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B & Co- chartered accountant(Ca) in india offering professional accopunting services, financial chartered accountant, financial accounting services in india and consultancy in direct and indirect tax, company forrmation foriegn investments approvals, auditing etc. .
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 Transfer Pricing
 
Overview | FAQ's
 Requisites for Transfer Pricing Regulations in India

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 India
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.

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.

The following step-by-step procedures explain our modus operandi.

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.

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.

Should you know how to carry out the business activities adhering to the transfer pricing policy or should you have any query on other related procedures,


Transfer Pricing in India- FAQs

1.

When do the transfer pricing regulations apply to a business?
  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.

2.

When can two companies be called as ‘associated enterprises?’

 

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.
3. What is meant by ‘International Transaction’ with regard to Transfer Pricing?
An international Transaction is defined as any transaction between two or more associated companies situated in different countries in terms of a property that is tangible or intangible, a service offered by the company, or any form of lending of money, etc. It is compulsory that at least one of the participants involved in the transaction is a non-resident of India. However, a transaction that has been carried out by two non-resident Indians, where one of them possesses a permanent setup in India and whose income is taxable from India, such a type of transaction is also considered as ‘International Transaction.’
4.
What are the different procedures to calculate the arm’s length price?
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.
5.
What all documents are required to be maintained by a company while executing an international transaction?

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.

6.

Who is the authorized person to furnish the report under section 92E of the Transfer Pricing Regulation Act?


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.

 
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