​​Transfer Pricing

• What is Pricing for Transfer?
• In order to intentionally minimise income and tax liability, transfer pricing deals with the technique of selling goods and services to subsidiary companies at an inflated price.
• India was late in making arrangements to counter transfer pricing under the Income Tax Act. Any revenue from international transactions shall be measured according to the Arm's length price in compliance with section 92. In order to deal with transfer pricing, the Finance Act, 2001 adopted sections 92A to 92F .
• The legislation allows products to be sold to subsidiaries at the price of arm's length, the price at which goods are exchanged between unconnected businesses.
• The benefit to be declared for IT services is cost plus 15% .
• That implies that you need to report 15 percent profit and pay corporate tax of 22 percent on that profit sum regardless of the salaries you send to the India office.
• This is done because in India, each one opens only a cost centre and sends only the monthly salary sum to the Indian office, the profit is parked in the foreign country for the complete group of companies. India wanted some tax from this operation, so the rules were formulated below.
• The MNCs have also embraced a trend with the advent of MNCs(Multi National Concerns) to structure their investment and business strategy in such a way that revenues are maximised in jurisdictions where tax rates are low, leading to the emerging problem of worldwide transfer pricing. Most nations have made regulations on transfer pricing.
• India was late in making arrangements to counter transfer pricing under the Income Tax Act. While under the 1961 Income Tax Act, section 92 existed, there were no applicable laws that could help tackle transfer pricing. In order to deal with transfer pricing, the Finance Act, 2001 added sections 92A to 92F. Some views are expressed in this article as explanatory provisions on transfer pricing under the 1961 Income Tax Act.
• What is transfer pricing: MNCs typically aim to change their international transactions in such a way that in that country where the tax rate is lowest, maximum profit occurs and minimum profit occurs in that country where the tax rate is highest. This causes issues with transfer pricing. Thus by changing their foreign transaction and reporting lower profits in that country, MNC can avoid tax in those countries where the tax rate is higher. This can be illustrated by an example:
• Suppose a subsidiary resident in Country A (which has a tax rate of, say, 30%) is manufacturing products and moving them for trading to its parent company in Country B (which has a tax rate of 20%). It will aim to deliver the products at prices below the market price in order to maximise the group company's total income. Indeed in country A the subsidiary will have lower income and hence lower tax incidence, while in country B, the parent company will, on the other hand, be affected by higher profits due to low costs but lower taxes due to the tax rate.
• In order to intentionally minimise income and tax liability, transfer pricing deals with the technique of selling goods and services to subsidiary companies at an inflated price. The legislation mandates that products and services be sold at arm's length expense to subsidiaries, the price at which goods are exchanged between unconnected businesses.
• Sections 92A to 92F were adopted and Sections 271AA, 271BA and 271 G were implemented, and Section 271 was amended to provide for criminal provisions in this respect.
• How the income from international transactions will be measured: all income from international transactions will be calculated on the basis of the duration of the price in compliance with section 92. Any interest or cost deduction for the above-mentioned income is also measured on the basis of the duration of the arm's price.
• Furthermore, if two or more similar undertakings enter into a mutual agreement in the form of an international transaction for the allocation or allocation of, or any contribution to any costs or expenses incurred or incurred in connection with an advantage, service or facility given or allocated to, or as the case may be, contributed by, any of those undertakings
• Simply put, it implies that not only is the gain from an international transaction to be measured on the basis of the length of the arm's price, but even any cost or expense to be incurred in an international transaction in conjunction with a profit or service or facility to be given would be calculated as the length of the arm's price.
• Furthermore, Section 92 specifies that its provisions shall not extend where as the case may be, they have the effect of decreasing taxable profits or increasing losses measured on the basis of entries in account books for the preceding year in which the international transaction was concluded.
• The question now arises as to the importance of some of the definitions listed above, such as International Transactions, Associated Businesses, and Arm Length. It is important to discuss the following:
• What is an international transaction: to apply the transfer pricing provisions found in u / s 92, 92A to 92F, there must be an international transaction.
• An foreign transaction means, pursuant to section 92B, a transaction between two or more related undertakings, one or both of which are non-resident, and that transaction includes the acquisition, selling or lease of tangible or intangible assets or the provision of services, or the lending or borrowing of money or any other transaction affecting the income, profits, losses or assets of those undertakings.
• Foreign transactions shall also require a mutual agreement or arrangement between two or more related undertakings for the distribution or allocation of any costs or expenses incurred or incurred in connection with, or to be made available to, any of the related undertakings, or for any contribution thereof.
• Furthermore, Section 92B specifies that when a transaction is concluded between an undertaking and a person other than an associated undertaking and there is a prior agreement between that other person and the associated undertaking on the particular transaction, or the terms of the relevant transaction are substantially decided between that other person and the associated undertakings afterwards.
• Associated Enterprises: Associated enterprises must also engage in the implementation of the provisions for transfer pricing. U/s 92B may be specified as those undertakings that may be called related undertakings. The related undertakings, pursuant to section 92B(i), are:
• (a) directly or indirectly, or one or more intermediaries, engage in the management or control or resources of another undertaking;
• (b) where one or more persons directly or indirectly or through one or more intermediaries participating in the management or control or capital of the other undertaking are the same persons directly or indirectly or through one or more intermediaries participating in the management or control or capital of that other undertaking.
• Two companies are deemed to be affiliated if, during the previous year at any time,-
• (a one company owns, directly or indirectly, shares in the other company holding not less than 26 per cent of the voting power;
• (b) any individual or enterprise owns, directly or indirectly, in each of those enterprises shares holding not less than 26% of the voting power;
• (c) a loan advanced to another enterprise by one enterprise represents not less than 26% of the gross book value of the assets of the other enterprise;
• (d) one company guarantees no less than 10 percent of the overall borrowing of the other company;
• (e) more than half of the board of directors or board members or one or more executive directors or executive board members of one organisation are named by the other company;
• (f) More than half of the members of the Board of Directors or of the Board of Directors or one or more members of the Executive Board or of the Board of Directors of either of the two companies shall be named by the same person or persons;
• (g) The manufacture or manufacture of goods or articles or undertakings by a single undertaking shall be wholly dependent on the use of know-how, patents, copyrights, marks, licences, franchisees or any other business or contractual rights of a similar nature or on any documents, records, drawings or specifications relating to any patent, invention, design, secret formula or process relating to such goods or undertakings.
• (h) 90% or more of the raw materials and consumables needed for the manufacture or processing of the goods or articles carried out by one undertaking or by persons listed by the other undertaking and the prices and other conditions of supply are affected by that undertaking;
• I goods or articles produced or processed by one undertaking shall be sold to the other undertaking or persons appointed by the other undertaking and shall be subject to the prices and other conditions of the other undertaking;
• (j) where one undertaking is regulated by an individual, the other undertaking is also controlled by or jointly controlled by the individual or his relative;
• (k) where one of the companies is owned by an undivided Hindu family, the other company is also controlled by or jointly controlled by a member of that HUF or a relative of that HUF;
• (l) where one company is a company, an association of persons or an entity of persons, the other company holds an interest of no less than 10% in that company, an association of persons or an entity.
• (m) Every relationship of mutual interest, as prescribed, exists between the two undertakings.
• What is the price of the arm length? As mentioned above the income from the foreign transaction is measured on the basis of the price of the arm length. In section 92F(ii), Arm's length price was specified as the price applied or proposed for use in an unregulated transaction between persons other than relevant undertakings.
• ​The principle of length of arm suggests that associated undertakings should be treated as independent undertakings and international transactions