Analyzing Indian Transfer Pricing Regulations: a Case Study

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International Research Journal of Finance and Economics ISSN 1450-2887 Issue 40 (2010) © EuroJournals Publishing, Inc. 2010 http://www.eurojournals.com/finance.htm

Analyzing Indian Transfer Pricing Regulations: A Case Study
Monica Singhania Associate Professor, Faculty of Management Studies (FMS), University of Delhi, India E-mail: monica@fms.edu Abstract The Indian Transfer Pricing regulations have been enacted with a view to provide a statutory framework which can lead to computation of reasonable, fair and equitable profit and tax in India so that the profits chargeable to tax in India do not get diverted elsewhere by altering the prices charged and paid in intra-group transactions leading to erosion of Indian tax revenue. Any income arising from an international transaction shall be computed having regard to the arm’s length price (ALP). The ALP shall be determined by any of the prescribed methods, being the most appropriate method. The present paper illustrates the practical aspects of the law regarding transfer pricing as it exists presently in India with the help of a case study. The relevant rules envisage determination of ALP by applying margins of each comparable company to the appropriate base of the enterprise. The regulations further provide that, where more than one price is determined by the most appropriate method, the ALP shall be taken to be the arithmetical mean of such prices. An alternative practical approach to arrive at such ALP is to compute the arithmetic mean of margins of comparable companies and apply the same to the appropriate base of the tested party to determine the ALP. The analysis shows that the mean GP/Sales of comparable companies is 33.71% while that of the PQR India (i.e., the tested party) is 44.20% during the year ended March 31, 2009 indicating that the prices of international transaction of PQR India conform to the arm’s length standard prescribed under the Indian regulations. Further, under Category B, costs recharged by PQR Group to PQR India are included. All these costs represent actual amounts paid by PQR Group to independent third parties and are recovered from PQR India, on a cost-to-cost basis. Applying the comparable uncontrolled price method, these recharges conform to the arm’s length standard prescribed under the Indian regulations. However, there are some practical problems arising out of the applications of transfer pricing regulations, which need to be addressed by the tax administrators as early as possible. These issues include absence of advance pricing agreements (APA) mechanism in India, data limitations, extremely wide definition of associated enterprises in India, stringent penalties, difficulties encountered while conducting economic analysis/benchmarking and many more.

Keywords: Transfer Pricing, Tax laws, International transactions, Arms length price

1. Introduction
The Indian Transfer Pricing regulations have been enacted with a view to provide a regulatory framework which is capable of computing reasonable, fair and equitable profit and tax in India so that the profits chargeable to tax in India do not get diverted elsewhere by altering the prices charged and

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International Research Journal of Finance and Economics - Issue 40 (2010)

paid in intra-group transactions leading to erosion of Indian tax revenue. Any income arising from an international transaction shall be computed having regard to the arm’s length price (ALP). The regulations on transfer pricing in India were clearly inevitable and long overdue. The regulations in their present form are a product of the findings of the Expert Group set up by the Government of India in November 1999 to study global transfer pricing practices and examine the need for such legislation in India. The Indian transfer pricing regulations applicable with effect from April 1, 2001 are largely based on the OECD guidelines. By manipulating a few book entries in the accounts books, multinational...
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