When it comes to transfer pricing most of the corporates get confused and have a hard time understanding its requirement and methods of transfer pricing in India. Honestly, transfer pricing is not that of a big deal as it seems to be. Here in this blog, I have answered the 5 basic questions to understand easily about Transfer Pricing in India.
1. What is Transfer Pricing?
In taxation and accounting, transfer pricing refers to the rules and methods for pricing transactions within and between enterprises under common ownership or control. Because of the potential for cross-border controlled transactions to distort taxable income, tax authorities in many countries can adjust intragroup transfer prices that differ from what would have been charged by unrelated enterprises dealing at arm’s length.
Transfer pricing is the setting of the price for the goods and services sold between the related entities within an enterprise. For example, if a subsidiary company sells goods or services to its parent company, the cost of those goods and services will be paid to the subsidiary company will be Transfer Pricing.
2. Who requires transfer pricing?
Transfer pricing needs to be set up between two related entities. Such as wholly-owned subsidiary and the parent company or Sister companies or in between companies who have the same personals as directors or shareholders and transacting with each other.
3. What is the transfer pricing setup/agreement? Why is it required?
A transfer pricing agreement is a signed contract between two or more associated enterprises. Such a contract governs the terms and conditions of controlled transactions, such as the sale of goods or rendering of services from one associated enterprise to another associated enterprise.
Transfer pricing documentation and transfer pricing policies lay down the appropriate transfer pricing arrangements. These agreements help to justify that the transactions are taking place at arm’s length price and are also usually required for submitting with revenue authorities.
4. How is Transfer Pricing beneficial?
Transfer pricing is required for the international transaction between related companies in different countries as well as domestic transactions for related party transactions in the same country.
The key benefits behind having transfer pricing are:
• Generating separate profit for each of the entity and enabling performance evaluation of each entity separately.
• Transfer prices would affect not just the reported profits of every entity, but would also affect the allocation of a company’s resources (Cost incurred by one center will be considered as the resources utilized by them).
• From the perspective of revenue authorities transfer pricing help determined if transactions between related parties are arm length transactions or not and hence there will less scope of tax evasion by charging at a differential to adjust profits in different countries etc.
5. What is Transfer Pricing Audit?
All financial gain acquired by the corporate by means that of any related party transaction shall be calculated at arm’s length value. There are numerous ways to calculate the arm’s length value, depending on the character and kind of the transaction, the character of the group or the association involved, or any other features of the transactions involved. These methods are introduced by the Central Board of Direct Taxes. A number of them embrace the resale price technique, cost and technique, comparable uncontrolled price technique, and transactional net margin method.
If there are 2 or more acceptable costs assumed for a certain transaction, the arm’s length value is going to be calculated as the average of the prices.
At the end of a fiscal year, the person or group concerned during a related party transaction ought to submit the report of it in form 3CEB with a certification from Chartered Accountant. This form has got to be filed before he files the income tax return of the same period.
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