P K DE & Associates

Frequently Asked Questions about Transfer Pricing

Auditing Services When two or more associated companies enter into a mutual contract during an international transaction in order to apportion a particular cost incurred in relation with a benefit, service or facility offered by any one or all of the companies, such a cost shall be calculated considering the arm’s length price of the particular benefit, service, or facility, as applicable.

According to sections 92, 92A, 92B, 92C, 92D, 92E and 92F, a company can be termed as an associated enterprise with respect to the other under the following circumstances. – If the respective company is involved directly or indirectly or with the help of one or more intermediaries 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 or with the help of one or more intermediaries in the management, control, or the capital of one company is/are involved directly or indirectly or with the help of one or more intermediaries in the management, control, or the capital of the other company.

The various procedures to calculate the arm’s length price with respect to an international transaction are the following.

Transactional net margin procedure
Resale price procedure
Comparable uncontrolled price procedure
Cost plus procedure
Profit split procedure
There are various other procedures that are prescribed by the Central Board of Direct Taxes, generally known as the Board.

The following documents have to be maintained when a company is involved in an international transaction.

The details of the ownership of the person with respect to the company. These include the ownership structure, the details of the shares, and information on ownerships held by any other company on it. A detailed profile of the foreign group to which the assessed company is associated with for the international transactions. The details such as name, address, country where tax returns are filed, and the legal status, etc., have to be furnished about the multinational group.
A detailed description of the business activities of both the assessed person and the associated group of companies with whom the former has been involved in international transaction. The details of the international transaction, such as the nature of the transaction, details of the property or services transferred, the terms contained in the transaction, and the amount and value of each transaction. The details of the functions carried out by such a transaction, the details of the risks involved and the value of the assets used or to be used by the assessed or the associated company that is involved in such a transaction.
The details of the records collected for the entire business or a particular division of the business during the period of the company’s business activity in which the foreign transaction has been involved. These include reports such as the estimates made on various market trends, forecasts about the market, budget analysis or any other such finance-related reports prepared by the company. The details of the uncontrolled transactions, if any, that has taken place with a third party during the period of the international transaction. The nature and the terms and conditions of such transaction have to be mentioned as they play an important role in deciding the value of the international transaction. The details of the analysis conducted in order to assess the impact of the uncontrolled transaction on the international transaction concerned. The details of the various procedures considered and the one adopted in deciding the arm’s length price with respect to an international transaction. The details should also include the details on why the particular method was adopted and how it was implemented successfully in order to decide the arm’s length price.

Any person who has involved in an international transaction in the previous year shall submit the report in Form 3CEB through a Chartered Accountant, duly verified by him, on or before the date prescribed by the authority, furnishing all the required details.

Since what is chosen is the “most appropriate method”, the concept of more than one appropriate price is a self-contradiction. But the proviso to section 92C(2) reads as under: “Provided that where more than one price may be determined by the most appropriate method, the arm’s length price shall be taken to be the arithmetical mean of such price.” The above proviso indicates that in the most appropriate method, which was chosen, there could be more than one price in which case the arithmetical mean will be taken. In other words, there could be more than one comparable and uncontrollable price, so that average could be adopted. Similarly, there could be more than one resale price or one cost plus price, so that the average can be adopted. The law does not, however contemplate more than one most appropriate method. Transfer pricing only when there is tax relevance.

An international transaction is one which takes place between a resident and a non resident or between two residents with a non resident associated concern as an intermediary. There is bound to be a tax impact for one or the other,so that transfer pricing become relevant , if not for the non- resident but atleast for the resident associate. Transfer pricing is bound to be relevant in such cases. It stands to reason, when the transfer pricing has no relevance at all for either party to the transaction, the rules would have no application, because the requirement of ascertainment of transfer pricing would not arise in such a case.

Transfer pricing rules relate to transactions. It is therefore reasonable to presume that the transaction covered in the last quarter of the previous year alone could be covered. There is possible view, that since it is an associate concern at any time during the year, all the transactions for the year are covered. The definition of “associated enterprise” in section 92A(2) would indicate, that an enterprise becomes an associate enterprise , if it becomes so “at any time during the previous year”. It would, therefore, mean that the associate enterprise is an associate enterprise for the whole year, so that the transaction for the period for which it was not associate enterprise may also be covered. This would, however, be a less plausible interpretation.

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