1. Transfer PricingRegulations

5. 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.

6. 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.

7. Factors Affecting Transfer Pricing • Internal factors: Performance Measurement and Evaluation • External Factors: • Accounting Standard • Income Tax • Custom Duty • Currency Fluctuations • Risk of Expropriation

8. International OECD formulated “Guidelines on transfer pricing”. They serve as generally accepted practices by the tax authorities India The Finance Act 2001 introduced the detailed TPR w.e.f. 1st April 2001 The Income Tax Act AS-18 Other Relevant Acts Transfer Price Regulations

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

10. Control by ownership 50% of the voting right Control over composition of board of directors Power to appoint or remove the directors Control of substantial interest 20% or more interest in the voting power Related Parties

11. 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. AS-18 and Transactions

12. 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.

13. TPR: Some Important Concepts • Income/Expenses/Cost arising from an international transaction shall be computed having regard to arm’s length price (ALP). • ALP provisions can be applied if it leads to decrease in taxable income or increase in losses.

14. 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

15. 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

16. Arm’s Length Price • Price which two independent firms would agree on. • Price which is generally charged in a transaction between persons other than associated enterprises.

17. Arm’s Length Price: 92C • Comparable uncontrolled price method • Resale price method • Cost plus method • Profit split method

18. 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 arm’s length principle.

19. 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

20. 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

21. 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 arm’s length price.

22. 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 • 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.

23. 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

24. 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