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Group: 9
 Definition of Transfer Pricing

 Why Problem?

 Operational Difficulties
 Determination of Arm’s Length Price (ALP)

 Databases

 Benchmarking

 Legal Issues
 Accounting Issues
 Problems in Documentation
 Tax Assessments

 Issues relating to Allied Laws

 Treatment of TP in India

 Pricing Methods

 Way Forward

Transfer pricing
Transfer pricing is not an exact science

Definition of Transfer
 Transfer pricing is the price charged by one associate of a
corporation to another associate of the same corporation.
 When one subsidiary of a corporation in one country sells
goods, services or know-how to another subsidiary in another
country, the price charged for these goods or services is called
the transfer price.
 Transfer pricing provisions primarily require any income
arising from an international transaction between two or more
Associated Enterprises (‘AE’) to be at arm’s length price and
comparable to similar transactions between unrelated
Why Problem?
 Transfer pricing is a strategy frequently used by TNCs
to book huge profits through illegal means.

 Lowering prices in countries where tax rates are high

and raising them in countries with a lower tax rate

 Removal of restrictions on capital flows

Increased mergers and acquisitions

Operational Difficulties
 Determination of ALP
 Some intra-group transactions are so unique that they
can-not be compared
 TP reports of two AE’s would have conflicting
 No recommended Profit Level Indicator (PLI) – wide
fluctuations may result depending upon each PLI.
 Corporate hesitant to disclose information
 Major countries do not require rejection of other methods
Operational Difficulties
 Databases
 Time gap in search of Databases
 Non availability of recognized databases
 Lack of comparables

Operational Difficulties
 Benchmarking
 No recommended method for benchmarking

Transaction by Transaction

Aggregate of similar Transactions

Based on Functions

For each AE separately
 Pricing of Intangibles – soft targets
 Difficulty in justifying adjustments for factors having a
bearing on prices
 Insufficient information available for calculating gross

Operational Difficulties
 Benchmarking
 In case of rapidly fluctuating prices, which prices to
compare with
 Gift from one enterprise to another
 Transfers at cost
 Capital transaction
 Cost Allocation & Cost Sharing Arrangements
 Acceptable Band of (+ - 5%)

Legal Issues
 Rule 10D(2) – No documents required for transactions
below 1 Crore, but still to justify Arm’s Length basis
 Determination of AE’s – unusual/ irrelevant situations
 Whether AO can open previous years’ assessments on the
basis of TP report
 Whether transactions which do not affect profitability are
covered– e.g. reimbursements
 Whether Liaison Offices are covered

Accounting Issues
 Segmental accounts were not mandatory in India
till 2001
 How to factor Internal Set-offs
 Comparability in special circumstances – startup
losses, market strategy, government controls,

Problems in
 Duplication of Documents in case a Foreign
Company (FC) earns Royalty, technical fee,
interest on ECB etc – ie FC also required to file a
ROI, TP report

 How to document discussions over phone and in


Tax assessments
 Not an exact science
 Concept of TP is still in its infancy.
 Flexibility to apply a method other than that
prescribed or apply a combination of methods
 Use of secret comparables
 Confidentiality of information
 Authenticity & reliability of databases

Role of Tax Officer
 Brief given to the TPO by the tax authorities
 Objective in mind
 Degree/depth of the review
 Overall understanding (general feel)
 Transactional analysis
 Actual documentation review
 Assessment Procedure
 What level of information/document would be
considered acceptable.

Issues relating to Allied
 Whether Customs authorities can take recourse of
valuation in TP report
 FERA/FEMA issues on higher valuation in TP

Treatment of TP in India
 Applicability
 There must be an international transaction,

 Such international transaction must be between two or

more associated enterprises, either or both of whom are


 Pricing Method Allowed

 CUP method,

 Resale Price Method,

 CPM,

 Profit Split Method,

 TNMM, or

 Any other method prescribed by the CBDT

Pricing Methods
 CUP method
The taxpayer or another member of the group sells
the particular product, in similar quantities and
under similar terms to arm's length parties in
similar markets (an internal comparable)

 Resale Price Method

The resale price method begins with the resale
price to arm's length parties (of a product
purchased from an non-arm's length enterprise),
reduced by a comparable gross margin
 CPM (Cost plus method)
The cost plus method begins with the costs incurred by a
supplier of a product or service provided to an non-arm's length
enterprise, and a comparable gross mark-up is then added to
those costs

 Profit Split Method

The first step is to determine the total profit earned by the parties
from a controlled transaction.
The second step is to split the profit between the parties based on
the relative value of their contributions

 TNMM (Transactional net margin method)
Compares the net profit margin of a taxpayer arising from a
non-arm's length transaction with the net profit margins
realized by arm's length parties from similar transactions

 Documentation/ Return
 Enterprise-wise documents-

Description of the enterprise,

Relationship with other associated enterprises,

Nature of business carried out.
 Transaction-specific documents-
 Information regarding each transaction,
 Description of the functions performed,
 Assets employed and risks assumed by each party to the transaction,
 Economic & Market Analysis etc.
 Computation related documents-
 Describe in details the method considered,
 Actual working assumptions, policies etc.,
 Adjustment made to transfer price,

Any other relevant information, data, documents relied for
determination of arm's length price etc.
 Penalty
 Penalty for concealment of income or
furnishing inaccurate particulars thereof- 100%
to 300% of the tax sought to be evaded.

 Penalty for failure to keep and maintain

information and documents in respect of
International transaction- 2% of the value of
each international transaction

 Penalty for failure to furnish report under

Section 92E- Rs. 100000/-
Way Forward
 Transfer pricing "band" rather than a transfer pricing

 “Safe harbor" rules

 Procedures for obtaining "Advance Pricing

Agreements (APA)”

 Use of multiple year data

 Objective and reasonable approach of the tax officer

 Thank You……………