Transfer Pricing Regulations

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Transfer PricingRegulations
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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.

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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.

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Factors Affecting Transfer Pricing

• Internal factors Performance Measurement and
  Evaluation
• External Factors
• Accounting Standard
• Income Tax
• Custom Duty
• Currency Fluctuations
• Risk of Expropriation

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Transfer Price Regulations

• International
• OECD formulated Guidelines on transfer pricing.
  They serve as generally accepted practices by the
  tax authorities

• India
• The Finance Act 2001 introduced the detailed TPR
  w.e.f. 1st April 2001
• The Income Tax Act
• AS-18
• Other Relevant Acts

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Accounting Standard 18

• Requires disclosure of any elements of the
  related party transactions necessary for an
  understanding of the financial statements.

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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

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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.

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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.

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TPR Some Important Concepts

• Income/Expenses/Cost arising from an
  international transaction shall be computed
  having regard to arms length price (ALP).
• ALP provisions can be applied if it leads to
  decrease in taxable income or increase in losses.
  

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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

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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

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Arms Length Price

• Price which two independent firms would agree on.
• Price which is generally charged in a transaction
  between persons other than associated
  enterprises.

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Arms Length Price 92C

• Comparable uncontrolled price method
• Resale price method
• Cost plus method
• Profit split method

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Comparable uncontrolled price method

• CUP method compares the price transferred in a
  controlled transaction to the price charged in a
  comparable un-controlled transaction.
• CUP method is the most direct and reliable way to
  apply the arms length principle.

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Resale price method

• The resale price method begins with the price at
  which a product is resold to an independent
  enterprise (IE)by an associate enterprise.
• X sold to AE at Rs. 1000 (profit 300)
• AE sold to an IE at Rs. 2000
• (profit of Rs. 500 for relevant IE)
• Arms length price 2000 - 500 1500

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Profit Split Method

• PSM is used when transactions are inter-related
  and is not possible to evaluate separately.
• PSM first identifies the profit to be split for
  the AE. The profit so determined is split between
  the AE on the basis of the functions
  performed/assets/CE

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Cost Plus Method

• In CP method, first the cost incurred is
  determined. An appropriate cost plus mark-up is
  then added to the cost to arrive at an
  appropriate profit. The resultant figure is the
  arms length price.

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Some Transactions subject to ALP

• Purchase at little or no cost.
• Payment for services never rendered.
• Sales below MP/ Purchase above MP
• Interest free borrowings

• Exchanging property
• Selling of real estate at a price different from
  MP
• Use of trade names or patents at exorbitant rates
  even after their expiry.

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Some Cases

• Kinetic Honda Motors
• Collaborator Honda Motor Co. Ltd Japan and their
  Subsidiary Honda Trading Corpn. Japan
• Hero Honda Motors Ltd.
• Parent Honda Motor Co. Ltd Japan and their
  Subsidiary Honda Trading Corpn. Japan

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Some Cases

• Peico Electronics Electricals Ltd.
• Parent Phillips Netherlands and its subsidiaries
  
• Asea Brown Boveri
• Parent ABB Switzerland and its subsidiaries
• Videocon Group
• Collaborators Toshiba Co., Mitsubishi Co

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