Transfer Pricing :-Increasing participation of multi-national groups in economic activities in the country has given rise to new and complex issues emerging from transactions entered into between two or more enterprises belonging to the same multi-national group. As these multinational groups may avoid tax by manipulating the prices charged and paid in such intra-group transactions. To check the tax avoidance by multinational groups the provisions regulating transfer pricing have been introduced in the Income Tax Act. The Finance Act, 2001 substituted section 92 with a new section and introduced new sections 92A to 92F in the Income-tax Act, relating to computation of income from an international transaction in order to facilitate the computation of reasonable, fair and equitable profits and tax in India in the case of businesses carried on by multinational companies. The transfer pricing provisions are in line with those stipulated by OECD. However there is a difference that the Indian legislation does not permit the use of unspecified method to compute arms length price as permitted in OECD guidelines.
When two unrelated companies trade with each other, the price at which they undertake their transactions is simply known as the price. But when supply of goods, services or finance is made to another related company, the negotiated price is called transfer price.
Transfer pricing is the process of adjusting the prices of cross-border transactions between related associated parties.
An international transaction means a transaction of
i) purchase, sale or lease of tangible or intangible property or
ii) provisional services of lending or borrowing of money or
iii) any other transaction having a bearing on the profits, income, losses or assets of such enterprises or
iv) 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 the benefit, service or facility provided or to be provided to any one or more of such enterprises between two or more associated enterprises either or both of whom are non-residents.
v) Or any other transaction having a bearing on the profits, income, losses or assets of such enterprises
Associated enterprise, in relation to another enterprise, means an enterprise–
Two enterprises shall be deemed to be associated enterprises if, at any time during the previous year,–
Arm’s Length Price
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.
The main objective of Arm’s length principle is profit maximization. The arm’s length price shall be determined by any of the following methods, being the most appropriate method having regard to the nature of transactions or class of transactions or class of associated persons or functions performed by such persons or such other factors as the Board may prescribe in a given case:
Where more than one price is determined by the most appropriate method, the arms length price shall be the arithmetic mean of such prices or a price which may vary from the arithmetic mean by an amount not exceeding 5% of such arithmetic mean , at the option of the assessee.
The most appropriate method shall be the one which is best suited to the facts and circumstances of each particular international transaction and which provides the most reliable measure of an arms length price. The factors to be considered include:
a) Maintenance and keeping of information (92D)
b) Obtaining Accountants Certificate (92E)
a) Maintenance and keeping of information and document by persons entering into international transaction
Every person who has entered into an international transaction shall keep and maintain such information and document in respect thereof, as may be prescribed
The information and document shall be kept and maintained for a period of eight years from the end of the relevant assessment year.
Information and documents to be kept and maintained under Section 92D as prescribed under Rule 10D are
a) a description of the ownership structure of the assessee enterprise with details of the shares or other ownership interest held therein by other enterprises.
b) a profile of the multinational group of which the assessee enterprise is a part along with the name, address, legal status and country of tax residence of each of the enterprises comprised in the group with whom international transactions have been entered into by the assessee, and ownership linkages among them.
c) a broad description of the business of the assessee and the industry in which the assessee operates, and of the business of the associated enterprises with whom the assessee has transacted.
d) the nature and terms (including prices) of international transactions entered into with each associated enterprise, details of the property transferred or services provided and the quantum and the value of each such transaction or class of such transaction.
e) a description of the functions performed, risks assumed and assets employed or to be employed by the assessee and by the associated enterprises involved in the international transaction.
f) a record of the economic and market analyses, forecasts, budgets or any other financial estimates prepared by the assessee for the business as a whole and for each division or product separately, which may have a bearing on the international transactions entered into by the assessee.
g) a record of uncontrolled transactions taken into account for analysing their comparability with the international transactions entered into, including a record of the nature, terms and conditions relating to any uncontrolled transaction with third parties which may be of relevance to the pricing of the international transactions.
h) a record of the analysis performed to evaluate comparability of uncontrolled transactions with the relevant international transactions.
i) a description of the methods considered for determining the arm’s length price in relation to each international transaction or class of transaction, the method selected as the most appropriate method along with explanations as to why such method was so selected, and how such method was applied in each case
j) a record of the actual working carried out for determining the arm’s length price, including details of the comparable data and financial information used in applying the most appropriate method, and adjustments, if any, which were made to account for differences between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions.
k) the assumptions, policies and price negotiations, if any, which have critically affected the determination of the arm’s length price.
l) details of the adjustments, if any, made to transfer prices to align them with arms’s length prices determined under these rules and consequent adjustment made to the total income for fax purposes.
m) any other information, data or document, including information or data relating to the associated enterprise, which may be relevant for determination of the arm’s length price.
A person who has entered into an international transaction shall not be required to maintain the above mentioned documents if aggregate value of transaction entered into by the assessee does not exceed one crore rupees.
The tax authorities may require the tax payer to furnish this information and documentation within a period of 30 days, which may be extended to further 30 days at the discretion of tax authorities.
b) Obtaining Accountants Certificate
Every person who has entered into an international transaction during a previous year has to obtain a report from an accountant and furnish such report on or before the due date of furnishing return in Form 3CEB duly signed and verified in the prescribed manner by such accountant and setting forth such particulars as may be prescribed.
In order to ensure compliance of Arms Length principle following penalties have been imposed by Indian Legislation
|Default||Nature of Penalty|
|In case of a post inquiry- adjustment, there is deemed to be a concealment of income||100-30% of tax of adjusted amount|
|Failure to maintain documents||2% of the value of each international transaction|
|Failure to furnish documents||2% of the value of each international transaction|
|Failure to furnish Accountants Report||Rs 1,00,000/-|