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DT > Transfer Pricing > Flashcards

Transfer Pricing Flashcards

1
Q

Associated Enterprise (92A)

A

Two or more enterprises are associated enterprises, if:
1. One enterprise holds 26% or more VP in other enterprise
2. Any person holds 26% or more VP in each of the two enterprises
3. Loan advanced by one enterprise constitutes 51% or more of Book Value of Total Assets of the other enterprise.
4. One enterprise guarantees 10% or more of the Total Borrowings of the other enterprise
5. One enterprise appoints more than half of the Board of Directors or at least one executive director in the other enterprise
6. Any person appoints more than half of the BOD or at least one Executive Director in each of the two enterprises
7. If one person controls one enterprise, the same person, or his relative, or jointly with his relative, controls the other enterprise
8. If one enterprise is controlled by an HUF, the other enterprise is controlled by a member or the relative of a member of the HUF
9. If one enterprise is a firm/AOP/BOI, the other enterprise holds at least 10% profit sharing ratio in such enterprise
10. The manufacturing or processing of one enterprise is wholly dependent upon the intangible asset of another enterprise
11. 90% or more of the raw material or consumables is supplied by other enterprise and the price and terms are decided by such other enterprise
12. One enterprise sells its manufactured goods to other enterprise at price and terms decided by such other enterprise
13. There exists any relationship of mutual interest between two enterprise

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2
Q

Sec 92A

A

Associated Enterprise

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3
Q

Sec 92B

A

International Transaction

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4
Q

Sec 92C

A

Arm’s Length Price

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5
Q

International Transaction

A

Transaction b/w 2 AEs where at least 1 is a Non Resident

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6
Q

Nature of Transaction for International Transactions

A
  1. Purchase, Sale or Lease of Property (eg. buying space for cafe)
  2. Provision of Service (supplying coffee)
  3. Lending or Borrowing money (selling coffee on credit)
  4. Allocation of Cost or Expense (splitting up amount of coffee and croissant in invoice)
  5. Any other transaction which affects profit
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7
Q

Deemed International Transaction

A

Transaction entered into with a third person (i.e. which is not an AE), AND a prior agreement exists b/w such third person and an AE of such enterprise.
(whether or not such 3rd person is an AE)

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8
Q

Methods for determining ALP

A

5 methods:
1. Comparable Uncontrolled Price Method (CUP)
2. Resale Price Method
3. Cost Plus Method
4. Profit Split Method
5. Transactional Net Margin Method

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9
Q

CUP Method

A

Comparing transaction with AE to a similar uncontrolled transaction.
Calculation:
Price charged/paid in uncontrolled trn +/- functional differences (FOB/CIF, warranty, quantity discount)

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10
Q

Resale Price Method

A

When goods purchased from AE and resold as is to outsider.
Calculation:
Resale price to outsider (-) Normal GP Margin (-) Additional Purchase Related Expenses

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11
Q

Cost Plus Method

A

Goods mfgd by Enterprise is sold to AE.
Calculation:
Direct & Indirect Cost of Production + Normal GP margin +/- Functional differences (technical support, quantity discount, credit period)

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12
Q

Profit Split Method

A

Used in Joint Ventures.
Calculation:
Cost incurred + Net Profit Share

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13
Q

Transactional Net Margin Method

A

Operating Profit Margin of other enterprise in similar industry shall be taken
Calculation:
Cost incurred + Operating Profit Mgn of other enterprise of similar industry

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14
Q

Arithmetic Mean Concept for determining ALP

A

If the most appropriate method gives more than 1 but less than 6 (ie upto 5) ALPs, use arithmetic mean i.e. average to choose the ALP.
If the difference between the Actual Transaction Price and Average ALP is upto 3% of the Average ALP, the Actual Transaction Price is considered to be ALP and no adjustment is required. If difference is more than 3% of the ALP, then the average ALP is considered as the ALP and according adjustment is made

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15
Q

Range Concept

A

NOT APPLICABLE IN CASE OF PROFIT SPLIT METHOD
> Applicable if the most appropriate method gives 6 or more ALPs.
1. Arrange all the ALPs in ascending order.
2. Calculate total number of values.
3. Calculate 35% and 65% of such total number of values. (if 35% and 65% results in decimal answer, ROUND IT UP eg. 2.44 and 2.65 both become 3 and take the corresponding value accordingly, but if it gives a whole number, ie not in decimals, then take the average of the value corresponding to such whole number and the value immediately succeeding it.)
4. Range of ALP is the value corresponding to such 35% and 65% place.
5. If the Actual Transaction Price falls within such range, no adjustment is required.
6. If the Actual Transaction Price does not fall within the range, then take the median, i.e. 50% of the total number of values, and the ALP is the value at the median place . (if 50% gives whole number, i.e. not in decimals, take the average of the value corresponding to the median place and immediately succeeding it.)

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16
Q

Circumstances where AO may determine ALP

A
  1. Assessee fails to compute ALP as per most appropriate method
  2. Data used in computation of ALP is not reliable
  3. Documents specified in section 92D not maintained
  4. Documents called by AO not furnished within time
17
Q

Consequences of ALP determined by AO

A
  1. Deduction under Chapter VI-A or Section 10AA shall not be allowed from income enhanced by AO
  2. Increase in income of one AE shall not change income of other AE
18
Q

Reference to TPO (92CA)

A
  1. Only AO can refer to TPO, not assessee
  2. Prior permission of CIT to be taken by AO
  3. TPO can call upon assessee to produce documents/evidence
  4. Can also determine the ALP of other international transactions identified subsequently during proceedings
  5. TPO order is binding upon AO and AO shall compute Total Income of assessee in confirmity with ALP determined by TPO
19
Q

Safe Harbour Rules (92CB)

A
  1. If assessee declares minimum margin as given in safe harbour rules, then AO shall accept the transfer price declared by assessee
20
Q

Advance Pricing Agreement (APA)

A
  1. Agreement between assessee and CBDT (remember not AO, CBDT) for determination of ALP of an International Transaction as per method and manner given in agreement.
  2. CBDT to take prior approval of Central Government
  3. APA shall be valid for maximum 5 consecutive previous years
  4. APA shall be binding on assessee and Income Tax Authorities (upto CIT level), in respect of the transaction for which APA was entered.
  5. If APA was entered by assessee on basis of fraudulent or misrepresentation of facts, CBDT may declare such APA to be void ab initio.
21
Q

Rollback Provision for APA

A
  1. A person who makes application for APA can apply for rollback for maximum 4 preceeding PY
  2. Assessee to make application in prescribed form (3CEDA) and pay fees of 5 Lakh
  3. Request has to be made by assessee for all roll back years
  4. International Transaction is same as mentioned in APA
  5. Return for Rollout Years is furnished on or before Due Date
  6. Rollback provisions shall not apply if determination of ALP is subject matter of appeal before ITAT and ITAT passes order before signing of APA
  7. Rollback provisions shall also not apply if it has the effect of reducing Total Income as declared in ROI.
  8. In case of corporate restructuring, only the companies which exist after merger/demerger are entitled for rollback.
  9. If ROI is already filed for any year to which APA/Rollback applies, modified ROI to be filed within 3 months from end of month in which APA was entered.
22
Q

Secondary adjustment (92CE)

A

Treat ‘Excess Money’ as deemed loan and calculate interest income on such excess money

23
Q

Excess Money

A

ALP (- )Actual Transaction Price

24
Q

Cases where Secondary Adjustment is to be made or not made

A

Applicable where Primary adjustment of TP has been made:
1. By assessee suo moto in ROI
2. By AO/Appeallate Authority and accepted by AO
3. Determined by APA
4. Made due to Safe Harbour Rules

Not Applicable if:
1. Amount of primary adjustment is upto Rs. 1 CR
2. Primary Adjustment is made in respect of AY 16-17 or earlier

25
Q

Excess Money Repatriation

A
  1. Excess money available with AE shall be repatriated to India within 90 days from Date of Order/Date of ROI.
  2. If not repatriated within 90 days, excess money shall be deemed to be an advance given to AE and interest income shall be computed on such advance from the date of order/ROI
26
Q

Interest Rate for Secondary adjustment

A
  1. If International Transaction is denominated in INR:
    SBI Rate -> for 1 yr -> as on 1/4 of PY + 3.25%
  2. If International Transaction is denominated in foreign currency:
    LIBOR Rate -> 6 month -> as on 30/09 of PY + 3%
27
Q

Additional IT Rate if excess money is not repatriated

A

20.9664%:
18% Tax + 12% SC + 4% C

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