Transfer Pricing in India

The international taxation framework has been made relevant in the majority of countries as a result of globalisation, and one of the most important notions is transfer pricing. Consequently, rather than viewing transfer pricing as merely a compliance procedure, in our opinion, you should view it as an extension of your business. The Income Tax Act of 1961 established the transfer pricing regulations in India. In India, transfer pricing is a constant process that requires organisations to manage risk in a methodical way while also adhering to compliance standards that include keeping proper records and documentation.

What is Transfer Pricing in India?

The prices at which an enterprise transfers tangible commodities or offers services to its affiliated businesses are referred to as transfer prices. The value associated to the transfer of goods, services, and technology between related companies as well as the value linked to the transfer between unrelated parties who share ownership are both included in the definition of transfer pricing.

Importance of Transfer Pricing- Why do businesses need it?

Transfer pricing is a crucial idea since these regulations help Transfer pricing is a crucial idea since following its regulations enables businesses to keep a flexible organisational structure. One of the key ideas that is essential to helping multinational corporations grow their operations abroad and significantly lower their tax burden is transfer pricing. This is frequently used by business entities, who then frequently completely control prices; as a result, transfer pricing legislation is crucial.

Due to the fact that transfer pricing is a method of regulating prices between different countries—either consciously or unconsciously—it is a significant subject for business. Companies from all over the world are required to abide by a set of severe compliance regulations since failing to do so could result in fines and other negative consequences. Cost management strategies might also include transfer pricing. It is an essential component of many major firms since it can be utilised as a non-aggressive legitimate tax planning strategy.

Arm’s Length Price

Under Section 92F of the Income Tax Act, the term “arms’ length price” has been defined. It speaks about the price charged in unregulated circumstances for transactions between parties other than affiliated businesses. The arms’ length price determination procedure is outlined in Section 92C, which also stipulates that the price will be estimated using the best available method.

The best technique from the list of options below can be used to determine this price:

• Comparable Uncontrolled Price Method

This method contrasts the price charged in a comparable uncontrolled transaction under comparable conditions with the price assessed for goods or services transferred in a controlled transaction. The arms-length principle can be applied in the clearest and most trustworthy way possible with this approach. This strategy necessitates extensive product and function comparison.

• Resale Price Method

This approach is a tried-and-true way to calculate transfer pricing. Here, the resale price of a product that was purchased from a related business and afterwards sold to an unrelated entity is being looked at. The cost of the transaction in which the product is sold again to a separate company is known as the resale price. The margin of resale price must be calculated for this strategy to work. The amount needed by the party reselling the product to cover the related selling and operating expenses is known as the resale price margin. The amount needed by a reseller to turn a profit that is appropriate for the services they provided is also included in the resale price margin.

• Cost plus method

It is a typical approach to transaction analysis that concentrates on the managed exchange between a supplier and related buyer. This technique is frequently employed when trading semi-finished goods between related parties or when related organisations have long-term supply and purchase agreements. Here, the provider’s costs are added to the markup for the good or service in such a way that the supplier makes a profit that is appropriate for the tasks they carry out and the current state of the market.

This approach works well when determining transfer pricing for low-risk processes like the production of physical goods. However, this method has some disadvantages, including the lack of comparable data and uniformity in accounting. The application of this strategy is calculating a markup on costs for comparable transactions between independent businesses.

• Transactional Net Margin Method (TNMM)

This method examines the taxpayer’s net profit from a controlled transaction that relates to an appropriate basis. This approach examines the profit of one of the connected parties participating in a transaction, exactly like the other ways (Cost-Plus Method and Resale Price Method).

With this procedure, the tested party’s net profit margins from controlled transactions are contrasted with similar net profit margins from uncontrolled transactions or from independent comparable firms. This strategy is more of an indirect way than the Cost-Plus Method and Resale Price Method.

• Profit split method

When parties to the controlled transaction contribute a significant amount of intangible property, this strategy is frequently used. Profits will be divided much like in a joint venture. This strategy aims to eliminate the impact on profits of special conditions made/imposed in a controlled transaction by establishing the division of profits that independent entities would have expected by engaging in the transaction and/or aggregating transactions.

• Other method

In addition to the ways above described, the CBDT has also established a sixth approach for determining arm’s length price. The other method is the sixth technique. Any approach that accounts for the price charged, paid, or would have been paid for the same uncontrolled transaction with/between unrelated firms, under identical conditions, taking into consideration all pertinent factors, is considered to be acceptable.

Transfer Pricing Documentation

In order to make sure that taxpayers give requirements of transfer pricing the proper consideration when setting prices and terms for transactions between associated enterprises and when reporting income obtained from such transactions in their tax returns, compliance with transfer pricing documentation is required. Before determining that a transaction was conducted at arm’s length, the tax authorities evaluate the paperwork created and maintained by the taxpayer careful consideration.

As part of the transfer pricing documentation, taxpayers are required to keep records and three-tier evidence that attests to the pricing policy’s adherence to the arms-length principle.

According to what BEPS Action Plan 13 has suggested, there should be three levels of documentation, which include:

Master File, Local File, and Reporting by Country.

Due to increased scrutiny from tax authorities around the world, it is essential to have a fully documented transfer pricing strategy. If it is discovered during an audit that a company’s documentation is insufficient, harsh fines may be levied. The OECD has made recommendations and increased the standards for transfer pricing documentation as part of the BEPS action plan.

Krahelps companies evaluate their current transfer pricing documentation and offers revisions where necessary. We also help them create internal policies and procedures that guarantee adherence to documentation standards. For documentation purposes, a thorough industrial, functional, and benchmarking study is essential; as a result, kar paymall performs this job as part of our documentation services.

Transfer Pricing Compliance

Tax authorities have implemented new disclosure criteria and compliance standards as a result of the ongoing change of the global tax scene. MNCs must abide by the compliance rules, and the revenue agency routinely checks on MNC compliance.

Enterslice offers TP certification and extends advising services on the master file and country by country reporting requirements in order to satisfy compliance requirements under Form 3CEB.

Transfer Pricing Advisory

These days, tax authorities are more vigilant about cases of base erosion and profit shifting, and they demand that intra-group transactions be determined on an arms-length basis. So, it is crucial to comprehend the client’s circumstance and address their transfer pricing worries.

Also, MNCs in many tax jurisdictions find it challenging to manage transfer pricing difficulties. To satisfy the demands of the various tax jurisdictions, it calls for a systematic TP planning process.

We at Kra Paymallprovide consulting services on transfer pricing matters, carry out transfer pricing-related due diligence exercises, and offer advice on alternative business models as well as implementation help.

As part of its TP advising services, Kra Pamall designs and plans related party transactions and agreements and reviews considered international transactions.

Value Chain Management

Businesses all across the world must operate more efficiently than before due to the changing tax climate. Companies must change their organisational structure to ensure tax management. This includes balancing tax rates, aligning taxes with company structures, and aligning results with economic substance. Businesses must identify the major value drivers and create the best possible model and structure from a commercial and tax standpoint.

Enterslice can assist with developing value chain strategies and global and regional transfer pricing policies, and then work with multinational customers to put those plans into practise, better manage their transfer pricing risks, and/or reduce their overall tax rate.

The objectives of the company and its current tax structure must be evaluated for effective value chain management. On the basis of the analysis, additional areas for improvement are identified. Enterslice uses this procedure to help our clients transform their supply chains and value chains.

Transfer Pricing Audit and Dispute Support

The tax department may investigate or evaluate a company organisation to make sure it complies with the relevant transfer pricing regulations. This is known as a transfer pricing audit. Auditors can evaluate the ledgers, accounts, and books during the process to ensure compliance.

The functions of the organisation and any potential hazards are evaluated as part of the transfer pricing audit. The next step is to select a transfer pricing strategy that is appropriate. Both specific domestic transactions and international transactions are included by the audit.

The professionals at Enterslice will make sure that their clients can defend transfer prices in front of local audit teams and tax authorities. We offer multi-jurisdictional support for advance pricing agreements. An APA, or advance pricing agreement, is a contract between a taxpayer and the tax authorities that specifies which transfer pricing methodology will be used to calculate the arm’s length price for the specific foreign transaction under consideration.

Frequently Asked Questions

Why was Transfer pricing regulations and compliances introduced?

It was put in place to make sure that globally related parties conduct their business without base erosion or profit shifting.

What is the scope of Transfer pricing in India?

Both domestic transactions between two related Indian parties and international transactions are subject to transfer pricing restrictions.

Who is required to furnish report under section 92E?

Anybody who took part in an international transaction in the year prior must make a report in Form 3CEB via a CA.

What are the different methods for transfer pricing?

The Similar Uncontrolled Pricing Method, Resale Price Method, Cost Plus Method, Transactional Net Margin Method (TNMM), and Profit Split Method are a few examples of several transfer pricing techniques.

What is Transfer Pricing Documentation?

To “characterise” the entity and transactions, transfer pricing paperwork requires examination of the business, industry, and functions.

 What approach should be undertaken towards Transfer Pricing Documentation?

The facts and conditions of the company will determine the answer to question.

What are some of the best practices in transfer pricing?

First, transfer pricing reports must adhere to tax authorities’ standards, Adopt corporate agreements, Examine the profit margins and the taxes due.