Indian Transfer Pricing:
 
Introduction
Increasing participation of multi-national groups in economic activities in India has given rise to new and complex issues emerging from transactions entered into between two or more enterprises belonging to the same group. Hence, there was a need to introduce a uniform and internationally accepted mechanism of determining reasonable, fair and equitable profits and tax in India in the case of such multinational enterprises. Accordingly, the Finance Act, 2001 introduced law of transfer pricing in India through sections 92A to 92F of the Indian Income tax Act, 1961 which guides computation of the transfer price and suggests detailed documentation procedures.
 
Earlier the transfer pricing provisions were restricted to transactions between non-resident and resident or between two non-resident but now said transfer pricing provisions have been extended to transactions between two residents as well.
 
Scope & Applicability
Transfer Pricing Regulations ("TPR") are applicable to the all enterprises that enter into an 'International Transaction' or a 'Specified Domestic Transaction' with an 'Associated Enterprise'.
Generally, it applies to all cross border transactions entered into between associated enterprises. It even applies to transactions involving a mere book entry having no apparent financial impact. 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').
 
In case of specified domestic transactions, it applies to transactions specified in section 40A(2)(b), transactions between related entities covered in deduction and exemption provisions like section 80A, 80IA and Chapter VIA, etc.
Transfer pricing will be applicable to taxpayer, if aggregate value of all specified domestic transactions exceeds INR 5 Crores.
 
Methods Applicable
There are 6 methods prescribed to determine the arm's length price
  • Comparable uncontrolled price method ('CUP' Method)
  • Resale price method ('RPM')
  • Cost plus method
  • Profit split method
  • Transaction net margin method ('TNMM')
  • any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all relevant facts
Penalties Prescribed
  • If adjustment is treated as concealment of income: Penalty will be 100% to 300% of the tax on adjustment
  • Failure to maintain required set of documents: 2% of value of transactions
  • Failure to report transaction in report from Chartered Accountant: 2%of value of transaction
  • Failure to furnish documentation: 2% of value of transactions
  • Failure to furnish report by due date: INR 1,00,000
 
 
     
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