ARMS LENGTH PRICE IN TRANSFER PRICING 

Here in this article, I am writing about arm’s length price in Transfer Pricing transactions. Hope it will be helpful to all of you.

ARM’S LENGTH PRICE:

MEANING OF ARMS LENGTH PRICE:

The Price at which two unrelated parties agree to a transaction. This is most often an issue in companies with International operations whose international subsidiaries trade with each other. For such companies there is often an incentive to reduce overall tax burden  by manipulation of inter company prices. Tax authorities want to insure that inter company price is equivalent to an Arm’s Length Price, to prevent loss of revenue.

The provisions of transfer pricing have been introduced to ensure that transactions between Associated Enterprises shall be computed having regard to Arm’s Length Price. Any cost or expenses allocated or apportioned between two or more Associated Enterprises shall also be at Arm’s Length Price.

Examples of such transactions could be where one associated enterprise carries out centralized functions which could also benefit one or more associated enterprises, or two or more associated enterprises agree to carry out joint activity such as research & development for their mutual benefit.

The arm’s length price in relation to transfer pricing shall be determined by any of the following Transfer Pricing Methods, which is the most appropriate method having regard to the class of transactions or class of associated persons or functions performed by them or such other relevant factors as the board may prescribe, namely:

1. Comparable Uncontrolled Price Method
2. Resale Price Method
3. Cost Plus Method
4. Profit Split Method
5. Transactional Net Price Method
6. Such other method as prescribed by the board.

The most appropriate method shall be applied for the determination of arm’s 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 arm’s length price shall be taken to be the arithmetic mean at the option of the assessee, a price which may vary from the arithmetic mean by an amount not exceeding 5% of such arithmetic mean.

Where during the course of any proceedings of assessment of income, The Assessing Officer with reference to Material of Information & documents in his possession, is of the opinion that:

• The Price has not charged or paid is not in accordance of the above.
• Any information or document in an international transactions have not been kept & maintained by the assessee in accordance with the Provisions.
• The information & data used in computation of arm’s length price is not reliable & correct.
• The assessee has failed to furnish any information or document within the specified time, which he was required to furnish

The Assessing Officer may proceed to determine Arm’s Length Price in relation to the said international transaction on the basis of such material, information or document available with him.

Provided that the opportunity shall be given by the Assessing Officer by service a notice on the assessee to show cause on date and time specified in the notice, why the arm’s length price should not be determined in accordance with the information or documents in the possession of the Assessing Officer.

ARMS LENGTH PRICE IN TRANSFER PRICING

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