Complied by Ravi Sanguri

Transfer Price Regulations

TP means the price or value at which transactions take place amongst related parties. TP means the prices at which an enterprise transfers physical goods and intangible property and provide services to associated parties. TP gain significance because these can be used by the controlling party to their advantage to minimise tax incidence.

Arms Length Price

Price which two independent firms would agree on. Price which is generally charged in a transactions between person other than associated enterprises.

Transfer Price---what and Why???

Approximately 60% of the transactions across the world are between related parties. If the transactions are across different tax jurisdictions , where tax rate are different , shifting is beneficial.

Income Tax Act and Transfer Pricing

Finance act 2001 substituted the old sections of 92 of income tax act by sections 92, 92A to92 F. the new provisions lay down that income arising from an international transaction between Associated enterprises shall be computed having regard to the Arm Length price. These sections are the backbone of Indian transfer price regulations. These sections define the meaning of related parties, international transactions and the method of calculating Arm length price.

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Complied by Ravi Sanguri

Section 92A- The term Associated enterprises has been defined

in section 92A. Associated Enterprises: 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.

Section 92B- This section defines an International transaction.

Transactions between two or more AE of which either both or anyone is a non-resident. Transactions - Purchase/Sale /Lease. - Provision of service. - Lending of borrowing.

Section 92C- The provisions contained in section 92C provide for

methods to determine the Arm Length Price in relation to an International transaction, and the most appropriate method to be followed out of the specified methods. While the primary responsibility of determining and applying an Arms Length price is on the assessee, sub section (3) of section 92C empowers the A.O to
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Complied by Ravi Sanguri

determine the Arms Length price and compute the total income of the assessee accordingly, subject to the conditions provided therein.

Methods for determining ALP.

Comparable uncontrolled price method. Resale price method. Cost plus method. Profit spilt method

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 arms 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 associated enterprise at Rs.1000 (profit Rs.300) AE sold to Independent enterprise at Rs. 2000 (Profit of Rs.500 for relevant IE) Arms Length Price: 2000-500=1500 Profit Spilt Method:- PSM is used when transactions are interrelated 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 arms length price. Transactional Net Margin Method
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Section 92D-this section provides for certain information and

documents required to be maintained by persons entering into international transaction.

Section 92E- this section provides for a report of an accountant to

be furnished along with the return of income. Few transactions Related to ALP Purchase at little at little or no cost. Payment for services never rendered. Sale below MP. Purchase above MP. Interest Free Borrowing. Exchanging Property. Selling of real estate at a price different from MP Use of trade names or patents at exorbitant rates even after their expiry.

Note:1. The assessing officer shall not make any adjustment to the arms length price determined by the tax payer, if such price is up to 5% less or 5% more than the price determined by the A.O. In such cases the price determined by the taxpayer may be accepted. 2. The power to determine arms length price in an international transaction is contained in sub section (3) of section 92C. However section 92CA provides that where the assessing officer considers it necessary or expedient so to do, he may refer the computation of arms length price in relation to international transaction to the TPO (transfer pricing officer).

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