Commercial transactions between the
different parts of the multinational groups may not be subject to the same
market forces shaping relations between the two independent firms. 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 organisation. 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.
Suppose a company A
purchases goods for 100 rupees and sells it to its associated company B in
another country for 200 rupees, who in turn sells in the open market for 400
rupees. Had A sold it direct, it would have made a profit of 300 rupees. But by
routing it through B, it restricted it to 100 rupees, permitting B to
appropriate the balance. The transaction between A and B is arranged and not
governed by market forces. The profit of 200 rupees is, thereby, shifted to the
country of B. The goods is transferred on a price (transfer price) which is
arbitrary or dictated (200 hundred rupees), but not on the market price (400
rupees).
Thus, the effect of
transfer pricing is that the parent company or a specific subsidiary tends to
produce insufficient taxable income or excessive loss on a transaction. For
instance, profits accruing to the parent can be increased by setting high
transfer prices to siphon profits from subsidiaries domiciled in high tax
countries, and low transfer prices to move profits to subsidiaries located in
low tax jurisdiction. As an example of this, a group which manufacture products
in a high tax countries may decide to sell them at a low profit to its
affiliate sales company based in a tax haven country. That company would in
turn sell the product at an arm's length price and the resulting (inflated)
profit would be subject to little or no tax in that country. The result is
revenue loss and also a drain on foreign exchange reserves
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Relevant Definitions
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Transfer Pricing - Arm's length price
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92F (ii) “arm’s
length price” means a price which is applied or proposed to be applied in a
transaction between persons other than associated enterprises, in
uncontrolled conditions;
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Enterprise
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92F (iii) “enterprise”
means a person (including a permanent establishment of such person) who is,
or has been, or is proposed to be, engaged in any activity, relating to the
production, storage, supply, distribution, acquisition or control of articles
or goods, or know-how, patents, copyrights, trade-marks, licences,
franchises or any other business or commercial rights of similar nature, or
any data, documentation, drawing or specification relating to any patent,
invention, model, design, secret formula or process, of which the other
enterprise is the owner or in respect of which the other enterprise has
exclusive rights, or the provision of services of any kind, 74[or
in carrying out any work in pursuance of a contract,] or in investment, or
providing loan or in the business of acquiring, holding, underwriting or
dealing with shares, debentures or other securities of any other body
corporate, whether such activity or business is carried on, directly or
through one or more of its units or divisions or subsidiaries, or whether
such unit or division or subsidiary is located at the same place where the
enterprise is located or at a different place or places;
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Permanent establishment
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92F 74[(iiia) “permanent
establishment”, referred to in clause (iii), includes a fixed place of
business through which the business of the enterprise is wholly or partly
carried on;]
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Transaction
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92F (v) “transaction”
includes an arrangement, understanding or action in concert,—
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(A) whether
or not such arrangement, understanding or action is formal or in writing; or
(B) whether or
not such arrangement, understanding or action is intended to be enforceable
by legal proceeding.]
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Computation of arm’s
length price.
92C. (1) The arm’s length price in relation to an
international transaction shall be determined by any of the following methods,
being the most appropriate method, having regard to the nature of transaction
or class of transaction or class of associated persons or functions performed
by such persons or such other relevant factors as the Board may prescribe63, namely :—
(a) comparable
uncontrolled price method;
(b) resale
price method;
(c) cost
plus method;
(d) profit
split method;
(e) transactional
net margin method;
(2) The most appropriate
method referred to in sub-section (1) shall be applied, for determination of
arm’s length price, in the manner as may be prescribed64 :
65[Provided that where more than one price is determined by the most
appropriate method, the arm’s length price shall be taken to be the
arithmetical mean of such prices:
Provided further that if the variation between the arm’s length
price so determined and price at which the international transaction has actually
been undertaken does not exceed five per cent of the latter, the price at which
the international transaction has actually been undertaken shall be deemed to
be the arm’s length price.]
(3) Where during the
course of any proceeding for the assessment of income, the Assessing Officer
is, on the basis of material or information or document in his possession, of
the opinion that—
(a) the
price charged or paid in an international transaction has not been determined
in accordance with sub-sections (1) and (2); or
(b) any
information and document relating to an international transaction have not been
kept and maintained by the assessee in accordance with the provisions contained
in sub-section (1) ofsection 92D and the rules made in this behalf; or
(c) the
information or data used in computation of the arm’s length price is not
reliable or correct; or
(d) the
assessee has failed to furnish, within the specified time, any information or
document which he was required to furnish by a notice issued under sub-section
(3) of section 92D,
the Assessing Officer
may proceed to determine the arm’s length price in relation to the said
international transaction in accordance with sub-sections (1) and (2), on the
basis of such material or information or document available with him:
Provided that an opportunity shall be given by the
Assessing Officer by serving a notice calling upon the assessee to show cause,
on a date and time to be specified in the notice, why the arm’s length price
should not be so determined on the basis of material or information or document
in the possession of the Assessing Officer.
(4) Where an arm’s
length price is determined by the Assessing Officer under sub-section (3), the
Assessing Officer may compute the total income of the assessee having regard to
the arm’s length price so determined :
Provided that no deduction under section 10A 66[or section 10AA] or section 10B or under Chapter VI-A shall be allowed in respect of the amount
of income by which the total income of the assessee is enhanced after
computation of income under this sub-section :
Provided further that where the total income of an
associated enterprise is computed under this sub-section on determination of
the arm’s length price paid to another associated enterprise from which tax has
been deducted 67[or was deductible] under the provisions of Chapter
XVIIB, the income of the other associated enterprise shall not be recomputed by
reason of such determination of arm’s length price in the case of the first
mentioned enterprise.
Meaning of international
transaction.
92B. (1) For the purposes of this section and sections 92, 92C, 92D and 92E, “international transaction” means a
transaction between two or more associated enterprises, either or both of whom
are non-residents, in the nature of purchase, sale or lease of tangible or
intangible property, or provision of services, or lending or borrowing money,
or any other transaction having a bearing on the profits, income, losses or
assets of such enterprises, and shall include a mutual agreement or arrangement
between two or more associated enterprises for the allocation or apportionment
of, or any contribution to, any cost or expense incurred or to be incurred in
connection with a benefit, service or facility provided or to be provided to any
one or more of such enterprises.
(2) A transaction
entered into by an enterprise with a person other than an associated enterprise
shall, for the purposes of sub-section (1), be deemed to be a transaction
entered into between two associated enterprises, if there exists a prior
agreement in relation to the relevant transaction between such other person and
the associated enterprise, or the terms of the relevant transaction are
determined in substance between such other person and the associated enterprise.
Meaning of associated
enterprise.
92A. (1) For the purposes of this section and sections 92, 92B, 92C, 92D, 92E and 92F, “associated enterprise”, in relation to
another enterprise, means an enterprise—
(a) which participates, directly or indirectly, or
through one or more intermediaries, in the management or control or capital of
the other enterprise; or
(b) 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.
(2) 62[For the purposes of sub-section (1), two
enterprises shall be deemed to be associated enterprises if, at any time during
the previous year,—]
(a) one enterprise holds, directly or indirectly,
shares carrying not less than twenty-six per cent of the voting power in the
other enterprise; or
(b) any person or enterprise holds, directly or
indirectly, shares carrying not less than twenty-six per cent of the voting
power in each of such enterprises; or
(c) a loan advanced by one enterprise to the other
enterprise constitutes not less than fifty-one per cent of the book value of
the total assets of the other enterprise; or
(d) one enterprise guarantees not less than ten per
cent of the total borrowings of the other enterprise; or
(e) more than half of the board of directors or
members of the governing board, or one or more executive directors or executive
members of the governing board of one enterprise, are appointed by the other
enterprise; or
(f) more than half of the directors or members of
the governing board, or one or more of the executive directors or members of
the governing board, of each of the two enterprises are appointed by the same
person or persons; or
(g) the manufacture or processing of goods or
articles or business carried out by one enterprise is wholly dependent on the
use of know-how, patents, copyrights, trade-marks, licences, franchises or any
other business or commercial rights of similar nature, or any data,
documentation, drawing or specification relating to any patent, invention,
model, design, secret formula or process, of which the other enterprise is the
owner or in respect of which the other enterprise has exclusive rights; or
(h) ninety per cent or more of the raw materials and
consumables required for the manufacture or processing of goods or
articles carried out by one enterprise, are supplied by the other enterprise,
or by persons specified by the other enterprise, and the prices and other
conditions relating to the supply are influenced by such other enterprise; or
(i) the goods or articles manufactured or processed
by one enterprise, are sold to the other enterprise or to persons specified by
the other enterprise, and the prices and other conditions relating thereto are
influenced by such other enterprise; or
(j) where one enterprise is controlled by an
individual, the other enterprise is also controlled by such individual or his
relative or jointly by such individual and relative of such individual; or
(k) where one enterprise is controlled by a Hindu
undivided family, the other enterprise is controlled by a member of such Hindu
undivided family or by a relative of a member of such Hindu undivided family or
jointly by such member and his relative; or
(l) where one enterprise is a firm, association of
persons or body of individuals, the other enterprise holds not less than ten
per cent interest in such firm, association of persons or body of individuals;
or
(m) there exists between the two enterprises, any
relationship of mutual interest, as may be prescribed.
[Reference to
Transfer Pricing Officer.
92CA. (1) Where any person, being the assessee, has
entered into an international transaction in any previous year, and the
Assessing Officer considers it necessary or expedient so to do, he may, with
the previous approval of the Commissioner, refer the computation of the arm’s
length price in relation to the said international transaction under section 92C to the Transfer Pricing Officer.
(2) Where a reference is
made under sub-section (1), the Transfer Pricing Officer shall serve a notice
on the assessee requiring him to produce or cause to be produced on a date to
be specified therein, any evidence on which the assessee may rely in support of
the computation made by him of the arm’s length price in relation to the
international transaction referred to in sub-section (1).
(3) On the date
specified in the notice under sub-section (2), or as soon thereafter as may be,
after hearing such evidence as the assessee may produce, including any
information or documents referred to in sub-section (3) of section 92D and after considering such evidence as the
Transfer Pricing Officer may require on any specified points and after taking
into account all relevant materials which he has gathered, the Transfer Pricing
Officer shall, by order in writing, determine the arm’s length price in
relation to the international transaction in accordance with sub-section (3) of section 92Cand send a copy of his order to the Assessing
Officer and to the assessee.
69[(3A) Where a reference was made under
sub-section (1) before the 1st day of June, 2007 but the order under
sub-section (3) has not been made by the Transfer Pricing Officer before the
said date, or a reference under sub-section (1) is made on or after the 1st day
of June, 2007, an order under sub-section (3) may be made at any time before
sixty days prior to the date on which the period of limitation referred to in section 153, or as the case may be, in section 153B for making the order of assessment or
reassessment or recomputation or fresh assessment, as the case may be,
expires.]
70[(4) On receipt of the order under sub-section
(3), the Assessing Officer shall proceed to compute the total income of the
assessee under sub-section (4) of section 92C in conformity with the arm’s length price as so
determined by the Transfer Pricing Officer.]
(5) With a view to
rectifying any mistake apparent from the record, the Transfer Pricing Officer
may amend any order passed by him under sub-section (3), and the provisions of section 154 shall, so far as may be, apply accordingly.
(6) Where any amendment
is made by the Transfer Pricing Officer under sub-section (5), he shall send a
copy of his order to the Assessing Officer who shall thereafter proceed to
amend the order of assessment in conformity with such order of the Transfer Pricing
Officer.
(7) The Transfer Pricing
Officer may, for the purposes of determining the arm’s length price under this
section, exercise all or any of the powers specified in clauses (a) to (d)
of sub-section (1) ofsection 131 or sub-section (6) of section 133.
Explanation.—For the purposes of this section, “Transfer
Pricing Officer” means a Joint Commissioner or Deputy Commissioner or Assistant
Commissioner authorised by the Board71 to perform all or any of the functions of an
Assessing Officer specified in sections 92C and 92D in respect of any person or class of persons.]
Maintenance and keeping
of information and document by persons entering into an international
transaction.
92D. (1) Every person who has entered into an
international transaction shall keep and maintain such information and document
in respect thereof, as may be prescribed72.
(2) Without prejudice to
the provisions contained in sub-section (1), the Board may prescribe the period
for which the information and document shall be kept and maintained under that
sub-section.
(3) The Assessing
Officer or the Commissioner (Appeals) may, in the course of any proceeding
under this Act, require any person who has entered into an international
transaction to furnish any information or document in respect thereof, as may
be prescribed under sub-section (1), within a period of thirty days from the
date of receipt of a notice issued in this regard :
Provided that the Assessing Officer or the Commissioner
(Appeals) may, on an application made by such person, extend the period of
thirty days by a further period not exceeding thirty days.
I,e initial 30days + additional 30days(max.)
Report from an
accountant to be furnished by persons entering into international transaction.
92E. Every person who has entered into an
international transaction during a previous year shall obtain a report from an
accountant and furnish such report on or before the specified date in the
prescribed form duly signed and verified in the prescribed manner by such
accountant and setting forth such particulars as may be prescribed
[Penalty for failure
to keep and maintain information and document in respect of international
transaction.
271AA. Without prejudice to the provisions of section 271, if any person fails to keep and maintain any
such information and document as required by sub-section (1) or sub-section (2)
of section 92D, the Assessing Officer or Commissioner
(Appeals) may direct that such person shall pay, by way of penalty, a sum equal to two per cent of the value
of each international transaction entered into by such person.]
271G. If any person who has entered into an international
transaction fails to furnish any such information or document as required by
sub-section (3) of section 92D, the Assessing Officer or the Commissioner
(Appeals) may direct that such person shall pay, by way of penalty, a sum equal
to two per cent (2%) of the value of
the international transaction for each such failure.]
271BA. If any person fails to furnish a report from an
accountant as required by section 92E, the Assessing Officer may direct that such
person shall pay, by way of penalty, a sum of one hundred thousand rupees (Rs.100,000)
Time limit for furnishing Form No. 3CEB
On or before 31st October of the relevant Assessment Year
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