“Transfer pricing“ refers to the prices of transactions between related parties like the parent and subsidiary, which may take place under the conditions differing from those taking place between independent enterprises. The transfer price between relevant parties may not be at par when compared to the transfer price on transactions with unrelated parties.
Suppose, a company A purchased the good for Rs. 100/- and sells it to its associated company B in another country amounted for Rs. 200/-, who in turn sells in the open market for Rs. 400/-. If company A had sold it directly in the latter country, it would have made a profit of Rs. 300/-. But by routing it through company B, it restricted the profit to Rs. 100/-, permitting company B to appropriate the balance. The transactions between A and B is arranged and are not governed by market forces. The profit amounting to Rs. 200/- is, thereby, shifted to country of B. The goods are transferred on a price (transfer price) which is arbitrary or dictated (Rs. 200/-), but not on the market price (Rs. 400/-).
To protect interests of the revenue, the Income Tax Act, 1961 (“the Act”) has vide its chapter X framed specific provisions. The basic principle enunciated through such provisions is to be considered “arm’s length price” for the international transactions. Almost every entity associated with an international entity faces the issue of transfer price regulation in India. We help those entities in determining the correct transfer pricing in India in the form of providing transfer pricing reports for indian companies within the timeframe adopting complete legal framework.
To protect interests of the revenue, the Income Tax Act, 1961 (“the Act”) has vide its chapter X framed specific provisions. The basic principle enunciated through such provisions is to be considered “arm’s length price” for the international transactions. Almost every entity associated with an international entity faces the issue of transfer price regulation in India. We help those entities in determining the correct transfer pricing in India in the form of providing transfer pricing reports for Indian companies within the timeframe adopting complete legal framework.
Transfer Pricing Methods
There are several methods for determining the arm’s length price of transactions for transfer pricing Income Tax, which can be applied to ascertain whether the commercial or financial relations between related parties are consistent with the arm’s length principle.
The method to find out the arm’s length price should be selected so that it is the most appropriate way for a given case, and the choice thereof depends on the facts and circumstances of each case. The various methods of determining arm’s length price are:
1: Comparable Uncontrolled Price (CUP) method
The comparable uncontrolled price method compares the price and conditions of goods or services in a controlled transaction between related parties with those of an uncontrolled transaction between independent enterprises. To make this comparison, the CUP method needs the transaction taking place between the associated enterprises to be extremely similar to the transaction happening between independent enterprises.
2: Resale Price Method
The resale price method uses the selling price of a product or service, otherwise known as the resale price. This amount is then reduced with a gross margin, determined by comparing the gross margins in comparable transactions made by similar but unrelated organisations. Then, the costs associated with purchasing the product, such as custom duties, are deducted from the total. The final figure is considered an arm’s length price for a controlled transaction made between related enterprises.
3: The Cost-Plus Method
The cost-plus method analyses a controlled transaction between an associated purchaser and supplier. It is generally used when semi-finished goods are transacted between associated entities or when related parties have long-term arrangements for ‘buy and supply’. The costs of the supplier are added to markup for the product or service so that the supplier makes an appropriate profit that takes into account the functions they performed and the current conditions of the market. The combined price is the arm’s length price for the transaction.
4: Transactional Net Margin Method
The Transactional Net Margin Method helps determine transfer prices by looking at the net profit of a transaction between related parties. Then this net profit is compared to the net profits in comparable transactions of unrelated enterprises.
This method is the most commonly used and broadly applicable type of transfer pricing methodology as under this method, transactions to qualify as comparable don’t have to be exactly similar to the controlled transactions.
5: The Profit Split Method
Associated enterprises sometimes engage in very interrelated transactions. Hence, they cannot be evaluated on a separate basis. Related enterprises usually agree to split the profits for these types of transactions.
The Profit Split Method for transfer pricing India examines the terms & conditions of these types of controlled transactions by finding out the division of profits that unrelated enterprises would have realised from engaging in those transactions.
Having invested a good quantum of time in the above processes, we can provide sound technical advice in different business and economic scenario and Statutory Audit of companies. Solutions being provided are practical, useful and implementable. Help CFOs and Tax Managers in decision making on Transfer Prices within their Group Companies.
Why SAAAR Wealth Advisors are helpful?
We are one of the best transfer pricing consultants in Delhi providing complete support in preparing TP reports in Delhi .
- Assistance in planning and transfer pricing planning documentation
- Assistance in preparing transfer pricing study / documentation
- Transfer pricing audit (Form No. 3CEB)
- Country-by-country reporting
- Representation before transfer pricing officer
- Transfer pricing litigation before higher authorities CIT(appeals), dispute resolution panel, income tax appellate tribunal (ITAT)
Having invested a good quantum of time in the above processes, we can provide sound technical advice in different business and economic scenario. Solutions being provided are practical, useful and implementable. Help CFOs and Tax Managers in decision making on Transfer Prices within their Group Companies.
Frequently Asked Questions
- What is the meaning of Associated Enterprises?
Associated enterprise, in relation to another enterprise, refers to an enterprise:
a: which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; or
b: in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise.
- What is Arm’s length price?
Arm’s Length Price is a price charged or proposed to be charged in a transaction between persons other than the associated enterprises in uncontrolled circumstances. The price at which the transaction between two associated enterprises takes place should be at Arm’s length price, which can be calculated using any of the following methods –
* Comparable Uncontrollable Price (CUP) Method
* Resale Price Method or Resale Minus Method
* Cost Plus Method
* The Comparable Profits Method
* The Profit Split Method
- What is a Transfer Pricing Agreement?
Before entering into the transactions with associated enterprises located outside India, an enterprise must have a Transfer Pricing Agreement. It specifies the terms and conditions of the transactions to be carried on between them.
- What is Transfer Pricing Report (Form 3CEB), and what is the due date of filing this report?
It is compulsory for all assessees to obtain an independent accountant’s report, Form 3CEB, regarding all international transactions between associated enterprises and submit it to the Income Tax department. In TP Report, entities need to demonstrate that their international transactions have been carried out at Arm’s length.
This report, i.e., Form 3CEB, must be furnished on or before 31stOctober following the relevant financial year.
- What is the due date of filing the ITR for assessees required to file Form 3CEB?
For the assessees required to furnish Form 3CEB, the due date for filing the ITR is 30thNovember following the relevant financial year.
