at which goods or service has been sold to unrelated parties which were bought or obtained from Associated Enterprise. Reselling should be done without adding significant commercial value.

This method is suitable in case where only basic sale, marketing and distribution activities are undertaken.

ALP= Resale Price of Goods (-) Gross Profit Margin (-) Costs

Gross Profit Margin: Compare gross profit margin Incomparable uncontrolled Transaction

Cost: for purchase of product such as custom duty

iii. Cost Plus Method (‘CPM’)

This is mostly used in transfer of goods, property or service between Associated Enterprises.

To calculate ALP using this method, all direct/indirect cost of Supplier of Goods or services in controlled transaction PLUS Gross Profit Mark-Up.

Such Gross Profit Mark-Up does not include operating expenses like overhead expenses.

Following transaction adopt this method:

1. Provision of Service

2. Transfer of semi-finished goods

3. Joint Facility agreements

4. Long Term Busying & selling agreements

iv. Profit Split Method (‘PSM’)

This is best suitable on combined services provided by Associated Enterprises in a transaction.

Under this method, Profits earned by parties engaged in comparable uncontrolled transactions are compared.

PSM is considered where transfer of unique intangibles or where activities of parties to the transaction are inter related that contributions of individual parties cannot be separated.

Under this method:

1. Combined Profit of all Associated Enterprises engaged in the transaction is computed

2. Proportionate contribution by each Associated Enterprises is evaluated by doing FAR analysis

3. Lastly, combined Net Profit is split among all Associated Enterprises in contributions ascertained.

          F: Functioned Performed

          A: Asset Deployed

         R: Risk Undertaken

Guidance Note:

Recommend alternative approach: Basic return to be allocated as per market forces and then residual profits would be allocated to Associated Enterprises as above method.

v. Transactional Net Margin Method (‘TNMM’)

This is most preferred method by Multinational Companies.

This method compares Net Profit margin earned in controlled transaction and Net Profit Margin earned by third party in a similar transaction.

Guidance Note on recommendation:

i. Provision of Service

ii. Transfer of semi-finished goods

iii. Distribution of finished products where any other method cannot be adopted.

vi. Other Method

CBDT prescribed ‘other method’ on 1^st April, 2012 as Rule 10AB which compared Actual Price of uncontrolled transaction which is similar to CUP method. It recommends use of price which would have been charged or paid in an uncontrolled transaction like quotations, price publications etc.

5. Transfer Pricing Documentation

Every person in international transaction or specified domestic transaction needs to keep and maintain information provided in Rule 10D provided that constituent entity of international group must also keep and maintain such information and documents.

Following documentation under Rule 10D to be maintained:

1. Entity related

• • Ownership Structure
  • Profile of Multinational group
  • Business description

2. Price related

• • Nature and term of international transactions
  • Description of functioned performed, risk assumed and asset employed
  • Record of economic and market analysis
  • Record of budgets, forecasts, financial estimated
  • Any other analysis to evaluate comparability of international transaction with uncontrolled transaction
  • Description of method considered with reasons of rejection of other methods

 3. Transaction related

• • Detail of Transfer Pricing adjustments made
  • Any other information such as invoice, agreement, price related correspondence etc.

3 Tier Transfer Pricing Documentation Structure

• • Local File: This is the file which is kept with the company itself for eight years.
  • Master File: Such documents to be filed with IT department if:
  • Consolidated revenue of International Group for Accounting Year > INR 500 Crore AND
  • Aggregate value of International Transaction > INR 50 crore

OR

Aggregate value of international transaction pertaining to intangible property > INR 10 Crore

Country by Country Report: File CbCR with Income Tax Department if Consolidated Revenue of International Group > INR 6400 Crore

6. Section 92E (Audit under Transfer Pricing)

Person who are entering into international transactional or specified domestic transaction needs to furnish report verified and certified by Independent Chartered Accountant in form 3CEB on or before 30^th November of following Financial Year.

7. Filing under Section 92 of Income Tax act, 1962

Particular	Section	Details
Transfer Pricing Audit	Section 92E	Form 3CEB by 30th November
Transfer Pricing Study- Documentation	Section 92D
Return of Income	Section 139	ITR 1/2/3/4/5/6/7
Master File	Section 92D	Form 3CEAA by 30th November
Intimation by a designated constituent	Section 92D (4)	Form 3CEAB
Intimation by a designated constituent	Section 286 (1)	Form 3CEAC to be filed 2 months prior to the due date of CbCr
Country by Country Report	Section 286 (2) & (4)	Form 3CEAD to be filed in 12 months from end of reporting Accounting year.

8. Transfer Pricing Between India and SVG

Cabinet approved agreement between India and SVG for exchange of tax information and assistance in the collection.

This agreement will help in facilitating exchange of information between two countries including information held by Banks and other Financial Institutions.

This also facilitates assistance in collection of tax claimed between two countries and India would be able to fight offshore tax evasion and tax avoidance practices.