FAQ’s of Transfer Pricing

By | October 29, 2014
Transfer Pricing FAQ’s

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?’
According to sections 92, 92A, 92B, 92C, 92D, 92E and 92F, a company can be termed as an 
associated enterprise with respect to the other enterprise, under the following conditions:
– 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.
– 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 non-resident 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 different Methods to calculate the arm’s length price?
The various Methods to calculate the arm’s length price with respect to an international transaction 
are as under :
– Transactional net margin method (TNMM)
– Resale price method (RPM )
– Comparable uncontrolled price method (CUP)
– Cost plus method (CPM )
– Profit Split Method (PSM) ( PSM )
– Other Method as prescribed by the Board (CBDT). So far, no method is prescribed by the 
Board.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.
– 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.
– 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.
– 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.
– 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.
– 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.
– 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.
– 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.
– The details of the analysis conducted in order to assess the impact of the uncontrolled 
transaction on the international transaction concerned.
– 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. 30th September ( of every year) ) prescribed by the authority, furnishing all the 
required details .When is the Transfer Pricing Documentation to be prepared and what is the quantum limit for 
the international transactions ?
Normaly, the Transfer pricing documentation is to be prepared irrespective of the quantum limit of 
the international transactions. But the threshold limit for the international transactions is Rs.1 Cr for 
the Assessing Offcers for prearation of the TP study. For the TPOs, it is Rs.15 Cr of international 
transactions for preparation of the TP study.
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.
How to fix or maintain the Arm’s Length Standard as per Indian conditions ?
T P India will always predict the unpredictable tax risk in India particularly in respect of International 
Transfer Pricing matters. To maintain the Arm’s length standard in a systematic manner, you can 
always consult the T P India and avoid huge tax burdens / huge adjustments.
What is the standard search criteria for the uncontrolled comparables in the Public data 
bases ?
There is no standard search criteria for the uncontrolled comparables in any of the public data bases 
and the same is not prescribed in the Income-tax Act or in the Income-tax Rules.
How to prepare calculations on working capital adjustments, risk adjustments, adjustments 
on infrastructure cost, adjustments on depreciation cost , adjustments on intangibles, 
adjustments on salary cost or employee cost etc. ?
In respect of the above adjustments, a separate forumula for each type of adjustment has been 
prepared by T P India according to OECD guidelines and you can obtain from us by giving the 
required details by you.
Is there any online preparation of T.P. documentation / TP study in T P India Services ?
Yes. You can obtain online preparation of T.P. documentation / T.P.study through us in a very 
effective manner. One can believe that “ transfer pricing is not an exact science “ It is a subjective 
analysis based on economic principles.

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