Professional Documents
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Transfer Pricing
Transfer Pricing
Regulations
Impact of TP
S-I S-2 S-3 S-4 S-5
C Transfers to X 200 280 300 400 500
Cost to C 100 100 100 100 100
SP of X 300 300 300 300 300
Tax Rate for C 20%
Tax Rate for X 60%
S-1 S-2 S-3
C X Total C X Total C X Total
SP 200 300 500 280 300 580 300 300 600
Cost 100 200 300 100 280 380 100 300 400
PBT 100 100 200 180 20 200 200 0 200
Tax 20 60 80 36 12 48 40 0 40
PAT 80 40 120 144 8 152 160 0 160
S-4 S-5
C X Total C X Total
SP 400 300 700 500 300 800
Cost 100 400 500 100 500 600
PBT 300 -100 200 400 -200 200
Tax 60 60 80 80
PAT 240 240 320 320
T ra n s a c tio n s
In te rn a l E x te rn a l
(W i t h i n th e c o u n try ) (o u ts i d e th e c o u n try )
In te r C o m p a n y In tra C o m p a n y In te r C o m a p n y In tra C o m p a n y
R e v e n u e P ro fi t C o n tro l S y s te m N o n -R e la te d : R e l a te d C o n tro l S y s te m s
C a p ita l G a in c o s t c e n tre s P ro fi t /D iv id e n d /R o y a lty P ro fit/D iv id e n d /R o y a lty F o re x F l u c tu a ti o n s
R o y a lty re v e n u e c e n tre s F o re x F lu c tu a tio n s T r a n s fe r P r ic in g A c c o u n tin g
p ro fit/In v e s tm e n t c e n tre A c c o u n tin g F o re x /A c c o u n ti n g T ra n s fe r P ric i n g
Transfer Price: What and Why?
• TP means the value or price at which transactions
take place amongst related parties.
• TP are the prices at which an enterprise transfers
physical goods and intangible property and
provides services to associated enterprises
• TP gain significance because these can be used by
the controlling party to their advantage to
minimise tax incidence.
Transfer Price: What and Why?
• Approximately 60% of the total transactions
across the world are between related parties.
• If the transactions are across different tax
jurisdictions, where tax rates are different,
shifting is beneficial.
Factors Affecting Transfer Pricing
• Internal factors: Performance Measurement
and Evaluation
• External Factors:
– Accounting Standard
– Income Tax
– Custom Duty
– Currency Fluctuations
– Risk of Expropriation
Transfer Price Regulations
International India
• OECD formulated • The Finance Act 2001
“Guidelines on introduced the detailed
transfer pricing”. They TPR w.e.f. 1st April
serve as generally 2001
accepted practices by • The Income Tax Act
the tax authorities • AS-18
• Other Relevant Acts
Accounting Standard 18
Requires disclosure of ‘any elements of the
related party transactions necessary for an
understanding of the financial statements’.
Related Parties
• Control by ownership
– 50% of the voting right
• Control over composition of board of directors
– Power to appoint or remove the directors
• Control of substantial interest
– 20% or more interest in the voting power
AS-18 and Transactions
• Purchase and sale of goods;
• Rendering or receiving services;
• Agency arrangements;
• Leasing arrangements;
• Transfer of research and development;
• Licence aggrements;
• Finance
• Guarantees and collaterals;
• Management contracts.
Income Tax Act and TP
• Finance Act 2001 substituted the old section
of 92 of the ITA by sections 92,92A to
92 F.
• These sections are the backbone of Indian
TPR.
• These sections define the meaning of
related parties, international transactions,
pricing methodologies etc.
TPR: Some Important Concepts
• Income/Expenses/Cost arising from an
international transaction shall be computed
having regard to arm’s length price
(ALP).
• ALP provisions can be applied if it
leads to decrease in taxable income or
increase in losses.
Associate Enterprise: 92A
• Direct Control/Control through intermediary
• Holding 26% of voting power
• Advance of not less than 51% of the total assets of
borrowing company.
• Guarantees not less than 10% on behalf of
borrower
• Appointment of more than 50% of the BoD
• Dependence for 90% or more of the total raw
material or other consumables
International Transactions: 92B
• Transaction between two or more AE of
which either both or anyone is a non-
resident.
• Transactions:
– Purchase/Sale/Lease
– Provision of service
– Lending or borrowing
Arm’s Length Price
• Price which two independent firms would
agree on.
• Price which is generally charged in a
transaction between persons other than
associated enterprises.
Arm’s Length Price: 92C