Section 1 - Transfer Pricing
- EVOLUTION OF TRANSFER PRICING IN INDIA – TRANSFER PRICING CA FINAL
- WHAT IS TRANSFER PRICING – CA Final Direct and International Tax
- EVOLUTION OF TRANSFER PRICING IN INDIA [PRE-2001 ERA] – SECTION 92 – TRANSFER PRICING CA FINAL
- MEANING OF TRANSFER PRICE
- TRANSFER PRICING METHODS
- Comparable Uncontrolled Price Method
- EVOLUTION OF TRANSFER PRICING IN INDIA [PRE-2001 ERA] – REPLACEMENT OF EXISTING LAW
- COMPUTATION OF INCOME HAVING REGARD TO THE ALP – SECTION 92 – APPLICABILITY OF ARM’S LENGTH PRINCIPLE
- COMPUTATION OF INCOME HAVING REGARD TO THE ALP – SECTION 92 – BASE EROSION CONCEPT
- ASSOCIATED ENTERPRISES – SECTION 92A (1)
- INTERNATIONAL TRANSACTION [SECTION 92B]
- ARMS’ LENGTH PRINCIPLE
- COMPUTATION OF ARM’S LENGTH PRICE [SECTION 92C]
- SELECTION OF TESTED PARTY
- SELECTION OF PROFIT LEVEL INDICATOR
- SELECTION OF MOST APPROPRIATE METHOD – RULE 10C
- DATA TO BE USED FOR ANALYZING COMPARABILITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRANSACTION
- ARITHMETIC MEAN – WHEN MORE THAN ONE PRICE IS DETERMINED
- APPLICABILITY OF RANGE CONCEPT – WHEN MORE THAN ONE PRICE IS DETERMINED
- FUNCTIONS, ASSETS AND RISK (FAR) ANALYSIS
- DOCUMENTATIONS AND COMPLIANCES – DOCUMENTATION REQUIREMENT UNDER THE INCOME-TAX ACT, 1961
- FUNCTIONAL ANALYSIS
- ECONOMIC ANALYSIS
- PENALTY FOR UNDER-REPORTING OF INCOME – SECTION 270A
- PENALTY FOR MISREPORTING OF INCOME – SECTION 270A
- PENALTY FOR FAILURE TO KEEP AND MAINTAIN INFORMATION AND DOCUMENTATION – SECTION 271AA
- PENALTY FOR FAILURE TO FURNISH INFORMATION OR DOCUMENT U/S 92D – SECTION 271G
- COUNTRY BY COUNTRY REPORTING
- Domestic Transfer Pricing
- SAFE HARBOUR RULES FOR INTERNATIONAL TRANSACTION
- TRANSFER PRICING ASSESSMENT procedure in India
- APPEAL PROCEDURE
- POWER OF ASSESSING OFFICER TO DETERMINE THE ARM’S LENGTH PRICE
- REFERENCE TO TRANSFER PRICING OFFICER [SECTION 92CA]
- RECTIFICATION OF TPO ORDER
- POWERS OF TPO
- SECONDARY ADJUSTMENT – SECTION 92CE
- DISPUTE RESOLUTION MECHANISM UNDER TRANSFER PRICING
- ADVANCE PRICING AGREEMENT
- MUTUAL AGREEMENT PROCEDURE
- MISCELLANEOUS TRANSFER PRICING PROVISIONS
Section 2 - Non-Resident Taxation
- CHARGE OF INCOME TAX AND RESIDENTIAL STATUS
- RESIDENTIAL STATUS OF A COMPANY
- SCOPE OF TOTAL INCOME AND INCOME DEEMED TO BE RECEIVED IN INDIA AND ACCRUE OR ARISE IN INDIA
- TAXABILITY OF OFFSHORE FUNDS AND INCOME THROUGH OR FROM ANY PROPERTY, ASSET OR SOURCE OF INCOME IN INDIA
- SALARY PAYABLE BY GOVERNMENT FOR SERVICES RENDERED OVERSEAS AND DIVIDEND PAID BY AN INDIAN COMPANY OUTSIDE INDIA
- EXEMPT INCOME OF NON-RESIDENTS
- INTEREST AND ROYALTY AND FEES FOR TECHNICAL SERVICES
- PRESUMPTIVE TAXATION FOR NON-RESIDENTS – introduction
- Capital Gains tax provisions – CA Final Direct and International Tax Notes
- WITHHOLDING TAX FROM PAYMENTS TO NON – RESIDENTS
Section 4 - Double Taxation Relief
- CONCEPT OF DOUBLE TAXATION AND WHY IT ARISES AND TYPES OF DOUBLE TAXATION RELIEF
- COUNTRIES WITH WHICH NO AGREEMENT EXISTS UNILATERAL AGREEMENTS – SECTION 91
- TREATY PROVISION TO OVERRIDE INCOME TAX ACT AND MODE OF COMPUTATION OF INCOME OF NON-RESIDENTS
- Foreign Tax Credit in India – Rule 128 of the Income Tax Rules 1962 – CA Final International Tax Notes
Section 5 - Black Money
- KEY FEATURES OF THE BLACK MONEY ACT
- APPLICABILITY AND COVERAGE OF THE BLACK MONEY ACT – SECTION 1
- BASIS OF CHARGE – SECTION 3
- DEFINITION OF ASSESSEE – SECTION 2(2)
- APPLICABILITY OF BLACK MONEY ACT TO PERSONS RESIDENT IN INDIA
- DEFINITION OF UNDISCLOSED ASSET LOCATED OUTSIDE INDIA – SECTION 2(11)
- RELEVANT PREVIOUS YEAR FOR CHARGEABILITY TO TAX – UNDISCLOSED ASSET LOCATED OUTSIDE INDIA – SECTION 3
- VALUATION OF AN UNDISCLOSED ASSET LOCATED OUTSIDE INDIA – SECTION 3(2)
- TRANSFER OF ASSETS BEFORE VALUATION DATE
- VALUATION IN CASE OF ACQUISITION OF ASSET OUT OF CONSIDERATION OF OLD ASSET OR BANK ACCOUNT – RULE 3(3)
- MEANING OF ESTABLISHED SECURITIES MARKET – EXPLANATION 1 TO RULE 3
- MEANINGFUL ANNUAL VALUE OF SHARES TRADED ON THE EXCHANGE – EXPLANATION 1 TO RULE 3
- MEANING OF QUOTED SHARE OR SECURITY – EXPLANATION 1 TO RULE 3
- MEANING OF UNQUOTED SHARE AND SECURITY – EXPLANATION 1 TO RULE 3
- SCOPE OF TOTAL UNDISCLOSED FOREIGN INCOME AND ASSET – SECTION 4(1)
- VARIATION MADE IN FOREIGN INCOME DURING ASSESSMENT OR REASSESSMENT- SECTION 4(2)
- NON-INCLUSION OF UNDISCLOSED FOREIGN INCOME AND ASSET IN INCOME COMPUTED UNDER INCOME-TAX ACT- SECTION 4(3)
- NO DISALLOWANCE AND SET-OFF FOR COMPUTATION OF TOTAL UNDISCLOSED FOREIGN INCOME AND ASSET – SECTION 5
- DEDUCTION FROM VALUE OF UNDISCLOSED ASSET OUTSIDE INDIA
- DEDUCTION FROM VALUE OF IMMOVABLE PROPERTY OUTSIDE INDIA
- TAX AUTHORITIES UNDER THE BLACK MONEY ACT – SECTION 6
- CHANGE OF TAX AUTHORITY – SECTION 7
- POWERS OF TAX AUTHORITY
- PROCEEDINGS BEFORE TAX AUTHORITIES TO BE JUDICIAL PROCEEDINGS – SECTION 9(1)
- ASSESSMENT OF FOREIGN INCOME AND ASSETS – SECTION 10
- TIME LIMIT FOR COMPLETION OF ASSESSMENT AND REASSESSMENT – SECTION 11(1)/(2)
- NON-APPLICABILITY OF THE 2-YEAR TIME LIMIT FOR COMPLETION OF ASSESSMENT- SECTION 11(3)
- EXCLUSIONS IN COMPUTING LIMITATION PERIOD OF ASSESSMENT/REASSESSMENT – EXPLANATION 1 TO SECTION 11
- RECTIFICATION OF MISTAKE – SECTION 12
- NOTICE OF DEMAND – SECTION 13
- DIRECT ASSESSMENT OR RECOVERY NOT BARRED – [SECTION 14]
- APPEALS TO COMMISSIONER (APPEALS) – SECTION 15
- APPEAL TO APPELLATE TRIBUNAL – SECTION 18
- APPEAL TO APPELLATE TRIBUNAL – SECTION 18
- APPEAL TO HIGH COURT – SECTION 19
- APPEAL TO SUPREME COURT – SECTION 21
- REVISION OF ORDERS PREJUDICIAL TO REVENUE – SECTION 23
- REVISION OF OTHER ORDERS – SECTION 24
- PAYMENT OF TAX DURING PENDING APPEAL
- RECOVERY OF TAX DUES BY ASSESSING OFFICER -SECTION 30
- RECOVERY OF TAX DUES BY TAX RECOVERY OFFICER – SECTION 31
- MODES OF RECOVERY OF TAX DUES – SECTION 32
- TAX RECOVERY OFFICER BY WHOM RECOVERY OF TAX DUES IS TO BE EFFECTED – SECTION 33
- RECOVERY OF TAX DUES IN CASE OF A COMPANY IN LIQUIDATION – SECTION 34
- LIABILITY OF MANAGER OF A COMPANY – SECTION 35
- JOINT AND SEVERAL LIABILITY OF PARTICIPANTS -SECTION 36
- RECOVERY THROUGH STATE GOVERNMENT- SECTION 37
- RECOVERY OF TAX DUES IN PURSUANCE OF DTAA OR TAX INFORMATION EXCHANGE AGREEMENT- SECTION 38
- RECOVERY BY SUIT OR UNDER OTHER LAW NOT AFFECTED – SECTION 39
- INTEREST FOR DEFAULT IN FURNISHING RETURN AND PAYMENT OR DEFERMENT OF ADVANCE TAX – SECTION 40
- PENALTY IN RELATION TO UNDISCLOSED FOREIGN INCOME AND ASSET – SECTION 41
- PENALTY FOR FAILURE TO FURNISH RETURN FOR FOREIGN INCOME AND ASSET – SECTION 42
- PENALTY FOR FAILURE TO FURNISH INFORMATION OF FOREIGN ASSET OR FOREIGN INCOME IN RETURN OF INCOME – SECTION 43
- DETERMINATION OF VALUE OF FOREIGN BANK ACCOUNT IN INR – EXPLANATION TO SECTION 42
- PENALTY FOR DEFAULT IN PAYMENT OF TAX ARREAR -SECTIONS 44
- PENALTY FOR OTHER DEFAULTS – SECTION 45
- PROCEDURE FOR IMPOSING PENALTY – SECTION 46
- PRIOR APPROVAL OF JOINT COMMISSIONER FOR IMPOSING PENALTY – SECTION 46
- BAR OF LIMITATION FOR IMPOSING PENALTY – SECTION 47
- OFFENCES AND PROSECUTION – CHAPTER V
- AGREEMENT WITH FOREIGN COUNTRIES OR SPECIFIED TERRITORIES – SECTION 73
- MODES OF SERVING NOTICE – SECTION 74
- ADDRESS FOR COMMUNICATION OF NOTICE BY POST OR APPROVED COURIER SERVICE – SECTION 74 READ WITH RULE 14
- E-MAIL ADDRESS FOR COMMUNICATION OF NOTICE – SECTION 74 READ WITH RULE 14
- AUTHENTICATION OF NOTICES AND OTHER DOCUMENTS – SECTION 75
- NOTICE DEEMED TO BE VALID IN CERTAIN CIRCUMSTANCES – SECTION 76
- APPEARANCE BY APPROVED VALUER IN CERTAIN MATTERS OR AUTHORIZED REPRESENTATIVE – SECTIONS 77 & 78
- MEANING OF AUTHORISED REPRESENTATIVE – SECTION 78
- ROUNDING OFF OF INCOME, VALUE OF ASSET AND TAX – SECTION 79
- CONGNIZANCE OF OFFENCE – SECTION 80
- ASSESSMENT NOT TO BE INVALID ON CERTAIN GROUNDS – SECTION 81
- BAR OF SUITS IN CIVIL COURTS – SECTION 82
- INCOME-TAX PAPERS TO BE AVAILABLE FOR THE PURPOSES OF THE BLACK MONEY ACT – SECTION 83
- APPLICATION OF PROVISIONS OF THE INCOME-TAX ACT – SECTION 84
- AMENDMENT OF PREVENTION OF MONEY-LAUNDERING ACT, 2002 – SECTION 88
Section 6 - Overview of Double Tax Convention
Section 7 - Application and interpretation of tax treaties
- ORIGINATION OF INTERNATIONAL TAX LAW AND DOUBLE TAXATION AND CONNECTING FACTORS
- DEFINITION OF TREATY , DOUBLE TAXATION AVOIDANCE AGREEMENT
- DIRECTIVE PRINCIPLES FOR INTERNATIONAL AGREEMENTS UNDER INDIAN CONSTITUTION AND ROLE OF VIENNA CONVENTION IN APPLICATION AND INTERPRETATION OF TAX TREATIES
- INDIAN JUDICIARY ON PRINCIPLES OF INTERPRETATION IN VIENNA CONVENTION AND ARTICLE 33: INTERPRETATION OF TREATIES AUTHENTICATED IN TWO OR MORE LANGUAGES INDIA AND TAX INFORMATION AND EXCHANGE AGREEMENT (TIEA)
- INTERPRETATION OF TREATIES – MONIST VIEW , DUALISTIC VIEW AND TREATY OVER DOMESTIC LAW
- INTERNATIONAL TAX CONFLICTS AND DOUBLE TAXATION INTRODUCTION AND BASIC PRINCIPLES OF INTREPRETATION OF A TREATY
- CUSTOMARY INTERNATIONAL LAW OF TREATY INTERPRETATION – OBJECTIVE INTERPRETATION , SUBJECTIVE INTERPRETATION AND PURPOSIVE INTERPRETATION
- CUSTOMARY LAW OF TREATY INTERPRETATION PRINCIPLE OF EFFECTIVENESS AND CONTEMPORANEA EXPOSITIO AND LIBERAL CONSTRUCTION
- EXTRINSIC AIDS TO INTERPRETATION OF A TAX TREATY
- OBJECTIVES OF TAX TREATIES ,OBJECTIVE OF DTAAs AND PURPOSE OF ENTERING INTO A DTAA INTO INDIAN CONTEXT – SECTION – 90(1) ?
Section 8A - Anti-Avoidance Measures
Section 8B - BEPS
Section 9 - E-Commerce
- HOW BUSINESS IS TRANSACTED THROUGH E-COMMERCE AND PREVALENT BUSINESS FORMS IN VARIOUS SEGMENTS OF DIGITAL ECONOMY?
- GROWTH OF E-COMMERCE AND TAXATION ISSUES ON E-COMMERCE ?
- PERMANENT ESTABLISHMENT IN E-COMMERCE AND DETERMINATION OF NATURE OF INCOME IN E-COMMERCE TRANSACTIONS?
- OECD RECOMMENDATIONS UNDER ACTION PLAN 1 OF BEPS TO TACKLE TAXATION ISSUES OF E-COMMERCE AND INTRODUCTION OF NEW CHAPTER OF EQUALIZATION LEVY ?
- WHO IS LIABLE TO DEDUCT EQUALISATION LEVY AND WHOSE INCOME IS LIABLE FOR DEDUCTION OF EQUALISATION LEVY ?
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Comparable Uncontrolled Price Method
WHEN CAN COMPARABLE UNCONTROLLED PRICE METHOD BE APPLIED
Comparable uncontrolled price method (“CUP”) is one of the transfer pricing methods, which, as the name suggests, compares
- the price in the transaction which is being evaluated for arm’s length,
- with the price charged /received between two unrelated parties for similar goods or services.
This can take place under two cases, i.e, where the transaction is between : –
- the company and unrelated third party (Internal comparable uncontrolled price). In such cases, the concerned company buys, or sells similar goods or services in comparable transactions with unrelated enterprises ; or
- Two unrelated parties (External comparable uncontrolled price) . In such cases, two Unrelated enterprises buy or sell similar goods or services, as is being done between the AE.
Facts : –
- ICO 1 sold unbranded Colombian coffee beans to ICO 2 (non AE).
- ICO1 also sold unbranded Colombian coffee beans of similar type, quality and quantity to FCO.
- Identify the nature of transaction as
- Internal Comparable uncontrolled price ; and
- Controlled transaction.
- Transaction between ICO1 and FCO is a controlled transaction.
- Transaction between ICO 1 and ICO 2 is an internal Comparable uncontrolled price .
- AE 1 sold unbranded Colombian coffee beans to AE 2.
- AE 1 did not sell any unbranded Colombian beans to third party (Non-AE).
- There is a sale of unbranded Colombian coffee beans of similar type, quality and volume between non-AE 1 non-AE 2.
- Identify the nature of transaction as External Comparable uncontrolled price and Controlled transaction ?
- Transaction between AE 1 and AE 2 is a controlled transaction.
- Transaction between Non – AE 1 and Non AE 2 is termed as external Comparable uncontrolled price , since it’s a transaction between two external parties.
STEPS INVOLVED IN COMPARABLE UNCONTROLLED PRICE METHOD
STEP 1 : – IDENTIFYING PRICES OF COMPARABLE UNCONTROLLED TRANSACTION/S – Comparable uncontrolled price method
Identify prices charged from or paid to, on transfer of goods or services in comparable uncontrolled transaction/s by X Ltd. Such transaction could be entered into by X Ltd. itself or between two unrelated enterprise.
STEP 2 : – ADJUSTMENTS TO UNCONTROLLED PRICE – Comparable uncontrolled price method
The price arrived at Step 1 should be adjusted for the following : –
1. If there are any functional differences between the international transaction or the Specified Domestic Transaction (SDT) under review, and the comparable uncontrolled transactions , adjustment should be made for such functional differences . Functional differences could be for the following : –
- Quality of product or service,
- Contractual terms,
- Credit terms (one entity allows a credit of 1 month and other allows credit of 6 months),
- Transport terms – Free on Board, Cost, Insurance and Freight
- Market level (wholesale, retail etc.));
2. If there are any differences between the enterprises entering into such transactions, such as size of the entity (if one entity is market leader and other is a small startup in same segment), operating environment, which could materially affect the price in the open market, the price should be adjusted for such differences.
Such adjusted price will be the arm’s length price.
EXAMPLES ON COMPARABLE UNCONTROLLED PRICE METHOD
EXAMPLE 1 -COMPARABLE UNCONTROLLED PRICE METHOD : –
- AE 1 sold unbranded Colombian coffee beans to AE 2 at Rs 5,00,000. AE 1 sold unbranded Colombian coffee beans of similar type, quality and quantity to third party (Non-AE) at Rs 4,00,000.
- Analyse the impact of transfer pricing provisions and ascertain the ALP?
- Price charged by AE 1 for sale of coffee beans from AE 2 is Rs. 5,00,000 and the price charged from Non-AE is Rs. 4,00,000.
- Since, the price charged from AE 2, Rs. 5,00,000 is more than the price charged from Non-AE Rs. 4,00,000, we cannot consider Rs 4,00,000 as ALP as it will reduce the taxable income of AE 1. This is due to the reason that TP provision cannot be applied to result in reduction in taxable income.
Hence, the ALP for sale of coffee beans by AE 1 to AE 2 shall be Rs. 5,00,000.
EXAMPLE 2 – COMPARABLE UNCONTROLLED PRICE METHOD: –
- AE 1 sold unbranded Colombian coffee beans to AE 2 at Rs 5,00,000. AE 1 sold unbranded Colombian coffee beans of similar type, quality and quantity to third party (Non-AE) at Rs 6,00,000.
- Analyse the impact of transfer pricing provisions and ascertain the ALP ?
SOLUTION : –
- Price charged by AE 1 for sale of coffee beans from AE 2 is Rs. 5,00,000 and the price charged from Non-AE is Rs. 6,00,000.
- Since, the price charged from Non-AE is Rs. 6,00,000, this would be an internal CUP . Since it is more than the price charged from AE 2 under controlled transaction, i.e. Rs. 5,00,000, the ALP would be Rs. 6,00,000.
- Accordingly, by applying the TP provisions, Rs. 1,00,000 (6,00,000 – 5,00,000) would be added to the income of AE 1.
EXAMPLE 3 – COMPARABLE UNCONTROLLED PRICE METHOD: –
- AE 1 sold unbranded Colombian coffee beans to AE 2 at Rs 5,00,000. AE 1 sold unbranded Colombian coffee beans of similar type, quality and quantity to third party (Non-AE) at Rs 5,50,000 (Internal comparable uncontrolled price). Independent third party (i.e., Non-AE) sold unbranded Colombian coffee beans of similar type, quality and quantity to third party (Non-AE) at Rs 6,00,000. (External comparable uncontrolled price).
- Analyse the impact of transfer pricing provisions and ascertain ALP ?
SOLUTION : –
- In the present case, ALP can be as under : –
- Applying internal CUP, the price would be Rs 5,50,000
- Applying external CUP, the price would be Rs 6,00,000
- Where both internal and external CUP are available, Internal Comparable uncontrolled price method should be preferred over ExternalComparable uncontrolled price method for comparison of controlled transaction with uncontrolled transaction.
- In this case, the ALP would be Rs 5,50,000, i.e., the price at which coffee beans were sold by AE 1 to Non-AE.
- Hence, the income of AE 1 would be increased by Rs 50,000 (5,50,000 – 5,00,000).
EXAMPLE 4 – COMPARABLE UNCONTROLLED PRICE METHOD : –
- AE 1 sold unbranded Colombian coffee beans to AE 2 at Rs 5,00,000. AE 3 sold unbranded Colombian coffee beans of similar type, quality and quantity to AE 4 at Rs 5,50,000. Independent third party (i.e., Non-AE) sold unbranded Colombian coffee beans of similar type, quality and quantity to third party (Non-AE) at Rs 6,00,000. (External CUP).
- Analyse the impact of transfer pricing provisions on AE 1 and ascertain ALP ?
- Transactions between two AE’s are controlled transactions and such transactions cannot be considered as base for determining ALP.
- In the given case, transactions between AE 1 & AE 2 amounting Rs. 5,00,000 and AE 3 & AE 4 amounting Rs. 5,50,000 are controlled transactions and hence should not be considered as comparables for the purpose of determining ALP.
- Therefore, ALP would be Rs 6,00,000 in the case, i.e., the price at which coffee beans were sold between two Non-AE.
- Hence, the income of AE 1 would be increased by Rs 1,00,000 (6,00,000 – 5,00,000).
EXAMPLE 5 – COMPARABLE UNCONTROLLED PRICE METHOD : –
- AE1 sold 1,000 bicycles to AE 2 at FOB price (Free on Board) of Rs 3,000 per bicycle
- AE 1 sold 10,000 bicycles to Non-AE at CIF price (Cost, Insurance and Freight) of Rs 6,000 per bicycle.
- AE2 would bear the cost of insurance and freight of Rs 500 per bicycle.
- As Non-AE placed order in large volumes, AE 1 offered quantity discount of Rs 200 per bicycle.
- Sales were made to Non-AE at credit facility of three months whereas the sales to AE 2 have always been on cash basis.
- The cost of credit may be taken as 1% per month.
- Analyse the impact of transfer pricing provisions and ascertain the ALP ?