Transfer Pricing Rules and provisions relating to the transaction between two related parties. The transaction as per transfer pricing rules must be at Arm’s length prices. Transfer Pricing in India applies to both international transactions as well as domestic transactions however the word used is transactions with Associated enterprise. Transfer pricing rules are governed by the Income Tax act. Transfer Pricing In India was introduced in 2001 whereas India accounts for 1/3rd of the total transfer pricing disputes around the world. The major dispute in transfer pricing relates to the arm’s length price.
What is Arm’s length price?
Arm’s length price is the price at which a transaction occurs between two independent parties wherein both the buyer and seller are willing to enter into the transaction. The parties being independent hold no sway over the other and the transactions would be completed at a market price. As per Income Tax, arm’s length price is defined by Section 92F and places an additional restriction in the form of the transaction being conducted in an uncontrolled environment.
Transfer Pricing in India also specifies the methods for computation of arm’s length price for any transaction between two related parties.
What methods are used for the calculation of Arm’s length price?
The calculation of arm’s length and the method used for the calculation of the same depends on the circumstances of the transaction. As per section 92C of the Income Tax Act, companies are free to choose the method that is best applicable to them considering the circumstances of the underlying transactions. The section allows for the following methods:
- Comparable Uncontrolled Price Method
- Resale Price Method
- Cost Plus Method
- Profit Split Method
- Transactional Net Margin Method
- Any other method as may be prescribed
All the methods are suitable for certain types of transactions and must be used accordingly by the organization. Apart from the above methods, the company can also use benchmarking for similar transactions with unrelated parties. However, companies must ensure that adjustments for any changed circumstances must be made.
What documents are needed to be maintained by companies?
Transfer Pricing in India rules requires companies to maintain all documents related to a transaction that is subject to transfer pricing provisions. The documents have been specified in Rule No 10D of the Income-tax and include a wide array of documents concerning the ownership structure of the company, price-related documents including economic and market analysis as well as transaction-related documents like contracts, correspondence, adjustments, etc.
Apart from the documents above, companies are also required to get a certificate from a Chartered Accountant in Form No 3CEB regarding the transactions undertaken by them, whether the same are at an arm’s length price, and the methods used to calculate such arm’s length price.
What transactions does transfer pricing apply to?
Transfer Pricing in India applies to both domestic and international transactions. However, in the case of domestic transactions, the value of such transactions needs to be greater than 20 crores and the entity must be undertaking specific deductions under the Income-tax act for the rules to be applicable.
Transfer Pricing for International transactions, however, applies to every transaction between an international company and its Indian counterpart regardless of the amount of the transaction. With increasing globalization and transfer of technology and know-how between countries and companies, transfer pricing in India is applicable to a wide array of transactions like:
- Usage or transfer of Intangibles such as Goodwill, patent, trademark, etc.
- Loans and Guarantees
- Purchase or Sale transactions including transfer of services between two group companies
- Research and Development activities
Companies can also indulge in advance pricing agreements with the tax authorities wherein the company can approach the tax authorities to determine the arm’s length price concerning a transaction.
Transfer Pricing in India is a recent law but one of the most important considering the flow of foreign investments towards the country. Transfer pricing advisory can assist companies in reducing transfer pricing risk, creation of proper structure as well as maintenance of documentation with respect to transactions undertaken. In India, top firms like AKM Global, PwC, KPMG, etc. can assist companies in transfer pricing advisory including international benchmarking services, country by country reporting, and transfer pricing audit.