Transfer pricing - Update

Hi Jaganathan,

Thanks for your detailed query. Let me address your questions point-by-point to provide clarity on Transfer Pricing (TP), including GST applicability, calculation, and journal entries.

📌 1. Applicability of Transfer Pricing (TP)

Transfer Pricing is applicable when:

• There is an international transaction between associated enterprises (AE), i.e., a parent company and its subsidiary, or two subsidiaries of the same parent.

• The transaction involves goods, services, royalties, loans, guarantees, etc.

📘 Applicable Sections in India:

• Sections 92 to 92F of the Income Tax Act.

• Rule 10A to 10E for methods and documentation.

💡 In your case: If a US parent and Indian subsidiary are transacting, TP is definitely applicable.

📌 2. Is GST applicable on transfer pricing transactions?

✅ Yes, but only if it is a supply under GST.

• GST is levied on supply of goods/services between distinct persons, which includes branches or subsidiariesin India and outside India (Sec 7 of IGST Act).

• TP adjustments (like year-end top-up entries) are generally not liable to GST unless they are in nature of a supply.

📝 Key Point:

• Transfer Pricing = Income Tax concept

• Supply under GST = GST law concept

So, GST and TP may overlap, but not always. You must evaluate whether the transaction is a "supply" under GST.

📌 3. Implications in determining Transfer Price

Some key challenges/implications:

• Arm’s Length Price (ALP) must be justified using acceptable TP methods (CUP, TNMM, CPM, etc.).

• Year-end adjustments may be needed if the profit margin differs from comparables.

• Incorrect pricing = Tax additions, penalties, and interest under TP laws.

📌 4. How to calculate Transfer Price between US and India?

Here’s a simple example using Transactional Net Margin Method (TNMM):

Assume:

• US Parent sells goods to Indian Subsidiary.

• Indian entity must earn at least 8% Net Profit Margin (benchmark).

Step-by-step:

1. Determine the comparable companies’ profit margin (say, 8%).

2. Check Indian entity’s actual margin.

   • If < 8%, adjust price upward to meet ALP.

   • If > 8%, you’re fine (India doesn't penalize for excess margin).

3. Adjust price accordingly — via year-end debit/credit notes.

📌 5. Transfer Pricing Journal Entry in Books (Example)

Let’s say:

• US Parent sells goods worth ₹10,00,000 to Indian Subsidiary.

• At year-end, TP study says Indian entity must pay ₹10,50,000 to meet ALP.

• So, ₹50,000 needs to be adjusted.

🎯 Journal Entry (at Indian Subsidiary books):

Initial Entry (at transaction time):

Year-end TP Adjustment Entry (additional ₹50,000):

If payment is made:

Optional:

If you want to gross up the purchase cost instead:

📎 This depends on whether you're adjusting COGS or showing separately in P&L.

🔗 Helpful Resources:

• CBDT TP Guidelines

• OECD Transfer Pricing Guidelines: Link

• ICAI TP Guidance Note: Link

📞 Contact Details:

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