a)What is transfer pricing?2
2Transfer Pricing in India3
d)Arm’s length transaction4
1.Comparable uncontrolled price method4
2.Resale price method5
3.Cost plus method5
4.Profit split method6
5.Transactional net margin method (TNMM)6
6.Any other method prescribed by the board6
f)Tax authorities, audit and penalties7
3Transfer Pricing Cases7
a)Sony India (P) Ltd. vs. Central Board Of Direct Taxes7
b)DIT (International Tax) vs. M/S Morgan Stanley & Co Inc (MSCo)8
c)Commissioner of Income Tax vs. M/S Samsung India Electronics Ltd.(SIEL)10
1 Transfer Pricing
What is transfer pricing?
In today’s world, firms have the capability to place its activities at different places/ locations. Increasingly goods and services are traded within the entity from different geographical locations and transfer pricing is used to monitor and account for such intra firm activities. Transfer price of 120.
Generally Transfer Pricing is used when there are global locations of a same firm trade with each other. To better understand this let’s look at the example below diagram:
Now, the company as a whole is making profits at two levels: 1. In US, where it is selling to its sister company at a profit of “Rs.20”. This is normally done to maintain internal and unit profitability. 2. In India, where the company is also making a profit of “Rs.20” by selling the good to the customer. This company goes on to pay income taxes at the end of the year on the “Rs.20 – costs incurred in India, let’s say Rs.10” (so the company goes on to pay income taxes on Rs.10). This is how transfer pricing affects every country. Out of a transaction where the origin of demand was India, the multinational makes profit in India and at the foreign location. The law of transfer pricing regulates how much profits an entity can keep outside India without attracting the tax authorities. 2 Transfer Pricing in India
The Income Tax Act of 1961 does not explain transfer pricing. The Indian Parliament approved transfer pricing legislation in April 2001 and the Central Board of Direct Taxes (CBDT) issued transfer pricing rules in August 2001. CBDT defines transfer pricing as follows (section 92): “One party transfers to another goods or services, for a price. That price is known as “transfer price”. This may be arbitrary and dictated, with no relation to cost and added value, diverge from the market forces. Transfer price is, thus, a price, which represents the value of good; or services between independently operating units of an organization. But, the expression “transfer pricing” generally refers to prices of transactions between associated enterprises, which may take place under conditions differing from those, taking place between independent enterprises. It refers to the value attached to transfers of goods, services and technology between related entities. It also refers to the value attached to transfers between unrelated parties which are controlled by a common entity.” The aim of transfer pricing rules is to prevent tax evasion by the two associated entities that can involve in transaction of goods and services at an arranged price other than that determined by an arm’s length transaction. Such transactions can lead to revenue loss and drain of foreign exchange when one entity is in high-tax country and the other entity is in tax-heaven country. b) Associated enterprises
The related parties involved in the transaction are determined by an “Associated Enterprises” (AE) concept. The affiliated status is determined by identifying the direct or indirect management, control or ownership of one enterprise by another enterprise (section 92C). For...