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Transfer
Pricing Rules
To
be Published in the Gazette of India Extraordinary Section
(3),
Sub-Section (ii)
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
…
…
New
Delhi, the 21st August, 2001
NOTIFICATION
INCOME-TAX
S.O.
808(E).- In exercise of powers conferred by section
295, read with sections 92C, 92D and 92E of the Income-tax
Act, 1961 (43 of 1961), the Central Government hereby
makes the following rules further to amend the Income-tax
Rules, 1962, namely:-
i ) These
rules may be called the Income-tax ( 21st Amendment)
Rules, 2001.
ii ) They shall come into force on the date of their
publication in the Official Gazette.-
In the Income-tax Rules, 1962, -
i ) after rule 10, the following rules shall be
inserted, namely:-
“10A.
Meaning of expressions used in computation of arm’s
length price
For
the purposes of this rule and rules 10B to 10E,-
-
'uncontrolled
transaction’ means a transaction between enterprises
other than associated enterprises, whether resident
or non-resident;
-
‘property’
includes goods, articles or things, and intangible
property;
-
‘services’
include financial services;
-
‘transaction’
includes a number of closely linked transactions.
10B.
Determination of arm’s length price under section
92C
-
For the purposes of sub-section (2) of section 92C,
the arm’s length price in relation to an international
transaction shall be determined by any of the following
methods, being the most appropriate method, in the
following manner, namely:-
-
comparable uncontrolled price method, by which,-
-
the price charged or paid for property transferred
or services provided in a comparable uncontrolled
transaction, or a
number of such transactions, is identified;
-
such price is adjusted to account for differences,
if any, between the international transaction
and the comparable
uncontrolled transactions or between the
enterprises entering into such transactions,
which could materially affect the price
in the open market;
-
the
adjusted price arrived at under sub-clause
(ii) is taken to be an arm’s length
price in respect of the property
transferred or services provided in the
international transaction;
-
resale price method, by which,-
-
the price at which property purchased or
services obtained by the enterprise from
an associated enterprise is resold or are
provided to an unrelated enterprise, is
identified;
-
such resale price is reduced by the amount
of a normal gross profit margin accruing
to the enterprise or to an unrelated enterprise
from the purchase and resale of the same
or similar property or from obtaining and
providing the same or similar services,
in a comparable uncontrolled transaction,
or a number of such transactions;
-
the price so arrived at is further reduced
by the expenses incurred by the enterprise
in connection with the purchase of property
or obtaining of services;
-
the
price so arrived at is adjusted to take
into account the functional and other differences,
including differences in
accounting practices, if any, between the
international transaction and the comparable
uncontrolled transactions, or between the
enterprises entering into such transactions,
which could materially affect the amount
of gross profit margin in the open market;
-
the adjusted price arrived at under sub-clause
(iv) is taken to be an arm’s length
price in respect of the purchase of the
property or obtaining of the services by
the enterprise from the associated enterprise;
-
cost plus method, by which,-
-
the direct and indirect costs of production
incurred by the enterprise in respect of
property transferred or services provided
to an associated enterprise, are determined;
-
the amount of a normal gross profit mark-up
to such costs (computed according to the
same accounting norms) arising from the
transfer or provision of the same or similar
property or services by the enterprise,
or by an unrelated enterprise, in a comparable
uncontrolled transaction, or a number of
such transactions, is determined;
-
the normal gross profit mark-up referred
to in sub-clause (ii) is adjusted to take
into account the functional and other differences,
if any, between the international transaction
and the comparable uncontrolled transactions,
or between the enterprises entering into
such transactions, which could materially
affect such profit mark-up in the open market;
-
the
costs referred to in sub-clause(i) are increased
by the adjusted profit mark-up arrived at
under sub-clause (iii);
-
the
sum so arrived at is taken to be an arm’s
length price in relation to the supply of
the property or provision of services by
the enterprise
-
profit split method, which may be applicable
mainly in international transactions involving
transfer of unique intangibles or in multiple
international transactions which are so interrelated
that they cannot be evaluated separately for
the purpose of determining the arm’s length
price of any one transaction, by which-
-
the combined net profit of the associated
enterprises arising from the international
transaction in which they are engaged, is
determined;
-
the relative contribution made by each of
the associated enterprises to the earning
of such combined net profit, is then evaluated
on the basis of the functions performed,
assets employed or to be employed and risks
assumed by each enterprise and on the basis
of reliable external market data which indicates
how such contribution would be evaluated
by unrelated enterprises performing comparable
functions in similar circumstances;
-
the
combined net profit is then split amongst
the enterprises in proportion to their relative
contributions, as evaluated under sub-clause
(ii);
-
the
profit thus apportioned to the assessee
is taken into account to arrive at an arm’s
length price in relation to the international
transaction
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