Increasing participation of multi-national groups in economic activities in the country and inter group transactions has given rise to new and complex issues emerging from transactions entered into between two or more enterprises belonging to the same multi-national or domestic group. With a view to provide a detailed statutory framework which can lead to computation of reasonable, fair and equitable profits and tax in India, government has incorporated various acts keeping in mind various aspects in this relation.
Transfer Pricing Laws & Rules covers :
– International Transfer Pricing &
– Domestic Transfer Pricing (w.e.f. Financial Year 2012-2013)
INTERNATIONAL TRANSFER PRICING :
In the case of multinational enterprises, 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 relation to the arm’s length price, meaning of associated enterprise, meaning of information and documents by persons entering into international transactions and definitions of certain expressions occurring in the said section.
What is Section 92?
As substituted by the Finance Act, 2002 states that any income arising from an international transaction or where the international transaction comprise of only an outgoing, the allowance for such expenses or interest arising from the international transaction shall be determined having regard to the arm’s length price. The provisions, however, would not be applicable in a case, where the application of arm’s length price results in decrease in the overall tax incidence in India in respect of the parties involved in the international_transaction.
Arm’s length price: In accordance with internationally accepted principles, it has been provided that any income arising from an international transaction or an outgoing like expenses or interest from the international transaction between associated enterprises shall be computed having regard to the arm’s length price, which is the price that would be charged in the transaction if it had been entered into by unrelated parties in similar conditions. The arm’s length price shall be determined by one of the methods specified in Section 92C in the manner prescribed in Rules 10A to 10C that have been notified vide S.O. 808 E dated 21.8.2001.
Arm’s length priced can be calculated by one of the specified methods:
– Comparable uncontrolled price method;
– Resale price method;
– Cost plus method;
– Profit split method or
– Transactional net margin method.
The taxpayer can select the most appropriate method to be applied to any given transaction, but such selection has to be made taking into account the various factors prescribed in the Rules. With a view to allow a degree of flexibility in adopting an arm’s length price the proviso to sub-section (2) of section 92C provides that where the most appropriate method results in more than one price, a price which differs from the arithmetical mean by an amount not exceeding five percent of such mean may be taken to be the arm’s length price, at the option of the assessee.
Is your company involved in any international transactions with any of its group companies?
Does your company engage in any inter-company transactions affecting the operating results?
Does your company render services to/receive services from affiliates free of charge?
Does your company render services to/receive services from affiliates free of charge?
Has your company been incurring operating losses over the past few years?
Are you a multinational corporation currently structuring your business plan?
Are you restructuring global operations as a result of changing global conditions?
if your answer is “yes” to one or more of the above questions, your company will in all probability require a transfer pricing review.
DOMESTIC TRANSFER PRICING :
Specified Domestic Transactions, Under the Income Tax Act 1961 :
Transfer pricing regulations have been extended vide Finance Act 2012 to include transactions entered into with domestic related parties or by an undertaking with other undertakings of the same entity for the purposes of section 40A, Chapter VI-A and section 10AA. Domestic transfer pricing provisions are applicable from Financial Year 2012-2013 i.e. Assessment Year 2013-14 onwards.
All of the compliance requirements relating to transfer pricing documentation, accountant’s report, etc shall equally apply to specified domestic transactions as they do for international transactions amongst associated enterprises.
Section 92BA defines Specified Domestic Transaction (SDT) which is covered by TP regulations. Section 92BA as under:
“For the purposes of this section and sections 92, 92C, 92D and 92E, “specified domestic transaction” in case of an assessee means any of the following transactions, not being an international transaction, namely:—
any expenditure in respect of which payment has been made or is to be made to a person referred to in clause (b) of sub-section (2) of section 40A;
any transaction referred to in section 80A;
any transfer of goods or services referred to in sub-section (8) of section 80-IA;
any business transacted between the assessee and other person as referred to in sub-section (10) of section 80-IA;
any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which provisions of sub-section (8) or sub-section (10) of section 80-IA are applicable; or
any other transaction as may be prescribed,
and where the aggregate of such transactions entered into by the assessee in the previous year exceeds a sum of INR 5 crore.’ (The Limit of Rs 5 crore is replaced with Rs. 20 crores from the F.Y. 2015-16 i.e. A.Y. 2016-17)
The above referred transactions will be regarded as SDT only if the aggregate value of all the above specified transactions exceeds the threshold limit of ` 5 crore (The Limit of Rs 5 crore is replaced with Rs. 20 crores from the F.Y. 2015-16 i.e. A.Y. 2016-17). All the transactions covered under the six limbs as mentioned above will be regarded as SDT only if the aggregate value of all transactions exceeds threshold of INR 5 crore (Upto the FY 2014-2015) and INR 20 crores (From FY 2015-16 onwards). If the threshold limit is crossed, the taxpayer will be required to comply with TP requirements with reference to all the transactions regardless of the fact that that the value of transactions under one of the limbs may be very small or nominal. Thus, there is no internal threshold for each limb of the definition.
The transactions included in the ambit of section 40A(2)(b) would include expenditure transactions like (illustrative only):
Expenditure on buying goods
Expenditure on procurement of services
Expenditure on interest payments
Expenditure on salary, training services, marketing expenses
Expenditure on purchase of tangible and intangible property
Director’s remuneration, commission, sitting fees
Guarantee fee expenditure
This provision operates only on the expenditure side and would not have any impact in the hands of the recipients of such payments. Thus only the persons/entities incurring such expenditure would be subject to SDT under this provision and would be required to comply with the relevant transfer pricing compliances.
Who are the Specified Persons :
(i) where the assessee is an individual –
- Any Relative (i.e. Spouse, Brother, Sister, Lineal Ascendant or Descendant) of such individual;
- Any person in whose buinsess or profession, the individual himself or his relative has substantial interest.
(ii) where the assessee is a company, firm, association of persons or Hindu un-divided family –
- Any Director of the Company, Partner of the firm, or member of the association, or family or any relative of such director, partner or member;
- Any Person in whose business or profession the assessee or director or partner or member of the assessee or any relative of such person has a substancial interest
(iii) All Assessess :
- Any Individual who has substantial interest in the business or profession of the Assessee
- A Company, Firm, AOP, or HUF having a substantial interest in business or profession of the assessee or any director, partner or member of any such person or any relative of any such director, partner or member
- A Company, firm, AOP or HUF of which a director, partner or member has a substantial interest in the business or profession of the assessee or any director, partner, or member of any such person or any relative of any such director partner or member
Services We Offer
Transfer Pricing Solutions
We at SGA. have skilled team of tax practitioners, economists and financial analysts who are masters in their fields. They focus on reducing threats and increasing opportunities to enhance corporate performance through proactive transfer pricing planning.
Integration of tax and economics is one of the most important attributes of our transfer pricing capabilities. This unified approach enables us to develop and implement transfer pricing methodologies that are analytically sound, flexible to deal with “real world” situations and fully compliant with the transfer pricing regulations. Further, this approach also ensures a creative and dynamic tax planning process for our clients.
Transfer Pricing Planning: Our team helps in evaluation of alternative business structures from a transfer pricing planning perspective in order to optimize allocation of revenues between group entities.
Compliance and Documentation: We provide assistance in various aspects of transfer pricing documentation preparation and compliance. A transfer pricing study prepared and supported by sound technical positions significantly reduces the risk of a possible tax contingency.
Controversy Resolution : As revenue authorities become more aggressive in applying transfer pricing regulations, disputes are likely to arise. SGA. Provides a range of services such as transfer pricing audit management and assistance in handling competent authority negotiations.
Managing Risk : SGA assists companies in preparing a defense against possible future inquiries from revenue authorities by assessing the current transfer pricing policies. The potential risks can then be evaluated and if required, appropriate corrective actions can be implemented. Our global controversy solutions and resources enable our clients to confidently address this dynamic issue with confidence.
Integrated Tax Planning: SGA specializes in solutions that provide international businesses with an opportunity to comprehensively assess tax position and drive benefits upwards through the company structure. We combine planning, coordination and execution of tax strategies in order to devise flexible solutions that effectively address business changes.