Transfer Pricing

[Siraj Shaikh]

I am selling to an Associated Enterprise ( my distributor in USA )a newly launched Product. My distributor wants me to sell them at  a dicsounted price, ie., i am recovering only the variable cost + some portion of overheads. and no profit at all.

What type of Transfer Pricing issues are going to arise in such transaction?????

URGENT

[Mahir S]

If the goods are to be exported at a price which is as per the terms and conditions of the contract entered between the two parties; and if Bank Realisation (BRC) also received for the said amount only;  then the export sale is a genuine sale with no transaction issues therein; specially if the product is newly laucnched..

 

[Siraj Shaikh]

Thanks Naveed for the prompt reply.

I selling to an associated enterprise and by selling at a discounted price, my profitablity is going to affected. TPO checks the profitabilty product wise and when the profitability is advesrsely affected TPO might raise the issue. 

[KR Ramesh]

Hi Siraj,

If you sell to your AE at a discounted price, there is no doubt you will be in trouble at TPO level;

And there is no limit for applicability of TP as it is applicable on each & every international transaction between the Associated Enterprise.

However for maintenance of books & records there is a threshold limit of Rs. 1 crore.

You cannot justify this transaction without charging any profit element.

If you are selling the same product to non AE, then it is advisable to charge the same rate to AE also which would be compared at CUP.

If you are not selling this product to any other than the AE, then it is advisable to get the market rate and charge accordingly.

Regards

Ramesh

 

AI Summary

Transfer pricing scrutiny arises when an associated enterprise is charged only cost; benchmark pricing and documentation required. Sale to an Associated Enterprise at cost plus overheads with no profit attracts Transfer Pricing scrutiny; contractual terms and evidence of repatriation may support genuineness, but product level profitability tests can trigger enquiries. If identical sales to independents exist, apply the CUP principle; otherwise obtain market rate benchmarks and maintain contemporaneous documentation and repatriation evidence to justify the pricing.