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Transfer Pricing

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
Tax Rate for X
Impact of TP
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-3 S-1 S-2
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
S-4 S-5
Revenue Profit
Capital Gain
Inter Company
Control System
cost centres
revenue centres
profit/Investment centre
Intra Company
(Within the country)
Forex Fluctuations
Transfer Pricing
Inter Comapny
Control Systems
Forex Fluctuations
Transfer Pricing
Intra Company
(outside the country)
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.
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.
Factors Affecting Transfer Pricing
Internal factors: Performance Measurement
and Evaluation
External Factors:
Accounting Standard
Income Tax
Custom Duty
Currency Fluctuations
Risk of Expropriation
Transfer Price Regulations
OECD formulated
Guidelines on
transfer pricing. They
serve as generally
accepted practices by
the tax authorities
The Finance Act 2001
introduced the detailed
TPR w.e.f. 1
The Income Tax Act
Other Relevant Acts

Accounting Standard 18
Requires disclosure of any elements of the
related party transactions necessary for an
understanding of the financial statements.
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
AS-18 and Transactions
Purchase and sale of goods;
Rendering or receiving services;
Agency arrangements;
Leasing arrangements;
Transfer of research and development;
Licence aggrements;
Guarantees and collaterals;
Management contracts.

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
These sections define the meaning of
related parties, international transactions,
pricing methodologies etc.

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

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
Appointment of more than 50% of the BoD
Dependence for 90% or more of the total raw
material or other consumables

International Transactions: 92B
Transaction between two or more AE of
which either both or anyone is a non-
Provision of service
Lending or borrowing
Arms Length Price
Price which two independent firms would
agree on.
Price which is generally charged in a
transaction between persons other than
associated enterprises.

Arms Length Price: 92C
Comparable uncontrolled price method
Resale price method
Cost plus method
Profit split method

Comparable uncontrolled price
CUP method compares the price transferred
in a controlled transaction to the price
charged in a comparable un-controlled
CUP method is the most direct and reliable
way to apply the arms length principle.
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
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
Profit Split Method
PSM is used when transactions are inter-
related and is not possible to evaluate
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
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
arms length price.
Some Transactions subject to ALP
Purchase at little or no
Payment for services
never rendered.
Sales below MP/
Purchase above MP
Interest free

Exchanging property
Selling of real estate at
a price different from
Use of trade names or
patents at exorbitant
rates even after their
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
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
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%
ROS Sales/Asset ROI