Transfer Pricing

By SGR & Associates

Chartered Accountants

Transfer Pricing – Scope &

Applicability?

Transfer Pricing Regulations ("TPR") are

applicable to:

• All cross border transactions entered into between

associated enterprises.

• Specified domestic transaction, not being an

international transaction fulfilling the conditions

outlined in section 92BA of the Act

The aim is to arrive at the comparable price as

available to any unrelated party in open market

conditions and is known as the Arm's Length Price

('ALP').

Associated Enterprises

('AEs')– How Identified?

The basic criteria to determine an AE is the

participation in management, control or capital

(ownership) of one enterprise by another enterprise.

The participation may be direct or indirect or through

one or more intermediaries.

The concept of control extends not only to control

through holding shares or voting power or the power to

appoint the management of an enterprise, but also

through debt, blood relationships, and control over

various components of the business activity performed

by the taxpayer such as control over raw materials,

sales and intangibles.

For instance, following are deemed to be considered as

AEs:

a. one enterprise holds, directly or indirectly, shares carrying not

less than twenty-six percent of the voting power in the other

enterprise; or

b. any person or enterprise holds, directly or indirectly, shares

carrying not less than twenty-six per cent of the voting power in

each of such enterprises; or

c. a loan advanced by one enterprise to the other enterprise

constitutes not less than fiftyone per cent of the book value of the

total assets of the other enterprise; or

d. one enterprise guarantees not less than ten per cent of the total

borrowings of the other enterprise; or

For instance, following are deemed to be considered

as AEs:

e. more than half of the board of directors or members of the

governing board, or one or more executive directors or executive

members of the governing board of one enterprise, are appointed

by the other enterprise; or

f. more than half of the directors or members of the governing

board, or one or more of the executive directors or members of

the governing board, of each of the two enterprises are

appointed by the same person or persons; or

For instance, following are deemed to be considered as

AEs:

g. the manufacture or processing of goods or articles or business

carried out by one enterprise is wholly dependent on the use of

know-how, patents, copyrights, trade-marks, licenses, franchises

or any other business or commercial rights of similar nature, or

any data, documentation, drawing or specification relating to any

patent, invention, model, design, secret formula or process, of

which the other enterprise is the owner or in respect of which the

other enterprise has exclusive rights; or

h. ninety per cent or more of the raw materials and consumables

required for the manufacture or processing of goods or articles

carried out by one enterprise, are supplied by the other enterprise,

or by persons specified by the other enterprise, and the prices

and other conditions relating to the supply are influenced by such

other enterprise; or

For instance, following are deemed to be considered as

AEs:

i. the goods or articles manufactured or processed by one

enterprise, are sold to the other enterprise or to persons specified

by the other enterprise, and the prices and other conditions

relating thereto are influenced by such other enterprise; or

j. where one enterprise is controlled by an individual, the other

enterprise is also controlled by such individual or his relative or

jointly by such individual and relative of such individual; or

k. where one enterprise is controlled by a Hindu undivided family,

the other enterprise is controlled by a member of such Hindu

undivided family or by a relative of a member of such

Hindu undivided family or jointly by such member and his relative;

or

For instance, following are deemed to be considered as

AEs:

l. Where one enterprise is a firm, association of persons or body

of individuals, the other enterprise holds not less than ten per cent

interest in such firm, association of persons or body

of individuals; or

m. there exists between the two enterprises, any relationship of

mutual interest, as may be prescribed

What is an International

Transaction?

For instance, following are deemed to be considered as

AEs:

An international transaction is essentially a cross border

transaction between AEs in any sort of property, whether tangible

or intangible, or in the provision of services, lending of money etc.

At least one of the parties to the transaction must be a non-

resident entering into one or more of the following transactions

(a) Purchase, sale or lease of Tangible or Intangible Property

(b) Provision of services

(c) Lending or borrowing of money

(d) Any transaction having a bearing on profits, income, losses or

assets

(e) Mutual agreement between AEs for allocation/apportionment

of any cost, contribution or expense.

What is Specified

Domestic Transaction?

Specified domestic transaction in case of an assessee

means any of the following transactions, not being an

international transaction.

Any expenditure in respect of which payment has been

made or is to be made to a person referred to in section

40A(2)(b)

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 section 80-IA (10)

Any transaction, referred to in any other section under

Chapter VIA or section 10AA, to which provisions of section

80-IA(8) or section 80-IA(10) are applicable

Any other transaction as may be prescribed

However, where the aggregate of all such transactions entered

into by the assessee in the previous year exceeds a sum of five

crore rupees the provisions of these sections would be applicable.

Methods of determining

Arm Length’s Price?

(a) Comparable Uncontrolled Price Method ('CUPM')

(b) Resale Price Method ("RPM')

(c) Cost plus method ('CPM')

(d) Profit Split Method ('PSM')

(e) Transactional Net Margin Method ('TNMM')

(f) Other Method as prescribed by the board

What is Most Appropriate

Method?

The most appropriate method shall be the one which best suits to

the facts and circumstances of each international transaction or

specified domestic transaction and that provides the most reliable

measure of the arm’s length price.

Following specific factors should be taken into account in the

process of selecting the most appropriate method:

a. Nature and class of international transactions or specified

domestic transactions

b. Class or classes of associated enterprises and the functions

performed by them taking into account the assets employed or to

be employed and risks assumed by such enterprises;

c. Availability, coverage and reliability of data. For instance, data

relating to transactions entered into by the enterprise itself would

be more reliable than the data relating to transactions

entered into by third parties;

d. The degree of comparability and

e. The extent to which reliable and accurate adjustments can be

made to account for the difference between the transactions.

Documentation?

Every Taxpayer who has entered into an international transaction

or specified domestic transaction shall keep and maintain transfer

Pricing document in respect transactions thereof, as prescribed by

the TPR.

The provisions contained in the TPR are exhaustive as far as the

maintenance of documentation is concerned.

This includes background information on the commercial

environment in which the transaction has been entered into,

information regarding the transaction entered into, the analysis

carried out to select the most appropriate method and to identify

comparable transactions, and the actual working out of the ALP of

the transaction.

This also includes report of an accountant certifying that the ALP

has been determined in accordance with the TPR and that

prescribed documentation has been maintained.

Accountant’s Report-Form

3CEB?

Every Taxpayer who has entered into an international transaction

or specified domestic transaction shall obtain a report from an

accountant and furnish such report on or before the specified date

in the prescribed form duly signed and verified in the prescribed

manner by such accountant and setting forth such particulars as

may be prescribed.

As of now the specified date is November 30th of the relevant

assessment year.

Burden of Proof?

The primary onus is on the taxpayer to determine an ALP in

accordance with the Transfer Pricing Regulations and to

substantiate the same with the prescribed documentation.

Where such onus is discharged by the taxpayer and the data

used for determining the ALP is reliable and correct there can be

no intervention by the tax officer.

Adjustment to ALP-

Effects?

(a) Adjustment to reported income of the taxpayer-The tax

officer is bound to adjust the reported income of the taxpayer with

the amount of adjustment proposed by the TPO. This would have

an effect of increasing the assessed income or alternatively

decreasing the assessed loss.

(b) Levy of penalty- To ensure compliance with the arm’s

length principle, penalties has been prescribed for various

defaults as summarised below:

In case of a post-inquiry adjustment, there is deemed to be a

concealment of income - 100-300% of tax on the adjusted

amount

Failure to maintain documents - 2% of the value of each IT/SDT

Failure to furnish documents/report transaction - 2% of the

value of the IT/SDT

Failure to furnish accountant’s report - Rs 100,000

SGR & ASSOCIATES

C.A. Sanjeev Kumar & C.A. Ritu SarinSGR & ASSOCIATES

CHARTERED ACCOUNTANTSHead Office: 17A, Highway Apartments, Ghazipur,

New Delhi - 110096.Branch Office: D-91, First Floor, Kaushambi-201001

Telephone: +91-0120-4561947Mobile: +91-9212332310, 9212306204E MAIL: office@casgr.com