Transfer Pricing in India CA Hiren D.Shah Ahmedabad email@example.com. Indian Regulations. Genesis for New TPR. In India, while introducing the new transfer pricing regulations the Finance Minister said:
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CA Hiren D.Shah
The process of fixation of Pricing of any Transaction between Associated Enterprises of MNC’s is known as “Transfer Pricing”
Overview - Indian Regulations between Associated Enterprises of MNC’s is known as
Developments – Indian Regime between Associated Enterprises of MNC’s is known as
Finance Act 2001, introduces
detailed Transfer Pricing Regulations
21 Aug 2001
Rules 10A to 10E notified
Circular No. 12 issued – Guidelines
to AO’s. Beneficial to Assesses
23 Aug 2001
Circular No. 14 issued – Explaining
Provisions of Finance Act, 2001
Guidance Note issued by the ICAI.
Finance Act, 2002 introduced –
Clarificatory Amendments made
Section 92 between Associated Enterprises of MNC’s is known as
- Cost Contributions
at Arms Length Price (ALP)
Concept between Associated Enterprises of MNC’s is known as
Arm’s length price
Associated Enterprises between Associated Enterprises of MNC’s is known as
Transaction [S. 92F(v)] between Associated Enterprises of MNC’s is known as
International Transaction [S. 92B] between Associated Enterprises of MNC’s is known as
A transaction between two
Either or both of whom are
Non - Residents,
in the nature of
Purchase, sale, lease of
Provision of Services
Borrowing/Lending of money
Cost Sharing arrangements
Applicability of Transfer Pricing between Associated Enterprises of MNC’s is known as
Branch & HO Issues
Whether TPR would apply to
transactions between Indian residents
& their foreign branches.
Whether, TPR would apply to
transactions between foreign residents
& their Indian branches.
Methods between Associated Enterprises of MNC’s is known as
Traditional transaction methods
Transactional profit methods
Computation Provisions between Associated Enterprises of MNC’s is known as
Documents to be maintained
MAM should be the reliable measure of Arm’s Length Price
- nature or terms of international transactions
- assumptions made or other factors
Elimination of companies with insufficient data
1. Segment Analysis
2. Must not engage in significant related party transactions
3. Must not own valuable IPRs
8 Acceptable Companies for Comparison
Electronic Databases facilitates effective
Data Search Strategy
By Functional Analysis - one also refers to FAR analysis, which means an analysis of Functionsperformed, Assets employed & Risks assumed by various components of a Group.
Understand ‘Business process’
for effective FAR Analysis
Selection of most appropriate method
Determination of ALP
Identification of comparable transactions
Establishing Comparability, Adjustment for material differences
For identifying comparable transactions, one must understand what comparability is.
One must satisfy five comparability 10B) factors
For establishing comparability, 10 steps of search process are essential to follow:
Step 1: Broad based analysis (e.g. industry analysis, analysis of value drivers…)
Step 2: Determination of years to be covered
Step 3: Review of the controlled transaction(s) in order to identify the relevant factors that will influence both the selection of the appropriate transfer pricing method(s) and the comparability analysis
Step 4:Review of existing internal comparable. Where necessary, decision to look for external ones.
Step 5:Determination of available sources of information (including, but not limited to, commercial databases) and of their reliability
Step 6 differences: Selection of the relevant transfer pricing method(s) and definition of the relevant indicia (e.g. what net margin indicator in case of a TNMM).
Step 7: Identification of potential comparables: defining the key characteristics to be met by any uncontrolled transactions to be potentially comparable, on the basis of the relevant factors identified under step 3 and in accordance with the comparability standard established under paragraphs 1.19 to 1.35 of the TP Guidelines
Step 8: Determination of and making comparability adjustments, where and as needed (comparison of taxpayer’s profits with profits which would have accrued at arm’s Length)
Step 9: Interpretation and use of data, determination of the arm’s length remuneration.
Step 10: Implement support process. Install review process to ensure adjustment for material changes and document these processes
1. COMPARABLE UNCONTROLLED PRICE (‘CUP’) METHOD
2. RESALE PRICE METHOD
3. COST PRICE METHOD,
4. PROFIT SPILT METHOD
5. TRANSACTIONAL NET MARGIN METHOD
Steps and circumstances of the transaction under review, provides the most reliable measure of an arm’s length result.involved in the determination of the arm’s length price can be summarized as Follows:
Audit Report under Form 3CEB by which the above adjustments were made
Powers of Assessing Officers by which the above adjustments were made
Impact of Adjustments by AO by which the above adjustments were made
Section by which the above adjustments were made
Failure to keep and maintain transfer pricing documentation and information.
Sum equal to 2% of the value of international transaction.
Failure to furnish Transfer Pricing Audit Report from an Accountant
One lac rupees
Failure in furnishing transfer pricing documents and information to tax authorities upon request.
Sum equal to 2% of the value of international transaction.
Penalties under TP Regulations
CA Hiren D Shah by which the above adjustments were made
Email : firstname.lastname@example.org
Determining the scope of an agreement, issues,
APA entered into between the Board and the applicant
Mutually agreed draft APA prepare
Internationally safe harbour has taken various forms
A Safe harbour (referred to as a comfort mechanism in the OECD Guidelines) has been defined to mean ‘circumstances’ in which, the Indian Revenue Authorities shall accept the transfer pricing declared by the tax payer.