FAQ - Transfer Pricing | Company Law

 

 

Transfer Pricing

Q.1. What is Transfer Pricing ?
Ans.: Transfer Pricing is the price at which an enterprise transfers physical goods and intangibles or provides services to associated enterprises. It is an accepted principle that transactions between related parties should be based upon the same terms as between unrelated parties. 

Q.2. Introduction of Transfer Pricing- International Transactions ?
Ans.: The Finance Act 2001 introduced the new Transfer Pricing regulations in India w.e.f. 1 April 2001 by substituting the existing section 92 with new a set of sections from 92 to 92F in the Act and a relevant set of rules 10A to 10E. Accordingly, Assessment Year (’A.Y.’) 2002-03 was the first year of TP Assessment.

Q.3.Introduction of Transfer Pricing- Specific Domestic Transactions ?
Ans.: The Finance Act, 2012 has extended the scope of Transfer Pricing (TP) provisions to Specified Domestic Transactions (SDT) as well. The provisions apply from the Financial Tear 2012-13 if the Transaction undertaken by the Taxpayer falls within the meaning of “Specified Domestic Transactions”.

Q.4. What do we mean by Arm’s Length Price?
Ans.: Arm’s Length Price means a Price which is applied or proposed to be applied in a Transaction between persons other than Associated Enterprises, in uncontrolled conditions.

Q.5. What are the methods to determine Arm’s Length Price?
Ans.: Arm’s Length Price has to be determined applying any of the prescribed methods:

  • Comparable Uncontrolled Price Method (CUP)
  • Resale Price Method (RPM)
  • Cost Plus Method (C+)
  • Profit Split Method (PSM)
  • Transactional Net Margin Method (TNMM)
  • Price which has been charged or paid, or would have been charged or paid, 
    for the same or similar uncontrolled Transaction
International Taxations
Q.6. What is meant by International Transaction’ with regard to Transfer Pricing?
Ans.: International Transaction” means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise.

When can two companies be called ‘Associated Enterprise'?
Ans.: An "enterprise" is an Associated Enterprise :-
  • When it participates directly or indirectly in the management or control or capital of the other enterprise? This can be explained as under:
  • If any person who participates in the management or control or capital of an enterprise, also participates in the management or control or capital of the other enterprise, then it comes under the above heading.


This can be explained as under:

Two enterprises shall be deemed to be associated enterprises if, at any time during the previous year

  • one enterprise holds, directly or indirectly, shares carrying not less than twenty- six percent. of the voting power in the other enterprise ; or
  • any person or enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in each of such enterprises; or
  • a loan advanced by one enterprise to the other enterprise constitutes not less than fifty-one per cent. of the book value of the total assets of the other enterprise; or
  • one enterprise guarantees not less than ten per cent. of the total borrowings of the other enterprise; or
  • more than half of the board of directors or members of the governing board, or one or more executive directors or executive members of the governing board of one enterprise, are appointed by the other enterprise; or
  • more than half of the directors or members of the governing board, or one or more of the executive directors or members of the governing board, of each of the two enterprises are appointed by the same person or persons; or
  • the manufacture or processing of goods or articles or business carried out by one enterprise is wholly dependent on the use of know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights; or
  • ninety per cent. or more of the raw materials and consumables required for the manufacture or processing of goods or articles carried out by one enterprise, are supplied by the other enterprise, or by persons specified by the other enterprise, and the prices and other conditions relating to the supply are influenced by such other enterprise; or
  • the goods or articles manufactured or processed by one enterprise, are sold to the other enterprise or to persons specified by the other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprise; or
  • where one enterprise is controlled by an individual, the other enterprise is also controlled by such individual or his relative or jointly by such individual and relative of such individual; or
  • where one enterprise is controlled by a Hindu Undivided Family, the other enterprise is controlled by a member of such Hindu Undivided Family, or by a relative of a member of such Hindu Undivided Family, or jointly by such member and his relative; or
  • where one enterprise is a firm, association of persons or body of individuals, the other enterprise holds not less than ten per cent. interest in such firm, association of persons or body of individuals; or
  • there exists between the two enterprises, any relationship of mutual interest, as may be prescribed.

Q.7. Are there any circumstances wherein transactions between two unrelated entities can be subjected to Transfer Pricing provisions? 
Ans.: Yes, there are certain deeming provisions under the Indian Tax Legislation wherein transactions amongst unrelated entities are also subjected to transfer pricing provisions.

Firstly, on satisfaction of certain criteria, two entities would be deemed to be associated enterprises, and hence the transfer pricing provisions shall be applicable on all transactions amongst them. The said criteria could be – shareholding, voting power, loans, guarantees, appointment of board members, dependence on intellectual property, purchase of raw material, sale of goods, mutual interest relationships, etc.

Secondly, a transaction amongst two entities which are not associated enterprises, would be deemed to be an international transaction in certain circumstances and transfer pricing provisions shall become applicable on the said transaction. The said circumstances are – where there is a prior agreement for the said transaction between the other party and an associated enterprise of the taxpayer; and where terms of the transaction are determined in substance between the other party and an associated enterprise of the taxpayer.


Specified Domestic Transactions
Q.8. How are Specified DomesticTransactions defined?
Ans.: The following transactions with the aggregate value exceeding INR 50 million (US$ 1 million) are covered.
  • Expenditure for which payment is made or to be made to specified domestic related parties.
  • Transfer of goods or services to/from eligible business (tax holiday undertaking) from/to other business (non-tax holiday undertaking).
  • Business transactions between eligible business (tax holiday unit) and other person(s) producing more than ordinary profits owing to close connection.
Q.9. What is “Specified Domestic Transactions”?
Ans.: As per section 92BA of Income Tax Act, 1961, the following transactions are “Specified Domestic Transactions”.
  • Any expenditure in respect of which payment has been made or is to be made to a person referred to in clause (b) of subsection (2) of section 40A.
  • Any transaction referred to in section 80A
  • Any transfer of goods or services referred to in sub-section (8) of section 80-IA
  • Any business transacted between the taxpayer and other person as referred to in sub- section (10) of section 80-IA
  • Any transaction, referred to in any other section under Chapter VI-A or section 10AA to which provisions of sub-section (8) or sub-section (10) of section 80-IA are applicable; or
  • Any other transaction as may be prescribed
Q.10.Indicative list of Specified Domestic Transactions 
Ans.: Following transactions between the specified persons and also between the inter unit transactions of taxpayers would be some of such transactions to which provisions of transfer pricing regulations are applicable.
  • Expenditure on buying goods
  • Expenditure on procurement of services
  • Expenditure on interest payments
  • Expenditure on salary, training services, marketing expenses
  • Expenditure on purchase of tangible and intangible property
  • Director’s remuneration, commission, sitting fees
  • Group charges/ Allocations of cost
  • Reimbursement expenditure
  • Guarantee fee expenditure
  • Any other operating expenses
Q.11. Which tax payers are covered under Specified Domestic Transactions? 
Ans.: Any taxpayer incurring any expenditure with specified domestic related parties are required to comply with the regulations.

Q.12. How do you define a specified domestic related party? 
Ans.: The domestic related party will inter alia include a director, a relative of the director, a person having substantial interest in the taxpayer (carrying not less than 20% of the voting power) and fellow related parties where a single person has substantial interest in two taxpayers.

Q.13. When is a person considered to be having substantial interest? 
Ans.: A person shall be deemed to have a substantial interest in a business or profession carried on by a company in case such person is, anytime during the previous year, the beneficial owner of its equity share carrying 20% or more voting power. A person shall be deemed to have a substantial interest in a business or profession carried on by any other person (i.e., other than company), in case such person is, at any time during the previous year, beneficially entitled to 20% or more of profit of such business or profession 

Documentation Requirement
Q.14. Requirement for the preparation of TP Study and 3CEB.
Ans.: International TP
  • TP Study is to be prepared if the aggregate value of International Transaction exceeds Rs. 1 crore.
  • In a case where the aggregate value of International Transaction does not exceed Rs. 1 crore, TP Study is not required to be maintained but still sufficient documentation are required to be maintained to justify that the transaction is at ALP
  • 3CEB is required to be prepared even if the value of International Transaction is of rupee 1.

Specific Domestic Transactions
Specific Domestic Transactions regime applicable from FY 2012-13 where value of SDTs in aggregate exceeds INR 5 crores annually

Preparation of Form No 3CEB and TP study report mandatory even for the SDT

Q.15. What is the due date for filing the Accountant’s report and documentation?
Ans.: 
  • The Accountant’s report needs to be submitted with the tax authorities by the due date of filing the annual return of income. At present, the due date is 30 November.
  • Documentation is not required to be submitted along with the Accountant’s report, but is to be in place by the due date. It does need to be submitted during the course of the audit/assessment.
Q.16. Who is the authorized person to furnish the report under section 92E of the Income Tax Act
Ans.: Any person who has been involved in an International Transaction or Specific Domestic Transactions 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. 

Penalty


Q.17. What is the penalty regime for non-compliance with the regulation? 

Ans.: A stringent penalty regime has been prescribed:

  • Failure to maintain documents
    • 2% of the value of the transaction
  • Failure to furnish documents
    • 2% of the value of the transaction
  • Failure to furnish the accountant’s report 
    • penalty of Rs.1,00,000/-
  • Failure to report a transaction in Accountant’s report 
    • 2% of the value of the transaction
  • Maintaining or furnishing incorrect information or documents 
    • 2% of the value of the transaction
  • Adjustment for incorrect pricing 
    • 100% to 300% of the additional tax payable

Q.18. Does taxable income enhanced as a result of addition qualify for benefit under Chapter X.

Ans.: Taxable income enhanced as a result of Transfer Pricing adjustment does not qualify for various concessions/holidays prescribed by the Income Tax Act.


Company Law

Q.1. What are the different types of business ownerships? 
Ans.: An Entrepreneur may choose any of the below mentioned types of business ownerships, whichever is best suitable to him, in the light of benefits/liabilities attached to them:

Company_law_pic1

Q.2. What do you mean by Company/Corporation and what are the most common forms of Companies incorporated in India?
Ans.: Company means an artificial person, created and existing in the eyes of law, owning a separate legal identity (distinct from its members), having limited liability, perpetual succession and a common seal.

Following are the most common types of Companies: 
  • Public Company
  • Private Company

Q.3. What do you mean by Wholly Owned Subsidiary?
Ans.: A Company, of which 100% Equity Share Capital is held by any other Company, is called a Wholly Owned Subsidiary. A Company may incorporate its wholly owned subsidiary by subscribing to its entire equity share capital, itself and through its nominee.

Q.4. What are the basic requirements for incorporating a Private Company?
Ans.: Following are the pre-requisites for incorporating a Private Company:

Company_law_img2
Q.5. What are the basic requirements for incorporating a Public Company?
Ans.: Following are the pre-requisites for incorporating a Public Company:

Company_law_img3
Q.6. Describe the procedure for incorporation of a Company, in brief?

Ans.: Description of procedure as follows :
  • File E-form 1A with the concerned Registrar of Companies for name availability.
  • Draft the Charter documents and other relevant documents of the proposed Company.
  • File E-Form 1, 18, & 32 whit the concerned Registrar of Companies.
  • After issue of the Certificate of incorporation of the Company by Registrar of Companies, get the Charter documents of the Company printed.

Q.7. What is the difference between Certificate of Incorporation and Certificate of Commencement of Business?
Ans.: Certificate of Incorporation is a Certificate of Registration issued by the Registrar of Companies, within whose jurisdiction the Company is registered and is a conclusive evidence of the compliances of requirements of The Companies Act, 1956. However, the Certificate of Commencement of Business is a Certificate issued by the concerned Registrar of Companies to the Public Companies, for Commencement of Business.

Q.8. Who is a Director? What are the powers of the Board of Directors?

Ans.: A Director is a person through whom the Company acts. The Board of Directors need not be the shareholders of the Company. However, Company’s Articles may require the director to hold the qualification shares in the Company.

Subject to the provisions of Articles of Association of the Company and The Companies Act, 1956, the Board of Directors of a Company shall be entitled to exercise all such powers and to do all such things as the Company is authorized to exercise/do.

Q.9. What are the types of the meetings of the Company?
Ans.: Following are the different types of the meetings a Company may hold: 

Company_law_img4
Q.10. What are the statutory requirements with respect to the Board Meetings?
Ans.: Statutory requirements with respect to the Board Meetings are as under:

Minimum quorum required: One third of the total number of Directors or two directors in case of private company/three directors in case of public company, whichever is higher.

Minimum number of Board Meetings: Atleast four Board Meetings be held in one financial year and one Board Meeting be held in every quarter of the year. Q.11. What are the statutory requirements with respect to the Annual General Meeting (AGM)?
Ans.: Time limits for holding the Annual General Meeting(s)

First AGM: A newly incorporated Company must hold its 1st AGM within a period of 18 months from the date of its incorporation or within 9 months from closure of its Financial Year, whichever is earlier.

Subsequent AGM:
  • One AGM be held in every calendar year.
  • The time gap between two successive AGMs shall not exceed 15 months.
Day & Time:
  • The AGM must be called on a day, which is not a public holiday.
  • The AGM shall be called during business hours only.
Place of AGM :
  • The AGM must be held either at the registered office address of the Company; or
  • At any other place situated within the same city/town in which the registered office of the Company is situated.

Q.12. What is Annual Filing and what are the Annual Filing compliances?
Ans.: Annual Filing is referred to the filing of Annual Accounts, Annual Returns and Compliance Certificates with Registrar of Companies (RoC), annually. 

Annual Filing Compliances:
  • E-Form 23 AC and ACA: The Annual Accounts of the Company be filed with RoC, within 30 days of the date of its AGM.
  • E-Form 20B: The Annual Return of the Company be filed with RoC, within 60 days of its AGM.
  • E-Form 66: The Compliance Certificate (if applicable) of the Company be filed with RoC within 30 days of its AGM.

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