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transfer pricing law in India

Transfer Pricing Law in India

Introduction

Transfer Pricing (“TP”) regulations have been at the forefront of corporate headlines over the last few years due to the increasing number of controversies resulting out of tax structuring by multinational companies in India. What makes the topic both contentious and interesting is that regulators view the various techniques applied to inter-corporate transactions as purportedly planned with the intent of achieving benefits of comparable labor cost and tax advantage at the cost of a countries tax revenues.

Hence, there was a need to introduce a uniform and internationally accepted mechanism of determining reasonable, fair and equitable profits and tax in India in the case of such multinational enterprises.

Statutory rules and regulations

A separate code on transfer pricing under Sections 92 to 92F of the Indian Income TaxAct, 1961 (“the Act”) covers intra-group cross-border transactions and specified domestic transactions. Since the introduction of the code, transfer pricing has become the most important international tax issue affecting multinational enterprises operating in India. The regulations are broadly based on the Organisation for Economic Co-operation and Development (“OECD”) Guidelines and describe the various transfer pricing methods, impose extensive annual transfer pricing documentation requirements and containharsh penal provisions for noncompliance.

The Indian Transfer Pricing Code prescribes that income arising from international transactions or specified domestic transactions between associated enterprises should be computed having regard to the arm’s length price. It has been clarified that any allowance for an expenditure or interest or allocation of any cost or expense arising from an international transaction or specified domestic transaction also shall be determined having regard to the arm’s-length price. The Act defines the terms international transactions, specified domestic transactions, associated enterprises and arm’s length price.

Type of transactions covered

The Indian transfer pricing regulations are applicable to an international transaction as well as to specified domestic transactions entered into two (or more) associated enterprises.Section 92B of the Act defines the term “international transaction” to mean a transaction between two (or more) associated enterprises involving the sale, purchase or lease of tangible or intangible property; provision of services; cost-sharing arrangements; lending/borrowing of money; or any other transaction having a bearing on the profits, income, losses or assets of such enterprises.

Further, the Finance Act 2012 extended the application of transfer pricing regulations to “specified domestic transactions”, being the following transactions with certain related domestic parties, if the aggregate value of such transactions exceeds INR 5 crore:

  • Any transaction related to businesses eligible for profit-linked tax incentives, for example, infrastructure facilities (Section 80-IA) and SEZ units (section 10AA); and
  • Any other transactions as may be specified.

Associated enterprises (“AEs”)

The relationship of associated enterprises is defined by Section 92A of the Actto cover direct/ indirect participation in the management, control or capital of an enterprise by another enterprise. It also covers situations in which the same person (directly or indirectly) participates in the management, control or capital of both the enterprises. For the purposes of the above definition, Section 92A of the Act specifies certain parameters have been laid down based on which two enterprises would be deemed as AEs.

Arm’s length principle and pricing methodologies

The term ‘arm’s length price’ is defined by Section 92F of the Act to mean a price that is applied or is proposed to be applied to transactions between persons other than AEs in uncontrolled conditions. The following methods have been prescribed by Section 92C of the Act for the determination of the arm’s-length price:

  • Comparable uncontrolled price (CUP) method
  • Resale price method (RPM)
  • Cost plus method (CPM)
  • Profit split method (PSM)
  • Transactional net margin method (TNMM)
  • Such other methods as may be prescribed

These regulations require a taxpayer to determine an arm’s-length price for international transactions or specified domestic transactions. However, transfer pricing provisions will not apply if the arm’s-length price would result in a downward revision in the income chargeable to tax in India.

Documentation requirements

Taxpayers are required to maintain, on an annual basis, a set of extensive information and documents relating to international transactions undertaken with AEs or specified domestic transactions. Rule 10D of the Income Tax Rules, 1962 prescribes detailed information and documentation that has to be maintained by the taxpayer.

Further, it is mandatory for all taxpayers, without exception, to obtain an independent accountant’s report in respect of all international transactions between associated enterprises or specified domestic transactions. The report has to be furnished by the due date of the tax return filing (i.e. on or before 30 November) to avoid stringent penalties prescribed for noncompliance with the provisions of the transfer pricing code.

 For a more detailed discussion of specific transfer pricing rules, or to obtain further assistance in transfer pricing compliance, transfer pricing study, planning activities,addressing and resolving intercompany transfer pricing issues, please contact AJSH & Co LLP. If you have any query regarding this Click Here.

tas adviser in india

TAX PLANNING WITH MUTUAL FUNDS

Mutual fund is an investment programme funded by shareholders that trades in diversified holdings and is professionally managed.Your Fixed Deposit may be offering decent returns with little option for liquidity, while the stock market may give you decent returns with easy liquidity and slightly higher probability of losses. A Mutual Fund is a fine balance between the two offering you good returns while providing you with decent liquidity.

Tax saving mutual fund schemes or ELSS (Equity Linked Savings Schemes) are one of the best tax-saving option available under Section 80C, qualifying for up to Rs.1.5 Lakh of income tax deductions. Similar to other tax saving options, ELSS also comes in with a mandatory 3 year lock-in period.Always consider the taxation policy before investing.

Funds are invested in the equity markets in such a way that even if one investment incurs losses, the other investment manages to mitigate the loss. Despite this, investment in stocks may inherently be volatile and should be done only after assessing your risk appetite. Also, even though ELSS has a mandatory 3 year lock-in period, investment should be done if you are open to 5-7 years of investment horizon as they can offer superior returns over a long period.

Some tax-saving schemes are as follows:

  • Tata India Tax Savings Fund – Direct (G)
  • L&T Tax Advantage -Direct (G)
  • Aditya Birla SL Tax Plan Direct-G

With professionally managed Mutual Funds, you can be assured that your investments are managed by people with many years of experience with market analysis. They will have enough knowledge to take calls on buying and selling those stocks and other investments. This is particularly helpful if you do not have the knowledge or time to handle individual stock or fixed-income investments.

If you are new to the entire investment scenario, it is advised to seek professional help. Professionals can advise on the available range of viable investmentsand will help you chalk out your entire investment plan. We canalso assist you with our tax advisory services at AJSH & Co LLP.

If you have any query regarding this Click Here.

GST consultant in India

FAQ’s on levy of GST on supply of services to the co-operative society

  1. Services provided by the Central Government, State Government, Union territory or local authority to a person other than business entity, is exempted from GST. So, Property Tax, Water Tax, if collected by the RWA/Co-operative Society on behalf of the MCGM from individual flat owners, then GST is not leviable.
  2. Similarly, GST is not leviable on Non-Agricultural Tax, Electricity Charges etc, which are collected under other statutes from individual flat owners. However, if these charges are collected by the Society for generation of electricity by Society’s generator or to provide drinking water facility or any other service, then such charges collected by the society are liable to GST.
  3. Sinking fund, repairs & maintenance fund, car parking charges, Non- occupancy charges or simple interest for late payment, attract GST, as these charges are collected by the RWA/Co-operative Society for supply of services meant for its members.

If you have any query regarding this Click Here