TRANSFER PRICING APPLICABILITY

When a domestic or foreign transaction exceeds a certain deal value threshold, Indian transfer pricing law is applicable. The addition of Section(s) 92A-F and the pertinent Rule(s) 10A-E of the Income Tax Rules 1962 resulted in the introduction of transfer pricing.

It guarantees that the price of the transaction between “connected” parties is the same as it would be if it were taking place between unrelated parties.

In terms of transfer pricing, the following sections of the Income Tax Act of 1961 apply to international transactions.

  • Section 92 of the Income Tax Act, 1961- Section 92 of the Income Tax Act, 1961 – Computation of income from international transactions having regarded to arm’s length price.

According to this section, any international or specified domestic transaction between associated businesses that has been agreed upon mutually and carried out for the purpose of allocating or apportionment of any cost or expense incurred or to be incurred for a benefit, service, or facility utilised by one or more of the organisations must be contributed taking into account the arm’s length price of such benefit, service, or facility.

  • Section 92B of the Income Tax Act, 1961- Section 92B of the Income Tax Act, 1961 – Meaning of international transaction which takes part in the administration, control, or capital of the other firm either directly, indirectly, or through one or more enterprises.

The same individuals who engage directly, indirectly, or via many intermediaries in the control, management, or capital of one organisation are also involved directly, indirectly, or through multiple intermediaries in the control, management, or capital of the other.

  • Section 92A of the Income Tax Act, 1961- Section 92A of the Income Tax Act, 1961 – Meaning of Associated Enterprises. For the purpose of Sections 92, 2B, 92C, 92D, 92E, and 92F the term associated enterprises in relation to another enterprise shall mean, an enterprise-

It is one that takes part in the administration, control, or capital of the other firm either directly, indirectly, or through one or more enterprises.

The same individuals who engage directly, indirectly, or via many intermediaries in the control, management, or capital of one organisation are also involved directly, indirectly, or through multiple intermediaries in the control, management, or capital of the other.

For the purpose of sub-section (1), two enterprises will be deemed to be associated enterprises if any time during the previous year at any time-

  • A direct or indirect ownership stake in another company that carries at least 26% of the voting power is held by one company.
  • Not less than 26% of the voting power in each of these businesses is held directly or indirectly by any person or business.
  • Any loan made from one business to another must equal at least 51% of the other business’s total assets as measured by book value.
  • One company’s guarantees must equal at least 10% of the total borrowings of the other company.
  • The other business appoints more than half of the board of directors, governing board, executive members, and directors.
  • One enterprise is dependent on another in terms of know-how, patents, trademarks, rights, and any other business or commercial rights, as well as any data, documentation, drawings, or specifications relating to any such patent, invention, model, or design for the manufacture or processing of goods that the other business holds the rights or patents to.
  • 90% or more of the raw materials or consumables are supplied by the other enterprise or by people it designates, and these other enterprises have an impact on the prices and other supply-related conditions.
  • The goods or items needed by one enterprise are provided by another business, and these other businesses have an impact on the prices and various supply-related conditions.
  • When one business is run by one person and both businesses are jointly controlled by that person or a member of his family.
  • In cases where one enterprise is held by an undivided Hindu family, the other business is either controlled by a member of that Hindu undivided family, by a relative of that member, or by both of them.
  • When one enterprise is a firm, association, or other group of people, the other business must own at least a 10% stake in that corporation, association or other group of people.
  • There is any relationship of mutual interest that may be required between the two businesses.

 

  • Section 92E – Audit Under Transfer Pricing

Persons engaging in a specified domestic transaction or an international transaction are required to provide a report from an accountant. Any person engaging in an international transaction or a specified domestic transaction in the prior year shall acquire, before the stipulated date, a report from an accountant in the required form, duly signed and verified by the accountant. Both specific local transactions and international transactions are subject to the audit. Then one must submit Form 3CEB.

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