This document discusses transfer pricing regulations. It provides examples of how transfer prices between related parties can be manipulated to minimize tax incidence by shifting profits between jurisdictions with different tax rates. It outlines factors that influence transfer pricing and international and domestic regulations governing transfer pricing, including OECD guidelines and India's Income Tax Act. Key concepts covered include arm's length price determination methods like comparable uncontrolled price, resale price, cost plus, and profit split.

1. Transfer Pricing
Regulations

2. Impact of TP
S-I S-2 S-3 S-4 S-5
C Transfers to X 200 280 300 400 500
Cost to C 100 100 100 100 100
SP of X 300 300 300 300 300
Tax Rate for C
20%
Tax Rate for X
60%

3. S-1 S-2 S-3
C X Total C X Total C X Total
SP 200 300 500 280 300 580 300 300 600
Cost 100 200 300 100 280 380 100 300 400
PBT 100 100 200 180 20 200 200 0 200
Tax 20 60 80 36 12 48 40 0 40
PAT 80 40 120 144 8 152 160 0 160
S-4 S-5
C X Total C X Total
SP 400 300 700 500 300 800
Cost 100 400 500 100 500 600
PBT 300 -100 200 400 -200 200
Tax 60 60 80 80
PAT 240 240 320 320

4. In te rn a l
(W ith in th e c o u n try )
In te r C o m p a n y
R e v e n u e P ro fit
C a p ita l G a in
R o y a lty
In tra C o m p a n y
C o n tro l S y s te m
c o s t c e n tre s
re v e n u e c e n tre s
p ro fit/In v e s tm e n t c e n tre
In te r C o m a p n y
N o n -R e la te d :
P ro fit/D iv id e n d /R o y a lty
F o re x F lu c tu a tio n s
A c c o u n tin g
R e la te d
P ro fit/D iv id e n d /R o y a lty
T ra n s fe r P ric in g
F o re x /A c c o u n tin g
In tra C o m p a n y
C o n tro l S y s te m s
F o re x F lu c tu a tio n s
A c c o u n tin g
T ra n s fe r P ric in g
E x te rn a l
(o u ts id e th e c o u n try )
T ra n s a c tio n s

5. Transfer Price: What and Why?
• TP means the value or price at which transactions
take place amongst related parties.
• TP are the prices at which an enterprise transfers
physical goods and intangible property and
provides services to associated enterprises
• TP gain significance because these can be used by
the controlling party to their advantage to
minimise tax incidence.

6. Transfer Price: What and Why?
• Approximately 60% of the total transactions
across the world are between related parties.
• If the transactions are across different tax
jurisdictions, where tax rates are different,
shifting is beneficial.

7. Factors Affecting Transfer Pricing
• Internal factors: Performance Measurement
and Evaluation
• External Factors:
– Accounting Standard
– Income Tax
– Custom Duty
– Currency Fluctuations
– Risk of Expropriation

8. Transfer Price Regulations
International
• OECD formulated
“Guidelines on
transfer pricing”. They
serve as generally
accepted practices by
the tax authorities
India
• The Finance Act 2001
introduced the detailed
TPR w.e.f. 1st April
2001
• The Income Tax Act
• AS-18
• Other Relevant Acts

9. Accounting Standard 18
Requires disclosure of ‘any elements of the
related party transactions necessary for an
understanding of the financial statements’.

10. Related Parties
• Control by ownership
– 50% of the voting right
• Control over composition of board of directors
– Power to appoint or remove the directors
• Control of substantial interest
– 20% or more interest in the voting power

11. AS-18 and Transactions
• Purchase and sale of goods;
• Rendering or receiving services;
• Agency arrangements;
• Leasing arrangements;
• Transfer of research and development;
• Licence aggrements;
• Finance
• Guarantees and collaterals;
• Management contracts.

12. Income Tax Act and TP
• Finance Act 2001 substituted the old
section of 92 of the ITA by sections 92,92A
to 92 F.
• These sections are the backbone of Indian
TPR.
• These sections define the meaning of
related parties, international transactions,
pricing methodologies etc.

13. TPR: Some Important Concepts
• Income/Expenses/Cost arising from an
international transaction shall be computed
having regard to arm’s length price
(ALP).
• ALP provisions can be applied if it
leads to decrease in taxable income or
increase in losses.

14. Associate Enterprise: 92A
• Direct Control/Control through intermediary
• Holding 26% of voting power
• Advance of not less than 51% of the total assets of
borrowing company.
• Guarantees not less than 10% on behalf of
borrower
• Appointment of more than 50% of the BoD
• Dependence for 90% or more of the total raw
material or other consumables

15. International Transactions: 92B
• Transaction between two or more AE of
which either both or anyone is a non-resident.
• Transactions:
– Purchase/Sale/Lease
– Provision of service
– Lending or borrowing

16. Arm’s Length Price
• Price which two independent firms would
agree on.
• Price which is generally charged in a
transaction between persons other than
associated enterprises.

17. Arm’s Length Price: 92C
• Comparable uncontrolled price method
• Resale price method
• Cost plus method
• Profit split method

18. Comparable uncontrolled price
method
• CUP method compares the price transferred
in a controlled transaction to the price
charged in a comparable un-controlled
transaction.
• CUP method is the most direct and reliable
way to apply the arm’s length principle.

19. Resale price method
• The resale price method begins with the
price at which a product is resold to an
independent enterprise (IE)by an associate
enterprise.
– X sold to AE at Rs. 1000 (profit: 300)
– AE sold to an IE at Rs. 2000
• (profit of Rs. 500 for relevant IE)
– Arms length price = 2000 - 500 = 1500

20. Profit Split Method
• PSM is used when transactions are inter-related
and is not possible to evaluate
separately.
• PSM first identifies the profit to be split for
the AE. The profit so determined is split
between the AE on the basis of the
functions performed/assets/CE

21. Cost Plus Method
• In CP method, first the cost incurred is
determined. An appropriate cost plus mark-up
is then added to the cost to arrive at an
appropriate profit. The resultant figure is
the arm’s length price.

22. Some Transactions subject to ALP
• Purchase at little or no
cost.
• Payment for services
never rendered.
• Sales below MP/
Purchase above MP
• Interest free
borrowings
• Exchanging property
• Selling of real estate at
a price different from
MP
• Use of trade names or
patents at exorbitant
rates even after their
expiry.

23. Some Cases
• Kinetic Honda Motors
– Collaborator: Honda Motor Co. Ltd Japan and
their Subsidiary Honda Trading Corpn. Japan
• Hero Honda Motors Ltd.
– Parent: Honda Motor Co. Ltd Japan and their
Subsidiary Honda Trading Corpn. Japan

24. Some Cases
• Peico Electronics & Electricals Ltd.
– Parent: Phillips Netherlands and its subsidiaries
• Asea Brown Boveri
– Parent: ABB Switzerland and its subsidiaries
• Videocon Group
– Collaborators: Toshiba Co., Mitsubishi Co

25. ROS Sales/Asset ROI
Computers 4% 2% 4 4 16% 8%
Software 10% 10% 2 2 15% 20%
Books 4% 5% 3 2 10% 10%
Overall 6.1% 5.1% 2.4 2.6 14.40% 13.51%