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Transfer Pricing Study & Audit - Canest

Canest > Transfer Pricing Study & Audit

Overview

Since 1991, with the liberalization of trade and foreign exchange policy India has started integrating its economy with global economy. This has led to increased cross border flow of goods, services, funds and even intangibles. There was a large inflow of Foreign Direct Investment (FDI). Monetary controls

were relaxed and quantitative import barriers were lifted. Obviously, with the growing MNEs interested in India, it has become imperative for tax authorities in India to take cognizance of transfer pricing issues. It is relevant to note that many of the Indian companies have also become large global players with major acquisitions in recent past and with overseas subsidiaries in many tax jurisdictions

How to Transfer Pricing Audit in India

During the last decade, India is now a major opportunity for global businesspeople looking to grow a successful business in India. Liberalization, booming middle class, and employment and the wages growth have made ​​India an appealing destination. Simultaneously, creating a company in India means to browse through the various tax and legal complexities. And one of the main tax legislation that need to be into consideration is the transfer pricing litigation.

In order to curb the practice of avoiding tax audit by the foreign companies in India, a legislation under the name ‘Transfer Pricing Regulation’ has been introduced.

So in a number of articles, Here Neeraj Bhagat & Company has explored various aspects of transfer pricing tax audit. Let us begin with understanding the transfer pricing rules in India.

The following are the important statutes of the law.

    • Each person or association who has involved in an international transaction should maintain an up-to-date record of each transaction as prescribed by the legislation.
    • All income acquired by the company by means of any international transaction shall be calculated at arm’s length price. There are various methods to calculate the arm’s length price, depending on the nature and type of the transaction, the nature of the group or the association involved, or any other features of the transactions involved. These methods are introduced by the Central Board of Direct Taxes, generally known as the ‘Board’. Some of them include the resale price method, cost plus method, comparable uncontrolled price method, and transactional net margin method.
    • If there are two or more appropriate prices assumed for a certain transaction, the arm’s length price will be calculated as the average of the prices.
    • At the end of a financial year, the person or group involved in an international transaction should submit the report of it in Form 3CEB under the guidance of a Chartered Accountant. This form has to be filed before he files the Income Tax return of the same period.

      What is a Transfer Pricing Study?

      A transfer pricing study examines the pricing of transactions between related two or more associates. By applying and documenting various test methods, it is determined whether the transactions are conducted under market conditions and survive the scrutiny of the IRS and other tax authorities.

      A study of transfer pricing shall justify how a particular method is selected for enterprises and transactions being reviewed.

      Transfer Pricing Study for Indian Companies

      All Indian companies are required to analyze their international transaction with respect to the Transfer Pricing Regulation and adhere to it by maintaining proper transaction records and documents.

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