What is the Meaning of Transfer pricing (TP) ?
TP meaning has not been defined anywhere in the Income Tax Act, 1961. Therefore, we have to go by general parlance. Transfer price is actual price charged between 2 related entities in a transaction which may be part of multinational or domestic group.
Since tax rates vary from country to country, there is a possibility that multinational group company may decide to keep prices of transaction between each other in such a way that group tax liability is minimized. This can be achieved by keeping prices in such a manner that countries having high tax rates should book less profit so that less tax is paid by them.
Purpose of Introduce Transfer Pricing in India
TP in India has been introduced by Finance Act 2001. The purpose of introduction as contemplated by Memorandum explaining the Finance Bill was that in order to curb the erosion of tax revenue due to TP practices of multinational group companies, the provisions of section 92 in chapter X were substituted by provisions of section 92 to 92F.
Later on via Finance Act 2012, TP provisions are also made applicable to domestic transactions.
Thus, now Transfer Pricing in India provisions are applicable to both domestic and international transactions. However, in case of domestic transaction there is a threshold of Rs 5 crore beyond which it will be applicable whereas no such limit is prescribed in case of international transactions.
Different Type of Transfer Pricing methods
Section 92 C read with Rules 10B and 10AB has prescribed 6 methods for determining arm’s length price namely,
- Comparable Uncontrolled price method [CUP method]
- Resale Price method [RPM method]
- Cost plus method [CPM method]
- Profit Split method [PSM method]
- Transactional Net Margin method [TNMM]
- Any other method as may be prescribed by CBDT. CBDT has prescribed “any other method” by notifying Rule 10AB wef 23rd March 2012
Out of above, first 5 methods are OECD recognized methods. Further, OECD has divided the methods above in 2 categories.
- Traditional Transactions method [Also called as Transactional Based Approach]. Here CUP, RPM and CPM are used.
- Transactional profits method. Here, PSM and TNMM are used.
Required Documents for Transfer Pricing Reports
As per provisions of section 92 E every person who has entered into an international transaction or specified domestic transaction during a previous year has to obtain a report in Form No. 3CEB from chartered accountant or any person who may act as an “accountant” and furnish such report on or before due date for filing Income Tax return u/s 139(1) i.e by 30th November.
TP study and Documentation
As per provisions of section 92D read with Rule 10D, every person who enters into any international transaction and whose aggregate value of such transactions during the year has exceed Rs 1 crore has to keep and maintain prescribed documents.
Similarly, any person who has entered into specified domestic transaction aggregating to more than Rs 5 crore in FY, shall have to keep and maintain prescribed documents.
Approx. 13 types of information are required to be kept like
- Description of ownership structure of organization
- Profile of Multinational group of which Assesse Company is part of
- Broad description of assessee’s business and industry in which it operates
- Nature and terms of international transaction including pricing
- FAR analysis i.e analysis of Functions performed, assets employed and Risks assumed
- Record of economic and market analysis, forecasts, budgets etc
- Record of uncontrolled transactions
- Comparability analysis
- Description of methods considered for determining arm’s length price
- Actual workings relating to computation of arm’s length price
- Assumptions , policies and price negotiations while computing arm’s length price
- Details of any adjustment made to transfer price in order to align them with arm’s length price
- Any other information, data or documents including data of AEs.
Further, aforesaid information must be accompanied by proper documentary evidence. That’s why normally every company which enters into international transaction or specified domestic transaction conducts TRANSFER PRICING STUDY REPORT or BENCHMARKING STUDY and document its finding in form of comprehensive report called as TP STUDY in order to determine arm’s length price and also meet the documentation required as prescribed in Act and Rules.
Aforesaid documents are required to be preserved for 8 years from end of relevant AY.
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