Transfer Pricing – Basic Analyses
Introduction: In current scenario it is possible that entity is operating not only in multiple state but also in multiple country; for said purpose it is important to understand whether entity is required to comply any additional law; how income tax will be levied if one of the branches of entity which is operating in tax free zone makes transfer of goods or service to another branch who is operating in taxable zone or vice-versa. In this article we will cover all compliance and related interpretation of transfer pricing.
Applicability and Definitions:
Mr. R has associated enterprise outside India and has transferred goods outside India at specified price, now if such price is lower than he will book sales in his books at lower price which will result in understating on Income in India, or it may happen that enterprise outside India has supplied goods to Mr. R and Mr. R has booked purchase at higher price, resulted in understating of Income. This is were transfer pricing provisions will come into place. Some of the points which are worth noting in relation to transfer price are as follows:
Before moving further, it is necessary to under what the term associated enterprise means:
The definition has been prescribed in two part, first is actual definition and another is deeming fiction, actual definition is as follows:
An enterprise which participates, directly or indirectly, or through one or more intermediaries, in:
If one or more persons participates, directly or indirectly, or through one or more intermediaries in:
then in such those two enterprises are associated enterprise.
XYZ Limited is participating in management of Y Ltd. and Y Ltd. is holding company of G Ltd. in such case XYZ Limited and G Ltd. will be treated as Associate Enterprise.
Mr. Desai is holding 75% in G Ltd., Also, he is holding 56% in H Limited. In this case G Limited and H Limited will be treated as Associate Enterprise.
From above we have seen that, cases where one entity having control, capital contribution, managerial control, even though through one or more intermediaries it will be treated as associated enterprise.
Whether Transfer pricing provisions are applicable to domestic transactions?
Yes, transfer pricing provisions are applicable to domestic transactions also. It has been prescribed that that one part of entity is claiming deduction specified under chapter IV-A of Income Tax Act, 1961 of 100% of profits and gains derived from his business and profession, and another part of entity is operating in area where no such deduction is available than transfer between said parts of same entity will be covered under transfer pricing. The said transactions are also know as specified domestic transaction.
The transaction will not be treated as specified domestic transaction if aggregate of such transactions entered into by the assessee in the previous year does not exceed a sum of Rs. 20 crores.
All the provisions of transfer pricing applicable to International Transaction will deemed to be applicable to specified domestic transaction.
Whether they are required to furnish any audit report?
Yes, audit report is required to be furnished as per section 92E of Income Tax Act, 1961; in case of failure assessee will be liable to pay penalty of Rs. 1,00,000/-. 31st October will the date within which such report will be required to be furnished by assessee to avoid any penalties.
Whether there is any provision for maintenance of documents relating International Transaction or specified domestic transaction?
Every entity who has entered into International transaction or specified domestic transaction is required to maintain data, document and information relating to such transaction. In case of failure penalty will be levied at the rate of 2% of transaction value of each international transaction entered into by him.
In case if assessee has maintained such documents but fails to furnish such to assessing officer after being called by such assessing officer or any other higher-level authority than in such case penalty will be limited to 2% of the value of each international transaction for which assessee failed to furnish the data. It shall be noted that small penalty is applicable in case if assessee fails to maintains or furnishes any incorrect information or document.
The small and immaterial exemption has been provided that if aggregate value of International transaction entered during the year does not exceed Rs. 1 Crore, assessee is relived from maintaining the prescribed records but in such case assessee will have to substantiate that the income arising from the international transactions with associated enterprises is at arm’s length price.
In next part we will cover the what do we mean by deemed associate enterprise and what are the other provisions relating to transfer price