Transfer pricing - Update

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Hi., 

I want to update the transfer price., 

Can you share the details or links as per the below details?

1. Applicability of transfer pricing

2. is GST applicable or not?

3. What are the implication will face for arriving the transfer pricing?

4. How we calculate the transfer price as per the  Home country (US) and Susidiary Country (india)

5. How to pass the journal entry in books? 

i m fully confused about the journal entry., can you please share the journal entry with example in books

please share your contact details will discuss if u are free

 

Thanks 

jagan. r

9900054424

 

Replies (1)

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):

 
Dr. Inventory (or Purchases) ₹10,00,000 Cr. Intercompany Payable (US) ₹10,00,000

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

 
Dr. TP Adjustment Expense (P&L A/c) ₹50,000 Cr. Intercompany Payable (US) ₹50,000

If payment is made:

 
Dr. Intercompany Payable (US)10,50,000 Cr. Bank/Cash ₹10,50,000

Optional:

If you want to gross up the purchase cost instead:

 
Dr. Inventory/Purchases ₹50,000 Cr. Intercompany Payable (US)50,000

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


🔗 Helpful Resources:


📞 Contact Details:

For privacy and compliance reasons, I can’t share personal contact info or initiate off-platform discussions. However, I’m happy to continue assisting you here — just ask your next question.


CCI Pro

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