Transfer Pricing Overview
Background
Since 1991, with the liberalization of trade and foreign exchange policy India has started integrating its economy with global economy. This has led to increased cross border flow of goods, services, funds and even intangibles. There was a large inflow of Foreign Direct Investment (FDI). Monetary controls were relaxed and quantitative import barriers were lifted. Obviously, with the growing MNEs interested in India, it has become imperative for tax authorities in India to take cognizance of transfer pricing issues. It is relevant to note that many of the Indian companies have also become large global players with major acquisitions in recent past and with overseas subsidiaries in many tax jurisdictions
Introduction of Transfer Pricing Regulations
The Transfer pricing Regulations (TPR) were introduced in India vide the Finance Act, 2001 by substitution of the existing 92 and introduction of new sections 92A to 92F in the Income Tax Act (‘Act’) and relevant rules 10A to 10E in the Income Tax Rules, 1962. The regulations are applicable to relevant international transactions entered into from 1st April 2001.
Before the introduction of the above detailed provisions, the concept of transfer pricing was applied under the Act in some specified circumstances and in a limited manner. Erstwhile s 92 provided that if the tax authorities believed that an international transaction with a non-resident resulted in less than ordinary profits for the resident owing to a “close connection” between the two they could re-compute the taxable income of the resident.
TPR was introduced with a view to provide a detailed statutory framework which can lead to computation of reasonable, fair and equitable profits and tax in India, in the cases of multinational enterprises, and also introduced new s 92A to 92F in the Act, relating to computation of income from an international transaction having regard to the arm’s length price, meaning of associated enterprise, meaning of international transaction, computation of arm’s length price, maintenance of information and documents by persons entering into international transactions and definitions of certain expressions occurring in the said sections.
The legislative intention, underlying the TPR, is to prevent the shifting of profits by manipulating prices charged or paid in international transactions, thereby eroding India’s tax base. The explanatory memorandum of Finance Bill, 2001 explains that the TPR was introduced to curb transfer pricing abuse.
Transfer Pricing in India
The Transfer Pricing Regulation in
In order to curb the practice of avoiding tax by the foreign companies in India, a legislation under the name ‘Transfer Pricing Regulation’ has been introduced. The following are the important statutes of the law.
- Each person or association who has involved in an international transaction should maintain an up-to-date record of each transaction as prescribed by the legislation.
- All income acquired by the company by means of any international transaction shall be calculated at arm’s length price. There are various methods to calculate the arm’s length price, depending on the nature and type of the transaction, the nature of the group or the association involved, or any other features of the transactions involved. These methods are introduced by the Central Board of Direct Taxes, generally known as the ‘Board’. Some of them include the resale price method, cost plus method, comparable uncontrolled price method, and transactional net margin method.
- If there are two or more appropriate prices assumed for a certain transaction, the arm’s length price will be calculated as the average of the prices.
- At the end of a financial year, the person or group involved in an international transaction should submit the report of it in Form 3CEB under the guidance of a Chartered Accountant. This form has to be filed before he files the Income Tax return of the same period.
- A fact-finding exercise is carried out in order to analyze the various functions performed by the organization and the possible risks that can be encountered by each activity.
- Select the appropriate method of transfer pricing and identify the parties who have been tested with the particular method.
- Conduct a survey based on the database available from various national and international sources in order to identify the companies that can be benchmarked for the selected company and perform a financial analysis on the basis of them.
- Prepare a consolidated report on the basis of the analysis and document it appropriately.
- Issue the report in Form 3CEB as mandated by the Indian Income Tax Act, 1961.
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The group or person who does not adhere to these rules is liable to pay the penalties as imposed by the Board.
Transfer Pricing Regulation for Indian Companies
All Indian companies are required to analyze their international transaction with respect to the Transfer Pricing Regulation and adhere to it by maintaining proper transaction records and documents.
How can NBC help you?
NBC acts as the advisor to your company, especially in matters concerning the effective operation of your business in India. We can help you in countering the new Transfer Pricing Regulation in a cost-effective manner, without consuming much of your time. We provide you the appropriate solution after studying your business objectives and the nature of transactions that have been carried out.
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The following step-by-step procedures explain our modus operandi.
NBC is also specialized in defending the transfer pricing policy of various companies in front of the policy officers and thus counter them in an efficient manner.