TRANSFER PRICE AND TRANSFER PRICING NEW

Transfer Pricing Overview

• Transfer Price: The price at which goods and services are transferred between associated entities within a multinational enterprise (MNE).

• Transfer Pricing: Involves the strategic pricing of intercompany transactions to optimize tax liabilities by shifting profits from higher tax jurisdictions to lower ones.

Details of Transfer Pricing

• Reason for Manipulation: Companies often shift profits to minimize tax exposure.

  • Example: A parent company (X) in a high tax country (30%) sells goods or services for higher prices to its low tax subsidiary (Y) (20%) to reduce its taxable profit.

  • X purchases raw material from Y at Rs. 2500 per unit, while the same raw material is sold to unrelated parties at Rs. 2000 per unit.

Shifting Losses and Income Manipulation

• Transfer pricing can also be utilized to shift losses across jurisdictions to obtain tax benefits and manipulate income categories.

Definition of International Transaction (Sec. 92B)

• Scope: Refers to transactions between associated enterprises where at least one is a non-resident.

  • Includes sale/purchase of tangible/intangible property, services, loans, or any transactions affecting profits, losses, or assets.

  • Covers mutual agreements for cost allocation among associated enterprises.

Deemed International Transactions (Sec. 92B(2))

• Transactions with non-associated enterprises may be treated as international if they are influenced by an agreement with associated enterprises.

Definition of Associated Enterprise (Sec. 92A)

• Criteria: For enterprises to be considered associated:

  • Direct/indirect participation in management or control.

  • Common management/control by the same individuals.

Criteria for Deeming Association

• Enterprises may be deemed associated if:

  • 26% or more voting power is held directly/indirectly by one in the other.

  • One enterprise guarantees significant borrowings of the other.

  • Shared management control.

Categories of Influential Relationships

• Additional Conditions for Association:

  • Dependence on each other for goods, services, or intellectual property.

  • Relationships dictated by control and ownership arrangements.

Arm's Length Price (Sec. 92F(ii))

• Definition: The price applied in transactions between unrelated parties under comparable conditions.

Determination of ALP - Case Studies

• Iljin Auto motive Pvt. Ltd. v. Astt. CIT (2011): Highlights the importance of establishing a baseline price for transactions among related parties, compared to unrelated parties.

• Maruti Suzuki India Ltd. v. Addl. CIT (2010): Reinforces the arm's length principle, ensuring prices between related parties should match market rates.

Methods to Compute ALP

• Comparable Uncontrolled Price Method: Compares controlled transactions with similar transactions by unrelated enterprises.

• Resale Price Method: Used when the reseller adds little value before selling.

• Cost Price Method (CPM): Starts with the controlled transaction's cost plus a market-based markup.

• Profit Split Method (PSM): Divides profits based on contributions from each party.

• Transactional Net Margin Method (TNMM): Analyzes net margins from controlled transactions compared to a suitable base.

Case Example: LG Electronics India Pvt. Ltd.

• Context: The taxpayer must pay royalties for technical assistance to its foreign associated enterprise (AE) while promoting the AE's brand.

• Findings: TPO noted significant AMP expenses, comparable to other firms, resolved to adjust based on branding costs and revenue enhancement.

Bright Line Test Analysis

• Application: Used to assess marketing expenditures related to brand promotion; taxpayers argued its validity as it was not prescribed under regulations. This test benchmarks routine marketing expenses.

International Transactions and AMP Expenditure

• Taxpayers contended AMP expenses do not meet the criteria for international transactions under regulations since payments went to third parties, not AEs.

• Legal Interpretations: The ITAT concluded that brand-building services qualify as an international transaction under the definitions laid out in the regulations.

Notable Case: Sony Ericsson Mobile Communications India Pvt. Ltd vs. CIT

• Observations: The bright line test lacks statutory authority and flexible approaches vary by case, highlighting the need for accurate methods in tax interpretations.

Taxpayer Case: ITO v. Tianjin Tianshi India Pvt. Ltd.

• Details: The taxpayer engaged with a Chinese group, and decided on transfer pricing provisions involving their Indian operations and associated foreign enterprises.

• ITAT ruling emphasized that even domestic transactions could fall under international transfer pricing provisions if related to non-resident enterprises.