Transfer Pricing in India: its Overview and impact due to covid-19

 

Transfer pricing applies to foreign as well as domestic transactions between the related businesses. The rules and methods for pricing transactions that are decided Between the companies under common ownership or control are referred to as transfer pricing in taxation and accounting. So in this blog we will discuss the benefits, risks and assurances involved and how Covid-19 have impacted all the Transfer Pricing.

Benefits of Transfer Pricing

Following are the benefits of Transfer pricing-

• Transfer pricing helps to reduce the cost of labour by exporting goods to high tax countries at very low prices so the bond value associated with this purchase is low.

• Reducing the income tax in countries where income tax is high by over taxing the goods transferred to units in those countries where the tax rate decreases relatively thus giving them a higher profit margin.

Risks involved

• There may be disagreements between the executives of the organizational divisions as to what policies should be in relation to transfer policies.

• There are many additional costs related to the time required and staff required to form transfer rates and assist in building an accounting .

• It is difficult to estimate the fair value of the intangible pricing policy like services, because the transfer price isn't effective as these departments don't provide measurable benefits.

• The issue of transfer of costs may end in misconduct by the management of the entities. Another matter of concern is that the process of transferring prices is extremely complex and time-consuming for several people in many countries.

• Buyer and seller perform different functions of each other that make differing types of risks. For example, a retailer may or might not provide a product warranty. But the worth the buyer can pay is going to be suffering from the difference. The risks involved in prices are as follows:

1. Financial risks

2. Risk of collection

3. Market and business risks

4. Risk of product expiration

5. Credit risk

Arm’s Length Method in Transfer Pricing

The methods available in Transfer pricing are direct and indirect methods. The direct methods can be compared to the uncontrolled price method, the resale price method, and the cost-plus method.

All of the above-mentioned direct methods are wont to compare the costs or the traditional gross profit margin margins or the traditional gross profit mark-ups respectively.

 

The indirect methods are the profit split method that splits the entire net income and therefore the transactional net margin method that's compared with internet margin of profit or the operating profit concerning a relevant base like cost, sales, or assets. In India, in most cases, the transactional net margin method is imposed followed by the resale price method and cost-plus method. The profit split method is usually applicable in only a few cases. There is also a residuary method which will be defined by the CBDT.

 

Major Taxation issues in Transfer Pricing

 

Following are the issues involved in Transfer Pricing-

 

1. Diverted Profit Tax and other non-complementary measures- The Indian government amended the ITA in 2012 to oppose offshore indirect transfers of shares with underlying assets in India. Section 9(1)(i) states that if any individual registered outside India derives its value from an individual situated in India in the form of shares or interest, then the individual from the surface is taken into account to be situated in India and responsible for capital gains tax. Hence, transfers of interest in the foreign entity would attract capital gains, subject to exemptions and valuation regulations.

2. People Get Taxed twice- India has signed a double taxation avoidance agreement even though the regulations for the corresponding adjustment in matters of transfer pricing.

3. Significant impact on other taxes- tax conclusions associated with transfer pricing adjustments are independent of the ITA and are regulated by different laws.

Under the GST laws, which are applicable to all supplies of goods and services in India (including imports), the transaction value between the parties is the most important basis of valuation of supplies for the rationale of determining the GST liability. Though, within the situation of a related-party transaction, the transaction value isn't accepted. Hence, a related-party transaction must be benchmarked supporting the principles that are stated, among which is that the open market price (OMV) of relevant goods or services supplied to a non-related party. In such a case where OMV is unavailable, then the taxable value is to be determined on the idea of the worth of comparable supplies, the value construction method, or the resale price of products to different individuals, therein order.

 

Indian custom rules, which give for liability important and export duties on goods imported into and exported from India, are supported by the planet Trade Organization’s Customs Valuation Agreement in thus far as ascertaining taxable value for customs duties purposes . On an equivalent basis, just in case of any related-party transaction, the announced import price isn't accepted unless it's stated that the connection between the customer and therefore the seller may not hold ‘influenced the price’ of the imported goods.

 

If the parties fail to state so, the transaction value is rejected, and therefore the valuation of the imports is referred, administratively, to the Special Valuation Branch (SVB) of Customs.

 

The SVB sequentially levies valuation rules described under Customs Valuation Rules to determine the arm’s-length transaction value. According to the Customs Valuation Rules, this value is ascertained on the idea of the import value of identical goods or similar goods (with necessary adjustments), the deductive value method or calculated value method, and then , the residual method.

 

How Covid-19 has impacted all transfer pricing?

 

Businesses have to face disturbances and losses during the pandemic and reassume transfer pricing policies. Agreements related to pricing between the companies need to be amended due to the pandemic. There are no administrative guidelines for the amended pricing but they can negotiate the terms. 

 

Take the expert advice of BIAT consultants, one of the top consultants across the country.