Transfer Pricing – Advanced Tax Laws and Practice Important Questions
Question 1.
Zonik Inc of Canada holds 35% shares of Gama India Ltd. imports 2000 units of product X from Zonik Inc Canada at a price of ₹ 1,500 per unit and these are sold to Sunil Regency Ltd. at a price of ₹ 1,700 per unit. Gama India Ltd. has bought similar products from Ronak India Ltd. and sold them to Vijay Ltd. at a gross profit of 14% on sales. Zonik Inc Canada offers a quantity discount of ₹ 15 per unit whereas Ronak India Ltd. does not offer such a quantity discount. Gama India Ltd. incurred freight of ₹ 10 per unit and customs duty of ₹ 30 per unit in case of purchases made from Zonik Inc Canada.
On the basis of these facts explain the method which would be applicable for the determination of Arm’s Length Price (ALP) under Income-tax Act, 1961.
Determine the Arm’s Length Price on the basis of the method as found to be applicable and also determine the effect on the net Profit/Income of Gama India Ltd. (assuming that there is no advance pricing agreement) in the scenario discussed above.
Answer:
Determination of Arm’s Length Price on basis of Resale Price Method and its effect on the income of Gama India Ltd.
| Particulars | Amount (₹) |
| Resale Price of goods purchased from Zonik Inc. Canada (per unit) | 1,700 |
| Less-. Normal Gross Profit Margin @ 14% on? 1,700 per unit | (238) |
| Less: Expenses connected with purchases (Freight and customs duty ie. ₹ 10 + ₹ 30) | (40) |
| Less: Quantity discount allowed by Zonik Inc. Canada | (15) |
| Arm’s Length Price per unit | 1,407 |
| The price paid to Zonik Inc. Canada per unit | 1,500 |
| Excess price paid per unit (₹ 1,500 – ₹ 1,407) | 93 |
| Increase in income of Gamma Ltd. (₹ 93 × 2,000 units) | 1,86,000 |
Question 2.
State with reasons, whether Jackson LLC, (incorporated in Japan) and Vijayshree Ltd. a domestic company, are/can be deemed to be associated enterprises for the transfer pricing regulations in the following independent situations:
(a) Jackson LLC. has advanced a loan of ₹55 crores to Vijayshree Ltd. on 12th January 2019. The total book value of assets of Vijayshree Ltd. is ₹100 crores. The market value of the assets, however, is ₹140 crores. Vijayshree Ltd. repaid ₹10 crores before 31st March 2019.
(b) Total value of raw materials and consumables of Vijayshree Ltd. is ₹800 crores. Of this, Jackson LLC supplies to the tune of ₹740 crores, at prices mutually agreed upon once in six months and depending upon the market conditions.
Answer:
(a) Jackson LLC (a foreign company, has an advanced loan of ₹55 crores to Vijayshree Ltd., a domestic company, which amounts to 55% of the book value of assets of Vijayshree Ltd. Since the loan advanced by Jackson LLC is not less than 51 % of the book value of assets of Vijayshree Ltd., Jackson LLC, and Vijayshree Ltd. are deemed to be associated enterprises for the purpose of transfer pricing regulations. The deeming provision would be attractive even if there is a repayment of loan during the same previous year which brings down its percentage below 51%.
(b) The Jackson LLC supplies 92.50% (₹740 crore/₹800 crores × 100) of the raw material and consumables required by Vijayshree Ltd. which is more than the specified threshold limit of 90%, however, Jackson LLC and Vijayshree Limited are not deemed to be associated enter¬prises since the price of supply is not influenced by Jackson LLC but is mutually agreed upon once in six months depending upon prevailing market conditions.
Question 3.
A Ltd., a US company has a subsidiary B Ltd. in India. An Ltd. sells Laptops to B Ltd. for resale in India. A Ltd. also sells laptops to C Ltd., another reseller. It sells 40,000 Laptops to B Ltd. at ₹ 10,000 per unit. The price fixed for C Ltd. is ₹ 9,000 per unit. The warranty in case of sale of laptops by B Ltd. is provided by B Ltd. However, for laptops sold by C Ltd., A Ltd. is responsible for providing a service warranty for 3 months. Both A Ltd. and B Ltd. offer an extended warranty at a standard rate of ₹ 1,000 per annum. On the basis of these facts explain the method which can be applied for the determination of arm’s length price. Also, determine the effect on the net profit/income of B Ltd. (Assuming that C Ltd. has not entered into an advance pricing agreement) in the scenario discussed above. Determine the arm’s length price also.
Answer:
A Ltd. the foreign company and B Ltd., the Indian Company are associated enterprises since A Ltd. is the holding company of B Ltd. A Ltd. sells laptops to B Ltd. for resale in India. A Ltd. also sells identical laptops to C Ltd., which is not an associated enterprise. The price charged by A Ltd. for similar products transferred in the comparable uncontrolled transactions is, therefore, identifiable. Therefore, the Comparable Uncontrolled Price (CUP) method for determining Arm’s Length Price (ALP) can be applied.
For the sale of laptops by C Ltd., A Ltd. is responsible for the warranty of 3 months. The price charged by A Ltd. from C Ltd. includes the charge for warranty for 3 months. Hence, Arm’s Length Price for laptops being sold by A Ltd. to B Ltd. and its effect on the total income of B Ltd. would be determined as follows:
| Particulars | Amount (₹) |
| Sale price charged by A Ltd. from C Ltd. | 9,000 |
| Less. Cost of warranty included in the price charged to C Ltd. (₹ 1,000 × 3/12) | (250) |
| Therefore, Arm’s Length Price (ALP) | 8,750 |
| Actual Price paid by B Ltd. to A Ltd. | 10,000 |
| Difference per unit | 1,250 |
| No. of units supplied by A Ltd. to B Ltd. | 40,000 |
| Addition required to be made in the computation of total income of B Ltd. (₹ 1,250 × 40,000 units) | 5,00,00,000 |
Notes:
- No deduction under chapter VI-A would be allowable in respect of the enhanced income of ₹ 5,00,00,000.
- Arm’s Length Price is to be adopted as adopting it would mean an increase in total income, (ie. if the purchase price for B Ltd. of ₹10,000 is replaced by ₹ 8,750, the purchase price would decrease by ₹ 1,250 per unit, and accordingly, income shall increase by ₹ 1,250 p.u. Hence adjustment for the same is required to the existing total income of B Ltd.)
Question 4.
ABC Ltd. Is a foreign subsidiary company of XYZ Ltd. sells refrigerators to ABC Ltd. at a price of 10,000 each for sale to Its dealers in Singapore. In other States, XYZ Ltd. is directly selling to their dealers at 12,000 with a warranty of one year ( ₹ 500 for each fridge). ABC Ltd. does not offer such a warranty. Quantity sold to ABC Ltd. Is 8,000 units and to dealers of XYZ Ltd. Is 3,000 units. Discuss the method to be applied to arrive at the arm’s length price and compute the ALP. How is the assessment of XYZ Ltd. going to be affected?
Answer:
ABC Ltd. and XYZ Ltd. are associated enterprises as ABC Ltd. is a subsidiary of XYZ Ltd. Comparable product (refrigerator) is sold to dealers (Uncompaiable transactions). Hence in given circumstances, the Comparable Uncontrolled Price (CUP) method for determining Arm’s Length price can be applied.
Arm’s Length Price and its effect on total Income can be determined as follows:
| Particulars | Amount (₹) |
| Sale price charged to dealers by XYZ Ltd. | 12,000 |
| Less Cost of warranty included in the price | (500) |
| Arm’s Length Price as per CUP method | 11,500 |
| Actual sale price of XYZ Ltd. to ABC Ltd. i.e. Transfer Price | 10,000 |
| Difference per unit | 1,500 |
| No. of units sold by XYZ Ltd. to ABC Ltd. | 8,000 |
| Addition required to be made in the computation of total income of XYZ Ltd. ( 1,500 per unit × 8,000 units) | 12,00,000 |
Notes:
1. No deduction under Chapter VI-A would be allowable in respect of the enhanced income of ₹ 12,00,000.
2. Arm’s Length Price is to be adopted as adopting it would mean an increase in total income. (Le. if the sale price for XYZ Ltd. of ₹ 10,000 is replaced by ₹ 11,500, the sale price would increase by ₹ 1,500 per unit, and accordingly, income shall increase by ₹ 1,500 p.u. Hence adjustment for the same is required to the existing total income of XYZ Ltd.)
Question 5.
What do you mean by ‘transfer pricing’? Explain its importance and benefits.
Answer:
Transfer Price means the value or price at which transactions take place amongst related parties. It is the price at which an enterprise transfers physical goods and intangible property and provides services to associated enterprises. It is used in accounting for the transfer of goods or services from one responsibility center to another or from one company to another associated company. It affects the revenue of transferring division and the cost of receiving division. As a result, the profitability, return on investment and managerial performance evaluation of both divisions are also affected. The transfer pricing mechanism is very important and beneficial due to the following reasons:
1. Helpful Incorrect pricing of Products/Services: An effective transfer pricing mechanism helps an organization incorrectly pricing of its products and services. Since, in any organization, the transaction between associated parties occurs frequently, it is necessary to value all transactions correctly so that the final product/service may be priced correctly.
2. Helpful in Performance Evaluation: For the performance evaluation of any entity, it is necessary that all economic transactions arc accounted. Calculation of correct transfer price is necessary for accounting of inter-related transactions between two associated enterprises.
3. Helpful In complying with Statutory Legislation: Since related party transaction has a direct bearing on the profitability or cost of a company, the effective transfer pricing mechanism is very necessary. For example, if the related party transactions are measured at less value, one unit may incur loss and another unit may earn undue profit. This will result in income tax imbalances at both party’s end.
Transfer pricing is also helpful in checking the practice of tax evasion.
Question 6.
Discuss the meaning of ‘associated enterprises’ as defined wider section 92A.
Answer:
Associated Enterprises ‘AE’ has been defined in Section 92A of the Act. It prescribes that HSiated enterprises, in relation to another enterprise, means an enterprise
(i) which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; or
(ii) in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise.
The basic criterion to determine an AE is the participation in management, control or capital (ownership) of one enterprise by another enterprise whereby the participation may be direct or indirect or through one or more intermediaries, control may be direct or indirect.
Question 7.
Discuss the meaning of the term ‘deemed associated enterprise’ as defined under section 92A(2).
Answer:
Two enterprises shaLl he deemed to be associated enterprises if, at any time during the previous year, any of the conditions prescribed below are satis1ed. Section 92A(2) enlists 13 situations in which two enterprises shall be deemed to be associated enterprises as follows:
(i) one enterprise holds, directly or indirectly, shares carrying not less than twenty-six percent of the voting power in the other enterprise;
or
(ii) any person or enterprise holds, directly or indirectly, shares carrying not less than twenty-six percent o the voting power in each of such enterprises; or
(iii) a loan advanced by one enterprise to the other enterprise constitutes not less than fifty-one percent of the book value of the total assets of the other enterprise; or
(iv) one enterprise guarantees not less than ten percent of the total borrowings of the other enterprise; or
(v) more than half of the board of directors or members of the governing board, or one or more executive directors or executive members of the governing board of one enterprise, are appointed by the other enterprise; or
(vi) more than half of the directors or members of the governing board, or one or more of the executive directors or members of the governing board, of each of the two enterprises, are appointed by the same person or persons; or
(vii) the manufacture or processing of goods or articles or business carried out by one enterprise is wholly dependent on the use of know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights; or
(viii) ninety percent or more of the raw materials and consumables required for the manufacture or processing of goods or articles carried out by one enterprise, are supplied by the other enterprise, or by persons specified by the other enterprise, and the prices and other conditions relating to the supply are influenced by such other enterprise; or
(ix) the goods or articles manufactured or processed by one enterprise, are sold to the other enterprise or to persons specified by the other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprise; or
(x) where one enterprise is controlled by an individual, the other enterprise is also controlled by such individual or his relative or jointly by such individual and relative of such individual; or
(xi) where one enterprise is controlled by a Hindu undivided family, the other enterprise is controlled by a member of such Hindu undivided family or by a relative of a member of such Hindu undivided family or jointly by such member and his relative; or
(xii) where one enterprise is a firm, association of persons or body of individuals, the other enterprise holds not less than ten percent interest in such firm, an association of persons or body of individuals; or
(xiii) there exists between the two enterprises, any relationship of mutual interest, as may be prescribed.
Question 8.
Explain In the following cases whether the entitles shall be deemed to be ‘associated enterprisés’ under section 92A(2):
(i) Run India Ltd. has 12 directors on its Board, out of which 6 directors are appointed by Race Ltd.
(ii) Cane UK Ltd. possesses 25% of the voting power In Bane (India) Pvt. Ltd.
(iii) Joy India’s total borrowings amounted to ₹1000 crore, out of which a guarantee has been given by Chapple India Ltd., for borrowing of ₹ 400 crores.
Answer:
(i) Two enterprises shall be deemed to be Associated Enterprises if more than half of the directors or members of the board of one enterprise are appointed by another enterprise. In the given case: – Race Ltd. has appointed only half (6 out of 12) of the directors on the Board of Run India Ltd. Thus, both are not Associated Enterprises.
(ii) Two enterprises shall be deemed to be Associated Enterprises, if one enterprise holds, directly or indirectly, shares carrying not less than twenty-six percent of the voting power in the other enterprise. In the given case, the volume of voting power possessed by Cane UK Ltd. in Bane (India) Pvt. Ltd. is less than 26%, thus they are not Associated Enterprises.
(iii) Two enterprises shall be deemed to be Associated Enterprises if one enterprise guarantees not less than ten percent of the total borrowings of the other enterprise; Here, as the percentage of borrowings guaranteed by Chapple India Ltd. is 40% ( 400 crores out of 1000 crore) is more than the prescribed limit thus, Joy India Ltd. and Chapple India Ltd., are deemed to be Associated Enterprises.
Question 9.
Brat Inc. of U.K. holds 9% shares in Pit Ltd. of India. The total book value of Assets of Pit Ltd. is ₹ 57,25,000. Brat Inc. of U.K. has given a loan to Pit Ltd. of ₹ 30,00,000. Examine whether Brat Inc. and Pit Ltd. are associated enterprises.
Answer:
Two enterprises shall be deemed to be Associated Enterprises if a loan advanced by one enterprise to another constitutes not less than 5196 of the j book value of total assets of another enterprise.
In the given case: – Total book value of Pit Ltd. is ₹57,25,000 51% of ₹57,25,000 = ₹29,19,750
Loan given by the UK company = ₹ 30,00,000
Since, the loan amount is more than 51% of the book value of the total assets of the Indian company, Brat Inc. and Pit Ltd. are deemed to be Associated Enterprises.
Question 10.
Coco Ltd. supplied consumables and raw material of 300 crores to Parrot Ltd. Total consumables and raw materials consumed by Parrot Ltd. was 400 crores. Examine whether Coco Ltd. and Parrot Ltd. are associated enterprises.
Answer:
Two enterprises shall be deemed to be Associated Enterprises, if, 90% or more of the raw materials and consumables required for the manufacture or processing of goods or articles carried out by one enterprise, are supplied by the other enterprise, or by persons specified by the other enterprise, and the prices and other conditions relating to the supply are influenced by such other enterprise.
Here, Coco Ltd. supplied 75% of the raw material (i.e. raw material worth ₹ 300 crores out of ₹ 400 crores) to Parrot Ltd. Therefore, Coco Ltd. and Parrot Ltd. would not be associated enterprises.
Question 11.
What are the ‘specified domestic transactions’ which are subject to transfer pricing provisions?
Answer:
Section 92BA, has been added in Transfer Price Code by Finance Act, 2012 which provides that “Specified domestic transaction” in case of an assessee means any of the following transactions, not being an international transaction, namely:
(i) Any expenditure in respect of which payment has been made or is to be made to a person referred to in clause (b) of sub-section (2) of section 40A;
(ii) Any transaction referred to in section 80A;
(iii) Any transfer of goods or services referred to in sub-section (8) of section 80-IA;
(iv) Any business transacted between the assessee and another person as referred to in sub-section (10) of section 80-IA;
(v) Any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which provisions of sub-section (8) or sub-section (10) of section 80-IA are applicable; or
(vi) Any other transaction as may be prescribed, and where the aggregate of such transactions entered into by the assessee in the previous year exceeds a sum of twenty crore rupees. Thus, a specified domestic transaction means a transaction that is covered by criteria as given in section 92BA and the aggregate value of such transactions exceeds ₹ 20 crores in a year.
Question 12.
Discuss the factors to be considered by the Assessing Officer while selecting the appropriate transfer pricing method.
Answer:
Factors to be considered by the Assessing Officer while selecting an appropriate transfer pricing method are as under:
- The nature and class of the international or Specified Domestic Transaction.
- The class or classes of Associated Enterprises entering into the transactions and the functions performed by them taking into account assets employed or to be employed and risk assumed by each enterprise.
- The availability, coverage, and reliability of data are necessary for the application of the method.
- The degree of comparability existing between the International transaction or Specified Domestic Transaction and the uncontrolled transaction, and between the enterprises entering into such transaction.
- The extent to which reliable and accurate adjustments can be made to account for differences, if any, between the International or Specified Domestic Transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions.
- The nature, extent, and reliability of assumptions are required to be made in the application of the method.
Question 13.
Explain the consequences that would follow if the Assessing Officer makes an adjustment to the Arm’s Length Price (ALP) in International transactions of the assessee resulting In an Increase In total income. What are the remedies available to an assessee to dispute such adjustment made by the AO?
Answer:
In case the Assessing Officer makes an adjustment to Arm‘s Length Price ALP’ in an international transaction which results in an increase in the taxable income of the assessee, the following consequences shall follow:
- No deduction under section 1 OAA or Chapter VI-A of Income-tax Act, 1961 shall be allowed from the income so increased.
- No corresponding adjustment would be made to the total income of the other associated enterprise (in respect of payment made by the assessee from whom tax has been deducted or is deductible at source) on account of an increase in the total income of the assessee on the basis of the arm’s length price so recomputed.
The remedies available to the assessee to dispute such an adjustment are:
- In case the assessee is an eligible assessee under section 144C of Income-tax Act, 1961, he can file his objections to the variation made in the income within 30 days [of the receipt of draft order by him] to the Dispute Resolution Panel and Assessing Officer. Appeal against the order of the Dispute Resolution Panel can be made to the Income-tax Appellate Tribunal.
- In any other case, he can file an appeal under section 246A of Income-tax Act, 1961 to the Commissioner (Appeals) against the order of the Assessing Officer within 30 days of the date of service of notice of demand.
- The assessee can opt to file an application to the Commissioner of Income-tax for revision under section 264 of Income-tax Act, 1961 of the order of the Assessing Officer.
Question 14.
When can uncontrolled transactions be taken as compared to international transactions? Which data can be used for the comparability of an uncontrolled transaction with an international transaction?
Answer:
As per rule 10B(3). the uncontrolled transactions can be taken as compared to international transactions only if
(a) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or
(b) Reasonably accurate adjustments can be made to eliminate the material effects of such difference.
If the differences are material and the adjustments cannot be made, the transaction cannot be taken as a comparable transaction, then such transaction shall be ignored.
Further, as far as possible the internal comparable (Le. transactions entered into by the associated enterprise with the unrelated party) should be selected as these will provide more reliable and accurate data as compared to external comparable data Le. (transaction with third parties).
As per rule IOB(4), the data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into.
However, data relating to a period not being more than 2 years prior to such a financial year may also be considered if such data reveals facts that could have an influence on the determination of transfer prices in relation to the transactions being compared.
Question 15.
(i) What Is the Role of Transfer Pricing Officer In the matter of reference made by the Assessing Officer u/s 92CA of the Income-tax Act, 1961?
(ii) is It possible for the Assessing Officer to pass the assessment order without considering the Arm’sLength Price determined by the Transfer Pricing Officer?
Answer:
(i) As per the provision of section 92CA of the Income-tax Act, 1961, where a reference is made by the Assessing Officer, the role of Transfer Pricing Officer is detailed as below:
- Transfer Pricing Officer shall serve a notice to the Assessee requiring him to produce the evidence in support of computation made by him in respect of Arm’s Length Price in relation to an International Transaction or specified domestic transaction.
- Transfer Pricing Officer after considering the evidence, information or documents as produced by Assessee and after considering such evidence as he may require on any specified points and after taking account all relevant materials which he has gathered, shall, by order in writing, determine the arm’s length price in relation to the international transaction or specified domestic transaction and send a copy of his order to the Assessing Officer for computation of total income of the assessee and also to the Assessee.
- With a view to rectifying any mistake apparent from the record, the Transfer Pricing Officer may amend any order passed by him and in such an event send a copy of the amended order to the Assessing Officer for re-assessment.
(ii) No, it is not possible for the Assessing Officer to pass the assessment order without considering the Arm’s Length Price determined by the Transfer Pricing Officer. As per Section 92(CA)(4), on receipt of the order from the Transfer Pricing Officer, the Assessing Officer shall proceed to compute the total income of the assessee in conformity with the arm’s length price as determined by the Transfer Pricing Officer.
Question 16.
What is the Advance Pricing Agreement (APA) under section 92CC of the Income-tax Act, 1961? Discuss and explain the validity and the binding nature of APA.
Answer:
Advance Pricing Agreement (APA) as per section 92CC is an agreement entered into between a taxpayer and a taxing authority (Board) on an appropriate transfer pricing methodology for fixing the arm’s length price ‘ALP’ for a set of transactions over a fixed period of time in future.
The Advance Pricing Agreement shall be valid for a period as specified in the Advance Pricing Agreement. However, this period will not be more than 5 consecutive previous years.
Advance Pricing Agreement shall be binding on:
(a) the person in whose case, and in respect of the transaction in relation to which, the agreement has been entered into; and
(b) on the Principal Commissioner or Commissioner, and the income-tax authorities subordinate to him, in respect of the said person and the said transaction.
However, the advance pricing agreement shall not be binding if there is a change in law or facts having bearing on the agreement so entered into.
Question 17.
Rule 10MA(2)(i) of the Income-tax Rules, 1962 postulates that the rollback provision in the context of transfer pricing shall apply in respect of an international transaction that is the same as the international transaction to which the agreement (other than the rollback provision) applies. What is the meaning of the word “same”? Also discuss whether this restriction also applies to the Functions, Assets, Risks (FAR) analysis.
Answer:
The International transaction for which a rollback provision is to be allowed should be the same as the one proposed to be undertaken in the future years and in respect of which the agreement has been reached. There cannot be a situation where rollback is finalized for a transaction that is not covered in the agreement for future years. The term “same international transaction” implies that the transaction in the rollback year has to be of the same nature and undertaken with the same associated enter-prise^), as proposed to be undertaken in the future years and in respect of which the APA has been reached.
In the context of FAR analysis, the restriction would operate to ensure that rollback provisions would apply only if the FAR analysis of the rollback year does not differ materially from the FAR validated for the purpose of reaching an agreement in respect of international transactions to be undertaken in the future years for which the agreement applies.
The word “materially” is generally being defined in the Advance Pricing Agreements being entered into by CBDT. According to this definition, the word “materially” will be interpreted consistently with its ordinary definition and in a manner that a material change of facts and circumstances would be understood as a change that could reasonably have resulted in an agreement with significantly different terms and conditions.
Question 18.
Bharani Exports Ltd. (BEL), has an SEZ unit in the 8th year of its operation. 90% of its export sales are to Lovely LLC of the USA, which has guaranteed the loan of ₹ 100 crores taken by BEL. Export sales turnover for the year is ₹300 crore. There are no DTA sales. The Assessing Officer, after examination of the records, concluded that the assessee BEL had failed to maintain proper records of the international transactions, computed the I ALP, and made an addition of ₹32 lakhs to the income returned. He also j proposes to levy the penalty. The assessee seeks your advice on the proposed action of the AO. Advise suitably.
Can the assessee claim deduction under section 10AA in respect of the addition of ₹32 lakhs made on account of transfer pricing adjustments? BEL has not entered into an Advance Pricing Agreement (APA).
Answer.
The action of the Assessing Officer in making an addition to the declared income and issuing show-cause notice for levy of various penalties is correct since BEL had committed various defaults, as briefed hereunder, in respect of which penalty, is imposable.
- Failure to report any international transaction or any transaction, deemed to be an international transaction or any specified domestic transaction, to which the provision of Chapter-X applies would attract penalty @ 200% of the amount of tax payable since it is a case of misreporting of income referred under section 270A(9) read with section 270A(8).
- Failure to maintain required records as required under section 92D in relation to the international transactions shall be subject to penalty u/s 271AA @ 2% of the value of each international transaction.
- Failure to furnish a report from an accountant as required under section 92E makes it liable for penalty under section 271BA of ₹ 1 Lakh. The Assessing Officer shall give an opportunity of being heard to the assessee with a notice as to why the arm’s length price should not be determined on the basis of material or information or documents in the possession of the Assessing Officer. The assessee cannot claim deduction u/s 1OAA in respect of the additions of ₹32 lakhs made the AO on account of transfer pricing adjustments.
Question 19.
Discuss in brief a few benefits derived from the Safe Harbour Rules, relating to the transfer pricing regulations.
Answer.
Benefits derived from Safe Harbour Rules are as under:
- Compliance Simplicity: Safe Harbour Rules tend to substitute requirements in place of existing regulations, thereby reducing compliance burden and associated costs for eligible taxpayers, who would otherwise be obligated to dedicate resources and time to collect, analyze and maintain extensive data to support their inter-company transactions.
- Certainty and Reduce litigation: Electing Safe Harbours may grant a greater sense of assurance to taxpayers regarding the acceptability of their transfer price by the authorities without onerous audits. This conserves administrative and monetary resources for both the taxpayer and tax administration.
- AdminIstrative Simplicity: Since Tax administration would be required to carry out oni a minimal examination in respect of taxpayers opting for safe harbors; they can channelize their efforts to examine more complex and high-risk transactions and high-risk transactions and taxpayers.
Transfer Pricing Notes
- Concept of “Transfer Price” and “Arm’s Length Price (ALP)”
- Meaning of “Associated Enterprises”
- Meaning of “International Transaction”
- Transfer Pricing: applicability to domestic transactions – in case of Specified Domestic Transactions (SDT) where the aggregate of such transactions entered into by the assessee in the previous year exceeds ₹ 20 crores.
- Methods of computing Transfer Price/Arm’s Length Price:
- Comparable Uncontrolled Price (CUP) Method
- Resale Price Method
- Cost Plus Method
- Profit Split Method
- Transaction Net Margin Method (TNMM)
- Criteria for selection of most appropriate transfer pricing method
- Reference to Transfer Pricing Officer (TPO)
- Concept of “Advance Pricing Agreement” (APA) and its basic provisions.
- “Documentation” for Transfer Pricing
- Concept of “Safe Harbour Rules” and its benefits
- Various Penalties for contravention of transfer pricing provisions.