TRANSFER PRICING (T.P.

Basic Components of TP
WHAT ?
- International Transaction

WHO ?

- Associated Enterprise

HOW ?

- Arms Length Price

INTERNATIONAL TRANSACTION
A CROSS BORDER TRANSACTION between ASSOCIATED ENTERPRISES. At least one of the parties to the transaction must be a non-resident Transactions: (a) Purchase, sale or lease of Tangible or Intangible Property. (b) Provision of services. (c) Lending or borrowing of money. (d) Mutual agreement between AEs (e) Any transaction having a bearing on profits, income, losses or assets.

ASSOCIATED ENTERPRISE
Which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of such company; The entity holds, directly or indirectly, shares carrying not less than 26% of the voting power ; or Loan advanced by the entity to the company constitutes not less than 51% of the book value of the total assets of the company; or The entity guarantees not less than 10% of the total borrowings of the company; or 90% or more of the raw materials and consumables required for the manufacture or processing of goods by the entity, are supplied by the company, or by persons specified by the company.

ARMS LENGTH PRICE (ALP)

Price which two independent firms would agree on.

The price, which is applied in a transaction between persons other than associated enterprises in uncontrolled and comparable conditions.

METHODS TO CALCULATE ALP

(a) Comparable Uncontrolled Price Method ('CUPM') (b) Resale Price Method (RPM') (c) Cost plus method ('CPM') (d) Profit Split Method ('PSM')

(e) Transactional Net Margin Method ('TNMM')

(f) Any other method approved by the Central Government.

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 by an associate enterprise to an independent enterprise (IE). 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

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.

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

Transactional Net Margin Method

The net profit margin realised by the enterprise from a related party transaction shall be computed having regard to any relevant base. The net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction shall also be computed having regard to the same base. This net profit margin shall be adjusted to take into account the differences, if any. The cost of production increased by the adjusted profit mark-up shall be taken as arms length price.

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 Use of trade names or patents at exorbitant rates even after their expiry.

PENALTIES
(a) Penalty for Concealment of Income - 100 to 300 % on tax evaded (b) Failure to Maintain/Furnish Prescribed Documentation 2% of the value of each international transaction (c) Penalty for non-furnishing of accountants report - INR 100,000 (fixed)

- SARVESHWAR LAHOTY