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Transfer Pricing

INDIA /INTERNATIONAL
CSGAURAV+919990694230
gauarvdelhirav@gmail.com

www.csgauravsharma.com

Friday,
November
07, 2014

Transactions

Internal

External

(Within the country)

(outside the country)

Inter Company

Revenue Profit
Capital Gain
Royalty

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Intra Company

Inter Comapny

Control System
Non-Related:
cost centres
Profit/Dividend/Royalty
revenue centres
Forex Fluctuations
profit/Investment centre
Accounting

Related
Profit/Dividend/Royalty

Transfer Pricing
Forex/Accounting
Friday,
November
07, 2014

Intra Company

Control Systems
Forex Fluctuations
Accounting
Transfer Pricing

Transfer Price: What and


Why?
TP means the value or price at which
transactions take place amongst
related parties.
TP are the prices at which an
enterprise transfers physical goods and
intangible property and provides
services to associated enterprises
TP gain significance because these can
be used by the controlling party to
their advantage to minimise tax
incidence.

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Friday,
November
07, 2014

Transfer Price: What and


Why?

Approximately 60% of the total transactions across the


world are between related parties.

If the transactions are across different tax jurisdictions,


where tax rates are different, shifting is beneficial.

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Friday,
November
07, 2014

Factors Affecting Transfer


Pricing

Internal factors: Performance Measurement and


Evaluation

External Factors:

Accounting Standard

Income Tax

Custom Duty

Currency Fluctuations

Risk of Expropriation

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Friday,
November
07, 2014

Transfer Price Regulations


International

OECD formulated
Guidelines on transfer
pricing. They serve as
generally accepted
practices by the tax
authorities

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India

The Finance Act 2001


introduced the detailed
TPR w.e.f. 1st April 2001

The Income Tax Act

AS-18

Other Relevant Acts

Friday,
November
07, 2014

Accounting Standard 18
Requires disclosure of any elements of the related party
transactions necessary for an understanding of the
financial statements.

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Friday,
November
07, 2014

Related Parties

Control by ownership

Control over composition of board of directors

50% of the voting right

Power to appoint or remove the directors

Control of substantial interest

20% or more interest in the voting power

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Friday,
November
07, 2014

AS-18 and Transactions

Purchase and sale of goods;


Rendering or receiving services;
Agency arrangements;
Leasing arrangements;
Transfer of research and development;
Licence aggrements;
Finance
Guarantees and collaterals;
Management contracts.

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Friday,
November
07, 2014

Income Tax Act and TP

Finance Act 2001 substituted the old section of 92 of the ITA by


sections 92,92A to
92 F.

These sections are the backbone of Indian TPR.

These sections define the meaning of related parties, international


transactions, pricing methodologies etc.

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Friday,
November
07, 2014

TPR: Some Important


Concepts

Income/Expenses/Cost arising from an international


transaction shall be computed having regard to

arms length price (ALP).


ALP provisions can be
applied if it leads to
decrease in taxable income
or increase in losses.
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Friday,
November
07, 2014

Associate Enterprise: 92A

Direct Control/Control through


intermediary
Holding 26% of voting power
Advance of not less than 51% of the total
assets of borrowing company.
Guarantees not less than 10% on behalf of
borrower
Appointment of more than 50% of the BoD
Dependence for 90% or more of the total
raw material or other consumables

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Friday,
November
07, 2014

International Transactions:
92B

Transaction between two or more AE of which either


both or anyone is a non-resident.

Transactions:

Purchase/Sale/Lease

Provision of service

Lending or borrowing

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Friday,
November
07, 2014

Arms Length Price

Price which two independent firms would agree on.

Price which is generally charged in a transaction


between persons other than associated enterprises.

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Friday,
November
07, 2014

Arms Length Price: 92C

Comparable uncontrolled price method

Resale price method

Cost plus method

Profit split method

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Friday,
November
07, 2014

Comparable uncontrolled
price method

CUP method compares the price transferred in a


controlled transaction to the price charged in a
comparable un-controlled transaction.

CUP method is the most direct and reliable way to apply


the arms length principle.

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Friday,
November
07, 2014

Resale price method

The resale price method begins with the price at which


a product is resold to an independent enterprise (IE)by
an associate enterprise.

X sold to AE at Rs. 1000 (profit: 300)

AE sold to an IE at Rs. 2000

(profit of Rs. 500 for relevant IE)

Arms length price = 2000 - 500 = 1500

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Friday,
November
07, 2014

Profit Split Method

PSM is used when transactions are inter-related and is


not possible to evaluate separately.

PSM first identifies the profit to be split for the AE. The
profit so determined is split between the AE on the
basis of the functions performed/assets/CE

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Friday,
November
07, 2014

Cost Plus Method

In CP method, first the cost incurred is determined. An


appropriate cost plus mark-up is then added to the cost
to arrive at an appropriate profit. The resultant figure is
the arms length price.

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Friday,
November
07, 2014

Some Transactions subject to ALP


Purchase at little or no
cost.
Payment for services
never rendered.
Sales below MP/
Purchase above MP
Interest free
borrowings
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Exchanging property
Selling of real estate at
a price different from
MP
Use of trade names or
patents at exorbitant
rates even after their
expiry.
Friday,
November
07, 2014

Some Cases
Kinetic Honda Motors
Collaborator: Honda Motor Co. Ltd Japan and
their Subsidiary Honda Trading Corpn. Japan

Hero Honda Motors Ltd.


Parent: Honda Motor Co. Ltd Japan and their
Subsidiary Honda Trading Corpn. Japan

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Friday,
November
07, 2014

Some Cases
Peico Electronics & Electricals Ltd.
Parent: Phillips Netherlands and its subsidiaries

Asea Brown Boveri


Parent: ABB Switzerland and its subsidiaries

Videocon Group
Collaborators: Toshiba Co., Mitsubishi Co

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Friday,
November
07, 2014

Transfer Pricing
INDIA /INTERNATIONAL
CSGAURAV+919990694230
gauarvdelhirav@gmail.com

www.csgauravsharma.com

Friday,
November
07, 2014