Transfer pricing Regulations in India

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Transfer pricing Regulations in India : 

Transfer pricing Regulations in India Brief Presentation by Novello D’souza.

Introduction : 

Introduction Increasing participation of multi-national groups in economic activities in India has given rise to new and complex issues emerging from transactions entered into between two or more enterprises belonging to the same group A need to introduce a uniform and internationally accepted mechanism of determining reasonable, fair and equitable profits and tax in India in the case of such multinational enterprises. The Finance Act, 2001 introduced law of transfer pricing in India through sections 92A to 92F of the Indian Income tax Act, 1961 which guides computation of the transfer price and suggests detailed documentation procedures.


SCOPE & APPLICABILITY Transfer Pricing Regulations ("TPR") are applicable to the all enterprises that enter into an 'International Transaction' with an 'Associated Enterprise‘ It applies to all cross border transactions entered into between associated enterprises. It even applies to transactions involving a mere book entry having no apparent financial impact. The aim is to arrive at the comparable price as available to any unrelated party in open market conditions.

Associated Enterprises ('AEs')- How Identified? : 

Associated Enterprises ('AEs')- How Identified? The basic criterion to determine an AE is the participation in management, control or capital (ownership) of one enterprise by another enterprise. The participation may be direct or indirect or through one or more intermediaries. Management control through holding shares or voting power or the power to appoint the management of an enterprise. For instance, if enterprise B is managed, controlled or owned either directly or through an intermediary, then Enterprise B is said to be an AE of enterprise A Further, if Mr. A and Mr. B control both Enterprise A and Enterprise B then both Enterprise A and Enterprise B AEs.

What is an International Transaction? : 

What is an International Transaction? An international transaction is essentially a cross border transaction between AEs in any sort of property, whether tangible or intangible, or in the provision of services, lending of money etc. At least one of the parties to the transaction must be a non-resident entering into one or more of the following transactions (a) Purchase, sale or lease of Tangible or Intangible Property (b) Provision of services (c) Lending or borrowing of money (d) Any transaction having a bearing on profits, income, losses or assets (e) Mutual agreement between AEs for allocation/apportionment of any cost, contribution or expense.


METHODS OF DETERMINING THE ALP Arms length price can be determined with any of the prescribed methods. However With a view to allow a degree of flexibility in adopting the ALP, a variance allowance of 5 percent has been provided under the Transfer pricing regulations. The prescribed methods have been listed below (a) Comparable Uncontrolled Price Method ('CUPM') (b) Resale Price Method ("RPM') (c) Cost plus method ('CPM') (d) Profit Split Method ('PSM') (e) Transactional Net Margin Method ('TNMM')


DOCUMENTATION The provisions contained in the Transfer pricing regulations are exhaustive as far as the maintenance of documentation is concerned Background information on the commercial environment in which the transaction has been entered. Supporting to justify and substantiate the expenses. Agreements and Contracts for mutual allocation or apportionment of cost. Report of an Chartered accountant certifying that the ALP has been determined in accordance with the TPR and that prescribed documentation has been maintained. The analysis carried out to select the most appropriate method and to identify comparable transactions, and the actual working out of the ALP of the transaction.


BURDEN OF PROOF - TAXPAYER OR TAX OFFICER? The primary onus is on the taxpayer to determine the following (a) price charged in the international transaction has been determined in accordance with the methods prescribed, (b) or information and documents relating to the international transaction have been kept and maintained in accordance with the TPR, c) or the information or data used in computation of the ALP is reliable and correct,


EFFECTS OF ADJUSTMENT TO THE ALP In case the Arms Length price determined by the Transfer pricing officer indicates understatement of income by the tax payer, it could result into the following. (a) Adjustment to reported income of the taxpayer resulting into more tax payment. (b) Levy of penalty

Penalties : 

Penalties Penalties have been provided as a disincentive for non-compliance with procedural requirements are as follows. (a) Penalty for Concealment of Income - 100 to 300 percent on tax evaded (b) Failure to Maintain/Furnish Prescribed Documentation - 2 percent of the value of the international transaction. (c) Penalty for non-furnishing of accountants report - INR 100,000 (fixed)

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