Transfer Pricing Agreement is the agreement between associated related parties where one of the parties should be a foreign business. The purpose of Transfer Pricing Agreement is to ensure that the international transaction between the Associated enterprises should happen at the Arm’s length pricing which is actually the bonafide pricing for a same transaction between some unrelated entities.
Transfer Pricing Agreement further defines the methodology of pricing as well as being defined in the income tax law. Transfer pricing agreement is being referred by the Transfer pricing expert at the time of preparation of Transfer Pricing Study. Transfer Pricing Agreement is also being referred by the Income Tax authorities at the time of assessment or appellate proceedings of the company.
In India, transfer pricing regulations were actually adopted in the 1961 Act. In view of the increasing participation of MNEs in the economic life of India, particularly, after the liberalisation of the Indian economy in 1991, a need was felt to provide a detailed statutory framework which can lead to a reasonable, fair and equitable profit allocation and tax to India. Accordingly, sections 92 to 92F were introduced with effect from 01.04.2002 along with rules 10A to 10E notified on 21.08.2002. These provisions covered the meaning of the terms ‘international transaction’ and ‘associated enterprises’ besides providing methods for computation of arm’s length price and documentation requirements. The provisions also created an authority named as Transfer Pricing Officer for the specialised role of determining arm’s length price after the assessing officer has made a reference of an international transaction to the above authority. This process was completed after extensive consultations and feedback from all the stakeholders.
Income Tax Law requires that the Arm’s Length Pricing should be determined by any of the specified method being the most appropriate method. The taxpayer has to select the most appropriate method to be applied for any specific transaction. The prescribed method is listed below:
The following are some of the international transactions which are governed by the Transfer pricing rules:
According to sections 92, 92A, 92B, 92C, 92D, 92E and 92F, a company can be termed as an associated enterprise with respect to the other under the following circumstances. – If the respective company is involved directly or indirectly or with the help of one or more intermediaries in the management, control, or the capital of the other company. – If any person/persons of the respective company who is/are involved directly or indirectly or with the help of one or more intermediaries in the management, control, or the capital of one company is/are involved directly or indirectly or with the help of one or more intermediaries in the management, control, or the capital of the other company.
The various procedures to calculate the arm’s length price with respect to an international transaction are the following.
Any person who has involved in an international transaction in the previous year shall submit the report in Form 3CEB through a Chartered Accountant, duly verified by him, on or before the date prescribed by the authority, furnishing all the required details.
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