At Ahuja & Ahuja Chartered Accountants, we understand the challenges faced by international entities in the area of transfer pricing regulations in India. We provide transfer pricing reports for Indian companies, ensuring that you comply with the legal framework and determine the correct transfer pricing within the required timeframe.
What is Transfer Pricing?
Transfer pricing is the price of transactions between related parties, such as a parent and subsidiary, which may occur under different conditions than those of transactions between independent enterprises. The transfer price between relevant parties may not be at par when compared to the transfer price on transactions with unrelated parties.
For example, suppose company A purchases goods for Rs. 100/- and sells them to its associated company B in another country for Rs. 200/-. Company B then sells the goods in the open market for Rs. 400/-. If company A had sold directly to the latter country, it would have made a profit of Rs. 300/-. By routing the transaction through company B, company A restricts the profit to Rs. 100/-, allowing company B to appropriate the balance. Transactions between A and B are arranged and are not governed by market forces. The profit of Rs. 200/- is thereby shifted to the country of B. The goods are transferred on an arbitrary or dictated price (transfer price) of Rs. 200/-, but not on the market price of Rs. 400/-.
Transfer Pricing Methods
There are several methods for determining the arm’s length price of transactions for transfer pricing Income Tax, which can be applied to ascertain whether the commercial or financial relations between related parties are consistent with the arm’s length principle. The arm’s length principle enunciated by the Income Tax Act, 1961 (“the Act”) has framed specific provisions to protect the interests of revenue.
The following methods can be used to determine the arm’s length price:
- Comparable Uncontrolled Price (CUP) method: This method compares the price and conditions of goods or services in a controlled transaction between related parties with those of an uncontrolled transaction between independent enterprises. To make this comparison, the CUP method requires the transaction between the associated enterprises to be extremely similar to the transaction happening between independent enterprises.
- Resale Price Method: The resale price method uses the selling price of a product or service, also known as the resale price. This amount is then reduced by a gross margin determined by comparing the gross margins in comparable transactions made by similar but unrelated organizations. Then, the costs associated with purchasing the product, such as custom duties, are deducted from the total. The final figure is considered an arm’s length price for a controlled transaction made between related enterprises.
- The Cost-Plus Method: The cost-plus method analyzes a controlled transaction between an associated purchaser and supplier. It is generally used when semi-finished goods are transacted between associated entities or when related parties have long-term arrangements for ‘buy and supply’. The costs of the supplier are added to markup for the product or service so that the supplier makes an appropriate profit that takes into account the functions they performed and the current conditions.
Transfer Pricing Applicability
Almost every entity associated with an international entity faces the issue of transfer price regulation in India. We help those entities in determining the correct transfer pricing in India, in the form of providing transfer pricing reports for Indian companies, within the timeframe adopting complete legal framework.
Transfer Pricing Audit
A transfer pricing audit is an examination of a company’s transfer pricing policies and practices to ensure compliance with tax laws and regulations. Transfer pricing audits are conducted by tax authorities to determine whether transactions between related parties are priced at arm’s length and to ensure that the correct amount of taxes are being paid in each jurisdiction.
At Ahuja & Ahuja Chartered Accountants, we understand the importance of maintaining compliance with transfer pricing regulations and avoiding potential tax penalties. Our team of experienced professionals can provide transfer pricing audit services that are tailored to your business needs.
We conduct a thorough review of your transfer pricing policies and practices to identify any potential risks and opportunities for improvement. Our team also assists in preparing transfer pricing documentation and reports that meet local regulations and international standards.
In addition, we can assist with dispute resolution services in case of any transfer pricing-related disputes with tax authorities. We can help you prepare and present your case effectively and negotiate with tax authorities to ensure a favorable outcome.
Frequently Asked Questions about Transfer Pricing
What are Associated Enterprises?
Associated Enterprises are two or more companies that are related through ownership, management, or control. In transfer pricing, an associated enterprise refers to a company that participates, directly or indirectly, in the management or control or capital of another enterprise, or whose management or control or capital is participated by the same persons who participate in the other enterprise.
What is Arm’s Length Price?
Arm’s Length Price (ALP) is the price that would be charged for a transaction between two unrelated parties in uncontrolled circumstances. In transfer pricing, the ALP is the price at which transactions between associated enterprises should take place. The ALP can be calculated using one of the following methods: Comparable Uncontrolled Price Method, Resale Price Method, Cost Plus Method, Comparable Profits Method, or Profit Split Method.
What is a Transfer Pricing Agreement?
A Transfer Pricing Agreement (TPA) is an agreement between two associated enterprises that sets the terms and conditions of the transactions to be carried out between them. It is mandatory for enterprises to have a TPA before entering into transactions with associated enterprises located outside India.
What is a Transfer Pricing Report?
A Transfer Pricing Report (Form 3CEB) is a report that entities must file with the Income Tax Department to demonstrate that their international transactions with associated enterprises have been carried out at Arm’s Length Price. The report must be prepared by an independent accountant and filed on or before October 31st following the relevant financial year.
What is the due date for filing the Income Tax Return for entities required to file Form 3CEB?
For entities required to furnish Form 3CEB, the due date for filing the Income Tax Return (ITR) is November 30th following the relevant financial year. It is important to note that failure to file Form 3CEB or filing an inaccurate report can result in penalties and legal consequences.
What are the consequences of non-compliance with transfer pricing regulations?
Non-compliance with transfer pricing regulations can result in penalties, interest, and even prosecution. In addition, the tax authorities may make adjustments to the prices of international transactions and levy additional taxes on the taxpayer.
What is a transfer pricing audit?
A transfer pricing audit is an examination of the international transactions of a taxpayer to ensure that they are carried out at arm’s length prices. The audit is conducted by the tax authorities to check if the taxpayer has complied with the transfer pricing regulations.
What is transfer pricing documentation?
Transfer pricing documentation is a record of the international transactions of a taxpayer and the methods used to determine the arm’s length prices. The documentation is required to be maintained as per the regulations of the tax authorities and must be furnished upon request during a transfer pricing audit.
What is the role of comparables in transfer pricing?
Comparables are used in transfer pricing to determine the arm’s length prices of international transactions. They are similar transactions carried out by unrelated parties under comparable circumstances. The prices of comparables are used as a benchmark to determine the arm’s length prices of the taxpayer’s transactions.
What is the Advance Pricing Agreement (APA)?
The Advance Pricing Agreement (APA) is an agreement between the taxpayer and the tax authorities to determine the arm’s length prices of the international transactions for a period of time in advance. The APA helps to provide certainty to the taxpayer regarding the transfer pricing issues and avoid disputes with the tax authorities.