International-Business-Dr-R-Chandran-E-book

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International Business- Dr. R. Chandran
Globally, there are several methods of detecting transfer pricing to check
whether transactions between related parties have been at an ‘arm’s length’.
The transaction method relies directly or indirectly on information about the
prices at which similar transactions have been entered into by unrelated
parties. This method is further divided into the Comparable Uncontrolled
Price (CUP) method and cost plus (C+) method.
Prices charged in similar business transactions between two
independent parties is the yardstick adopted under the CUP method.
Whereas under the C+ method, as arm’s length price is determined by
applying an appropriate mark-up on the costs incurred. The transactional
profit method, as the name indicates, is transaction-specific; it examines
whether or not profits from a particular deal are reasonable.
Importance of Transfer Pricing Regulations in Developing Countries
Import of raw material, semi-finished goods for assembling and most
important of all, intellectual property such as know-how and technology are
areas prone to transfer pricing. Such goods or services can be sent to
associate companies in India at a higher or lower rate than the prices charged
to unrelated parties, to secure a global tax advantage. In today’s high-tech
age, Indian companies often rely on technology and know-how from their
foreign joint venture partners; thus strict regulations are very important.
Regulations in Dealing with Transfer Pricing
The important sections relating to transfer pricing in the Income Tax Act
1961 are Section 40A (2), Section 80 1A (9) and Section 1A (10). The first
enables tax authorities to disallow any expenditure made to a related party,
which they feel is excessive. Certain tax benefits are available under Section
80 1A such as a tax holiday for a certain number of years. If transfer pricing
is suspected then the tax authorities can deny such tax holidays.
The most important provision in the tax laws is in Section 92. This
allows the Indian tax authorities to adjust the taxable income of the Indian
party, if they feel that the prices charged in a transaction are not at an arm’s
length due to close connection between the Indian entity and a foreign party.
COUNTRY RISK
When making overseas direct investments it is necessary to allow for risk
due to the investment being in a foreign country. Country risk is one of the
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