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Transfer Pricing in India

Introduction and Importance of Transfer Pricing in India

Setting Context:

Transfer pricing in India plays a pivotal role in the case of cross border transactions between related parties in determining on pricing arrangement of supply of goods or services between them. Only the pricing arrangement, not the non-pricing arrangement, between related parties needs to benchmark with Arm’s length Price under TP Regulation in India. TP provisions are Anti-Tax Avoidance, not the anti-tax evasive, therefore, TP adjustments are out of the preview of ‘Undisclosed Foreign Income’ under Black Money Act in India.

United Nations on Transfer Pricing:

As per United Nations Practice Manual on Transfer Pricing for Developing Countries (UNTP Manual) explains as under:

“The aim of non-arm’s length transfer pricing in such cases is usually to reduce an MNE’s worldwide taxes. This can be achieved by shifting profits from associated entities in higher tax countries to associated entities in relatively lower tax countries through either under-charging or over-charging the associated entity for intra-group trade. For example, if the parent company in a MNE group has a tax rate in the residence country of 30 per cent, and has a subsidiary resident in another country with a tax rate of 20 per cent, the parent may have an incentive to shift profits to its subsidiary to reduce its tax rate on these amounts from 30 per cent to 20 per cent. This may be achieved by the parent being over-charged for the acquisition of property and services from its subsidiary.”

Now when cross border transactions within Multinational Enterprises globally are rising exponentially due to monopolization of businesses in the hands of these MNEs and adoption of aggressive tax planning even after implementation of BEPS OECD Project. As per United Nations Practice Manual on Transfer Pricing Manual for Developing Countries (UNTP Manual) explains as under:

“A significant volume of global trade now-a-days consists of international transfers of goods and services, capital (such as money) and intangibles (such as intellectual property) within an MNE group; such transfers are called “intra-group transactions”. There is evidence that intra-group trade is growing steadily and arguably accounts for more than 30 per cent of all international transactions.” [Para 1.1.3 of the UNTP Manual]

Regulatory Framework:

In India TP regulations are incorporated in domestic tax laws as Special Anti-Avoidance Rules (SAAR) to deal with the use of arbitrary prices, but also conversion of returns on equity and investment to royalty and interest under Chapter-X: Special Provisions Relating to avoidance of Tax (Section-92 to Section-94B) under the Indian Income Tax Act.

The following provisions of the Act deal with transfer pricing in respect of international transactions:

Section Deals with
92 Computation of income from international transaction having regard to arm’s length price
92A Meaning of associated enterprise
92B Meaning of international transaction
92C Computation of arm’s length price
92CA Reference to Transfer Pricing Officer
92CB Power of Board to make safe harbour rules
92CC Advance Pricing Agreement
92CD Effect of advance pricing agreement
92CE Secondary adjustment in certain cases
92D Maintenance, keeping of information and documents by persons
92E Report from an accountant to be furnished by persons entering into international transaction or specified domestic transaction
92F Definitions of certain terms relevant to computation of arm’s length price, etc.
94A Special measures in respect of transactions with persons located in notified jurisdictional area
94B Limitation on interest deduction in certain cases
144C Reference to Dispute Resolution Panel
271AA Penalty for failure to keep and maintain information and documentation in respect of certain transactions
271BA Penalty for failure to furnish report under section 92E
271G Penalty for failure to furnish information or document under section 92D
286 Furnishing of report in respect of international group
271GB Penalty for failure to furnish report or for furnishing inaccurate report under section 286

Concluding Remarks:

Huge amount of litigations are involved in Transfer Pricing in India, in spite of the fact that some mechanism to reduce litigations is put in place like Safe Harbour Rule and Advance Pricing agreements. In addition to domestic tax laws, lot of support is being taking from Transfer pricing guidelines both by United Nation Transfer Pricing Manual and OECD Guidelines on Transfer Pricing for the purposes of resolving dispute of transfer pricing in India.

 

(Disclaimer: This content is meant for our clients or professional friends only for stimulating discussion on the subject matter not to frame any commercial opinion. All efforts are made to compile correctly with no guarantee of extreme accuracy)

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