TRANSFER PRICING
Transaction between two or more Associated Enterprises Should takes place at Arm’s Length Price; if it doesn’t then adjustment should be done
Two Enterprises are said to be Associated if any of the following condition should satisfy
1)An Enterprises which participates, directly or indirectly, or through one or more intermediaries, in:
Management of the other enterprises or
Control of other enterprises, or
Capital of other enterprises
2)If one or more persons participates, directly or indirectly, or through one or more intermediaries in:
Management of the two different enterprises
Control of the two different enterprises
Capital of the two different enterprises
3)One enterprises holds 26% or more of the voting power, directly or indirectly, in the other enterprises
4)Any person or enterprises holds 26% or more of the voting power, directly or indirectly, in each of Two different enterprises
5)one enterprises advances loan to other enterprises of an amount of 51% or more of the Book value of the total assets of the other enterprises
6)one enterprise guarantees 10% or more of the total borrowing of the other enterprise
7) one enterprise appoints more than half of the board of directors or the members of the governing board, or one or more executive directors or executive members of the governing board of other enterprises
8) 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
9)manufacturing or processing of goods or articles or business carried out by one enterprise is wholly dependent on the knowhow, patent, copyrights
10)90% or more of raw materials and consumables required for the manufacturing or processing of goods or articles are supplied by other enterprises
11)The goods or articles manufactured or processed by one enterprise are sold to other enterprise and prices and other conditions relating thereto are influenced by such other enterprise
12)when one enterprise is controlled by an individual the other enterprise is also controlled by such other individual
13)where one enterprise is controlled by HUF and the other enterprise is controlled by member of such HUF or by relative of member
14)where one enterprise is a Firm, AOP, BOI, the other enterprises holds 10% or more interest in firms/AOP/BOI
Calculation of Arms Length Price
1)comparable uncontrolled price method:
(a) under this method the price charged or paid for the property transferred or services provided under any comparable uncontrolled transaction should be identified
(b)Adjustment to account for differences between the international transaction and comparable uncontrolled transactions or between the enterprises entering into such transaction which materially affect the price in the open market can be made
(c) the adjusted price as worked out above will be considered as an Arms length price
2)Resale price method:
(a) under this method the price at which property purchased or services obtained by the enterprises from an associated enterprise is sold or are provided to an unrelated enterprise should be identifiable.
(b) The following adjustments can be made to such resale price
For normal gross profit margin
For expenses incurred in connection with the purchases of property or obtaining of services
For functional and other differences, including differences in accounting practices which could materially affect the gross profit margin in the open market .
(c) the adjusted price as worked out above will be considered as an Arms length price.
3)Cost Plus method:
(a) under this method the direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprises should be determined.
(b)the amount of gross profit margin to such costs arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise in comparable uncontrolled transaction or transaction should be determined.
(c)the above normal gross profit markup can be adjusted to take into account the functional and other differences which could materially affect such profit mark up in the open market.
(d)Costs referred in (a) above should be increased by the adjusted profit mark up as stated in (c) above and the price so arrived will be considered as the Arms length price.
4)Profit Split method:
(a)under this method, combined net profit of the associated enterprise arising from the international transaction in which they are engaged is first determined
(b)the relative contribution of each associated enterprises to the earning of such enterprise to the earning of such combined net profit is then evaluated based on functions performed, assets employed, and risk assumed.
(c)the combined net profit is then split amongst the enterprises in proportion to their relative contributions. The profit thus apportioned to the assessee is taken into consideration to arrive at an Arm length price in relation to the international transaction.
5) Transactional Net Margin method:
(a) in this method, the net profit margin realized by the enterprise from an international transaction with an associated enterprise is computed having regard to costs incurred or sales effected or assets employed or having regard to any other relevant base
(b)the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction by applying the same base as in (a) above is computed. This profit margin is adjusted to take into account the differences which could materially affect the net profit margin in the open market having regard to international transactions or having regard to the enterprise entering into such transactions
(c)if the net profit margin realized by the enterprise as in (a) above is established to be the same as the net profit as in (b) above, then the same is taken into consideration to arrive at an Arms length price in relation to the international transaction
Transaction between two or more Associated Enterprises Should takes place at Arm’s Length Price; if it doesn’t then adjustment should be done
Two Enterprises are said to be Associated if any of the following condition should satisfy
1)An Enterprises which participates, directly or indirectly, or through one or more intermediaries, in:
Management of the other enterprises or
Control of other enterprises, or
Capital of other enterprises
2)If one or more persons participates, directly or indirectly, or through one or more intermediaries in:
Management of the two different enterprises
Control of the two different enterprises
Capital of the two different enterprises
3)One enterprises holds 26% or more of the voting power, directly or indirectly, in the other enterprises
4)Any person or enterprises holds 26% or more of the voting power, directly or indirectly, in each of Two different enterprises
5)one enterprises advances loan to other enterprises of an amount of 51% or more of the Book value of the total assets of the other enterprises
6)one enterprise guarantees 10% or more of the total borrowing of the other enterprise
7) one enterprise appoints more than half of the board of directors or the members of the governing board, or one or more executive directors or executive members of the governing board of other enterprises
8) 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
9)manufacturing or processing of goods or articles or business carried out by one enterprise is wholly dependent on the knowhow, patent, copyrights
10)90% or more of raw materials and consumables required for the manufacturing or processing of goods or articles are supplied by other enterprises
11)The goods or articles manufactured or processed by one enterprise are sold to other enterprise and prices and other conditions relating thereto are influenced by such other enterprise
12)when one enterprise is controlled by an individual the other enterprise is also controlled by such other individual
13)where one enterprise is controlled by HUF and the other enterprise is controlled by member of such HUF or by relative of member
14)where one enterprise is a Firm, AOP, BOI, the other enterprises holds 10% or more interest in firms/AOP/BOI
Calculation of Arms Length Price
1)comparable uncontrolled price method:
(a) under this method the price charged or paid for the property transferred or services provided under any comparable uncontrolled transaction should be identified
(b)Adjustment to account for differences between the international transaction and comparable uncontrolled transactions or between the enterprises entering into such transaction which materially affect the price in the open market can be made
(c) the adjusted price as worked out above will be considered as an Arms length price
2)Resale price method:
(a) under this method the price at which property purchased or services obtained by the enterprises from an associated enterprise is sold or are provided to an unrelated enterprise should be identifiable.
(b) The following adjustments can be made to such resale price
For normal gross profit margin
For expenses incurred in connection with the purchases of property or obtaining of services
For functional and other differences, including differences in accounting practices which could materially affect the gross profit margin in the open market .
(c) the adjusted price as worked out above will be considered as an Arms length price.
3)Cost Plus method:
(a) under this method the direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprises should be determined.
(b)the amount of gross profit margin to such costs arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise in comparable uncontrolled transaction or transaction should be determined.
(c)the above normal gross profit markup can be adjusted to take into account the functional and other differences which could materially affect such profit mark up in the open market.
(d)Costs referred in (a) above should be increased by the adjusted profit mark up as stated in (c) above and the price so arrived will be considered as the Arms length price.
4)Profit Split method:
(a)under this method, combined net profit of the associated enterprise arising from the international transaction in which they are engaged is first determined
(b)the relative contribution of each associated enterprises to the earning of such enterprise to the earning of such combined net profit is then evaluated based on functions performed, assets employed, and risk assumed.
(c)the combined net profit is then split amongst the enterprises in proportion to their relative contributions. The profit thus apportioned to the assessee is taken into consideration to arrive at an Arm length price in relation to the international transaction.
5) Transactional Net Margin method:
(a) in this method, the net profit margin realized by the enterprise from an international transaction with an associated enterprise is computed having regard to costs incurred or sales effected or assets employed or having regard to any other relevant base
(b)the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction by applying the same base as in (a) above is computed. This profit margin is adjusted to take into account the differences which could materially affect the net profit margin in the open market having regard to international transactions or having regard to the enterprise entering into such transactions
(c)if the net profit margin realized by the enterprise as in (a) above is established to be the same as the net profit as in (b) above, then the same is taken into consideration to arrive at an Arms length price in relation to the international transaction
