Section 92: Computation of Income from International Transaction having Regard to Arm's Length Price (ALP)
TP relates to determination of correct market price i.e. arm's length price.
Section 92(1) & (2) Any income / allowance / expense allocation from an international transaction with FAE shall be computed having regard to the correct market price i.e. arm's length price.
Further, the regulations are applicable to sale /purchase / allocation of cost/expense in connection with services provided etc.
Section 92(3) Where the application of ALP price results in decrease in the overall tax incidence in India, the TPR will not be applied.
The ALP in relation to an international transaction shall be determined by any of the following 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:
Comparable uncontrolled price method - This method compares the price charged in transaction with FAE to the price charged in a comparable un-controlled transaction.
Resale price method - The resale price method begins with the price at which a product is resold to an independent enterprise by an associate enterprise. The profit from the said subsequent sale is to be reduced by normal expenses & gross profit margin to arrive at arm's length price.
Cost plus method - In this method the ALP is determined as total cost to associated enterprise plus normal gross margin of the industry.
Profit split method - This method 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 ALP of any one transaction, by which consolidated profit for entire transaction for all enterprise put together is determined & then the same is split between all enterprises on the basis of the functions performed/assets/risks taken etc.
Transactional Net Margin Method - This method compares the net profit margin in transaction with FAE to net profit margin in a comparable un-controlled transaction.
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