Transfer Pricing FAQ’s
When do the transfer pricing rules affect to a business?
When two or more associated enterprises companies enter into a joint contract during an global
transaction in order to allocate a particular cost incurred in relation with a profit, service or facility
presented by any one or all of the companies, such a cost shall be calculated taking into account the
arm’s length price of the particular assistance, service, or facility, as applicable.
When can a company called ‘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 enterprise, under the following conditions:
– If the particular 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.
– A minimum of 26% share holding in any of the enterprises is required. One enterprise shall be
resident and another entity shall be non-resident normally.
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.’
What are the different Methods to calculate the arm’s length price?
The various Methods to calculate the arm’s length price with respect to an international transaction
are as under :
– Transactional net margin method (TNMM)
– Resale price method (RPM )
– Comparable uncontrolled price method (CUP)
– Cost plus method (CPM )
– Profit Split Method (PSM) ( PSM )
– Other Method as prescribed by the Board (CBDT). So far, no method is prescribed by the
Board.What are the documents 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 methods considered and the most appropriate method 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 and why other methods
are rejected / not suitable to the entity, have to be observed.
Who is the authorized person to furnish the report under section 92E of the Transfer Pricing
Regulation Act in India ?
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 and certified by him, on or before
the date ( i.e. 30th September ( of every year) ) prescribed by the authority, furnishing all the
required details .When is the Transfer Pricing Documentation to be prepared and what is the quantum limit for
the international transactions ?
Normaly, the Transfer pricing documentation is to be prepared irrespective of the quantum limit of
the international transactions. But the threshold limit for the international transactions is Rs.1 Cr for
the Assessing Offcers for prearation of the TP study. For the TPOs, it is Rs.15 Cr of international
transactions for preparation of the TP study.
What will happen if the Report in Form 3-CEB is not obtained, and Transfer pricing
documentation is not prepared / maintained in the company ?
In respect of non-filing of Form No.3CEB, a penalty of Rs.1 lakh is leviable by the TPO concerned. In
respect of non-maintenance/ non-preparation of the Transfer Pricing documentation , the company is
liable to pay a penalty of 2% of the total international transaction value. In respect of non-filing of the
T.P. documentation before the TPO concerned, the company is liable to pay another 2% of the total
international transaction value.
How to fix or maintain the Arm’s Length Standard as per Indian conditions ?
T P India will always predict the unpredictable tax risk in India particularly in respect of International
Transfer Pricing matters. To maintain the Arm’s length standard in a systematic manner, you can
always consult the T P India and avoid huge tax burdens / huge adjustments.
What is the standard search criteria for the uncontrolled comparables in the Public data
bases ?
There is no standard search criteria for the uncontrolled comparables in any of the public data bases
and the same is not prescribed in the Income-tax Act or in the Income-tax Rules.
How to prepare calculations on working capital adjustments, risk adjustments, adjustments
on infrastructure cost, adjustments on depreciation cost , adjustments on intangibles,
adjustments on salary cost or employee cost etc. ?
In respect of the above adjustments, a separate forumula for each type of adjustment has been
prepared by T P India according to OECD guidelines and you can obtain from us by giving the
required details by you.
Is there any online preparation of T.P. documentation / TP study in T P India Services ?
Yes. You can obtain online preparation of T.P. documentation / T.P.study through us in a very
effective manner. One can believe that “ transfer pricing is not an exact science “ It is a subjective
analysis based on economic principles.
When do the transfer pricing rules affect to a business?
When two or more associated enterprises companies enter into a joint contract during an global
transaction in order to allocate a particular cost incurred in relation with a profit, service or facility
presented by any one or all of the companies, such a cost shall be calculated taking into account the
arm’s length price of the particular assistance, service, or facility, as applicable.
When can a company called ‘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 enterprise, under the following conditions:
– If the particular 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.
– A minimum of 26% share holding in any of the enterprises is required. One enterprise shall be
resident and another entity shall be non-resident normally.
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.’
What are the different Methods to calculate the arm’s length price?
The various Methods to calculate the arm’s length price with respect to an international transaction
are as under :
– Transactional net margin method (TNMM)
– Resale price method (RPM )
– Comparable uncontrolled price method (CUP)
– Cost plus method (CPM )
– Profit Split Method (PSM) ( PSM )
– Other Method as prescribed by the Board (CBDT). So far, no method is prescribed by the
Board.What are the documents 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 methods considered and the most appropriate method 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 and why other methods
are rejected / not suitable to the entity, have to be observed.
Who is the authorized person to furnish the report under section 92E of the Transfer Pricing
Regulation Act in India ?
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 and certified by him, on or before
the date ( i.e. 30th September ( of every year) ) prescribed by the authority, furnishing all the
required details .When is the Transfer Pricing Documentation to be prepared and what is the quantum limit for
the international transactions ?
Normaly, the Transfer pricing documentation is to be prepared irrespective of the quantum limit of
the international transactions. But the threshold limit for the international transactions is Rs.1 Cr for
the Assessing Offcers for prearation of the TP study. For the TPOs, it is Rs.15 Cr of international
transactions for preparation of the TP study.
What will happen if the Report in Form 3-CEB is not obtained, and Transfer pricing
documentation is not prepared / maintained in the company ?
In respect of non-filing of Form No.3CEB, a penalty of Rs.1 lakh is leviable by the TPO concerned. In
respect of non-maintenance/ non-preparation of the Transfer Pricing documentation , the company is
liable to pay a penalty of 2% of the total international transaction value. In respect of non-filing of the
T.P. documentation before the TPO concerned, the company is liable to pay another 2% of the total
international transaction value.
How to fix or maintain the Arm’s Length Standard as per Indian conditions ?
T P India will always predict the unpredictable tax risk in India particularly in respect of International
Transfer Pricing matters. To maintain the Arm’s length standard in a systematic manner, you can
always consult the T P India and avoid huge tax burdens / huge adjustments.
What is the standard search criteria for the uncontrolled comparables in the Public data
bases ?
There is no standard search criteria for the uncontrolled comparables in any of the public data bases
and the same is not prescribed in the Income-tax Act or in the Income-tax Rules.
How to prepare calculations on working capital adjustments, risk adjustments, adjustments
on infrastructure cost, adjustments on depreciation cost , adjustments on intangibles,
adjustments on salary cost or employee cost etc. ?
In respect of the above adjustments, a separate forumula for each type of adjustment has been
prepared by T P India according to OECD guidelines and you can obtain from us by giving the
required details by you.
Is there any online preparation of T.P. documentation / TP study in T P India Services ?
Yes. You can obtain online preparation of T.P. documentation / T.P.study through us in a very
effective manner. One can believe that “ transfer pricing is not an exact science “ It is a subjective
analysis based on economic principles.