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Transfer Pricing: International Transaction and Arm’s Length Price

Transfer pricing can be termed as the value which is attached to the goods or services transferred between related parties. In other words, transfer pricing referred to the price which is paid for goods or services transferred from one unit of an organization to its other units situated in different countries (with exceptions).

Subjects Which Comes in Transactions to Transfer Pricing

The below mention list is some of the typical international transactions which are governed by the transfer pricing rules:

  1. Sale of finished goods.
  2. Sale or purchase of machinery.
  3. Sale or purchase of Intangibles.
  4. Purchase of raw material.
  5. Purchase of fixed assets.
  6. IT Enabled services.
  7. Support services.
  8. Software Development services.
  9. Technical Service fees.
  10. Management fees.
  11. Royalty and Corporate Guarantee fees.
  12. Reimbursement of expenses paid or received.
  13. Loan received or paid.

Transfer pricing law has objective to assure that transactions between associated enterprises does not happen at an unreasonably favorable & controlled price.

Objective of Transfer Pricing Law:

The main purpose of transfer pricing law in international transactions is to assure that transactions between associated enterprises take place at a price as if the transaction were taking place between unrelated parties.

International transaction refers to a transaction which are going to happen between two or more associate enterprises, where either or both parties are non-resident.

These kinds of transactions can be related to purchase, sales/lease of property, tangible assets or intangible assets, lending of money, provision of services etc. As said earlier, one of the parties involved in the transaction must be a non-resident entering to one or more than one of the transactions mentioned below:

  1. Transactions related to providing with services
  2. Transactions involving buying, selling, or offering a lease of tangible and intangible properties
  3. A mutual deed among associated enterprises for appointment or allocation of any cost, contribution, or expense
  4. Capital Financing deals like borrowing, or lending, guarantees

The Provisions of Transfer Pricing have been proposed to ensure that income arising from an International Transaction between Associated Enterprises will be computed having regard to the Arm’s Length Price. Any cost allocated between two or more associated enterprises under a mutual agreement will also be at an Arm’s Length Price.

Arm’s Length Transactions is described under Companies Act, 2013 which define for the aim of Section-188(1), the expression Arm’s Length Transaction referred to a transaction between two related parties that is conducted as if they were not related, so that there is no conflict of interest.

Arm’s Length Price define under Income Tax Act, 1961-Section 92F , according to this section the price applied (or proposed to be applied) when two unrelated persons involved in a transaction in uncontrolled conditions.

Unrelated Persons: As per the Section 92A, the persons come under category of unrelated if they are not associated or deemed to be associated enterprise.

Uncontrolled Conditions: this refers to that conditions which are uncontrolled /not controlled or suppressed for accomplishment of a predestined results.

Main aspects of Arm’s Length Price.

1. The price need to be applied or proposed to be applied in a transaction.

2. A transaction will happen between two unrelated persons

3. The transaction need to happen in uncontrolled conditions.

If an international transaction includes only outgoings like expenses, interest, allowances or other then these are also decided or valued based on Arm’s Length Price as per the Section 92(1).

Note: Section 92 is not applicable to a Non-resident whose income is not taxable as per provisions sections 5 and section 9 of the Income Tax Act, 1961.