Transfer pricing means determination of fair market value i.e. arm's length price. If two or more associated enterprises enter into an agreement for allocation of expenses with respect to the service provided then the determination of expenses shall be on the basis of arms length price of service providers.
ASSOSIATED ENTERPRISE:
Two enterprises shall be deemed to be associated enterprise:
-If the particular company is involved directly or indirectly in the management, control, or the capital of the other company.
-If any person of the respective company who is involved directly or indirectly in the management, control, or the capital of one company is involved directly or indirectly in the management, control, or the capital of the other company.
Apart from the above there are many provision defined under Section 92A of the Income-tax Act, 1961.
INTERNATIONAL TRANSACTION:
The term international transaction includes:
a) Transfer or use of tangible and intangible property.
b) Provision of services.
c) Financing includes lending, borrowing or guarantee and other transaction having a bearing on profit income losses of such enterprises.
d) Transaction arrived from business restructuring.
As per section 92B transaction is an international transaction if it is done between two associate enterprises and at least one of them must be nonresident. But sometimes transaction between enterprises and an unrelated person shall be deemed to be transaction between associate enterprise if there is an existence of prior agreement and the term of transaction determined between such person and associates enterprises.
SPECIFIED DOMESTIC TRANSACTION:
The finance act 2012 came with further amendments which includes specified domestic transaction. According to section 92AB and sections 92, 92C, 92D and 92E, "specified domestic transaction" transaction not being an international transaction includes:
"The transaction entered into by the assessees in the previous year exceeds INR5crore."
The Finance Bill 2012 has cast Transfer pricing regulation net wider and deeper by substantially expanding the scope of transfer pricing services provisions by including domestic transactions for the first time. The following transactions will be included if their aggregate exceeds INR 50 million in an Financial Year
i) Any expenditure to which section 40A applies
ii) Any transaction referred in section 80A
iii) Any transaction with a person specified in 80-IA (10)
iv) Any transaction referred in Chapter VI-A, Section 10AA to which 80(10) or 80(18) applies
v) Any other transaction which may be prescribed
MAINTENANCE OF DOCUMENTS:
Every person enters into international transaction should have to maintain information and documents this is not applicable if international transaction does not exceeds 1crore.and require to kept for 8 years from the end of relevant assessment year.
The assessing officer may require furnishing the documents and information from NA. Then NA should have to furnish the documents within 30 days from the notice.
SAFE HARBOUR RULE:
Arms length price under sec. 92C to sec. 92CA shall be subjected to safe harbour rules in which income tax authorities shall accept the transfer price declared by the NA.
PENALTIES:
a) A Penalty of 2% of the value of international transaction may be imposed, if the taxpayer fails to maintain prescribed documents or information or; report any international transaction which is required to be reported, or; maintains or furnishes any incorrect information or documents.
b) If there is any disallowance made on the basis of arm's length price and penalty for concealment of income ranging from 100% to 300%of the amount of tax sought to be evaded.
c) If NA failed to furnish the reports to the income tax authorities within due date then the amount of penalties is INR 1 lacs (adjust exchange rates).
NOTE : Variation of 1% with arm's length price is permissible. More information at Accounting forte
By Shubham
Repost by Acarre Media Community
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