What is Transfer Pricing? Is Transfer Pricing applicable to all
companies? Penalty Provisions in India against guilty.
Transfer prices means are the charges made when a company supplies goods,
services or finance to another company to which it is related. It is an
internationally accepted principle that transactions between related parties
(associated enterprises) should be based upon the same terms as between
unrelated parties i.e. should be at Arm?s Length. Both the Double Tax Avoidance
treaties entered into between countries and domestic tax legislation of various
countries has adopted the arm's length principle.
Determination of Associate Enterprises
According to Indian Tax laws, a company can be termed as an associated
enterprise with respect to the other enterprise, under the following conditions:
If the particular company is involved directly or indirectly in the management,
control, or the capital of the other company.
If any person/persons of the respective company who is/are involved directly or
indirectly in the management, control, or the capital of one company is/are
involved directly or indirectly in the management, control, or the capital of
the other company.
Apart from the above there are many deeming provisions enlisted under Section
92A of the Income-tax Act, 1961.
Are Domestic Transactions also covered under Transfer Pricing? The Finance Bill
2012 has cast Transfer Pricing net wider and deeper by substantially expanding
the scope of transfer pricing (TP) provisions by including domestic transactions
for the first time.
The following transactions (?specified domestic transactions?) will be included
if their aggregate exceeds INR 50 million in an Financial Year
i) Any expenditure to which section 40A(2)(b) applies
ii) Any transaction referred in section 80A
iii) Any transaction with a person specified in 80-IA(10)
iv) Any transaction referred in Chapter VI-A, Section 10AA to which 80(10) or
v) Any other transaction which may be prescribed
Regulations in India to tackle transfer pricing
Section 92 to 92F of Income-tax Act, 1961and Rule 10A to 10E of Income-tax
Rules, 1962 requires international transactions to be arm?s length in nature
when occurring between associated enterprises.
Determination of inter-company transaction is at arm?s length
There is no universal roadmap to arm?s length pricing. Usually, the first step
is to analyze the transaction, including the functions, assets and risks. Next,
the most appropriate transfer pricing method should be determined. Finally, that
method should be applied to the transaction so that an economic analysis can be
confirmed. These three steps are the basic building blocks to prepare the
transfer pricing documentation.
Indian taxpayers obligations
Taxpayers are required to maintain, on an annual basis, a set of extensive
information and documents relating to international transactions undertaken with
AEs. Rule 10D of the Income-tax Rules, 1962 prescribes detailed information and
documentation that the taxpayer has to maintain.
Do all Companies having International Transactions need to comply
with transfer pricing rules
Taxpayers having aggregate international transactions below the
prescribed threshold of INR 10 million are relieved from maintaining
the prescribed documentation. However, even in these cases, it is
imperative that documentation be maintained that is adequate to
substantiate the arm?s-length price of international transactions.
Penalty Provisions against violation of law and guilty
A Penalty of 2% of the value of international transaction may be
imposed, if the taxpayer fails to maintain prescribed documents or
information or; report any international transaction which is
required to be reported, or; maintains or furnishes any incorrect
information or documents.