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Transcript of Alp - Deepali
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CORPORATE TAX PLANNING
REPORT ONARMS LENGTH PRICE.
SUBMITTED BY-
DEEPALI MISHRA
A0101913124
MBA (G) CLASS OF 2015.
SECTIONC (4)
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ARMS LENGTH PRICE
1 MEANING&CONCEPT
A deal between two interrelated or enterprise associates parties. That is behavior as if they were
not related, so that there is no query of a disagreement of attention. In simple way we can
describe this 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 are
behave in their self-attention and are not issue to any force or pressure from the other associate.
The Provisions of Transfer Pricing have been introduced to ensure that income arising from an
International Transaction between Associated Enterprises shall be computed having regard to the
Arms Length Price.Any cost or expense allocated or apportioned between two or more
associated enterprises under a mutual agreement or arrangement shall also be at an Arms Length
Price.
Examples of such transactions could be where one associated enterprise carries out centralised
functions which could also benefit one or more associated enterprises, or two or more associated
enterprises agree to carry out a joint activity, such as research and development, for their mutual
benefit.
The arms length price in relation to Transfer Pricing in an international transaction shall be
determined by any of the following Transfer Pricing Methods, being the most appropriate
method, having regard to the nature of transaction or class of transaction or class of associated
persons or functions performed by such persons or such other relevant factors as the Board may
prescribe, namely: -
1. Comparable Uncontrolled Price Method (CUP Method)
2. Resale Price Method
3. Cost Plus Method
4. Profit Split Method
5. Transactional Net Margin Method
6. Such Other Method as may be prescribed by the Board.
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The most appropriate method referred shall be applied for the determination of arms length
price, in the manner as may be prescribed. Provided that where more than one price may be
determined by the most appropriate method, the Arms Length Price shall be taken to be the
arithmetic mean of such prices, or, at the option of the assessee, a price which may vary from the
arithmetical mean by an amount not exceeding 5% of such arithmetical mean.
Where during the course of any proceedings for the assessment ofincome,the Assessing Officer
on the basis of Material of Information or Document in his possession, is of the Opinion that:-
1. The price charged or paid has not been determined in accordance with the above or
2. Any Information and Document relating to an International Transaction have not been kept and
maintained by the Assessee in accordance with the provisions, or
3.
The Information or data used in Computation of the Arms Length Price is not reliable or correct,
or
4. The Assessee has failed to furnish, within the specified time, any information or document which
he was required to furnish
The Assessing Officer may proceed to determine the arms length price in relation to the said
International Transaction on the basis of such Material or Information or Document available
with him.
Provided that an opportunity shall be given by theAssessing Officerby serving a notice calling
upon the Assessee to show cause on a date and time to be specified in the notice, why the arms
length price should not be so determined on the basis of material or information or a document in
the possession of the Assessing Officer.
Choice of appropriate transfer pricing method
For tangible property- The Guidelines provide that where it is possible to locate
comparable uncontrolled transactions, the CUP method is the most direct and reliable
way to apply the arms length principle. Consequently, in such cases the CUP method is
preferable over all other methods. (para 2.7 of OECD Guidelines)
Services- The method to be used to determine arms length transfer pricing for intra -
group services should be determined according to the prescribed guidelines. Often, the
application of these guidelines will lead to use of the CUP or cost plus method for pricing
http://www.charteredclub.com/e-filing-your-income-tax-return-online-in-8-simple-steps/http://www.incometaxindia.gov.in/ao/firstlevel.asphttp://www.incometaxindia.gov.in/ao/firstlevel.asphttp://www.charteredclub.com/e-filing-your-income-tax-return-online-in-8-simple-steps/ -
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intra-group services. A CUP method is likely to be used where there is a comparable
service provided between independent enterprises in the recipients market, or by the
associated enterprise providing the services to an independent enterprise in comparable
circumstances. For example, this might be the case where accounting, auditing, legal, or
computer services are being provided. A cost plus method would likely to be appropriate
in the absence of a CUP where the nature of the activities involved, assets used, and risks
assumed are comparable to those undertaken by independent enterprises. (para 7.31 of
OECD Guidelines)
For intangible property- In establishing arms length pricing in the case of a sale or
licence of intangible property, it is possible to use the CUP method where the same
owner has transferred or licensed comparable intangible property under comparable
circumstances to independent enterprises. If the aforesaid enterprise sub-licenses the
property to third parties, it may also be possible to use some form of resale price method
to analyse the terms of the controlled transaction. (para 6.23 of OECD Guidelines)
In the sale of goods incorporating intangible property, it may also be possible to use the CUP or
resale price method. (para 6.24 of OECD Guidelines)
In cases involving highly valuable intangible property, it may be difficult to find comparable
uncontrolled transactions. It, therefore may be difficult to apply the traditional transaction
methods and the transactional net margin method, particularly where both parties to the
transaction own valuable intangible property or unique assets used in the transaction that
distinguish the transaction from those of potential competitors. In such cases the profit split
method may be relevant although there may be practical problems in its application. (para 6.26
of OECD Guidelines)
Definition in section 92F(ii)
Irrespective of which method is ascertained/identified as the most appropriate method, while
applying the said method for determination of the arms length price, the definition of arms
length price under section 92F(ii) should always be kept in mind. Hence, the cardinal principle
which can never be lost sight of is, that the objective is to determine a price which is applied in
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a transaction between persons other than associated enterprises, in uncontrolled conditions.
Hence, whatever be the method being applied, the effort/objective/attempt should be to arrive at
a price which independent enterprises in uncontrolled conditions would have transacted at.
EXAMPLE:
The concept of an arm's length transaction commonly comes into play in the real estate market.
When determining the fair market value of a piece of property, the price for the property must be
obtained through a potential buyer and seller operating through an arm's length transaction,
otherwise, the agreed-upon price will likely differ from the actual fair market value of the
property.
For example, if two strangers are involved in the sale and purchase of a house, it is likely that the
final agreed-upon price will be close to market value (assuming that both parties have equal
bargaining power and equal information about the situation). This is because the seller would
want a price that is as high as possible and the buyer would want a price that is as low as
possible.
This contrasts with a situation in which the two parties are not strangers. For example, it is
unlikely that the same transaction involving a father and his son would yield the same result,
because the father may choose to give his son a discount.
REFERECES:
http://transferpricer.com/TParmlist1.asp
http://www.investopedia.com/terms/a/armslength.asp
http://www.charteredclub.com/transfer-pricing-methods-of-computation-of-arms-length-price/
http://www.transferpricing-india.com/Arms_Length.htm
http://transferpricer.com/TParmlist1.asphttp://transferpricer.com/TParmlist1.asphttp://www.investopedia.com/terms/a/armslength.asphttp://www.investopedia.com/terms/a/armslength.asphttp://www.charteredclub.com/transfer-pricing-methods-of-computation-of-arms-length-price/http://www.charteredclub.com/transfer-pricing-methods-of-computation-of-arms-length-price/http://www.transferpricing-india.com/Arms_Length.htmhttp://www.transferpricing-india.com/Arms_Length.htmhttp://www.transferpricing-india.com/Arms_Length.htmhttp://www.charteredclub.com/transfer-pricing-methods-of-computation-of-arms-length-price/http://www.investopedia.com/terms/a/armslength.asphttp://transferpricer.com/TParmlist1.asp