BACKGROUND OF TRANSFER PRICING
It is a universal phenomena that Mutlinational Companies(MNCs) have branches/ subsidiaries/divisions operating in more than country. In such a situation, it becomes a common event for MNCs to transfer goods produced by a branch in one tax jurisdiction to an associate branch in another tax jurisdiction. While doing so ,MNCs have the objective to minimise the tax burden, specially when they deal with their associates and maximising their profits BUT the two tax jurisdictions/countries have also their consideration of maximising their revenues by regulating those transactions.
TRANSFER PRICING IN INDIA-Increasing participation of multi-national groups in economic activities in India has given rise to new and complex issues emerging from transactions entered into between two or more enterprises belonging to the same group. Hence, their was a need to introduce a uniform and internationally accepted mechanism of determining reasonable, fair and equitable profits and tax in India in the case of such multinational enterprises.
Accordingly, the Finance Act, 2001 introduced law of transfer pricing in India through introduction of chapter X (sections 92A to 92F) in the Indian Income tax Act, 1961 which guides computation of the transfer price and suggests detailed documentation procedures
DOMESTIC TRANSFER PRICING IN INDIA-
Supreme court in case of CIT Vs. Glaxo SmithKline Asia (P) Ltd. (195 Taxman 35) observed that in the absence of guidance or methodology for computing the proper market value of transactions entered into with related parties the AO were facing problems and limited methods were available to them.Hence, Supreme Court observed that “transfer pricing provisions” should also be applicable to “specified domestic transactions as well”
Based upon the recommendation of the Apex court, CBDT in the Finance Act,2012 has extended the scope of Transfer pricing laws to include “Specified Domestic Transactions.”
SECTION-92BA : MEANING OF SPECIFIED DOMESTIC TRANSACTIONS(SDT)-
Specified domestic transactions means the following transactions ,provided that the aggregate value of such transactions entered by the assessee company in the previous year is more than Rs5crores.:
1. Payment made or to be made under Section 40A(2)(b) of the IT Act (transactions with related parties).
2. Any transaction under Section 80A (general section for deductions)
3. Any transfer of goods or services referred to in Section 80-IA(8) (i.e. applicable to companies operating as industrial undertaking or enterprises engaged in infrastructure development)
4. Any transaction section 80-IA(10) (i.e. transactions of an unit eligible for benefits under section 80-IA with any other entity where there is a close connection between the two entities)
5. Any transaction under Chapter VI-A or section 10AA (i.e. SEZ units), to which provisions of sub-section (8) or sub-section (10) of section 80-IA are applicable
6. Any other transaction, as prescribed by the board.
Payments to persons specified under section 40A(2)(b)
Specified persons under section 40A (2)(b) for an assessee company means-
(a) Any director of the company and his relative.
(b) Any individual or his relative having substantial interest* in the company.
(c) Any company, HUF, AOP, firm having substantial interest* in the business of the company.
(d) Relatives of directors, members, partners in the above said case.
*Substantial interest means shares carrying not less than 20% voting power in the company
METHODS FOR COMPUTING ARM’S LENGTH PRICE
Section 92C deals with the following methods for determining the “Arm’s length price” of the transaction and the factors to be considered for applicability or non-applicability of a particular method to a given situation(known as Most Appropriate Method(MAM)).
(a) Comparable Uncontrolled Price method(CUP)
(b) Resale price method(RPM)
(c) Cost Plus Method(CPM)
(d) Profit Split Method(PSM)
(e) Transaction Net Margin Method(TNMM)
(f) Any other method as prescribed by the board.
COMPLIANCE PROVISIONS
a. Every assessess has to obtain and furnish a prescribed report from Chartered Accountant in Form 3CEB
b. The report has to be submitted to the tax authorities by the due date of filing of annual returns( i.e. 30th november).
c. Every assessee company has to maintain the prescribed documents as per section 92D that requires documents related to entity,pricing and transactions
d. Non-compliance would attract a penalty of-
1. 2% of value of transactions- In case of failure to maintain required documents,failure to report transactions,providing incorrect information,failure of furnishing documents to tax officer.
2. Rs 100000-Failure to furnish form 3CEB before due date
NEW TRANSFER PRICING RULES TO BECOME LESS STRINGENT-CBDT RELEASE dated 18.09.2013
a. Safe harbour rules spell out the circumstances under which the tax authorities would accept the transfer prices as declared by taxpayer.
b. As per these rules ,the ceiling of Rs100 crore on IT & ITES activtities has been removed.
c. Further, Rs100 crores ceiling on corporate guarantees have also been removed.
d. Now ,the definition of KPOs is more rationalised.
e. Advantage of new rules;
(a) Expected to cut down on transfer pricing litigation.
(b) Rise in tax demand on MNCs has drawn charge of aggressive taxation
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