Transfer Pricing

Over view of TP:

In terms of provisions of Income Tax Act 1961, every assessee entering into International Transaction or Domestic transaction (wherein specified conditions are satisfied) will have to ensure that the transactions entered into by them are at arm's length price. To assist assessees as to what is arm's length? What they have to comply with? We qualified and experienced chartered accountants are assisting our clients by providing following services.

What We Provide?

  • Providing analysis on comparables (Accept/Reject Matrix of companies).
  • Providing a protest to the TP audit.
  • Handle matters in appellate stages.
  • Providing legal advises on tax planning while entering into international or specified domestic transactions.
  • Providing assistance in drafting reports.
  • Conducting Transfer Pricing Study
  • Compliance to Tax authorities , rules and requirements as required under statute.
  • Issuing Accountants Report as required by statute.
  • Industry analysis and review.
  • Functional, Asset and Risk Analysis.

Cross Border TP:

FAQ's:

Chapter X of Income Tax Act 1961 states that any transaction entered with associated enterprise has to be within arm's length. The price at which the transaction is transacted with related parties should be the same price at which it will be transacted with unrelated parties. We assist our clients in analysing the facts, studying the price risk and advising them the price at which the transaction should take place.

  1. Am i required to comply with transfer pricing?

    1. XYZ Private Limited Company, an Indian Company is into the business of Software Development. It renders services to its holding company ABC Private Limited located at Perth. Will the company be assessed for Transfer Pricing?

      As there is direct participation in the form of investment in capital by ABC Private Limited, we can say that ABC private limited and XYZ Private Limited are associated. Accordingly Transfer Pricing is applicable.

    2. Aero Limited, situated in Bangalore is into the business of manufacturing aeronautical parts. It purchases raw materials from Zebra Limited Located in Sydney, Zebra Limited has stake of 15% in Aero Limited, Hira Limited has 55% stake in Zebra Limited. Will Hira Limited and Aero Limited be called as Associated enterprises?

      Hira Limited and Zebra Limited have direct participation. Zebra Limited and Aero Limited have Direct participation, but Hira Limited and Aero Limited have indirect participation by Hira Limited controlling Zebra Directly.

    3. In the case of example a.) What if no transactions have taken place between the companies ?

      Just because a company is associated will not give rise to Transfer pricing Compliance. Once they are associated, to analyse the transfer pricing risk, existence of a trasaction as specified in the act is necessary.

    4. D.) JIM limited is located in India dealing with Aluminium products, has advanced loan of certain sum of money to JACK Limited located in Singapore. The loan advanced is 55% of the book value of total assets of JACK Limited. Are the enterprises said to be associated ?

      Two enterprises shall be deemed to be associated enterprises if, at any time during the previous year, a loan advanced by one enterprise to the other enterprise constitutes not less than fifty-one per cent of the book value of the total assets of the other enterprise. In the above case JIM and JACK Limited are Associated as JIM has advanced 55% of the book value of total assets of JACK limited, which is more than 51%.

    5. What if the loan is guaranteed by A Ltd to B Ltd, will it be an associated enterprise?

      Two enterprises shall be deemed to be associated enterprises if, at any time during the previous year, one enterprise guarantees not less than ten per cent of the total borrowings of the other enterprise. A LTD and B LTD are not associated enterprise as borrowings guaranteed by A LTD is less than 10%. As per provisions it should be not less than 10% to satisfy the criteria of associated enterprise.

    6. DARE Limited and DASH Limited have 4 directors on board. The process of appointing directors vests with DASH Limited located in Sweden, whereas DARE Limited is in India. Are the enterprises said to be associated with each other?

      Yes. As per the provisions where more than half of the directors or members of the governing board are appointed by other enterprise, it is said to be associated enterprise.

  2. AU Limited located in Bengaluru has entered into the transactions of borrowing a certain sum of money from its Subsidiary AG Limited located at Napier. Will this transaction be an International transaction?

    A transaction is said to be an International Transaction in following cases :

    • Transaction in the form of lending or borrowing of money.
    • Transaction in the form of Purchases or Sales of goods or services.
    • Transaction in the form of dealing with Tangible/Intangible Property.
    • Transaction of business restructuring.
    • Any other as defined in section 92B of the Income Tax Act 1961.
  3. What is Transfer Pricing Study?

    Transfer pricing study is all about examining the Industry overview (like competitors, pricing which is done by similar participants in Industry), it is also about analysing Functional, Risk and Asset analysis. Then deciding which method is suitable and giving reasons as to why such method was selected over other methods.

  4. What are the documents required to be maintained by a company while executing an International Transaction?

    • Details of ownership structure of the company.
    • Detailed profile of Foreign group or Domestic group(if SDT is applicable) to which the assessed company is associated with International or SDT as the case may be. (name, address, country/State )
    • Detailed description of business activities of both the contracted parties.
    • Details of International Transactions or SDT as the case may be. (Nature of transaction, value of transaction , terms contained in transaction.)
    • Details of functions carried out, details of risks associated, details of tangibles and intangible assets.
    • Details of uncontrolled transactions.
    • Details of market analysis.
    • Details of the transfer pricing method used and reasons for selecting the same over other.

    The above list is exhaustive and any documentation is with reference to rule 10D of Income Tax Act 1962.

  5. Who is authorised person in India to Furnish the report under Section 92E of the Transfer Pricing Regulation in India?

    Any Person who has involved in International Transaction will have to furnish the report under section 92E within November 30th of every assessment year.

  6. What is the role of an Accountant?

    Accountant means Chartered Accountant. Every Chartered Accountant has to examine the information and documentation maintained and express an opinion in Form 3CEB as to the compliance of the legal requirements. A CA also examines the truth and correctness of the report.

  7. What is the validity of Safe harbour rules?

    Five years beginning from FY 12-13.

    1. What compliances are to be followed by an assessee following Safe Harbor Rules ?
      File Form 3CEFA .

      3CEFA should contain:

      • Transaction entered with an AE is an eligible international transaction;
      • Quantum of the international transaction;
      • Whether the AEs country or territory is a no tax or low tax country or territory; and
      • Operating profit margin/transfer price.
    2. ENFIS Company located in Rohtak provides back end software operations to Mutual Fund company ENVY of US. Such transactions with associated enterprise has given rise to International Transaction amounting 650 crores. The company ENFIS states that the concept of Transfer Pricing Risk does not exist as it expects the pricing followed by it to be accepted as it has maintained 20% margin . Clarify it.

      The Finance Act 2009 introduced SAFE HARBOUR Rules. It means the circumstances when the pricing fixed by assessee will be accepted by assessing officer. It was amended in 2013 with a specific rule which provides Minimum operating profit margin in relation to operating expenses that which will be accepted by assessing officer.

      Safe harbour rules are not arm's length price but contains the conditions and circumstances under which these norms are applicable.

  8. What are the methods used in computing arms length price?

    Methods used in computing arms length pricing are :

    • Comparable Uncontrolled Price method (CUP method)
    • Resale Price Method (RPM)
    • Cost Plus Method (CPM) Guidance Note – Transfer Pricing
    • Profit Split Method (PSM)
    • Transactional Net Margin Method (TNMM)
    • Other Prescribed by the board and provided in rule 10AB.
  9. What is transfer pricing documentation?

    Preparing transfer pricing study in accordance with rule 10D of Income Tax rules 1962 and section 92D of Income Tax Act 1961, which specifies the manner in which documentation for TP study has to be made.

  10. S Constructions Limited located in Noida and transacting with L constructions located in Singapore as not maintained documents required to be kept for International Transactions .What are the consequences?

    Penalty , a sum equal to 2% of the value of each international transaction or SDT as entered by assessee.

  11. Raj Limited has failed to furnish report under section 92E, What is the impact?

    Penalty of one hundred thousand rupees will be levied.

Domestic Transfer Pricing:

The Finance Act 2012 has introduced the concept of Transfer Pricing for Domestic Transactions also.

Will my Business be assessed for Transfer Pricing?

  1. CH Limited is into the business of Infrastructure located in Bengaluru, the company is subsidiary of SN Limited located in Pune. Are the companies related?

    Since there is direct participation by way of CH Limited controlling SN limited, both the companies are related.

  2. DT Limited is into the business of dealing with Motor Vehicles, the company is procuring goods from HL Limited .HL Limited has 12% stake in DT Limited. HL Limited has invested 53% in capital of RM Limited. Are RM and DT related?

    • RM limited and HL Limited are related directly.
    • HL Limited has 12% stake in DT Limited.
    • Since RM holds HL by way of 53% stake and HL holds 12% in DT, we can say that RM is indirectly controlling DT through intermediary HL Limited.

    Hence RM and DT are related through an intermediary.

  3. HGC, located in Mysuru is into the business of rendering back end accounting services to QRT located in Bengaluru. Both the companies have four directors of which two directors S & T work as directors in both companies. Are the company related?

    • Companies having common directors will not immediately make them related.
    • To be related both directors decisions should have its influence on the company.

    If directors S & T play significant role in making decisions at HGC and QRT, then we can say companies are related.

  4. What if the above companies are related?

    • Check the transactions entered into by the company.
    • Check the transaction limit to know whether the transaction is a Specified Domestic Transaction.
  5. What do you mean by Specified Domestic Transaction ?

    Specified Domestic Transactions Include :

    • Any expenditure incurred of which payment is made to parties referred to in section 40(a)(2)(b).
    • Any transaction referred to in section 80A.
    • Any transfer of goods or services referred to in section 80IA(8).
    • Any business transacted between the assessee and other person referred to in 80IA(10).
    • Any transaction referred to in any other section under chapter VI-A or section 10AA.
    • Any other transaction as may be prescribed.

    and where the aggregate of such transactions entered into by the assessee in the previous year exceeds 20 Crores.

  6. In the case of Domestic Transfer Pricing, will the provisions of Transfer Pricing Applicable for both related companies ?

    • Domestic transfer pricing is assessed only from expenditure point of view.
    • Domestic transfer pricing is not applicable to the company for whom the transaction is generating Income.
    • Domestic transfer pricing is one way applicable to the company for whom it is an expenditure.
    1. Aeroplane Limited is involved in manufacturing Aeronautic parts at Bengaluru , It is purchasing the raw materials from Accessories Limited located at Mumbai. Aeroplane Limited and Accessories Limited wants to know will TP be applicable for the said transaction if the limit has exceeded 20 Crores.

      • The threshold limit of 20crores is to be assessed from the point of view of the one who is incurring expenditure.
      • This provision operates only on expenditure side.
      • Persons/ Entities Receiving income will not be subject to SDT under the provisions and would not be required to comply with the relevant transfer pricing regulations.

      In the given example , for Aeroplane Limited buying of raw materials is an expense. For Accessories limited it is a revenue. Transaction of buying falls under Specified Domestic Transaction, the limit of 20 crores is also exceeded. The provisions operates only on expenditure side and hence TP regulations are to be complied by Aeroplane Limited Only. As for helicopter limited the transaction results in flow of income.

  7. What is Transfer Pricing Study?

    Transfer pricing study is all about examining the Industry overview (like competitors, pricing which is done by similar participants in Industry), it is also about analysing Functional, Risk and Asset analysis. Then deciding which method is suitable and giving reasons as to why such method was selected over other methods.

  8. What are the documents required to be maintained by a company while executing an International Transaction/SDT ?

    • Details of ownership structure of the company.
    • Detailed profile of Foreign group or Domestic group(if SDT is applicable) to which the assessed company is associated with International or SDT as the case may be. (name, address, country/State )
    • Detailed description of business activities of both the contracted parties.
    • Details of International Transactions or SDT as the case may be. (Nature of transaction, value of transaction , terms contained in transaction.)
    • Details of functions carried out, details of risks associated, details of tangibles and intangible assets.
    • Details of uncontrolled transactions.
    • Details of market analysis.
    • Details of the transfer pricing method used and reasons for selecting the same over other.

    The above list is exhaustive and any documentation is with reference to rule 10D of Income Tax Act 1962.

  9. Who is authorised person in India to Furnish the report under Section 92E of the Transfer Pricing Regulation in India ?

    Any Person who has involved in Specified Domestic Transfer Pricing will have to furnish the report under section 92E within November 30th of every assessment year.

  10. What is the role of an Accountant ?

    Accountant means Chartered Accountant. Every Chartered Accountant has to examine the information and documentation maintained and express an opinion in Form 3CEB as to the compliance of the legal requirements. A CA also examines the truth and correctness of the report.

  11. BRAVE Limited located in Chennai is engaged in the business of selling Motor Vehicles to NEED Limited located in Bengaluru. During the year transactions of the NEED Limited has exceeded 20 Crores. It wants to know as to for how many years once TP study report has to be prepared ?

    As and when the limit of SDT exceeds , NEED Limited has to get TP study completed . If market conditions and risks assessed show less deviation then recent past report say conducted two-three years ago can be relied and in such case a fresh study is not required but compliance is a must under section 92E that is submitting report from an accountant.

    1. Bijli Limited located at Haryana is into the business of providing power to Howrah limited at Kolkata. It wants to know the methods used in computing arms length price.

      Methods used in computing arms length pricing are :

      • Comparable Uncontrolled Price method (CUP method)
      • Resale Price Method (RPM)
      • Cost Plus Method (CPM) Guidance Note – Transfer Pricing
      • Profit Split Method (PSM)
      • Transactional Net Margin Method (TNMM)
      • Other Prescribed by the board and provided in rule 10AB.
    2. What is transfer pricing documentation?

      Preparing transfer pricing study in accordance with rule 10D of Income Tax rules 1962 and section 92D of Income Tax Act 1961, which specifies the manner in which documentation for TP study has to be made.

    3. SL Constructions Limited located in Bengaluru and transacting with UT constructions located in Hyderabad has not maintained documents required to be kept for International or Specified Domestic Transaction .What are the consequences?

      Penalty, a sum equal to 2% of the value of each Specified Domestic Transaction as entered by assessee.

    4. Ronak Limited has failed to furnish report under section 92E, What is the impact ?

      Penalty of one hundred thousand rupees will be levied.