TRANSFER PRICING : AN INDIAN SCENARIO

Accounting

Research Paper

E-ISSN No : 2454-9916 | Volume : 3 | Issue : 5 | May 2017

TRANSFER PRICING : AN INDIAN SCENARIO

1

Harmanpreet Kaur | Monika 1

1

Assistant Professor, Shivaji College.

ABSTRACT The main focus of this paper is on understanding how international transactions are taxed amongst MNE's. In this context, the concept of transfer pricing has been discussed. The arm's length price and various methods to determine the same has been explained. Finally, the paper provides analysis of Vodafone India case study with reference to transfer pricing regulations in India.

KEY WORDS: arm's length price, international taxation, transfer pricing.

Introduction Since the onset of globalization, international trade has grown many folds. With the removal of barriers to trade, the mobility of corporate activity has increased and business boundaries expanded internationally. The capital flows among the countries has risen. As the opportunities to make money internationally expanded, there is a need for international taxation to define taxation rights amongst the nations.

In the recent years, more and more enterprises belonging to the same multinational group are participating in the economic activities in the country. This includes different and complicated manufacturing processes and transfer of goods and services across the countries. With the growth of MNE's, the volume of related party transactions has also grown. Thus, transfer pricing turns out to be of greater significance in today's context.

What is Arm's Length Price?

'This valuation principle is commonly applied to commercial and financial transactions between related companies. It says that transactions should be valued as if they had been carried out between unrelated parties, each acting in his own best interest (OECD)'. This principle has been included in Article 9 of OECD Model Tax Convention.

In simple terms, arm's length price means price charged from unrelated or independent parties in open market or uncontrolled conditions.

Following are the methods to determine arm's length price as given by Model Tax Convention and also followed by India:

The transfer pricing refers to prices that are charged for the intra-firm transfers or trade. The particular MNE group can avoid or reduce its tax incidence by manipulating the price charged and paid in such intra-group transactions. The firms carry their intra-transactions in such a way that in high-tax countries, they show lower profits and high profits in low-tax countries.

By maneuvering transfer prices, MNE's earn unreasonable profits and at the same time leads to loss of tax revenues for governments across the countries it operates. To keep this into check, various countries introduced transfer pricing regulations. Moreover, the BEPS (Base Erosion and Profit Shifting) program has also been launched by OECD to improve the functioning of current regime.

Figure 1: Methods for calculating Arm's length price 1.

Comparable Uncontrolled Price (CUP): In this method, the price charged for a property or service transferred in a controlled transaction is compared to the price charged for a comparable property or service transferred in a comparable uncontrolled transaction in comparable circumstances.

2.

Resale Price Method (RPM): This Method is used to determine the price to be paid by a reseller for a product purchased from an associated enterprise and resold to an independent enterprise. The purchase price is set so that the margin earned by the reseller is sufficient to allow it to cover its selling and operating expenses and make an appropriate profit.

3.

Cost Plus (C+ or CP): Under this method, direct and indirect cost of production is determined and normal gross profit- margin after adjustments is added to the cost to determine the price in relation to supply of the property or provision of services by the enterprise.

4.

Profit Split Method: It is applicable for international transactions of unique intangibles or multiple transactions which cannot be separately evaluated.

In this method, profits of both the related parties are taken together and are divided between them as per their relative contribution. Arm's length price for both parties thus derived working back from profit to price.

5.

Transactional net margin method: This method determines the net profit margin from controlled transactions by reference to the net profit margin of comparable independent enterprise. This method determines the net profit margin relative to an appropriate base realized from the controlled transactions by reference to the net profit margin relative to the same appropriate base realized from uncontrolled transactions.

In context of India, transfer pricing regulations were introduced through Finance Act 2001 by making amendments in Income Tax Act, 1961. Sections 92 to 92F were added as a part of Chapter 10. With the changing times, the necessary amendments are made yearly through Union Budget.

Rationale of Study The purpose of this study is to understand the concept of transfer pricing, arms' length price and its different methods to calculate, transfer pricing rules and regulations in context of India. Finally, we also studied Vodafone India transfer pricing case.

What is Transfer Pricing?

As per definition given by OECD, 'A transfer price is a price, adopted for bookkeeping purposes, which is used to value transactions between affiliated enterprises integrated under the same management at artificially high or low levels in order to effect an unspecified income payment or capital transfer between those enterprises.' It is the price for trade between two affiliates of MNE's or intra-firm trade. According to Lall (1974, p.36) transfer pricing may be defined as the pricing of commodities and intangibles, such as technological services and brand names between different branches of Multinational Corporations (MNCs) In simple words, international transfer price is price charged or paid by firms (affiliates or subsidiaries) in one country for transfer or sale of any physical goods, intangibles, services etc. to any other firms (affiliates or subsidiaries) i.e. related party transactions in other countries.

As per OECD's Model Tax Convention, related party transactions should be carried out on arm's length principle.

Transfer Pricing in India With the introduction of new economy policy in 1991, the foreign investments and flows have increased many folds. International transfers of tangibles and intangibles amongst related parties to affiliations/ subsidiaries or associated enterprises which leads to transfer pricing abuses. Keeping all this in mind, the Finance Act 2001 introduced transfer price regulations in India through Section 92 to 92F of Indian Income Tax Act, 1961 which includes computation of transfer price and procedures. It is effective from April 1, 2001. The related parties needs

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International Education & Research Journal [IERJ]

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Research Paper

E-ISSN No : 2454-9916 | Volume : 3 | Issue : 5 | May 2017

to do transfers internationally at arm's length price, if they fail to do so and abuse transfer price, the tax department has the authority to adjust the taxable income of Indian counterpart. The penalties for non-compliance has also been described under the Act. Vodafone: The transfer pricing case Vodafone India Services Pvt. Ltd. is a wholly owned subsidiary of Vodafone Tele-Services (India) Holdings Ltd. based in Mauritius. During the AY 2009-10, Vodafone India issue equity share to Vodafone Holding at premium. The tax authorities assumed capital gains tax on this transaction and Rs. 8500 crores were demanded to be added to firm's taxable income. The tax department considered this transaction under the purview of transfer pricing regulations. The tax department ordered Vodafone India a tax demand of Rs. 3700 crore in 2013. The Vodafone filed the petition in court and argued that the tax department had no jurisdiction in this case as it is not international transaction. Though, the IT Tribunal stayed the demand during the proceedings of the case and asked to deposit Rs. 200 crore by February 2014 and they complied. Ultimately, the Bombay High Court reversed the decision of Tribunal and ruled in favor of Vodafone India in October 2015. The court is of the view it does not fall under transfer pricing purview and sets aside a tax demand of Rs. 3700 crore imposed on Vodafone India.

Conclusion The transfer pricing rules and regulations in India as compared to world is not so mature. Though, India is progressively moving in the direction of more interdependence and integration in this globalized era. But much is needed to be done in terms of correct implementation and interpretation of laws to avoid tax evasion and resolving disputes. These regulations and penalties should not be treated as source of income generation. There is a need to do continuous efforts to make the system at par with international practices. The confidence of international investors should be sought in Indian system to attract more investment. To address this issue, Advance rulings has also been introduced in India in order to reduce litigation and promote better relations with a non-resident.

Bibliography 1.

Lall Sanjaya (1974), “Transfer Pricing and Multinational Corporations”, Monthly Review, December, p.36.

2.

OECD (2008), “OECD Guidelines for Multinational Enterprises”.

3.

OECD (2009), “Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration 2009”.

4.

http://www.thehindu.com/business/Industry/Vodafone-wins-transfer-pricing-taxdispute-case/article10145274.ece

5.

http://www.incometaxindia.gov.in/pages/international-taxation/transfer-pricing.aspx

6.

http://www.ey.com/in/en/services/tax/about-tax/tax-alerts--the-vodafone-case

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