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a) Comparable Uncontrolled Price (CUP):- This method seeks to determine the ALP by comparing the controlled transaction with the uncontrolled transaction in relation to property transferred or services provided. This method is basically applied to concerns engaged in the manufacturing and selling of the product and hence to be applied to manufacturers.

Typical transactions in respect to which CUP may be adopted:-

1. Transfer of goods
2. Provision of services
3. Intangibles
4. Loans, provision of finance

The Comparable uncontrolled price method shall be determined in the following manner:-

1. Identify the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction
2. Such price is adjusted to account for differences, if any, between the international transaction and the uncontrolled transaction or between the enterprises entering into such transactions, which could materially affect the price in the open market
3. The price so adjusted is taken to be the arm’s length price in relation to the international transaction
4. The arm’s length price is compared with the price charged in the international transaction
5. If the price charged in the international transaction is lower than the arm’s length price or the price paid in the international transaction is higher than the arm’s length price then an adjustment is to be made to the price charged or paid in the international transaction by the amount of such variance

Continue reading Transfer Pricing Systems :Methods & Selection(Part C)

What we have below

• are the terms and definitions used in Transfer Pricing.
• the relevant acts pertaining to Transfer Pricing in India.
• a sample report from an accountant to be furnished under Section 92E

Transfer Pricing Regulations: are applicable to all enterprises that enter into an “International Transaction” with an “Associated Enterprise“. The objective is to arrive at a comparable price, as available, in relation to transactions with unrelated parties in open market conditions and is known as the “Arm’s Length Price”.

“Associated Enterprise”: The basic criterion to determine an “Associated Enterprise” is the participation in management, control or capital (ownership) of one enterprise by another enterprise. The participation may be direct or indirect or through one or more intermediaries. The concept of control extends not only to control through holding shares or voting power or the power to appoint the management of an enterprise, but also through debt and control over various components of the business activity such as control over raw materials, sales and intangibles.

Section 92A (1) of the Income Tax Act, 1961 defines “Associated Enterprise”, in relation to another enterprise as one which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; or in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise.
“International Transaction”: An “International Transaction” is essentially a cross border transaction between two or more associated enterprises in any sort of property, tangible or intangible, or in the provision of services, lending of money, etc. At least one of the parties to the transaction must be a non-resident entering into one or more of the following transactions:

• Purchase, sale or lease of tangible or intangible property,
• Provision of services,
• Lending or borrowing of money,
• Any transaction having a bearing on profit, income or assets.
• Mutual agreement between “associated enterprises” for allocation / apportionment of any cost, contribution or expense.

Continue reading Transfer Pricing System: Definitions & Relevant Acts (Part B)

India is one of those countries that view Transfer Pricing very seriously, at least amongst Asia Pacific countries. India requires an Annual Certification to accompany the auditor report. As we are fully aware that India is opening up its economies. The authorities would like to ensure that there is no unnecessary hanky-panky by investors to siphon foreign exchange from its country. Hence,the setting up proper transfer pricing methodology/documentation to comply with the authorities is indeed one of the hot topics amongst financial controllers.

Transfer pricing regulations started in Year 2000. As India’s fiscal year ends on 31st March, hence Indian subsidiaries with international links felt its impact in its submission of the annual financial statement ending 31st March 2001. Indian Tax authorities will need proof or evidence in order to believe that international transactions with their domestic organization are above board. Thus, if a group of companies has Indian subsidiaries, it is essential that their Indian subsidiaries need to keep records, registers, systems and general information to justify transfer pricing with its international counterpart.

In establishing the transfer pricing of the Company, it is essential that a Core Documentation File should be set up in the event of dispute or query from the Indian Inland Revenue. A typical TP Core Documentation File should include the profile of the international /multinational group, justification of the transfer prices with its function vs risk analysis, records , registers or systems (refer to details).

Let’s discuss more in detail what’s in the Core Documentation File :

Continue reading Transfer Pricing System: Core Documentation File (Part A)