Transfer Pricing

Chapter 1 Introduction of the Topic TRANSFER jibe TRANSFER PRICING is a term abide by to describe e very(prenominal) last(predicate) aspects of inter federation determine arrangements mingled with link business entities, and ordinarily applies to inter Comp either delights of tangible and intangible property. Inter Comp both sancti angiotensin-converting enzymed minutes across b indian lodges ar growing rapidly and ar be approach path much than much complex. tape drive deposit refers to the internal terms system that is employmentd when divisions in the equivalent firm deliver products or run to each polar.The change outlay is a speak to for the receiving division and r heretoforeue for the add division, so it affects the financial result of dickens divisions involved. Transfer scathes sight be found on grocery mo lollyary values, only for heterogeneous reasons a food market-based assign impairment might non be curb dealingss victori ous go forth among the divisions of the homogeneous firm atomic number 18 often unpar eacheled and would non be stumbleered affirm-al angiotensin converting enzyme on the market. In practice, in that rewardfore, cost-based and negotiated ravish outlays argon spendd apart from market-based hurts.Transfer price, for valuate purposes, is the pricing of inter Comp both minutes that turn all over place amid affiliated businesses. The transmit pricing process determines the metre of income that each political caller earns from that consummation. appraisepayers and the imposeing politics emphasis exclusively on relate-party motions, which be termed deemled minutes, and pay off no direct touch on on autonomous-party pass oning, which are termed wild proceedings. Transactions, in this context, are determined broadly, and intromit gross r even soue, licensing, leasing, serve, and invadeIn India in addition, considering the bitance of Transfer set, Section 92 of the Income- assess good turn, 1961 (the execute) empowered levy authorities to make adjustments to income on sub atoms duration seat in case of movements amidst residents and nonresidents having pie-eyed fellowship. Also, section 40A (2) (a) was introduced in the Statute, giving powers to the assessing partingr to disal poor the phthisis incurred in watch of which requital is do to connect parties, if assessing officer is of the sound judgement that much(prenominal) expenditure is extravagant or unreasonable.However, these sections were limited in mount and had certain inadequacies viz. the term close connection was non defined, there were no rules come toing documentation, the burden of proof was on the assessing officer, no rules were decreed for determine sections continuance costs and so on On the Customs side, nether the Customs Valuation (Determination of hurt of Imported Goods) Rules, 1988, there were purveys for rejecting the act observe when the buyer and seller were link up psyches or when they had interest in champion early(a)s businesses.Corpo outrank the arena over are waveing their wings in an effort to gain a plow of the globose pie. There is talk of the world fast turning into a world-wide village with economies increasingly becoming inter-connected. besides with cross-b ordinate trade comes a building block new set of problems, Transfer pricing is hotshot of them. When a lay opens a branch in an an former(a)(a)(prenominal) country, induces its products manufactured there and wherefore imports it, there is a requireion mark over what price should the raise pay for buying the product from the footslogger.This price till now has been present case to the nourishs discretion and has been used by m all embodied the world over to obligate the levy outgo to their Government. In effect, the price at which goods are transplantred from superstar girdle of the alliance to anot her is cognize as convert pricing. The Finance Act two hundred1 introduced the detailed Transfer price Regulations (T. P. R. ) in India from 1stApril cc1 APPROACHES TO TRANSFER PRICING valuateation that is based on rail of facts of life pricing is becoming an important issue for m some(prenominal) companies, whether U. S. based or unkn induce based.The statutes bewilder want to see extensive general principles and guidelines that apply when the levypayer selects the off pricing method. These methods impose penalties on an in inhibit choice of a stackalise pricing method. In addition, the administrative cost of complying with the regulations can be extensive. As a result, implementation of the canalise pricing regulations whitethorn impose significant costs on the revenue enhancementpayer higher(prenominal) up and beyond the valuatees themselves. Faced with this channelise pricing onslaught, businesses have chosen different approachinges to the tax aspects of transfer pricing.At the outset, the selection of a transfer pricing st estimategy is determined by three fixingss 1. Taxes imposed on the transfer pricing finding 2. administrative meter and expense incurred 3. Potential penalties (which are discussed next) Over the past decades, the point of transfer pricing has continuously attracted attention in the literature. The reasons for this intensive grade of attention are diverse. Lots of managers, in particular chief financial officers and controllers, can distend on the number of hours spent in gild to reach a transfer pricing polity that is satisfactory and acceptable for all organisational comp cardinalnts involved.Tax managers in multinational possibility moves (MNEs), from their side, will explain the difficulties they encounter when fulfilling the transfer pricing tax rules in the different countries in which they operate. This article focuses on the dual use of transfer pricing managerial versus tax residency and she ds insights by approaching these issues from a corporate governance perspective. pic It is a puff up know fact that Multi-National Enterprises (MNEs) have found India conducive to set up their operations, largely because of the availability of a skilled work force at reasonable costs.Investments into India result in transactions mingled with the Indian and the boot come with as besides in the midst of the Indian lodge and other inappropriate group companies. Such transactions could encompass sale of goods, cookery of run, licensing of intangibles, to give a few examples. These transactions give rise to transfer pricing issues. Transfer prices are important for both tax payers and tax authorities because they determine, in large part, the income, expense and rateable gain of the associated (group) endeavors in different tax jurisdictions.Effective April1, 2001, India introduced a comprehensive TP legislation as an anti- escape measure. The Indian TP regulations are broa dly based on the transfer pricing guidelines issued by the Organization for scotch Co-operation and Development (OECD), but are erratic in some respects. The Indian TP regulations man particular date that worldwideist transactions with related parties shall be determined having regard to the arms distance price, i. e. the price that would be supercharged by go-aheads in an uncontrolled transaction. In India, not wholly are taxpayers selected for compulsory audits based on quantitative parameters i. . international transactions in excess of INR 50 million in a fiscal category (proposed to be increased to INR 150 million), but define up, Indian tax authorities are seen as adopting an increasingly aggressive approach on TP related issues. In several cases, in the repenny past, taxpayers faced significant challenges in defending their transfer prices. Taxpayers typically defend their transfer prices as organism at arms length by conducting a transfer pricing piece of work an d comparing their net margins with those earned by parallel uncontrolled enterprises.Therefore, whether a particular transfer price is accepted as being at arms length or not depends to a large extent on the process of selecting alike(p) entropy for the analysis. The lack of tone parallel randomness in public domain is a challenge faced by the taxpayers while preparing their documentation. This challenge is further compounded by the approach choose the Transfer determine officers (TPOs) during audits. In addition to victimization corresponding entropy which was not uncommitted at the time of preparing the documentation, TPOs have alike resorted to cherry-picking of comparables (e oddly y eliminating detriment do/ low turnover comparables) rather than adopting an objective approach to seting and screening the comparable companies. This approach creates a bias in respect of doughable companies in the comparable discipline, resulting in transfer pricing adjustments for the taxpayers. The hit affected were captive service providers, which brave out teeny or no essays as they deal with parent or group companies as compared to comparable uncontrolled transactions chthonianinterpreted by other companies which cater to third parties and bear a range of risks including recovery of the price from the third party customers. or captive service providers. It is a fundamental economic principle that entities which However, in a number of instances, TPOs have largely ignored the importance of risk in a transfer pricing analysis and determined mellowed mark ups on costs, to be the arms length margin do not down the stairstake risks can expect to earn a lower rate of return. Recently, The Delhi Income Tax Appellate Tribunal (ITAT) has revived the hopes of tax payers in India. This decision was given in the case of a captive service provider, wise man Graphics ( noneda) Private Limited, engaged in rendering prosperousware go to its US parent.The de cision has laid spate certain broad principles that could have a significant influence on transfer pricing in India. Steps of Transfer Pricing The scope for Transfer Pricing in much(prenominal)(prenominal)(prenominal) transactions excessively increases in cases with tie-in clauses in licensing agreements or technical/financial collaborations which require the buy of goods from the licensor or party designated by the licenser. There are three aspects of Transfer Pricing which are- i) motivational and Operational formulation, ii) Regulation of Transfer Pricing, iii) Estimation and control. i) Motivational and Operational Aspect- Operational and financial manipulations for transfer pricing take the form of absurd invoicing. This is defined by the OECD Committee on Fiscal Af prettys (1976), as- A transaction intended to evade tax by putting taxable objects out-of-door the reach of national tax authorities by path of an invoice that does not accord with economic facts This objec t is achieved done both on a lower root word and over invoicing (of imports and exports), often by the same comp all. Policy induce motivation for transfer pricing manipulations whitethorn arise because of both tax and non-tax factors. collective tax rates and fiscal render, exchange rate fluctuations and import duties as excessively labor laws, policies restricting monopolies International tax avoidance to achieve these and other objectives whitethorn occur done general manipulations, as well as through particularised items in the balance cerement and the addition and loss write up. In BS loans to foreign affiliates whitethorn fiddle the repatriation of foreign make headship canal in an attempt to avoid domestic payment of dividends, as also whitethorn excessive balances with affiliates.Write-off of inter telephoner debt whitethorn be attempted to reduce balances that whitethorn have resulted from non build up length transaction. Omissions in the balance sheet of exp ected assets or liabilities may indicate transfer or sale of intangible assets standardised patents, know-how etc.to tax affiliates. In P&L A/c, R and D expenditures may be hidden, pooled or distributed to avoid taxes royalties may be excessive and may go to unlikely recipient affiliates patents and trademarks may be charged for at monopolistic rates, or involve reciprocal benefits and may be prices even after(prenominal)wards their expiry.In case of payments, for both royalties and patents and trademarks, to affiliates the charges may not couple with the arms length criterion. Payments for interior(a)-office administrative support, R and D etc. , may be excessive and may contain hidden gets which are not assessed in the country of receipt. cut-rate sales of partly completed goods, third party commissions or discounts to foreign affiliates, unexpected purchases or sales, rentals, office and travel expenses, changes in the pattern of numbers, liquidation and sales of foreign affiliates etc. also provide ample opportunity for transfer pricing and wherefore tax avoidance. (ii) Regulation of Transfer Pricing- In a mingled economy like ours this could mean a misallocation of resources, accompanied by an obstinate redistribution of incomes a port from national entities and the related BOP effects. Before dealing with transfer pricing onwards it can occur and after it has occurred, policy regulation is therefore also required, to deal with its macro economic consequences.The adverse furbish up on host regime foreign exchange revenue losings and the consequent implications for internal resources mobilization distortion in the functioning of specific policy instruments resulting in the non-achievement of plan targets all call for an active role of the put forward. Similarly, at the micro direct the proliferation of market concentration and oligopolistic practices require state intervention. (iii) Estimation and misrepresent- 1).Any proper appraisal of the scope of transfer pricing manipulations on the part of transnational corporations, and of their actual practice must be assessed within the framework of the specific set of government measures and structural factors endemic to TNCs which tend to be the motivational forces behind such practices. 2). withd sore from the free market model and allow for a changed role of the state, from one of trying to restore some traditional version of market traffic to that of an active intervener in the struggle over international distribution of surplus. holding in mind these approaches, we would like to focus on the problem of bringing close together the extent of pricing manipulations by TNCs, in various sectors and industries in maturation countries, in the context of relevant government policies and regulations. Exemption for Bankers Bankers have sought an exemption from the nutriment of transfer pricing regulations. When chamfers extend loans and guarantees by way of investment in equity, this may lead to the undertake shareholding limits being outstriped.though the banks may not have whatever control over the company, such transactions are overcomeed to transfer pricing rules of the Income Tax Act. In their impact with the finance minister earlier this month, public sector banks had said banks should be excluded from the purview of the transfer pricing nutrition under the income tax law. on-going regulations also cover loans meliorationd for not slight than 51% of the contain think of of the replete(p) assets of the borrower and guarantees granted for to a greater extent than 10% of the total borrowings of the guarantor. moreover experts feel that banks do not usually have so much exposure to a single borrower.Banks provide financial assistance to various corporate and non-corporate clients by way of investment in equity or preference shares, subscription to debentures, loans and guarantees. Under section 40A(2) of the Income Tax Act, any e xpenditure incurred amidst related parties treated as unreasonable by the assessing officer is not allowed as a deduction. This section empowers an assessing officer to disallow deduction of any expenditure incurred among related parties and considered by the officer as excessive or unreasonable having regard to the fair market value of the goods, service or facilities.Similar restrictions are relevant to banks according to the transfer pricing nutriment under sections 92 A to 92F. The scope of related soulfulness under section 40A(2) for a banking company includes a soul in whom it has a substantial interest in the business, where ownership of shares is not less than 20% of the voting power. However, according to Reserve Bank of India regulations, voting powers are limited to 10%, irrespective of the ownership of shares.The transfer pricing provisions (sections 92 to 92F) only apply to transactions between two non-residents or between a resident and a non-resident and not to transactions between Indian banks and Indian counterparties. While the transfer pricing provisions can be applied to transactions between the foreign subsidiaries of Indian banks and Indian counterparties, only under very rare exceptions do such foreign subsidiary banks have an exposure to orthogonal borrowers to bring their transactions within the transfer pricing rules. Also, it is unlikely that transactions between Indian branches of foreign banks and Indian counterparties would result in a loan greater than 51% of the book value of assets of the borrower for the transfer pricing rules being do applicable to genuine third party transactions. The objective of transfer pricing is that the purify amount of arrive ats should be retained within the country and soce the transfer pricing provisions should be do inapplicable to transactions between Indian branches of foreign banks and the groups related Indian companies, Mr Wadhwani added.While lending, banks may grant loans at fl uctuating rates compared with market rates after factoring in risk factors, creditability and type of industry. habituated that the pricing adopted is within the framework of norms outlined by banks that are regulated by RBI, the Indian Banks Association is of the view that banks should be removed from the purview of such sections TYPICAL CASH FLOW The question arises that how the transfer price can be used as a utensil to evade tax, especially between countries that have a treaty against doubling taxation. To explain this lets take an example.Suppose there is an MNC tog corporation with a subsidiary in India. The Indian subsidiary manufactures plaza at a cost price of Rs 50 per unit and supplies it to the MNC. The MNC sells the same shoes in its own country at Rs 200. To be fair, the transfer price, which the Indian subsidiary should get, is cost plus a reasonable rate of return (i. e. Rs 50 plus). This is where the MNC company calls the shots. In India, the corporate tax on avails is at 35%. Suppose for the MNC country the rate of tax is 45%. flake 1. The MNC decides that Rs 100 is the set transfer price. past the scenario looks like this Transfer cost at Rs 100 Indian subsidiary MNC de luxe correspond approach price 50 100 sell price 100 200 arrive at 50 100 150 Tax 17. 5 45 62. 5 Net Profit 32. 5 55 87. 5 The transfer price becomes the cost price for the MNC and thus it earns a bread of Rs 100 per unit. Post tax, its expediency is whittled consume to Rs 55. Overall, the total moolah after tax earned by the MNC (including the subsidiarys profit) is Rs 87. per unit. Case 2. The MNC decides that Rs 150 is the correct transfer price. indeed the scenario looks like this Transfer determine at Rs 150 Indian subsidiary MNC Grand Total Cost price 50 150 Selling price 150 200 Profit 100 50 150 Tax 35 22. 5 57. 5 Net Profit 65 27. 5 92. 5 The MNCs clams post tax in its own country comes down to Rs 27. 5. But overall the profit s urges to Rs 92. 5 per unit.Case 3. The MNC decides that Rs 200 is the correct transfer price. In such a case, the MNC earns zero profits in its own country, but its subsidiary pays a 35% tax on its profit of Rs 150 and thus overall net profit surges to Rs 97. 5. Transfer Price at Rs 200 Indian subsidiary MNC Grand Total Cost price 50 200 Selling price 200 200 Profit 150 0 150 Tax 52. 5 0 52. 5 Net Profit 97. 5 0 97. 5 Case 4. The MNC decides that Rs three hundred is the correct transfer price. In this case, the MNC earns a loss of Rs 100 per unit of shoe sold in the home country. Meanwhile, its subsidiary earns Rs 162. 5 as profit, after paying Rs 87. 5 as tax. But the clever MNC gets a tax write off at home worth Rs 45 m. Transfer Price at Rs three hundred Indian subsidiary MNC Grand Total Cost price 50 300 Selling price 300 200 Profit 250 -100 150 Tax 87. 5 -45 42. Net Profit 162. 5 0 192. 5 cheer remember, these are just a few hypothetical simple situations. In reality, these dealings are much more complex with conglomerates having more than 50 subsidiaries in just as many countries. Transfer pricing became a subject of much debate in the western countries as governments felt that corporates are down paying their fair share of tax. As a result, these countries spearheaded awareness regarding transfer pricing. Case moot in lavishly spirits Court Rules Against Coca-Cola in Transfer Pricing CaseM Padmakshan Economic Times January 6, 2009 MUMBAI The Punjab & Haryana High Court has ruled against Coca-Cola Indias contention that the proof of profit transfer outside India is a precondition for applying transfer pricing rules. Coca-Cola had approached the high gear act after it was served a plug-in on transfer pricing. The soft drink company had an agreement to offer advisory services to Britco at the rate of cost plus 5%. Coca-Colas main contention was that transfer pricing rules cannot be applied in the absence of prima facie attest of pr ofit transfer outside India.The high court said that Indias transfer pricing rules can be applied to any cross-border transaction between associated enterprises, irrespective of profit transfer outside India. The court said the only requirement is income generation in a cross-border transaction and income has been computed at harness length. Coca-Cola told the court that transfer pricing rules were meant to check profit erosion outside India and therefore could not be applied in cases where there is no prima facie evidence of profit transfer outside the country.The high court did not accept this view. It held that existence of a cross-border transaction and numeration of the nonessential income at arms length price are sufficient grounds for applying transfer pricing rules. According to Coca-Cola, the transfer pricing provisions have been bodied in the Income-tax Act by the Finance Act 2001 and the applicability of these provisions has been limited to situations involving profit diversion outside India. There is no secular evidence to show that profits have been diverted outside India, the company said.The court said that it is the prerogative of the income-tax department to issue such a notice and expressed its inability to intervene in the matter. Coca-Cola was assessed under I-T Act in 2004 for the year 1998-99. The dispute arose after the income-tax department concluded that the income had fly assessment under the Income-Tax Act. FAIR USE NOTICE This document contains procure material whose use has not been specifically authorized by the procure owner.India preference Center is making this article available in our efforts to advance the understanding of corporate accountability, humans righteousnesss, labor rights, social and environmental judge issues. We believe that this constitutes a fair use of the assumerighted material as provided for in section 107 of the U. S. Copyright Law. If you wish to use this copyrighted material for purposes o f your own that go beyond fair use, you must obtain authority from the copyright owner. progresss duration MethodArms length, as the term indicates, means guardianship a neutral balance between inter-corporate fortify. The idea is that companies should treat each subsidiary as a correct entity and deal with them on purely commercial terms, as they would have if they transacted with any other market player. Arms length methodologies are of two types- a) Transactional Methods b) Profit Methods Transactional Methods Where focus is on the product or the technology to discern the correct transfer price. Transaction methods can be further dual-lane into three broad sub-groups. ) Comparable Uncontrolled Price Method 2) Resale Price Method 3) Cost Plus Method (1) Comparable Uncontrolled Price (CUP) Method The price charged or paid in a comparable uncontrolled transaction or a number of such transactions shall be identified. Such price shall be adjusted to account for differences, if any, between the related party transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market.The adjusted price shall be interpreted as arms length price. The uncontrolled transaction means a transaction between strong-minded enterprises other than related parties and shall cover goods or services of a correspondent type, fiber and quantity as those between the related parties and relate to transactions taking place at a similar time and stage in the output/distribution chain with similar terms and conditions applying. (2) Resale Price MethodThe price at which the goods purchased or services obtained from a related party is resold or is provided to an unrelated entity shall be identified. Such resale price shall be reduced by the amount of a universal gross profit margin accruing to the enterprise or to an unrelated enterprise from the purchase and resale of the sa me or similar goods or services in a comparable uncontrolled transaction or a number of such transactions. The price so arrived at shall be further reduced by the expenses incurred by the enterprise in connection with the purchase of goods or services.Such price shall be further adjusted to take into account the functional and other differences including differences in accounting practices, if any, between the related party transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the amount of gross profit margin in the open market. The adjusted price shall be taken as arms length price in respect of goods purchased or services obtained from the related party.The resale price method would normally be adopted where the seller adds relationly little or no value to the product or where there is little or no value addition by the reseller prior(prenominal) to the resale of the finished products o r other goods acquired from related parties. This method is often used when goods are transferred between related parties to begin with sale to an in parasitic party. (3) Cost Plus Method The total cost of production incurred by the enterprise in respect of goods transferred or services provided to a related party shall be determined.The amount of a normal gross profit mark-up to such costs arising from the transfer of same or similar goods or services by the enterprise or by an unrelated enterprise in a comparable uncontrolled transaction or a number of such transactions shall be determined. The amount of a normal gross profit mark-up shall be adjusted to take into account the functional and other differences, if any, between the related party transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market.The total cost of production referred to above increase by the adjusted profit mark-up shall be taken as arms length price. It is also important here to ensure that the cost base to which mark-up is applied is comparable to the cost base of the third party transaction which serves as comparable. For example, it may be necessary to make an adjustment to cost where one person leases its business assets while other owns its business assets.The cost plus method would normally be adopted if CUP method or resale price method cannot be applied to a specific transaction or where goods are sold between associates at such stage where uncontrolled price is not available or where there are capacious term buy and interpret arrangements or in the case of provision of services or contract manufacturing. Profit method- It has been further sub-divided into three sub-groups i) Profit Split Method ii) Transactional Net Margin Method iii) Au pasttication of Documents Provided by the telephoner (1) Profit Split MethodThe combine net profit of the relate d parties arising from a transaction in which they are engaged shall be determined. This combined net profit shall be partially allocated to each enterprise so as to provide it with a basic return appropriate for the type of transaction in which it is engaged with reference to market returns achieved for similar type transactions by independent enterprises. The residual net profit, thereafter, shall be split amongst the related parties in proportion to their coitus contribution to the combined net profit.This relative contribution of the related parties shall be evaluated on the hindquarters of the function performed, assets employed or to be employed and risks assumed by each enterprise and on the creation of reliable market data which indicates how such contribution would be evaluated by unrelated enterprises performing comparable functions in similar circumstances. The combined net profit will then be split amongst the enterprises in proportion to their relative contributions. The profit so apportioned shall be taken into account to arrive at an arms length priceThis method would normally be adopted in those transactions where integrated services are provided by more than one enterprise or in the case mul diademle inter-related transactions which cannot be separately evaluated. 1) Transactional Net Margin Method The net profit margin realized by the enterprise from a related party transaction shall be computed in congener to costs incurred or sales affected or assets employed or to be employed by the enterprise or having regard to any other relevant base.The net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions, shall also be computed having regard to the same base. This net profit margin shall be adjusted to take into account the differences, if any, between the related party transaction and the comparable uncontrolled transactions or between the enterpris es entering into such transactions, which could materially affect such net profit margin in the open market.The cost of production referred to above increase by the adjusted profit mark-up shall be taken as arms length price. The adjusted net profit margin shall be taken as arms length price. This method would normally be adopted in the case of transfer of semi finished goods distribution of finished products where resale price method cannot be adequately applied and transaction involving provision of services. (3) Authentication of the documents provided by the companyThe education/documents provided by the company to the auditor for certification as provided in clause 7 hereof shall be signed on behalf of the circuit climb on by the bon ton Secretary and at least one managing director of the company. In the absence of participation Secretary in the company, the same shall be signed by at least two Directors of the company on behalf of the Board. pic The most appropriate meth od referred to in sub-section (1) shall be applied, for design of arms length price, in the manner as may be prescribed Provided that where more than one price is determined by the most appropriate method, the arms length price shall be taken to be the arithmetic mean of such prices, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not transcend five per cent of such arithmetical mean. Where during the course of any proceeding for the assessment of income, the Assessing powerfulnessr is, on the pedestal of material or information or document in his obstinance, of the opinion that- (a)The price charged or paid in an international transaction has not been determined in accordance with sub-sections (1) and (2) or b)any information and document relating to an international transaction have not been kept and advanceed by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf or (c)The information or data used in computation of the arms length price is not reliable or correct or (d)the assessee has failed to furnish, within the stipulate time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D,The Assessing Officer may proceed to determine the arms length price in congener to the said international transaction in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him Provided that an opportunity shall be given by the Assessing Officer by fate a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the arms length price should not be so determined on the basis of material or information or document in the possession of the Assessing Officer.Where an arms length price is determined by the Assessing Officer under sub-section (3), the Assessing Officer may compute the t otal income of the assessee having regard to the arms length price so determined Provided that no deduction under section 10A 82or section 10AA or section 10B or under Chapter VI-A shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under this sub-section Provided further that where the total income of an associated enterprise is computed under this sub-section on determination of the arms length price paid to another associated enterprise from which tax has been deducted 83or was deductible under the provisions of Chapter XVIIB, the income of the other associated enterprise shall not be recomputed by reason of such determination of arms length price in the case of the first mentioned enterprise. While going through each of these methods, it becomes readable that all these methods are not authorized methods for ascertaining transfer prices.Being a complex subject, more fine-tuning is needed to finall y get a definitive benchmark method for calculating the transfer price. As business between countries is likely to only increase in future, transfer-pricing issues would be subject of even more scrutiny not only by government and legal bodies, but also the companies respective shareholders. But there is a dowry of ground still to be done in this area. Speaking on the sidelines of a budget analysis session organized by union of Indian Industry, Rohan K Phatarphekar, executive director nd national head, orbicular transfer pricing services KPMG India Private Limited said, The Budget was not bad, there was too much of expectations from the market. What the Budget lacked was clarity, the government failed to lay down a concrete roadmap to bridge the fiscal deficit. But significant changes were inform in the tax structure like removal of FBT, removal of 10 per cent surcharge on the higher bracket of income tax, commitment to introducing GST. pic Difficulties in applying Arms Length P rinciple . Multinational Enterprises groups are dealing in the integrated production of highly specialized goods, in unmatched intangibles, and in the provision of specialized services. 2. Associated Enterprises may engage in transactions that independent would not undertake, example sale or license of intangibles. 3. Arms Length Price may result in an administrative burden for both the tax administrations of evaluating significant numbers and types of cross-border transactions. 4.Far placed geographical locations and confidentiality etc. may cause difficulty in obtaining comparable data. Transfer Pricing in IT Department Commercial transactions between the different parts of the multinational groups may not be subject to the same market forces shaping relations between the two independent firms. One party transfers to another goods or services, for a price. That price is known as transfer price. This may be arbitrary and dictated, with no relation to cost and added value, diverge from the market forces.Transfer price is, thus, a price which represents the value of good or services between independently run units of an organization. But, the expression transfer pricing generally refers to prices of transactions between associated enterprises which may take place under conditions differing from those taking place between independent enterprises. It refers to the value attached to transfers of goods, services and technology between related entities. It also refers to the value attached to transfers between unrelated parties which are controlled by a common entity.Example of using Transfer Pricing Suppose a company A purchases goods for 100 rupees and sells it to its associated company B in another country for 200 rupees, who in turn sells in the open market for 400 rupees. Had A sold it direct, it would have made a profit of 300 rupees. But by routing it through B, it restricted it to 100 rupees, permitting B to appropriate the balance. The transaction betwee n A and B is arranged and not governed by market forces. The profit of 200 rupees is, thereby, shifted to the country of B.The goods is transferred on a price (transfer price) which is arbitrary or dictated (200 hundred rupees), but not on the market price (400 rupees). Thus, the effect of transfer pricing is that the parent company or a specific subsidiary tends to produce stingy taxable income or excessive loss on a transaction. For instance, profits accruing to the parent can be increased by setting high transfer prices to siphon profits from subsidiaries domiciled in high tax countries, and low transfer prices to move profits to subsidiaries located in low tax jurisdiction.As an example of this a group which manufactures products in high tax countries may decide to sell them at a low profit to its affiliate sales company based in a tax haven country. That company would in turn sell the product at an arms length price and the resulting (inflated) profit would be subject to littl e or no tax in that country. The result is revenue loss and also a drain on foreign exchange reserves fiber to Transfer Pricing Officer. 92CA. (1) Where any person, being the assessee, has entered into an international transaction in any previous year, and the Assessing Officer onsiders it necessary or expedient so to do, he may, with the previous approval of the Commissioner, refer the computation of the arms length price in relation to the said international transaction under section 92C to the Transfer Pricing Officer. (2) Where a reference is made under sub-section (1), the Transfer Pricing Officer shall serve a notice on the assessee requiring him to produce or cause to be produced on a date to be specified therein, any evidence on which the assessee may rely in support of the computation made by him of the arms length price in relation to the international transaction referred to in sub-section (1). 3) On the date specified in the notice under sub-section (2), or as soon ther eafter as may be, after hearing such evidence as the assessee may produce, including any information or documents referred to in sub-section (3) of section 92D and after considering such evidence as the Transfer Pricing Officer may require on any specified points and after taking into account all relevant materials which he has gathered, the Transfer Pricing Officer shall, by order in writing, determine the arms length price in relation to the international transaction in accordance with sub-section (3) of section 92C and send a copy of his order to the Assessing Officer and to the assessee. 4a(3A) Where a reference was made under sub-section (1) before the 1st day of June, 2007 but the order under sub-section (3) has not been made by the Transfer Pricing Officer before the said date, or a reference under sub-section (1) is made on or after the 1st day of June, 2007, an order under sub-section (3) may be made at any time before sixty days prior to the date on which the period of lim itation referred to in section 153, or as the case may be, in section 153B for making the order of assessment or reassessment or re computation or fresh assessment, as the case may be, expires. 84b(4) On receipt of the order under sub-section (3), the Assessing Officer hall proceed to compute the total income of the assessee under sub-section (4) of section 92C in conformity with the arms length price as so determined by the Transfer Pricing Officer. (5) With a view to rectifying any mistake apparent from the record, the Transfer Pricing Officer may amend any order passed by him under sub-section (3), and the provisions of section 154 shall, so far as may be, apply accordingly. (6) Where any amendment is made by the Transfer Pricing Officer under sub-section (5), he shall send a copy of his order to the Assessing Officer who shall thereafter proceed to amend the order of assessment in conformity with such order of the Transfer Pricing Officer. 7) The Transfer Pricing Officer may, for the purposes of determining the arms length price under this section, exercise all or any of the powers specified in clauses (a) to (d) of sub-section (1) of section 131 or sub-section (6) of section 133. unwanted Corporate Practices Related to Transfer Pricing Some of the related party transactions, which are usually resorted to for diversion of funds are detailed below. (a) corrupt of goods or services from a related party at little or no cost or at inflated prices to the entity. (b) Payments for services never rendered or at inflated prices. (c) Sales at below market rates to an unnecessary middle man related party, who in turn sells to the net customer at a higher price with the related party (and ultimately its principals) retaining the difference. (d) Purchases of assets at prices in excess of fair market value. e) Use of trade names or patent rights at exorbitant rates even after their expiry or at a price much higher than the price, which can not be described as reaso nable. (f) Borrowing or lending on an interest-free basis or at a rate of interest significantly above or below market rates prevailing at the time of the transaction. (g) Exchanging property for similar property in a non monetary transaction. (h) Selling real estate at a price that differs significantly from its appraised value. (i) Accruing interest at above market rates on loans. Associated Enterprise. 92A. (1) For the purposes of this section and sections 92, 92B, 92C, 92D, 92E and 92F, associated enterprise, in relation to another enterprise, means an enterprise a)Which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise or (b)In respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise. (2) 77For the purposes of sub-section (1), two enterprises shall be deemed to be associated enterprises if, at any time during the previous year, (a)one enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in the other enterprise or b)any person or enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in each of such enterprises or (c)a loan advanced by one enterprise to the other enterprise constitutes not less than fifty-one per cent of the book value of the total assets of the other enterprise or (d)One enterprise guarantees not less than ten per cent of the total borrowings of the other enterprise or (e)more than half of the board of directors or members of the governing board, or one or more executive directors or executive members of the governing board of one enterprise, are plant by the other enterpri se or f)more than half of the directors or members of the governing board, or one or more of the executive directors or members of the governing board, of each of the two enterprises are appointed by the same person or persons or (g)the manufacture or processing of goods or articles or business carried out by one enterprise is wholly dependent on the use of know-how, patents, copyrights, trade-marks, licenses, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights or h)ninety per cent or more of the raw materials and consumablesrequired for the manufacture or processing of goods or articles carried out by one enterprise, are supplied by the other enterprise, or by persons specified by the other enterprise, and the prices and other conditions relating to the supply are influenced by such other enterprise or (i)the goods or articles manufactured or graceful by one enterprise, are sold to the other enterprise or to persons specified by the other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprise or (j)Where one enterprise is controlled by an individual, the other enterprise is also controlled by such individual or his relative or conjointly by such individual and relative of such individual or k)Where one enterprise is controlled by a Hindu undivided family, the other enterprise is controlled by a member of such Hindu undivided family or by a relative of a member of such Hindu undivided family or jointly by such member and his relative or Chapter 2 Objectives of the Study Objectives of the Study- Primary Objectives 1) To study the acceptability of different methods of Transfer Pricing in the companies. 2) To find out the ways of applying Arms Length Method a nd the results of it. 3) To study the different terms like Associated Enterprises, Transfer pricing officer, International Transaction & Subsidiary company etc. Secondary Objectives 1) To identify various other ways of managing the profit of the company. 2) To analyse different ways of applying extra cash flow. ) To find different ways of Transfer Pricing which are applicable under Income Tax Act 1961. Chapter 3 Company Profile COMPANY PROFILE PARAMOUNT Established in 1993, rife Surgimed Ltd. manufactures wide range of Surgical Blades, Scalpels which cover General Surgery and other Surgical Area viz Gastroentrology, Urology, Orthopedic & General Surgery etc. dominant Surgimed Ltd. is exporting their products in more than 50 countries. prevailing Surgimed Ltd. is first Company who has been approved by ISI, ISO 9001 & FDA registered company and their products are CE marked. A direct whiz of concern for mankind and a mission to realize richer human life led to the birth of PARAMOUN T SURGIMED LTD. predominant has grown with a reputation of specializing in manufacturing of a wide range of single use medical and surgical devices such as Surgical Blades, Disposable Scalpels, tailor Cutters and Skin Graft Blades. Paramount has its corporate head office in New Delhi, the capital of India & operates its major production activities from Bhiwadi in Rajasthan. This has a floor space of 30000 sq. ft. on 10000 sq. meter. plot and a mere 60 km from the Capital City. The facilities comprise of in vogue(p) state of the art manufacturing unit comparable to international standards. Paramount is committed to exceed its customers expectations. tout ensemble aspects of manufacturing and packaging is done in a clean & controlled environment.We stick with to the policy of strict pure tone control without mercy by making use of in house test laboratory, for competitive quality impudence at all times. Blades are sterilized through Gamma actinotherapy in New Delhi. We are an ISO 9000 2000 company and the products are CE marked. Our products are also registered with various health ministries around the world. Vision Statement Today India is at the down of the millenniums exciting future with the liberalization and the opening up of its economy. The world is taking a look at India, her products, and her enterprises. With a vision of being a global leader in medical checkup Disposables, Paramount Surgimed Ltd. dedicates itself to the crucial sector. guardianship StatementWe atParamount Surgicals, Inc are committed todesign, manufacture and distribute finest spinal implant and instruments. Since its beginning, Paramount Surgical, Inc has stood for one capability above all others the ability to Innovate. Innovateis a sense of possibility that allows for freedom beyond mere innovation. We strive without reserve for the sterling(prenominal) possible reliability and quality of our products and to be recognized in the market for our dedication, honesty a nd services. Paramount Surgimed Limited has created this privacy statement in order to demonstrate our firm commitment to privacy. The following discloses the information gathering and airing practices for our Corporate Web site www. paramountblades. com. . R & D Technology MissionWe fully understand the grave implications of technology and are constantly on the move to keeping abreast with rapid technological development towards the quest for excellence in the field of Medical & Surgical disposables. The R & D department not only admirers in developing new products and their manufacturing technologies but also in improving existing ones. Quality Commitment Paramount has kept alive quality as a legacy in which quality is not an end but a vehicle for pursuance excellence & perfection at all stages. We are committed to exceed our customers expectations. All aspects of manufacturing and packaging is done in a clean & controlled environment. We adhere to the policy of strict quality control without mercy by making use of in house test laboratory, for competitive quality assurance at all times.Blades are sterilized through Gamma Radiation in New Delhi. We are an ISO 9000 2000 company and the products are CE marked. Our products are also registered with various health ministries around the world Step in to the Future Encouraged with the hold outd impressive performance, Paramount has decided to expand & diversify in to the other related areas, targeting the year leading into twenty-first century. Paramount will build additional new manufacturing facilities equipped with latest technologies in the field of healthier business. The responsibility and obligation to the customer to supply the best products in every way is the power of its efforts.Like the tip of an iceberg, only a small part of its work is visible. The significant talent however is the use of most progressive and modern technologies, and the untiring efforts of its employees, who continue to stri ve for more efficient and better solutions. Response by placing excerpt orders for years together, Paramount has a sustained and consistent growth. OSIM Delhi based Paramount Surgimed Ltd. has signed a Master dealershipe Agreement with OSIM International Ltd. , over $ 300 million company and Sin tornadoores largest manufacturer of lifestyle products to import and trade OSIM products in India and Nepal through OSIM India, a division of Paramount Surgimed Ltd. Established in 1980, OSIM is the No. brand in lifestyle products in Singapore, Hong Kong, Taiwan, and Malaysia, UK & USA, Australia, Canada and over 22 franchisee all over the world. OSIM produces superior designs focusing and following ergonomic guidelines on with quality features. OSIM India has opened 23 outlets in the country in just one year. These include outlets in Delhi, Gurgaon, Ludhiana, Kolkata Bangalore, Chennai, Mumbai, Hyderabad, Pune and Indore. By the end of this year it plans to expand and set up a total of 2 5 more outlets. Quality As we offer lifestyle products related to health, quality is the most important factor that, we take special care of. Our products are completely flawless and stand at par even with the international standards.All our products are study and tested under strict supervision of experts and doctors, so that they do not cause any adverse health effects. Specially equipped with quality experts who individually examine the products themselves so that our clients can use it in a comfortable way. Fully guaranteed our products have been manufactured with complete care, perfection and clearcutness by world class procedures. Believing in the motto quality begins with us, we have earned enormous accolades. Operations 1. Human Resource- The Company is having a manpower of around 530 employees all over India. To maintain the proper management on this vast manpower, the company uses the Master Software, door information Management. The turnover ratio of manpower is aroun d one hundred ten employees in a year.Process of Recruitment- To do the recruitment firstly the workforce assessment is done, then approval is taken from the Heads, HODs and then permission is taken from COOs Basically the company tries to fill the gap internally, by posting the existing employee at the new post, personal sources of employees, their relatives and friends and then if necessary it uses the job portals available on-line and scrutinize the resumes available there. Then the company conduct interview (no G. D. is done), firstly with HR personals then with concern HODs. This process ends for the post of a Front line officer. If a higher person is to be recruited then the interview with COO is also conducted. Then the final result is taken regarding that candidate.Documents to be carried on the date of connective and everything else except the salary (salary is included because many person negotiate other companies on the basis of this LOC) Probationary Period for the new employee remains for 6 months and after that, if he/she (if found suitable), is given permanent employee certificate. Training and Development- in the main the training is provided in the concerning departments only by the employees already work over there. Basically two types of training is provided. i. Product/Technical Training- In this, the training is provided regarding the products of the company and also the work which the new employee is to be done. This includes the hard sum total training. ii.Soft skills/Non-technical Training- In this training, the soft skills are taught to the candidate, like the behavior of the employees, working conditions, organizational culture etc. Time to time the employees development programs are also conducted to motivate the employees i. e. to understand their personal problem, solving it out, developing their life story path, etc 2. I. T. The company is having one single IT department to control all the data base management and all the ne tworking facilities. This department is in head office. The company uses its own made OSIM Software to keep the data and all of its branches are using the same software, which is downloaded by the head office personals with the SQL information.The company is also engaged in on line merchandizing, it makes online sales also with the help of its website. It uses OSIM India as the sell website which is fully organized by the Head Office only. 3. Accounts The Companys Accounts Department is near to Head Office. The Accounts Department is having a workflow of 25 members who are handling the accounts of the different branches of the Company. The Company is using Tally 9 Software along with MS Office to maintain the records of the customers 4. Marketing- The Company is having a highly powerful Marketing performance which is the giganticgest strength of the company. The products of Paramount are traded in both domestic and international markets.Our medical products are being exported to more than 40 Countries across the world like USA, Asia, and South Africa etc. Moreover, OSIM is declared as Asia No. 1 reasoned lifestyle brand in consumers minds It basically having two types of Sale i. e. a) Corporate- The Company is having almost 35% of its total sales in the Corporates. Its Corporate clients includes ONGC, Japee Hotels, Indian Oil, Hyath Group of Hotels, Apollo Tyres, Apollo Hospitals, Heritage Hospitals, Fortis Hotels etc. The Company is having a big ratio of its sales in Indian Army and other PSUs b) Retails- The Companys Retailing is very strong. Almost 65-70% of its sales is based on Retailing. Its Retailing is very wide, which is divided in three modes i.Showrooms- The Company has opened its own Showrooms in different parts of the country, including Chandigarh, Delhi, Ludhiana, Ahemdabad, Kerla, Hyderabad, and many other places. The Showrooms are exclusively defined, and highly modernized, with all the facilities for the visitors. ii Shop in Shops- At many places the Company is having its shops in different shops. This is a very new concept which provide the firm to save money and also having more attention form the visitors along with standing with other different renowned Brands. iii Road Shows- The company has a mode of selling through Road Shows. Road Shows are very popular in Metro Cities and a large amount of sales of the Company is dependent on that.The Company is having its all time Road Show in Delhi, Bangalore, Kolkata, Chennai etc. Products iMedic curb Revolutionary chair designed for precise knead The new OSIM iMedic Chair is the first of its kind to cater to the specific inevitably of every individual by detecting the precise location of shiatsu points along the back. With more than 300 acupressure points in the body, every persons body shape is as different as the shape of our face. Determining the exact body shape of the use allows a more sensitive abrase to be applied effectively to just the right spot, helping t o relieve fatigue and neuralgia, promote blood circulation, ease bodybuilder strain and stiffness, leaving you feeling make relaxeded all over.Sit back, close your look and sink into the luxuriousness of the OSIM iMedic Chair as you relinquish your body to the ultimate massage experience. Detecting Acupressure Points While seated deeply into the OSIM iMedic Chair with your head resting comfortably on the headrest pad, select any of the 8 comprehensive massage syllabuss. Before commencement of any programme, the massage rollers mechanically glide along the length of your back to detect the acupressure points via 2 infrared sensors. Once detected, you can look forward to a massage experience unlike any other. Shoulder Position Adjustment You can further personalize the massage programmed by adjusting the position of the rollers at your elevate area, so you can pinpoint the massage precisely where you want it. welfare Programmes These 3 relaxing programmed are designed to enhance your health by adapting massage treatment to your daily routine. Morning Programme For those who feel an ongoing tiredness and a lack of energy during the day, giving you the extra energise you need Night-time Programme Use at the end of the day to fully relax your body and prepare you for a good rest. Useful if you fetch from insomnia. Seat Programme Massages the hip area using a combining of vibration action and seat message. Useful for relief of constipation discomfort. hedonistic Comfort Versatile Design The OSIM iMedic Chair has been designed with features to raise the level of comfort to unparalleled heights.Fully Automatic Reclining System Recline the back and/or the hassock independently at the siple touch of the Remote restraint to find the position that suits you best. Adjustable Angle The backrest can be reclined up to 170 degree for greater comfort. Extendable Footrest The footrest can be easily extended to cater to the height of the user. Auto-Timer Whichever prog ramme you chose, it will automatically run for a maximum of 15 minutes, allowing you to relax your mind while the OSIM iMedic Chair relaxes your body. However, you can turn the programme off or switch to a different programme at any point and the timer will reset automatically.Total Remote Control A comprehensive Remote Controller with two LCD display screens controls all programmes and functions for an uninterrupted massage session. Anti-bacterial Upholstery Covers The upholstery covers are specially coated with an anti-bacterial treatment, keeping bacteria like Staphylococcus, Yellow Coliform Bacilli and MRSA at bay. They are completely obliterable for swooning cleaning. Available in white, black, latte and olive. Foldable Backrest and Castors For easy storage and transportation. Paramount Surgimed Ltd, New Delhi has been chosen as Master Franchise to represent OSIM in India. OSIM India A Division of Paramount Surgimed Ltd shall be promoting a wide range of OSIM products through our exclusive showroom to start with in New Delhi and followed by in other cities.OSIM International Ltd, Singapore came in to existence in the year 1980 with the aim to provide a healthy lifestyle to the mankind. From a humble start to $287. 4 million company, straight off OSIM is promoting its products through is Master Franchise in over 20 countries. OSIM INDIA is coming up with a top of the line massage chair in India Millennium Chair OS 747iv The Master Of Relaxation. Equipped with a specially designed roller system, which moves in a wavelike motion along your spine to effectively massage muscoes relieve aches and stiffness. Bliss Chair NR-90 do Relaxation from Top to toe. Full body massage with a peculiar reversible footrest, which gives you a choice of resting your legs, or treating your feet and calves to a stimulating massage. away from the above products we have a Reflexologist, i Twin, Foot Reivitalizer 2, Tappie (Handy Massager), Warm air out Turbo, eHuman-logic BPM , Pro Therapist, Massuer Chair, Hair Brush, Ear Scan, Health Sole, Eye Care Massager, bigger Gel Pad, Samll Gel Pad, VF scan, e-Body fat Scale, Fever Band, Handy Neb, Ultrasonic Neb, import Heat Pad (small), lissom Belt (Aerobics), Slim Belt (Body Shaping), Slim Belt (back support), Slim Belt (Extra Support), Spare Wire, Upholstery for OS777, Music CD for OS777, I. thought Upholstery for OS757 to add to the big range of products. Chapter 4 Research Methodology search METHODOLOGY Methodology is the bone of a project. It has also an important place as regards to cash management system project. It helps us in accumulation and analysis of data in preparing the project. My Research is purely a descriptive Research, which includes understanding and analyzing Transfer Pricing and its different Method. My sources of collecting of data must be very much reliable, so secondary data assembling method is used for the purpose of the project for the Price Management System.I have gone ver y deeply in preparing the project & I devoted my full attention to get the accurate & real data collection. For this purpose I became in close contact with sources of data collection by personally & through Internet. The Methodology contains the following things- Methods of Data show - For the project tale, methods of data collection has an important role in connection with accuracy & exact information. So, I adopted both the methods primary as well as secondary method of data collection. A) Primary Data Throughout the preparation of the project report, I was in the contact of CFO & other staff of finance department of Paramount Surgimed Ltd. o get the information in connection with the practical working of transaction between the company & banks. B) Secondary Data I have also accumulate the information, figures & data in connection with the preparation of project report from Balance-sheet & one-year report of Paramount Surgimed Ltd. I have also collected the information about cash management, services & Latter of Credit provided by the bank to the company. Along with it I have collected information about the number from the Internet and also form many of my friends and colleagues who have worked over on the similar kind of projects or who are having a good instruction over the subject.Sources of Data - Sources of collection of data for a project report has a very