TAX CONSULTANT GLANCE AT TRANSFER PRICING LAW IN INDIA
Transfer pricing refers means the value or price of goods and services, tangible and intangible properties, arrived at between, or, by two taxable entities being related parties or closely-held companies in the course of their internal transactions involving transfer of such goods or rendering of services across different tax jurisdictions worldwide where the €related entities€ may be located.
Transfer pricing may be defined as €the price charged for transfer of goods and services from one division to another within the same firm is known as the transfer price€.
Transfer price is, thus, a price which represents the value of goods; or services between independently operating units of an organization. But, the expression transfer pricing generally refers to prices of transactions between associated enterprises which may take place under uncontrolled conditions.
The effect of transfer pricing is that the parent company or a specific subsidiary tends to produce insufficient taxable income or excessive loss on a transaction. For example, profits accruing to the parent can be increased by setting high transfer prices to siphon profits from subsidiaries domiciled in high tax countries, and low transfer prices to move profits to subsidiaries located in low tax jurisdiction.
OECD Transfer Pricing Guidelines state, €Transfer prices are significant for both taxpayers and tax administrations because they determine in large part the income and expenses, and therefore taxable profits, of associated enterprises in different tax jurisdictions.€
Suppose a Company A purchases goods for 100 rupees and sells it to its associated company B in another country for 200 rupees, who in turn sells in the open market for 400 rupees. Had A sold it direct, it would have made a profit of 300 rupees. But by routing it through B, it restricted it to 100 rupees, permitting B to appropriate the balance. The transaction between A and B is arranged and not governed by market forces. The profit of 200 rupees is, thereby, shifted to the country of B. The goods is transferred on a price (transfer price) which is arbitrary or dictated (200 hundred rupees), but not on the market price (400 rupees).
The result is revenue loss and also a drain on foreign exchange reserves. As an example of this, a group which manufactures products in high tax countries may decide to sell them at a low profit to its affiliate sales company based in a tax haven country.
If we talking about transfer pricing, there is important concept of Arm Length Price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions.
ELIGIBILITY FOR TRANSFER PRICING
Transfer pricing provisions are applicable to transactions between two or more associated enterprises where both or at least one of them is Non -Resident. In case of such transactions, it is seen that whether the transactions are at Arm's Length Price (ALP) or not; there are various methods prescribed for calculating the same. However if the variation in actual prices and ALP doesn't exceed 5%, then the actual price shall be deemed to be the ALP. To make things simpler, Advance Pricing Agreement has been notified by the Govt. of India:
An APA (Advance Pricing Agreement) is an agreement between the Central Board of Direct Taxes and any person, which determines, in advance, the arm's length price or specifies the manner of the determination of arm's length price (or both), in relation to an international transaction. Hence, once this agreement has been entered into with respect to an international transaction, the arm's length price with respect to that international transaction, for the period specified in the agree, will be determined only in accordance with the APA. The APA process is voluntary and will supplement appeal and other Double Taxation Avoidance Agreement (DTAA) mechanism for resolving transferpricing dispute. The term of APA can be a maximum of five years. The APA would be binding only on the taxpayer and the tax authorities, and only in respect of the international transactions for which the agreement is sought.
MAINTENANCE AND KEEPING OF INFORMATION AND DOCUMENT BY PERSONS ENTERING INTO AN INTERNATIONAL TRANSACTION:
As per Section 92 D of the Income Tax Act, 1961, every person who has entered into an international transaction shall keep and maintain such information and document as may be prescribed under the act and required to furnish all the information and document in relation to transactions entered, within 30 days from the date of issue of notice, if Assessing Officer or the Commissioner (Appeals) may call for such information or documents, in the course of any proceeding under this Act.
On an application made by such person, the Assessing Officer or the Commissioner (Appeals) may extend the period of thirty days by a further period not exceeding thirty days.
PENALTY FOR FAILURE TO FURNISH INFORMATION OR DOCUMENT UNDER SECTION 92D:
As per Section 271G of Income Tax Act, 1961, if any person who has entered into an international transaction fails to furnish any such information or document as required above, the Assessing Officer or the Commissioner (Appeals) may direct that such person shall pay penalty, a sum of equal to two per cent of the value of the international transaction for each such failure.
RECENT AMENDMENT:
There is a recent amendment in thetransfer pricing, that Central Board of Direct taxes simplified transfer-pricing rules for multinational companies operating in India.
The Central Board of Direct Taxes modified another circular around taxation of development centres, defining a contract research and development (R&D) centre, a move which will enable foreign firm to outsource more of their research and development activities to India without worrying about tax liability. When an entity is defined as a contract research and development centre, it is deemed to be mainly performing tasks for its foreign entity and, hence, its tax liability in India is limited.
The tax consultants point of view about the recent amendment is that tax liability will be limited in India, and foreign firm can outsource their activities without worrying about the tax- liability.
TAX CONSULTING SERVICES ON TRANSFER PRICING:
Lexis Juris is also engaged in providing tax consulting services ontransfer pricing and our multi-disciplinary professionals acts as tax consultant who helps you review, document, manage and defend your transfer pricingpolicies and processes and aligning them with your business strategy.
Transfer pricing may be defined as €the price charged for transfer of goods and services from one division to another within the same firm is known as the transfer price€.
Transfer price is, thus, a price which represents the value of goods; or services between independently operating units of an organization. But, the expression transfer pricing generally refers to prices of transactions between associated enterprises which may take place under uncontrolled conditions.
The effect of transfer pricing is that the parent company or a specific subsidiary tends to produce insufficient taxable income or excessive loss on a transaction. For example, profits accruing to the parent can be increased by setting high transfer prices to siphon profits from subsidiaries domiciled in high tax countries, and low transfer prices to move profits to subsidiaries located in low tax jurisdiction.
OECD Transfer Pricing Guidelines state, €Transfer prices are significant for both taxpayers and tax administrations because they determine in large part the income and expenses, and therefore taxable profits, of associated enterprises in different tax jurisdictions.€
Suppose a Company A purchases goods for 100 rupees and sells it to its associated company B in another country for 200 rupees, who in turn sells in the open market for 400 rupees. Had A sold it direct, it would have made a profit of 300 rupees. But by routing it through B, it restricted it to 100 rupees, permitting B to appropriate the balance. The transaction between A and B is arranged and not governed by market forces. The profit of 200 rupees is, thereby, shifted to the country of B. The goods is transferred on a price (transfer price) which is arbitrary or dictated (200 hundred rupees), but not on the market price (400 rupees).
The result is revenue loss and also a drain on foreign exchange reserves. As an example of this, a group which manufactures products in high tax countries may decide to sell them at a low profit to its affiliate sales company based in a tax haven country.
If we talking about transfer pricing, there is important concept of Arm Length Price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions.
ELIGIBILITY FOR TRANSFER PRICING
Transfer pricing provisions are applicable to transactions between two or more associated enterprises where both or at least one of them is Non -Resident. In case of such transactions, it is seen that whether the transactions are at Arm's Length Price (ALP) or not; there are various methods prescribed for calculating the same. However if the variation in actual prices and ALP doesn't exceed 5%, then the actual price shall be deemed to be the ALP. To make things simpler, Advance Pricing Agreement has been notified by the Govt. of India:
An APA (Advance Pricing Agreement) is an agreement between the Central Board of Direct Taxes and any person, which determines, in advance, the arm's length price or specifies the manner of the determination of arm's length price (or both), in relation to an international transaction. Hence, once this agreement has been entered into with respect to an international transaction, the arm's length price with respect to that international transaction, for the period specified in the agree, will be determined only in accordance with the APA. The APA process is voluntary and will supplement appeal and other Double Taxation Avoidance Agreement (DTAA) mechanism for resolving transferpricing dispute. The term of APA can be a maximum of five years. The APA would be binding only on the taxpayer and the tax authorities, and only in respect of the international transactions for which the agreement is sought.
MAINTENANCE AND KEEPING OF INFORMATION AND DOCUMENT BY PERSONS ENTERING INTO AN INTERNATIONAL TRANSACTION:
As per Section 92 D of the Income Tax Act, 1961, every person who has entered into an international transaction shall keep and maintain such information and document as may be prescribed under the act and required to furnish all the information and document in relation to transactions entered, within 30 days from the date of issue of notice, if Assessing Officer or the Commissioner (Appeals) may call for such information or documents, in the course of any proceeding under this Act.
On an application made by such person, the Assessing Officer or the Commissioner (Appeals) may extend the period of thirty days by a further period not exceeding thirty days.
PENALTY FOR FAILURE TO FURNISH INFORMATION OR DOCUMENT UNDER SECTION 92D:
As per Section 271G of Income Tax Act, 1961, if any person who has entered into an international transaction fails to furnish any such information or document as required above, the Assessing Officer or the Commissioner (Appeals) may direct that such person shall pay penalty, a sum of equal to two per cent of the value of the international transaction for each such failure.
RECENT AMENDMENT:
There is a recent amendment in thetransfer pricing, that Central Board of Direct taxes simplified transfer-pricing rules for multinational companies operating in India.
The Central Board of Direct Taxes modified another circular around taxation of development centres, defining a contract research and development (R&D) centre, a move which will enable foreign firm to outsource more of their research and development activities to India without worrying about tax liability. When an entity is defined as a contract research and development centre, it is deemed to be mainly performing tasks for its foreign entity and, hence, its tax liability in India is limited.
The tax consultants point of view about the recent amendment is that tax liability will be limited in India, and foreign firm can outsource their activities without worrying about the tax- liability.
TAX CONSULTING SERVICES ON TRANSFER PRICING:
Lexis Juris is also engaged in providing tax consulting services ontransfer pricing and our multi-disciplinary professionals acts as tax consultant who helps you review, document, manage and defend your transfer pricingpolicies and processes and aligning them with your business strategy.