Transfer Pricing Norms in India. Interest Free Loan to Wholly Owned Foriegn Subsidiary would attract this Laws of Transfer Pricing.

TRANSFER PRICING NORMS IN INDIA

 

Most likely transactions under the scanner of the transfer pricing authorities would be:

a. Interest Free Loans to group companies;

b. Granting of Corporate Guarantees / Performance Guarantees by Parent Company to its

subsidiaries;

c. Intra-group purchase / sell / service transactions;

d. Payment made to key personnel of the assessee, e.g. transactions with the directors /

CFO / CEO, etc.;

e. Payment made to key personnel of the group companies;

f. Payment made to relatives of key personnel of the assessee / group companies.

there are

5 methods by which the ALP is determined,

1. The Comparable Uncontrolled Method(CUP),
2. Resale Price Method (RPM),
3. Cost Plus Method (CPM),
4. Profit Split Method(PSM) and
5. the Transactional Net Margin Method (TNMM) (S.92C).

The Act provides

for the determination of ALP by Assessing Officer or Transfer Pricing Officer (TPO)

in case of trade of value INR 150 Million or more.

When do the transfer pricing rules affect to a business?

When two or more associated enterprises companies enter into a joint contract during an global transaction in order to allocate a particular cost incurred in relation with a profit, service or facility presented by any one or all of the companies, such a cost shall be calculated taking into account the arm’s length price of the particular assistance, service, or facility, as applicable.

When can a company called ‘associated enterprises?’

# If the particular company is involved directly or indirectly or with the help of one or more intermediaries in the management, control, or the capital of the other company.

# If any person/persons of the respective company who is/are involved directly or indirectly or with the help of one or more intermediaries in the management, control, or the capital of one company is/are involved directly or indirectly or with the help of one or more intermediaries in the management, control, or the capital of the other company.

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# A minimum of 26% share holding in any of the enterprises is required. One enterprise shall be resident and another entity shall be non-resident normally.

What is meant by ‘International Transaction’ with regard to Transfer Pricing?

An international Transaction is defined as any transaction between two or more associated companies situated in different countries in terms of a property that is tangible or intangible, a service offered by the company, or any form of lending of money, etc. It is compulsory that at least one of the participants involved

in the transaction is a non-resident of India. However, a transaction that has been carried out by two nonresident Indians, where one of them possesses a permanent setup in India and whose income is taxable from India, such a type of transaction is also considered as ‘International Transaction.’

What are the documents required to be maintained by a company while executing an international transaction?

The following documents have to be maintained when a company is involved in an international transaction.

1.      The details of the ownership of the person with respect to the company. These include the ownership structure, the details of the shares, and information on ownerships held by any other company on it.

2.      A detailed profile of the foreign group to which the assessed company is associated with for the international transactions. The details such as name, address, country where tax returns are filed, and the legal status, etc., have to be furnished about the multinational group.

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3.      A detailed description of the business activities of both the assessed person and the associated group of companies with whom the former has been involved in international transaction.

4.      The details of the international transaction, such as the nature of the transaction, details of the property or services transferred, the terms contained in the transaction, and the amount and value of each transaction.

5.      The details of the functions carried out by such a transaction, the details of the risks involved and the value of the assets used or to be used by the assessed or the associated company that is involved in such a transaction.

6.      The details of the records collected for the entire business or a particular division of the business during the period of the company’s business activity in which the foreign transaction has been involved. These include reports such as the estimates made on various market trends, forecasts about the market, budget analysis or any other such finance-related reports prepared by the company.

7.      The details of the uncontrolled transactions, if any, that has taken place with a third party during the period of the international transaction. The nature and the terms and conditions of such transaction have to be mentioned as they play an important role in deciding the value of the international transaction.

8.      The details of the analysis conducted in order to assess the impact of the uncontrolled transaction on the international transaction concerned.

9.      The details of the various methods considered and the most appropriate method adopted in deciding the arm’s length price with respect to an international transaction. The details should also include the details on why the particular method was adopted and how it was implemented successfully in order to decide the arm’s length price and why other methods are rejected / not suitable to the entity, have to be observed.

Who is the authorized person to furnish the report under section 92E of the Transfer Pricing Regulation Act in India ?

Any person who has involved in an international transaction in the previous year shall submit the report in Form 3CEB through a Chartered Accountant, duly verified and certified by him, on or before the date ( i.e. 30^th November of every year) ) prescribed by the authority, furnishing all the required details Though the regulations recommend contemporaneous maintenance of documentation, it is also prescribed that the documentation should be maintained latest by 30th November following the financial year in case of companies; 30th September for persons (other than corporates) whose accounts are required to be audited under Income-tax Act (Tax Audit) or any other Act and 31st July following the financial year in other cases.
The specified information and documents are required to be maintained for a period of eight years from the end of the relevant assessment year.

When is the Transfer Pricing Documentation to be prepared and what is the quantum limit for the international transactions ?

The preparation of Transfer Pricing Documentation has to be completed and certified by the Chartered Accountant, at the time of filing of the return of income i.e. 30th September of every previous year. The quantum limit of international transactions is Rs.5 Crores. Even if below Rs. 5 Crores, the Transfer Pricing

Documentation has to be prepared and maintained in the company. ( Rule 10D(2) One Crore as per  ICAI GN)

What will happen if the Report in Form 3-CEB is not obtained, and Transfer pricing documentation is not prepared / maintained in the company ?

In respect of non-filing of Form No.3CEB, a penalty of Rs.1 lakh is leviable by the TPO concerned. In respect of non-maintenance/ non-preparation of the Transfer Pricing documentation , the company is liable to pay a penalty of 2% of the total international transaction value. In respect of non-filing of the T.P. documentation before the TPO concerned, the company is liable to pay another 2% of the total international transaction value.

 EXTRACTS OF ICAI GUIDENCE NOTE FOR TRANSFER PRICING-

1). The Chartered accountant should obtain from the assessee a letter of

appointment for conducting the examination as mentioned in

section 92E. It is advisable that such an appointment letter should

be signed by the person competent to sign the return of income in

terms of the provisions of section 140. The accountant should get

the statement of particulars, as required in the annexure to the

report, authenticated by the assessee before he proceeds to

verify the same. The accountant is required to submit his report

to the person appointing him viz. the assessee.

2). The appointment of the accountant in the case of a company

need not be made at the general meeting of the members. It can

be made by the Board of Directors or even by any officer, if so

authorised by the Board in this behalf.

3). A loan advanced by one enterprise to the other enterprise

constitutes not less than fifty-one per cent of the book value

of the total assets of the other enterprise.

[Section 92A(2)(c)]

Where the lender enterprise’s loans to the borrower enterprise

constitute more than 51% of the ‘book value’ of the total assets of

the borrowing enterprise, then both the lender and the borrower

enterprises would be treated as ‘associated enterprises’.

4). One enterprise holds, directly or indirectly, shares carrying

not less than twenty-six per cent of the voting power in the

other enterprise.

[Section 92A(2)(a)]

Two enterprises shall be associated enterprises based on the

shareholding of one enterprise in the other if the investing

enterprise holds shares carrying not less than twenty-six per cent

of the voting power in the other enterprise. Holding for this

purpose includes indirect holding too.

5). The associated enterprises often enter into a transaction of

borrowing and lending. The rate of interest charged on these

borrowings will have a bearing on the profits or losses of the

associated enterprises and hence included as part of the

definition of ‘international transaction’.

6). Typical transactions in respect of which the comparable

uncontrolled price method may be adopted are:

(a) Transfer of goods;

(b) Provision of services;

(c) Intangibles;

(d) Interest on loans.

CONCLUSION:

Transfer Pricing matter is a serious issue for a country many of the company is getting benefit of it and saving there tax expenses due to which tax revenues of country is going down. Indian Income Tax law wake up so late in April 2001 to abolish this kind of practice, but still we need more improvement in comparison to other Country Transfer Pricing Laws. 

In Short i would like to attract your attention towards one thing that if a Indian Company granted a interest free loan to its wholly owned foreign subsidiary than it would attract provision of Transfer Pricing in India unless and otherwise it is made due to commercial expediency.

Case Law in Favour of above- http://taxguru.in/income-tax-case-laws/interest-free-loan-subject-arms-length-test-irrespective-commercial-expediency.html