What is the meaning of Techniques for determination of Arm’s Length Price Under Section 92CC and 92CD?

Techniques for determination of Arm’s Length Price

Section 92C of the Income Tax Act, 1961 provides that the arm's length price (ALP) of a transaction between related parties should be determined by using any of the following methods:

1. Comparable Uncontrolled Price Method (CUP): Under this method, the price charged for a transaction between related parties is compared with the price charged for a similar transaction between unrelated parties.
2. Resale Price Method (RPM): This method is applicable when one party purchases goods from an associated enterprise and resells them to an unrelated third party. The price at which the goods are resold to the third party is compared with the gross profit margin earned by the reseller.
3. Cost Plus Method (CPM): This method is applicable when one party provides goods or services to an associated enterprise and charges a markup on the cost of providing those goods or services. The markup is compared with the markup earned by an unrelated party for providing similar goods or services.
4. Profit Split Method (PSM): This method is applicable when two or more related parties contribute to a transaction and share the profits or losses arising from the transaction. The profits or losses are split among the parties based on their contributions.
5. Transactional Net Margin Method (TNMM): Under this method, the net profit margin earned by the related party from a transaction is compared with the net profit margin earned by an unrelated party engaged in a similar transaction.
6. Any other method prescribed by the CBDT: The Central Board of Direct Taxes (CBDT) may prescribe any other method for determining the arm's length price of a transaction between related parties.

Conclusion:

In conclusion, the Income Tax Act, 1961 provides for various provisions related to transfer pricing to ensure that related parties conduct their transactions at arm's length. These provisions include the use of different techniques to determine the arm's length price of a transaction, the provision of Safe Harbor Rules to reduce the compliance burden on taxpayers, and the availability of Advance Pricing Agreements to provide certainty in transfer pricing. It is important for taxpayers to comply with these provisions and maintain proper documentation to avoid any penalties or disputes with the tax authorities.