Section 80C is a primary choice for Tax Saving for most taxpayers as it allows deductions up to...
Ans. The increasing participation of multinational groups in the Indian economy has arisen various issues of a transaction entered by those groups.
Business may be carried on between resident and a person who is non-resident or not ordinarily resident in India and owing to close connection between them, the course of business may arrange that the resident may make either no profit or less than the ordinary profit in that business, such an arrangement would deprive that Indian revenue of the tax which would otherwise be payable by the resident.
Transfer pricing means the value of Goods or Services Tax which is transferred between two or more related parties.
Hence the Transfer Pricing can be defined as the price payable on goods or services transfer between one economy unit to another economy unit (assuming both units are in different countries but belongs to same multinational company & firm).
Ans. The Arm’s Length rule is applied in both case either it is transfer pricing or distribution of profit. The arm length price can be defined as a price which is payable on GST Eligibility which has been transferred from one entity to another entity within a group and having a place of business in two different economies if these entities were not related.
Ans. There are 6 Method of calculation of Arm’s Length Price in relation to an international transaction:-
Before choosing any method the following procedure must be followed:-
The central Govt. has notified that the variation between the ALP determined & price at which international transaction or specified domestic transaction has actually been undertaken does not exceed 1% of the latter in respect of wholesale trading and 3% later in other cases
Ans. As per the Guidance Note issued by the ICAI the comparable uncontrolled price (CUP) may be determined with the following steps.
Suitability:-Transfer of goods, provision of services, transfer of intangible assets, a transaction relating to loan or provision of finance.
Eg.EntersliceUSA USA and XYZ Ltd. an Indian company are associated enterprises. XYZ Ltd. manufactures Mobile phones to EntersliceUSA and BITTU LTD., Korea. During the year, XYZ Ltd. manufactures Mobile phones and sells them to EntersliceUSA at price of Rs. 2000 per unit. The transaction of XYZ Ltd. with Enterslice and BITTU LTD. are comparable subject to the followings differences:-
Compute the Arm’s Length price and the amount of increase in the total income of XYZ ltd., if any due to such Arm’s length price.
|The sale price of mobiles phones sold to BITTU||3,200/-|
· Freight & insurance cost
· Estimated cost of warranty
· Bulk quantity Discount
|Arm’s Length price for mobile sold to Enterslice||2,500|
|Arm’s Length price for 1, 20,000 phones||30, 00, 00,000(1, 20,000*2,500)|
|Price charged from Enterslice||24, 00, 00,000(1, 20,000*2000)|
|Therefore the income of XYZ Ltd. will be increased by||6, 00, 00,000|
Ans. As per the Guidance Note issued by the ICAI the Resale Price Method (RPM) may be determined with the following steps:-
However, if it is material then it should be adjusted.
Suitability:-This method is more suitable for the transaction which involves the distribution of goods with no or little value addition. It is not suitable for the goods which further processed.
Eg.EntersliceUSA and XYZ India Ltd. are associated with the enterprise. XYZ India Ltd. Import 200 Mobile phones from Enterslice USA at a price of Rs. 15,000/- per unit and these are sold to ITC Hotel Ltd. at a price 17,000 per unit. XYZ India Ltd. has bought similar products from Xiomi India Ltd. and sold Oberon Hotel at a gross profit of 10% on sales. XYZ Ltd. incurred freight of Rs.400 and customs duty of Rs. 1500/- per unit in case of a purchase made from Enterslice Japan and Rs. 200 in case of purchase from Xiomi India Ltd.
Compute the Arm’s length price and the amount of increase in the total income of XYZ Ltd., if any, due to such arm’s length price.
Calculation of Arm’s length price
|Resale price of Y Ltd. to ITC Hotels||17000/-|
|Less: Gross profit Margin||1700/-|
|Less: – Difference of Expenses||1700/-|
|Arm’s Length Price||13,600/–|
|Price paid to LG (200 units *15,000 each)||30,00,000/-|
|Arm’s Length Price||27,20,000/-|
|Increase in income of XYZ Ltd.||2,80,000/-|
Ans. As per the Guidance Note issued by the ICAI the Cost Plus Method (CPM) may be determined with the following steps:-
Suitability:- Long-term buying and selling arrangement, transfer of semi-finished goods, joint facility arrangement.
Egg. Enterslice USA Inc., a U.S.A company holds 30% shares in Enterslice Business Solution Private Ltd. (India). Enterslice Business Solution Private Ltd. develops software for various customers including Enterslice, USA. Enterslice Business Solution Private Ltd. during the year billed Enterslice U.S.A for 2000 man-hours at the rate of Rs 400/- per man-hour. The total cost (direct and indirect) for executing this work amounted to Rs. 6, 50,000/-.
Enterslice Business Solution Private Ltd. billed XYZ Ltd. India at the rate of Rs. 800/-per man-hour although the person who was working for the development of the software of XYZ Ltd. were of the same caliber and level that of person who developed the software for Enterslice U.S.A. Enterslice Business Solution Private Ltd. earned a gross profit of 40% of its sales to XYZ Ltd.
The transaction of Enterslice Business Solution Private Ltd. with Enterslice U.S.A and XYZ. Ltd. are comparable subject to the following difference:
Compute the arm’s length price and the amount of increase in the total income of staffing solution Ltd., if any, due to such arm’s length price.
Calculation of Arm’s length price
|The price charged to XYZ Ltd.||800/-|
|Gross Profit Mark up in case of XYZ Ltd.||40%|
|Less: – Value of Technical know- How from Enterslice, USA||4%|
|Less: – Quantity Discount||2%|
|Add: – Cost of credit of Enterslice, USA||1%|
|Arm’s Length gross profit mark up||35%|
|Direct & indirect cost||Rs.6,50,000/-|
|Arm’s Length Billed value (6, 50,000*100/65)*||Rs.10,00,000/-|
|Billed Income (2000 hours*Rs.400)||Rs.8,00,000/-|
|Income of EBS shall be increased by||Rs.2,00,000/-|
Ans. As per the Guidance Note issued by the ICAI the Profit Split Method (PSM) may be determined by the following steps:-
-Market data indicating how such contribution will be evaluated.
Eg. Ent. Ltd. UK received an order from XYZ Ltd. Germany for developing a software product for a sum of US $1, 00,000/-. In order to execute the same, Ent. Ltd. QPR Ltd. (A company in which Ent. Ltd. holds 50% shares) and S Ltd. India (where Z Ltd. holds 50% shares) and Sarthak Ltd. India( where QPR Ltd. holds 40% shares) together develop the above software.
Ent. Ltd. UK pays to QPR Ltd and Sarthak Ltd., India a sum of US $ 24,000/- and $ 27,000/- respectively and keeps the balance for itself.
In the entire transaction, a profit of $16,000/- is earned. Sarthak Ltd. India incurred a total cost of $24,000/- in the execution of its work relating to the above project.
Assume the relative contribution of Ent. Ltd, QPR Ltd, and Sarthak Ltd. is 40%, 25%, 35/% respectively.
Compute the arm’s length price and the amount of increase in the total income of Sarthak Ltd., if any due to such arm’s length price.
The Arm’s Length Price under the profit split method shall be determined as under:-
|Price charged by Ent. Ltd. to XYZ Ltd.||$1,00,000/-|
|Sarthak Ltd. India Shares of revenue||$27,000/-|
|PQR Ltd. share of revenue||$24,000/-|
|Ent. Ltd. Share of Revenue||$49,000/-|
|Combined total profit||$16,000/-|
|Profit Apportionment equivalent to their relative contribution|
|Ent. Ltd. 40% of $16,000||$6,400/-|
|PQR Ltd. 25% of $16,000||$ 4,000/-|
|Sarthak Ltd. 35% of $16,000||$5,600/-|
|The total cost of Sarthak. Ltd. India||$24,000/-|
|Revenue of Sarthak Ltd. on the basis of ALP (24000+5,600)||$29,600/-|
|Actual revenue of Sarthak Ltd. India||$27,000/-|
|Therefore the total income of Sarthak Ltd. owned incurred by||$2,600/-|
Ans. As per the Guidance Note issued by the ICAI the Transactional net margin method TNMM (Transactional net margin method) may be determined by the following steps:-
Suitability: – Provision of services, distribution of finished goods (if resale price method is not applicable)
Direct Cost Rs.18,00,000/-
Gross profit Rs. 7,00,000/-
Indirect cost Rs. 2,00,000/-
Net Profit Rs. 5,00,000/- Net profit Ratio 20%
Direct Cost Rs.8,00,000/-
Gross profit Rs.12,00,000/-
Indirect cost Rs.5,00,000/-
Net Profit Rs. 7,00,000/- Net profit Ratio 35%
Material difference (35%-20%) 15%
Revised Profit at ALP Rs.8,75,000/-
Earlier profit Rs. 5,00,000/-
Profit to be increased by Rs.3,75,000/-
Ans. As per CBDT (Central Board of Direct Taxes, Government of India) vide notification No. 18/2012, Dt.23.5.2012 has notified the following rule 10AB which has come into force A.Y. 2012-13 and onwards:
The other method in relation to the determination of Arm’s length price of international transactions or specified domestic transaction shall be the price which has been charged or paid or would have been paid to similar kind of comparable uncontrolled transaction between two non-associated enterprises under