Transfer Pricing

Regulations
 Overview of applicability of TP Provisions
Any income arising from an international transaction
(IT) between
Associated Enterprises (AE) shall be computed having
regard to the arms length price (ALP).
Any allowance for an expenditure or interest or allocation
of any cost or expense or any income in relation to the
specified domestic transaction (SDT) shall be computed
having regard to the arm's length price.
Arms length price means price applied or proposed
to be applied in a transaction between independent parties
in uncontrolled transactions. 3 Elements of Transfer
Pricing: 1. Arms Length Price(ALP)
2. AE / Domestic AE // 3. International Transaction
 T ra n s a c tio n s

In te rn a l E x te rn a l
(W i t h i n th e c o u n try ) (o u ts i d e th e c o u n try )

In te r C o m p a n y In tra C o m p a n y In te r C o m a p n y In tra C o m p a n y

R e v e n u e P ro fit C o n tro l S y s te m N o n -R e l a te d : R e la te d C o n tro l S y s te m s

C a p ita l G a in c o s t c e n tre s P ro fit/D i v id e n d /R o y a lty P ro fit/D i v id e n d /R o y a lty F o re x F l u c tu a tio n s
R o y a lt y re v e n u e c e n tre s F o re x F lu c tu a tio n s T r a n s fe r P r ic in g A c c o u n ti n g
p ro fit/In v e s tm e n t c e n tre A c c o u n tin g F o re x /A c c o u n tin g T ra n s fe r P ric i n g
 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.
 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.
 Factors Affecting Transfer Pricing

Internal factors: Performance Measurement

and Evaluation
External Factors:
Accounting Standard
Income Tax
Custom Duty
Currency Fluctuations
Risk of Expropriation
 Transfer Price Regulations
International India
OECD formulated The Finance Act 2001
Guidelines on introduced the detailed
transfer pricing. They TPR w.e.f. 1st April
serve as generally 2001
accepted practices by The Income Tax Act
the tax authorities AS-18
Other Relevant Acts
 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.
 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.
 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
 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
 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.
 Arms Length Price: 92C

Comparable uncontrolled price method

Resale price method
Cost plus method
Profit split method
TNMM
 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.
 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
 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
 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.
 Some Transactions subject to ALP
Purchase at little or no Exchanging property
cost. Selling of real estate at
Payment for services a price different from
never rendered. MP
Sales below MP/ Use of trade names or
Purchase above MP patents at exorbitant
Interest free rates even after their
borrowings expiry.
 Transfer Pricing
Brief history Post World War I
What is Transfer Pricing?
Basic Issues Underlying Transfer Pricing
Evolution of Transfer Pricing
Concepts in Transfer Pricing
Transfer Pricing Methods
Transfer Pricing as a Current and Future Issue
for Developing Countries
Indian Regulation on Transfer Pricing