transfer price 12-2-14
TRANSCRIPT
TRANSFER PRICE REGULATION
Transfer Pricing
The process of fixation of Pricing of any Transaction between Associated Enterprises of MNC’s is known as “Transfer Pricing” TPR not to apply to cases which has the effect of reducing income chargeable to tax or increase the loss [s. 92(3)]
Transfer Price: What and Why?
• TP means the value or price at which transactions take place amongst related parties.
• TP are the prices at which an enterprise transfers physical goods and intangible property and provides services to associated enterprises
• TP gain significance because these can be used by the controlling party to their advantage to minimize tax incidence.
Transfer Price: What and Why?
• Approximately 60% of the total transactions across the world are between related parties.
• If the transactions are across different tax jurisdictions, where tax rates are different, shifting is beneficial.
Intent of Indian TP Regulations(International transactions)
Indian Co.Associated Enterprise (AE Co.)
Shifting of Profits
Shifting of Losses
India Overseas
Tax @ 32.45% Tax @ lower rate approx 10%
Tax Saving for the Group – Loss to Indian revenue
Concept
International transactions- goods- services- intangibles- loans
Independent entity
Resident
Associated enterprise
Resident
Transfer price
Arm’s length price
Arm’s length price
ALP means price applied or to be applied in transactions between unrelated persons & in uncontrolled conditions.
Income/Expenses/Cost arising from an international transaction shall be computed having regard to arm’s length price (ALP).
Associate Enterprise: 92A
• 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
OECD Guidelines
9
Transfer Pricing Methods
TP Methods
Indian Regulations
CUP Methods
Resale Price Method
Cost Plus Method
Profit Split Method
Transactional Net Margin Method
CUP Methods
Resale Price Method
Cost Plus Method
Profit Split Method
Transactional Net Margin Method
JGarg Economic Advisors
Comparable uncontrolled price method
• 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.
Resale price method
• 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
Profit Split Method
• 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
Cost Plus Method
• 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 Price Regulations
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. 1st April 2001• The Income Tax Act• AS-18• Other Relevant Acts
Factors Affecting Transfer Pricing
• Internal factors: Performance Measurement and Evaluation
• External Factors:– Accounting Standard– Income Tax – Custom Duty– Currency Fluctuations – Risk of Expropriation
Indian TP provisions• Indian TP provisions were introduced under
“Chapter X : Special Provisions Relating to Avoidance of Tax”– Chapter X, Section 92 of the Income Tax Act
(1961) and Rule 10A-D of the Income Tax Rules (1962)
– TP regime was introduced via Finance Bill 2001 April 1st 2001.
– In other words, India is a relatively new entrant into the TP vortex!
Indian TP Provisions – Section 92Section & Rules
Provisions
92 Computation of income having regard to ALP
92A Meaning of Associated Enterprise
92B Meaning of International transaction
92BA Meaning of specified domestic transactions
92C (1)(Rule 10B, 10C)
Methods of computation of ALP*Rule 10AB – Any other method for determination of ALP
92CA Reference to Transfer Pricing Officer (TPO)
92CB Safe harbour rules
92CC Advance Pricing agreement
92CD Effect of advance pricing agreement
92D (Rule 10D)
Maintenance of information and documents by persons entering into an international transaction or specified domestic transaction
92E(Rule 10E, Form 3CEB)
Accountant’s Report entering into an international transaction or specified domestic transaction
92F (Rule 10A) Definitions: Accountant, ALP, Enterprise, PE, Specified date, Transaction *
Transfer Pricing Penal provisions
October 2013
Sr.No.
Type of penalty Section Penalty quantified
1 a) Failure to maintain prescribed information/ documents
271AA 2% of transaction value (b) Failure to report any such transaction or(c) Furnish incorrect information
2 Failure to furnish information/ documents during assessment u/s 92D
271G 2% of transaction value
3 Adjustment to taxpayer’s income during assessment
271(1)(c) 100% to 300% of tax on adjustment amount
4 Failure to furnish accountant’s report u/s 92E
271BA INR 100,000
Indian TPAssessment &
Litigation
Commissioner of Income Tax (Appeals)
Assessing Officer (AO)
Transfer Pricing Officer (TPO)
Dispute Resolution panel (DRP)
Income Tax Appellate Tribunal (ITAT)
High Court
Supreme Court
TPO reference
TPO Order u/s 92CA(3)
Appeal againstCIT(A) order
Form 3CEB
Appeal againstAsst. order
Appeal againstDraft Asst. order
Appeal againstFinal Asst. Order
Set-aside / Remanded back to AO
Sept.2006
TPO: Dec. 2008
AO:Dec. 2009
May 2010
May 2011
2011+
2011+
FY 2005-06
Assessment timelineexample
T.P.Ostwal & Associates
Specified transaction U/S
92BA
