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Transfer Pricing- Arms length principle

Transfer Pricing- Arms length principle

Transfer Pricing: Arm’s length principle

Transfer Pricing was introduced in India in 2001 and since then it has gone through numerous changes in respect to amendments for the purpose of strengthening the rule. In simple words, if one was to define transfer pricing’s ‘Arm’s Length Principle’, it is a deal between two interrelated or enterprise associates parties.

The deal is conducted in a manner whereby the behavior of the two companies is deemed not related so no query of a disagreement of attention arises. It can invariably be termed as ‘a deal between two unconnected or associate parties’.

The concept of an arm's length deal is to make sure that both associates in the transaction behave for their self-attention and are not under any force or pressure from the other associate. The Organisation for Economic Co-operation and Development (OECD) had introduced guidelines for transfer pricing in respect to multinational enterprises and tax administrations in the year 1995.

In the transfer pricing system, the transfer pricing has to be determined on the basis of arm’s length principle so price fixed is the Arm’s Length Price (ALP). Defined in Section 92F of the Companies Act, arm’s-length price is proposed to be applied to transactions between persons other than Associated Enterprises in uncontrolled conditions.

The following methods have been determined by Section 92C of the Act for the arm’s-length price:

  • Comparable uncontrolled price (CUP) method.
  • Resale price method (RPM).
  • Cost plus method (CPM).
  • Profit split method (PSM).
  • Transactional net margin method (TNMM).
  • Other methods as may be prescribed.

For other methods that may be prescribed, the Central Board of Direct Taxes (CBDT) has said that the ‘other method’ for calculation of the arm’s-length price in relation to an international transaction shall be any method which considers the price which has been charged or paid, or would have been charged or paid, in a similar or the same uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering the relevant facts.

The regulations for arm’s length price requires a taxpayer to determine a price for international transactions or specified domestic transactions.

It further established that in the case of more than one arm’s-length price, it is determined by applying the most appropriate transfer pricing method, the arithmetic mean (average) of such prices shall be the arm’s-length price of the international transaction or specified domestic transactions.

Accordingly, the Indian regulations do not recognise the concept of arm’s-length range but requires the determination of a single arm’s-length price.

The inherent problem of transfer pricing where difficulty arises in setting a fair price in the absence of two unrelated parties in a transaction and the manipulation of rules by multinationals in an attempt to evade tax is curbed by constant regulations to ensure the transfer pricing principle strengthens tax filing in countries and ensures the sanctity of the tax infrastructure. To know more transfer pricing, get in touch with our experts at info@ascgroup.in

 

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