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Transfer pricing refers to pricing transactions among subsidiaries in the same group that operate under common control. Both local and international deals may be subject to transfer pricing. Typically, transfer prices align with the current market value of the product or service offered by one division, subsidiary, or holding company.

"Transfer pricing" refers to the prices of transactions between related parties like the parent and subsidiary, which may take place under conditions differing from those between independent enterprises. The transfer price between related parties may not always be at par with the transfer price in transactions with unrelated parties.

For instance, suppose a company A purchases goods for Rs. 100/- and sells them to its associated company B in another country for Rs. 200/-. Company B, in turn, sells the goods in the open market for Rs. 400/-. If company A had directly sold the goods in the latter country, it would have made a profit of Rs. 300/-. However, by routing the transaction through company B, it restricts its profit to Rs. 100/-, permitting company B to appropriate the balance. Since the transactions between A and B are arranged and not governed by market forces, the profit amounting to Rs. 200/- is shifted to the country of B. The goods are transferred at an arbitrary or dictated transfer price (Rs. 200/-), rather than the market price (Rs. 400/-).

To protect revenue interests, the Income Tax Act, 1961 ("the Act") has framed specific provisions under Chapter X. The basic principle outlined in these provisions is to ensure that international transactions follow the "arm's length price" concept. Almost every entity associated with an international entity faces transfer pricing regulations in India. We assist such entities in determining the correct transfer pricing by providing transfer pricing reports for Indian companies, ensuring compliance within the legal framework.

According to the Internal Revenue Service (IRS), transfer pricing in intra-company deals must be the same as in third-party deals. By imposing transfer pricing rules, taxpayers can ensure they never engage in transactions with related or affiliated businesses that are not at arm's length. Therefore, the primary objective of these laws is to maintain records proving that all inter-company transactions adhere to the arm’s length principle. The taxpayer must provide these records to the Transfer Pricing Officer ("TPO") upon request to meet the legal burden of proof.

Transfer Pricing Rules Adopted in India

To implement Transfer Pricing Regulations (TPR), new sections 92A through 92F were added to the Income Tax Act, and corresponding rules 10A through 10E were included in the Income Tax Rules, 1962, under the Finance Act of 2001. Foreign transactions that are legally binding and meet specific criteria after April 1, 2001, are subject to these rules.

TPR was enacted in 2001 to protect India's revenue stream from losses caused by price manipulation and profit shifting in cross-border trade. The Finance Bill, 2001, clarified that the purpose of TPR was to prevent transfer pricing fraud. Before these specific clauses were added, the Act did not fully implement transfer pricing laws in India.

The amendments introduced under TPR include new sections 92A through 92F, addressing issues such as calculating income from international transactions based on arm’s length pricing, defining an affiliated firm, determining the scope of international transactions, assessing whether a transaction is arm's length, and dealing with major concerns in transfer pricing.

Transfer Pricing Methods

There are several methods for determining the arm’s length price of transactions for transfer pricing under income tax laws. These methods help ascertain whether the commercial or financial relations between related parties are consistent with the arm’s length principle. The selection of the most appropriate method depends on the facts and circumstances of each case.

1. Comparable Uncontrolled Price (CUP) Method

The CUP 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. This method requires the transactions between associated enterprises to be highly similar to those between independent enterprises.

2. Resale Price Method

The resale price method determines the arm’s length price by taking the selling price of a product or service (resale price) and reducing it by a gross margin. This margin is determined by comparing similar transactions made by unrelated entities. After deducting purchasing costs, such as customs duties, the final price is considered the arm’s length price.

3. Cost-Plus Method

The cost-plus method evaluates a controlled transaction between an associated purchaser and supplier. It is commonly used when semi-finished goods are exchanged between related entities or when long-term "buy and supply" agreements exist. The supplier's costs are added to an appropriate markup to determine a fair profit margin, resulting in the arm’s length price.

4. Transactional Net Margin Method

The Transactional Net Margin Method determines transfer prices by analyzing the net profit of a transaction between related parties and comparing it to net profits from comparable transactions among unrelated enterprises. This is the most commonly used transfer pricing method, as it does not require exact similarities between controlled and uncontrolled transactions.

5. Profit Split Method

In certain cases, associated enterprises engage in highly interrelated transactions that cannot be assessed individually. In such cases, related enterprises may agree to split the profits. The Profit Split Method examines controlled transactions by determining how unrelated enterprises would have shared profits from such transactions.

Why Choose Manish Anil Gupta & Co.?

We are one of the best transfer pricing consultants in Delhi, providing complete support in preparing TP reports. Our services include:

• Assistance in transfer pricing planning and documentation
• Preparation of transfer pricing study/documentation
• Transfer pricing audit (Form No. 3CEB)
• Country-by-country reporting
• Representation before the Transfer Pricing Officer (TPO)
• Transfer pricing litigation before higher authorities (CIT Appeals, Dispute Resolution Panel, Income Tax Appellate Tribunal - ITAT)
   

Having dedicated significant time to these processes, we provide sound technical advice in various business and economic scenarios. Our solutions are practical, useful, and implementable, helping CFOs and tax managers make informed decisions regarding transfer prices within their group companies.

If you have any queries related to transfer pricing, feel free to reach out to us at [email protected]. We offer exemplary consultancy services to address all your transfer pricing matters.