When multinationals proceed through cross border transactions, tax authorities on both sides would like to make sure that they get their fair share of tax. Transfer Pricing regulations are only to achieve this goal. But does transfer pricing means pricing of goods? Well, here you need to have a clear understanding of Transfer Pricing. Hence, go through the article as we have mentioned everything you should know about Transfer Pricing and International taxation.
At the first place, let's talk about what is transfer pricing,
Transfer pricing means price charges for goods or services provided. However, under the tax, in common parlance, Transfer Pricing is considered as the value attached to goods or services when the transaction proceeds between two related/associate parties whether international or domestic.
Example: Suppose company A processes and produces apples. Company B acts as the distributor and seller of the same product. Company C owns both companies A and B. As company C owns both companies A & B, therefore, for the purpose of Transfer pricing provisions under Income Tax Act, 1961, Company A and B is considered as related/associate entities due to common control. So now, transactions of sales of apple to Company B by Company A shall be subject to transfer pricing provisions of Income Tax Act, 1961.
Indian Finance Ministry has implemented the Transfer Pricing provisions from the financial year 2001-02. The finance Act, 2001, was introduced to substitute section 92, along with section 92F and section 92A in the Income Tax act 1961. The purpose of the substitution was to offer a clear statutory framework that can give a fair and reasonable computation process with equitable profits and tax in India. The Central Board of Direct Taxes (CBDT) came out with the Transfer Pricing Rules (Rule 10A to Rule 10E) mentioning minute details in relation to Arm's length price, associated enterprise, and the documents requirements to indulge in international transactions.
Transfer pricing provisions are applicable to international and specific domestic transactions that take place between related/associate enterprises.
However, in this article, we will have a detailed discussion about international transactions only.
Business entities in India need to fulfill two conditions to apply transfer pricing provisions. To comply with the transfer pricing provisions, the first thing required is an international transaction. Secondly, the transaction must have to happen between two or more associated business enterprises where at least one party is a non-resident.
“International transaction” means a transaction between two or more associate enterprises, where either or both parties are non-resident.
Such transactions can be related to purchase, sales or lease of property, tangible or intangible assets, lending of money, provision of services or any other transaction. As said earlier, one of the parties involved in the transaction has to be a non-resident entering to one or more than one of the transactions mentioned below:
Managerial participation, ownership of one business entity by another is the two basic conditions of considering Associated Enterprises.
As per the definition mentioned in Section 92A(1) of the Income Tax Act, 1961, the participation of associated enterprises can be direct or indirect or through one or more than one intermediaries.
Section 92A(1) is further supplemented with 13 additional clauses that enlist different circumstances under which two business entities will be adjudged as Associated Enterprises.
As per section 92A, you must consider the following entities:
1. Where one party participates, directly or indirectly, in the management or control or capital of the other enterprise.
例：A社がB社を完全子会社として保有している場合。このとき、A社とB社は関連企業とみなされ、両者間の取引は移転価格税制の対象となります。または、
2. 経営、支配、または資本において共通の関与がある当事者間の場合。
例： A社とB社がC社の子会社である場合。両社は共通の支配下にあるため、A社とB社は関連企業とみなされます。または、
3. 一方の企業が、他方の企業の議決権の26%以上を直接的または間接的に保有している場合。または、
4. 議決権の26%超の株式保有を通じて共通の支配下にある企業間の場合。または、
5. 一方の企業が他方の企業に対し、その企業の総資産の帳簿価額の51%以上に相当する融資を行っている場合。または、
6. 一方の企業が他方の企業の総借入額の10%以上を保証している場合。または、
7. 一方の企業の取締役会または管理委員会の過半数、あるいは1名以上の業務執行取締役または業務執行委員が、他方の企業によって任命されている場合。
Furthermore,
8. 2つの企業のそれぞれの取締役会または管理委員会の過半数、あるいは1名以上の業務執行取締役または管理委員が、同一の人物または複数の人物によって任命されている場合。または、
9. 一方の企業が行う物品の製造・加工や事業が、他方の企業が所有するノウハウ、特許、著作権、商標、ライセンス等の使用に全面的に依存している場合。または、
10. 原材料および消耗品の90%以上を一方の企業が他方の企業、または他方の企業が指定する者から調達しており、かつ供給に関する価格やその他の条件が当該他方の企業の影響を受けている場合。または、
11. 一方の企業が製造した物品が他方の企業または他方の企業が指定する者に販売され、かつそれに関連する価格やその他の条件が当該他方の企業の影響を受けている場合。
Furthermore,
12. 個人またはその親族、あるいは当該個人と親族が共同で共通の支配を行っている企業間の場合。または、
13. ヒンドゥー教の未分割家族（HUF）、または当該家族の構成員、あるいは当該構成員とその親族が共同で共通の支配を行っている企業間の場合。または、
14. 一方の企業が会社（ファーム）、組合、または個人の集まりであり、他方の企業が当該会社、組合、または個人の集まりに対して10%以上の持分を保有している場合。または、
移転価格税制の適用範囲は広範です。規則に基づき、以下のケースにおいても取引を国際取引とみなす必要があります。
居住者である事業体が海外の非関連者に商品やサービスを提供し、かつ、その非関連者と関連企業との間に、製品価格に影響を及ぼし得る別途の合意が存在する場合。
非関連者間の取引は、市場価格に基づいて行われます。しかし、独立企業間原則（Arm’s Length Principle）に基づき、関連当事者間での取引においては、もし両者が関連していなかった場合に成立していたであろう価格と同等の価格でなければなりません。
独立企業間価格とは、関連企業間での取引において、独立企業間原則に従って決定される価格のことです。
According to the Organisation for Economic Co-operation and Development (OECD), the ALP can be defined as the price at which transactions between two entities other than Associated Enterprises are carried out in uncontrolled situations.
Depending on the type of transaction or class of transaction, the best possible method of calculating Arm's length price will be implemented. According to the provisions of section 92C, the Arm's length price in relation to an international transaction needs to determined through any of the following rules,
However, we have provided detailed information on methods of computation of ALP in a separate article. To read the same click here
As per the Transfer Pricing Regulations, detailed maintenance of documentation is required if the value of the international transaction with related parties exceeds Rs 10 million in a fiscal year. But there are absolute relaxation in the maintenance of documentation as well. Associated
The list includes,
Under the act of indulging in any international or specified domestic transaction, all the Indian taxpayers have a legal obligation to report compliance. Henceforth, a report from an authorized tax practitioner or Chartered Accountant in the prescribed format offering the details related to the transactions is essential. The accountant needs to clarify the below points:
However, the businesses need to furnish the report through form 3CEB for each financial year.
There are rigorous penal provisions because of non-compliance under the transfer pricing regulations. However, here in this table, we have mentioned all the details of the penalties for non-compliance with several provisions,
Associated Enterprises proceeding through an international transaction or cross border transactions have to ensure that all the transactions are maintained with Arm's Length Principle. Hence, if you fail to maintain proper documents, a heavy penalty will have to pay.
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