Transfer pricing, in simple terms, can be defined as the price charged by one unit of the enterprise from another unit of the same enterprise. For example, X Inc. has two units, Unit A and Unit B. Unit A of the X Inc. manufactures speedometers for automobiles and Unit B manufactures automobiles which include the speedometers produced by Unit A of the X Inc. Now, the price paid by Unit B for the speedometers produced by Unit A is the transfer pricing, and the method is known as Transfer Price.
Transfer pricing can be defined as the value which is attached to the goods or services transferred between related parties. In other words, transfer pricing is the price which is paid for goods or services transferred from one unit of an organization to its other units situated in different countries.Meaning of Transfer Pricing
- It relates to determination of correct Market Price i.e. Arm Length Price
- Any income from domestic transaction shall be computed as per Arm Length Price.
- Any allowance for expenditure/interest or allocation of cost or expense or income in relation to specified domestic transaction shall be computed as per ALP.
- But if provisions of TP has the effect of reducing the income chargeable to tax or increasing the loss to the assesse to whom TP applies, provisions of TP shall not apply.
Methods of Transfer Pricing
Meaning of Associated Enterprises – Sec 92 A
- If one enterprise holds, directly or indirectly, shares carrying not less than 26% of voting power in other enterprise
- Any other person holding directly or indirectly, shares carrying not less than 26% of voting power of each of such enterprise.
- A loan given by one enterprise to the other constitutes not less than 51% of the Book Value of the total assets of the other enterprise.
- One enterprise guarantees not less than 10% of the total borrowings of the other enterprise.
- More than ½ of BOD or Members of Governing Body or 1 or more Executive Director of one enterprise is appointed by other enterprise.
- More than ½ of BOD or Members of Governing Board or 1 or more Executive Director of each of the two enterprise is appointed by other person.
- The business of one enterprise is wholly dependent on the use of know how, patent, technical knowhow of the other enterprise which have exclusive rights.
- 90% or more of the raw material/consumables required for manufacture/processing of goods is supplie by the other enterprise.
- Goods manufactured by one enterprise is sold to other enterprise and the price and other conditions are influenced by such other enterprise.
Meaning of Specified Domestic Transaction – Sec 92 BA
- Payment made to Domestic Related Parties for Expenditure i.e 40A(2) Payment.
- Transaction referred in Sec 80A.
Compliance
- Obtain a report under Form 3CEB from a Chartered Accountant and file it before tax authorities within due date of filing of return of income.
- Due date for filing tax return would be 30th November for the assessee on whom transfer pricing provisions are applicable
- Assessee must submit the transfer pricing document to the tax authorities, within 30 days of the receipt of notice from the department.
Penalties for Non Compliance
| Under Sec 271 AA |
| 2% of the value of specified domestic transaction |
| Under Sec 271 BA | For failure to furnish report from CA | Rs. 1 lakh |
| Under Sec 271 G | For Failure to furnish information/document called by tax authorities | 2% of the value of specified domestic transaction |
TRANSFER PRICING Documentation
- To be preserved for 8 years from end of relevant Assessment Year.
- • Documents related to name of the associated enterprise, nature of the relationship have also to be kept.
Accountant’s Report – Sec 92 E
- Every assessee who has entered into specified domestic 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.
- Aggregate value of Specified domestic transaction should not be less than Rs. 20 crore.