Overview of Transfer Pricing �in India���By CA Raghav Gupta�FCA�
Contents
A Corp. (China) –Factory manufacturing GEAR BOX
B Pvt Ltd. (Canada)- Manufacturing the
CAR BODY
C Ltd. (USA) – Factory manufacturing CHASSIS and OTHER PARTS
XYZ Ltd. (India) is a holding company of A Corp (China), B Pvt Ltd (Canada) and C Ltd. (USA).
It purchases various parts from its subsidiaries, ASSEMBLES the car and sell it to the final customers
Selling CARS to the final Customers
in Multiple Countries
What is it?
Transfer Pricing
Who sets the price?
Company A (India) Parent Co.
Particulars | Amount (INR) |
Sale Price | 1,00,000 |
Cost | 68,000 |
Profit before tax | 32,000 |
Tax @ 30% | 9,600 |
Profit after tax | 22,400 |
Company B (Dubai) Subsidiary Co.
Particulars | Amount (INR) |
Sale Price | 1,20,000 |
Cost | 1,00,000 |
Profit before tax | 20,000 |
Tax @ 0% | 0 |
Profit after tax | 20,000 |
Final Customers (USA)
Manufacturing the product and selling it to its subsidiary
Distributing the product to final customers
Situation 1 | Overall tax liability in India comes to INR 9,600.
Indian company is making sales to its Dubai subsidiary (distributor Company), and further making all its sales through it
Transfer Pricing
How it affects taxability in India
Situation 1
Company A (India) Parent Co.
Particulars | Amount (INR) |
Sale Price | 70,000 |
Cost | 68,000 |
Profit before tax | 2,000 |
Tax @ 30% | 600 |
Profit after tax | 1,400 |
Company B (Dubai) Subsidiary Co.
Particulars | Amount (INR) |
Sale Price | 1,20,000 |
Cost | 70,000 |
Profit before tax | 50,000 |
Tax @ 0% | 0 |
Profit after tax | 50,000 |
Final Customers (USA)
Manufacturing the product and selling it to its subsidiary
Distributing the product to final customers
Situation 2 | MNE managed the intercompany pricing between Company A and Final customer and introduced Company B in their business structure to reduce overall tax liability to INR 600.
Now, MNE company tries to reduce their tax burden by manipulating inter company pricing
Situation 2
Transfer Pricing
Company A (India) Parent Co.
Company B (Dubai) Subsidiary Co.
Final Customers (USA)
Manufacturing the product and selling it to its subsidiary
Distributing the product to final customers
Particulars | Amount (INR) |
Sale Price | 70,000 |
Cost | 68,000 |
Profit before tax | 2,000 |
Tax @ 30% | 600 |
Profit after tax | 1,400 |
Particulars | Amount (INR) |
Sale Price | 1,20,000 |
Cost | 70,000 |
Profit before tax | 50,000 |
Tax @ 0% | 0 |
Profit after tax | 50,000 |
Adjustment
Transfer Pricing
Transfer Pricing Regulations in India
Transfer Pricing in India - Framework
Transfer Pricing Regulations
Relevant sections of the Income Tax Act, 1961 | Coverage |
Section 92 | Computation of Income from International Transaction having regards to Arm’s Length Price |
Section 92A | Meaning of associated Enterprises |
Section 92B | Meaning of International Transaction |
Section 92BA | Meaning of Specified Domestic Transaction |
Section 92C | Computation of Arm’s Length Price |
Section 92CA | Reference to Transfer Pricing Officer |
Section 92CB | Power of Board to make safe harbour rules |
Section 92CC | Advance Pricing Agreement |
Section 92CD | Effect to Advance Pricing Agreement |
Transfer Pricing Regulations
Relevant sections of the Income Tax Act, 1961 | Coverage |
Section 92CE | Secondary adjustment in certain cases |
Section 92D | Maintenance of prescribed documentation |
Section 92E | Obtaining of Accountant’s Report |
Section 92F | Definitions of various terms |
Transfer Pricing - Overview
Section 92 – Legislative Provisions
Provisions in Section 92
(1) Any income arising from an international transaction shall be computed having regard to the arm's length price.
Explanation: For the removal of doubts, it is hereby clarified that the allowance for any expense or interest arising from an international transaction shall also be determined having regard to the arm's length price.
(2) Where in an international transaction or specified domestic transaction, two or more associated enterprises enter into a mutual agreement or arrangement for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises, the cost or expense allocated or apportioned to, or, as the case may be, contributed by, any such enterprise shall be determined having regard to the arm's length price of such benefit, service or facility, as the case may be.
(2A) Any allowance for an expenditure or interest or allocation of any cost or expense or any income in relation to the specified domestic transaction shall be computed having regard to the arm's length price.
Provisions in Section 92
(3) The provisions of this section shall not apply in a case where the computation of income under sub-section (1) or sub-section (2A) or the determination of the allowance for any expense or interest under sub-section (1) or sub-section (2A), or the determination of any cost or expense allocated or apportioned, or, as the case may be, contributed under sub-section (2) or sub-section (2A), has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction or specified domestic transaction was entered into.
Applicability
Applicability
The keywords in Section 92 are:
The terms are defined in sections 92A, 92B and 92F.
Section 92A – Associated Enterprises
Meaning of Associated Enterprises
Section 92
Associated Enterprises
Section 92A(1)
Defines associated enterprises generally
Section 92A(2)
Deemed associated enterprises
Meaning of Associated Enterprises
Section 92A(1)(a)
An enterprise which participates, directly or indirectly or through one or more intermediaries, in management/control/capital of other enterprise.
Example:
Intermediatory
B Ltd.
Participates in management/ capital/control
Participates in management/ capital/control
Case 2
A Ltd.
Case 1
Meaning of Associated Enterprises
Section 92A(1)(b)
If one or more persons participates, directly or indirectly, or through one or more intermediaries in management/control/capital of two different enterprises. Then, those two enterprises are AEs.
Example:
C Ltd.
A Ltd.
D Ltd.
Participates in management/ capital/control
Participates in management/ capital/control
Meaning of Associated Enterprises
It may be noted that when Finance Act, 2002 had amended sub-section (2) of section 92A, the memorandum to the Finance Bill, 2002 explained the said amendment as under:
“It is proposed to amend sub-section (2) of the said section to clarify that the mere fact of participation of one enterprise in the management or control or capital of the other enterprise or the participation of one or more persons in the management or control or capital of both the enterprises shall not make them associated enterprise unless the criteria specified in sub-section (2) are fulfilled.”
Meaning of Associated Enterprises
Section 92A(2)
Two enterprises shall be deemed to be associated enterprises if, at any time during the previous year is covered in any of the 13 specified situations.
Situation 1: one enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in the other enterprise.
Example:
B Ltd.
A Ltd.
C Ltd.
75%
75%
Meaning of Associated Enterprises
Situation 2: any person or enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in each of such enterprises.
Example:
B Ltd.
A Ltd.
C Ltd.
75%
75%
Meaning of Associated Enterprises
Situation 3: a loan advanced by one enterprise to the other enterprise constitutes not less than fifty-one per cent of the book value of the total assets of the other enterprise.
Example:
B Ltd.
A Ltd.
B’s book value of an asset INR 10 Cr.
Loan from A Ltd. INR 6 Cr.
Meaning of Associated Enterprises
Situation 4: one enterprise guarantees not less than ten per cent of the total borrowings of the other enterprise.
Example:
Indian Bank
A Ltd.
(USA)
Loan of INR 500 Cr.
B Ltd.
(India)
Guarantee of INR 100 Cr.
Meaning of Associated Enterprises
Situation 5: more than half of the board of directors or members of the governing board, or one or more executive directors or executive members of the governing board of one enterprise, are appointed by the other enterprise.
Example:
Meaning of Associated Enterprises
Situation 6: more than half of the directors or members of the governing board, or one or more of the executive directors or members of the governing board, of each of the two enterprises are appointed by the same person or persons.
Example:
B Ltd.
Mr. A
C Ltd.
Appointed 9/10 directors of B Ltd.
Appointed 2 executive directors on board of C Ltd.
Meaning of Associated Enterprises
Situation 7: the manufacture or processing of goods or articles or business carried out by one enterprise is wholly dependent on the use of know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights.
Example:
B Ltd.
(India)
A Ltd.
(USA)
Provide patent formula of Fizzy drinks
Meaning of Associated Enterprises
Situation 8: ninety per cent or more of the raw materials and consumables required for the manufacture or processing of goods or articles carried out by one enterprise, are supplied by the other enterprise, or by persons specified by the other enterprise, and the prices and other conditions relating to the supply are influenced by such other enterprise.
Situation 9: the goods or articles manufactured or processed by one enterprise, are sold to the other enterprise or to persons specified by the other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprise.
Meaning of Associated Enterprises
Situation 10: where one enterprise is controlled by an individual, the other enterprise is also controlled by such individual or his relative or jointly by such individual and relative of such individual.
The word relative is defined u/s 2(41) of the Act.
Example:
Mr. A
Y Ltd.
Mr. B
X Ltd.
Relatives
Control
Control
Meaning of Associated Enterprises
Situation 11: Where one enterprise is controlled by a Hindu undivided family, the other enterprise is controlled by a member of such Hindu undivided family or by a relative of a member of such Hindu undivided family or jointly by such member and his relative.
Example:
HUF
Y Ltd.
Member of HUF/ Relative of member of HUF
X Ltd.
Control
Control
Meaning of Associated Enterprises
Situation 12: where one enterprise is a firm, association of persons or body of individuals, the other enterprise holds not less than ten per cent interest in such firm, association of persons or body of individuals.
Situation 13: there exists between the two enterprises, any relationship of mutual interest, as may be prescribed.
Section 92B - International Transaction
Meaning of International Transaction
Transaction relates to:
Meaning of International Transaction
Section 92B(2) – A transaction entered into by an enterprise with a person other than an associated enterprise shall be deemed to be an international transaction entered into between two associated enterprises, if
Meaning of International Transaction
Example:
Company A (USA) Parent Co.
Company B (India) AE of Company A
Contract Manufacturer
Prior agreement/ terms are determined in substance by Company A (USA).
Meaning of International Transaction
Explanation.—For the removal of doubts, it is hereby clarified that—
(i) the expression "international transaction" shall include—
(a) the purchase, sale, transfer, lease or use of tangible property including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing;
(b) the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know-how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature;
(c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;
(d) provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service;
(e) a transaction of business restructuring or reorganisation, entered into by an enterprise with an associated enterprise, irrespective of the fact that it has bearing on the profit, income, losses or assets of such enterprises at the time of the transaction or at any future date;
(ii) the expression "intangible property" shall include—
(a) marketing related intangible assets, such as, trademarks, trade names, brand names, logos;
(b) technology related intangible assets, such as, process patents, patent applications, technical documentation such as laboratory notebooks, technical know-how;
(c) artistic related intangible assets, such as, literary works and copyrights, musical compositions, copyrights, maps, engravings;
(d) data processing related intangible assets, such as, proprietary computer software, software copyrights, automated databases, and integrated circuit masks and masters;
(e) engineering related intangible assets, such as, industrial design, product patents, trade secrets, engineering drawing and schema-tics, blueprints, proprietary documentation;
(f) customer related intangible assets, such as, customer lists, customer contracts, customer relationship, open purchase orders;
(g) contract related intangible assets, such as, favourable supplier, contracts, licence agreements, franchise agreements, non-compete agreements;
(h) human capital related intangible assets, such as, trained and organised work force, employment agreements, union contracts;
(i) location related intangible assets, such as, leasehold interest, mineral exploitation rights, easements, air rights, water rights;
(j) goodwill related intangible assets, such as, institutional goodwill, professional practice goodwill, personal goodwill of professional, celebrity goodwill, general business going concern value;
(k) methods, programmes, systems, procedures, campaigns, surveys, studies, forecasts, estimates, customer lists, or technical data;
(l) any other similar item that derives its value from its intellectual content rather than its physical attributes.
Meaning of Specified Domestic Transactions
Section 92BA
The Specified domestic transaction shall mean any of the following transaction, not being an international, namely,-
Clause (va): any business transacted between the persons referred to in sub-section (6) of section 115BAB, or
Following clause (vb) shall be inserted after clause (va) of section 92BA by the Finance Act, 2023, w.e.f. 1-4-2024 :
Clause (vb): any business transacted between the assessee and other person as referred to in sub-section (4) of section 115BAE
The aggregate of such transactions entered into by the assessee in the previous year exceeds a sum of twenty crore rupees.
Definitions
Section 92F
Definitions of certain terms relevant to computation of arm's length price, etc.
In sections 92, 92A, 92B, 92C, 92D and 92E, unless the context otherwise requires,—
Definitions
(iii) "enterprise" means a person (including a permanent establishment of such person) who is, or has been, or is proposed to be, engaged in any activity, relating to the production, storage, supply, distribution, acquisition or control of articles or goods, or know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights, or the provision of services of any kind, or in carrying out any work in pursuance of a contract, or in investment, or providing loan or in the business of acquiring, holding, underwriting or dealing with shares, debentures or other securities of any other body corporate, whether such activity or business is carried on, directly or through one or more of its units or divisions or subsidiaries, or whether such unit or division or subsidiary is located at the same place where the enterprise is located or at a different place or places;
Definitions
(iiia) "permanent establishment", referred to in clause (iii), includes a fixed place of business through which the business of the enterprise is wholly or partly carried on;
(iv) "specified date" means the date one month prior to the due date for furnishing the return of income under sub-section (1) of section 139 for the relevant assessment year;
(v) "transaction" includes an arrangement, understanding or action in concert,—
(A) whether or not such arrangement, understanding or action is formal or in writing; or
(B) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceeding.
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