INDIA Law and Practice Contributed by: Deepak Chopra, Harpreet Singh Ajmani, Rohan Khare, Pulkit Pandey and Priyam Bhatnagar, AZB & Partners
criteria provided under Section 92A(2) of the IT Act, then such enterprises may be deemed to be AEs, and may also be considered as an international transaction for the purposes of Section 92B(2) of the IT Act. • Transactions – as per Section 92F(v) of the IT Act, the term transaction includes an arrangement, understanding or action in concert, whether or not such arrangement, understanding or action is formal or in writing; or whether or not such arrangement, under - standing or action is intended to be enforce - able by legal proceeding. • International transactions – in terms of Sec - tion 92B of the IT Act, an international trans - action is a transaction between two or more AEs, and at least one of the parties in such transaction is a non-resident. • Specified domestic transactions – these are specific transactions between two domestic AEs which have been enumerated in Section 92BA and exceed INR200 million in value. In essence, a wide power has been bestowed with the Indian Tax Authorities for assumption of jurisdiction to determine ALP of an international transaction under the provisions of Chapter X of the IT Act. 3. Methods and Method Selection and Application 3.1 Transfer Pricing Methods The ALP of an international transaction has to be determined by a Transfer Pricing Officer (TPO) in accordance with Section 92C/92CA of the IT Act read with Rule 10B of the IT Rules. Rule 10B of the IT Rules prescribes the following methods for benchmarking the price of an international transaction:
• comparable uncontrolled price (CUP); • resale price method (RPM); • cost-plus method (CPM); • profit split method (PSM); • transactional net margin method (TNMM); and • such other method as may be prescribed by the CBDT. It is relevant to mention that CUP, RPM and CPM are considered as traditional methods and PSM and TNMM are considered as transactional methods. 3.2 Unspecified Methods The Indian Transfer Pricing Regulations require taxpayers to compute ALP using any of the six methods prescribed under Section 92C of the IT Act (see 3.1 Transfer Pricing Methods ). In terms of available judicial precedent, preference is given to traditional methods over transactional methods whilst selecting the most appropriate method. Section 92C(2) of the IT Act read with Rule 10B of the IT Rules, prescribes the concept of “most appropriate method” for determination of ALP and provides that the comparability of an international transaction or a specified domes - tic transaction with an uncontrolled transaction shall be judged with reference to the following, namely: • the specific characteristics of the property transferred or services provided in either transaction; • the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; • the contractual terms (whether or not such terms are formal or in writing) of the transac - tions which lay down explicitly or implicitly
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