The Hindu Business Line : Transfers that cross borders

Morgan Stanley was recently before the Authority for Advance Rulings (AAR). The issue was about Morgan Stanley Advantage Services (P) Ltd (MSAS). The company, incorporated in India, had been set up to provide support services, such as `income-tax support, account reconciliation, and research', to the Morgan Stanley group's front-office and infrastructure unit functions globally, informs the text of the AAR judgment dated February 13.

MSAS was to reimburse to Morgan Stanley the compensation cost with no profit element. For services rendered, Morgan Stanley paid MSAS `the sum of the costs and a mark-up of a certain percentage of the costs as agreed upon'.

For the financial year 2003-04, Ernst & Young (P) Ltd conducted a transfer pricing study for MSAS. "The Transactional Net Margin Method (TNMM) was selected as the most appropriate method with operating profit margin being the profit level indicator in respect of services rendered by MSAS to the applicant. The average margin earned by the comparable companies providing similar services is worked out to 28.33 per cent and under the existing arrangement MSAS charges the applicant a margin of 29 per cent on the costs it incurs... "

For the avid, there is more to grapple with in the 14,000-word judgment. But if you are looking for literature on the crux of the issue, here is V. S. Wahi's Transfer Pricing: Law, Procedure & Documentation, from Snow White Publications (www.swpindia.com).

First, what is transfer pricing? "Prices at which an enterprise transfers physical goods and intangible property or provides services to associated enterprises," is an OECD (Organisation for Economic Co-operation and Development) definition cited in the book.

"Commercial transactions between different parts of a multinational group may not be subject to the same market forces shaping relations between two independent firms," explains www.oecd.org. A useful publication is OECD's Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.

Wahi emphasises that "an efficient transfer pricing is one that provides a reasonable method for allocating revenue to the concerned taxation jurisdictions, apart from providing a simple and consistent tax regime to taxpayers." Though legislation on this subject dates back to 1915 (UK), importance to transfer pricing grew post-1960, in tandem with growth in multinational businesses.

In India, Sections 92 and 92A to 92F of the Income-Tax Act contain important provisions about transfer pricing, after Finance Acts 2001 and 2002 brought in many changes. You'd find there the definition of phrases such as associated enterprise, and international transaction. Methods have been specified for the computation of arm's length price, and these include TNMM that E&Y had adopted in the case of Morgan Stanley.

Wahi's book has chapters on transfer pricing of intangibles, documentation, electronic commerce, and regulations in other countries.

Useful read.

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