September 26, 2024

Transfer pricing can be defined as the value which is attached to the goods or services transferred between related parties. In other words, transfer pricing is the price that is paid for goods or services transferred from one unit of an organization to its other units situated in different countries (with exceptions). Transfer price, also known as transfer cost, is the price at which related parties transact with each other, such as during the trade of supplies or labor between departments. Transfer prices may be used in transactions between a company and its subsidiaries, or between divisions of the same company in different countries. Transfer Price Transfer prices are used when individual entities of a larger multi-entity firm are treated and measured as separately run entities. It is common for multi-entity corporations to be consolidated on a financial reporting basis; however, they may report each entity separately for tax purposes. A transfer price arises for accounting purposes when related parties, such as divisions within a company or a company and its subsidiary, report their own profits. When these related parties are required to transact with each other, a transfer price is used to determine costs. Transfer prices generally do not differ much from the market price. If the price does differ, then one of the entities is at a disadvantage and would ultimately start buying from the market to get a better price. For example, assume entity A and entity B are two unique segments of Company ABC. Entity A builds and sells wheels, and entity B assembles and sells bicycles. Entity A may also sell wheels to entity B through an intracompany transaction. If entity A offers entity B a rate lower than market value, entity B will have a lower cost of goods sold (COGS) and higher earnings than it otherwise would have. However, doing so would also hurt entity A’s sales revenue. If, on the other hand, entity A offers entity B a rate higher than market value, then entity A would have higher sales revenue than it would have if it sold to an external customer. Entity B would have higher COGS and lower profits. In either situation, one entity benefits while the other is hurt by a transfer price that varies from market value. Purposes of Transfer Pricing Generating separate profit for each of the divisions and enabling performance evaluation of each division separately. Transfer prices would affect not just the reported profits of every centre, but would also affect the allocation of a company’s resources (Cost incurred by one centre will be considered as the resources utilized by them). Transactions Subject to Transfer Pricing The following are some of the typical international transactions which are governed by the transfer pricing rules: Sale of finished goods Purchase of raw material Purchase of fixed assets Sale or purchase of machinery etc. Sale or purchase of intangibles Reimbursement of expenses paid/received IT enabled services Support services Software development services Technical Service fees Management fees Royalty fees Corporate Guarantee fees Loan received or paid Importance of Transfer Pricing For the purpose of management accounting and reporting, multinational companies (MNCs) have some amount of discretion while defining how to distribute the profits and expenses to the subsidiaries located in various countries. Sometimes a subsidiary of a company might be divided into segments or might be accounted for as a standalone business. In these cases, transfer pricing helps in allocating revenue and expenses to such subsidiaries in the right manner. The profitability of a subsidiary depends on the prices at which the inter-company transactions occur. These days the inter-company transactions are facing increased scrutiny by the governments. Here, when transfer pricing is applied, it could impact shareholders wealth as this influences company’s taxable income and its after-tax, free cash flow. It is important that a business having cross-border intercompany transactions should understand the transfer pricing concept, particularly for the compliance requirements as per law and to eliminate the risks of non-compliance. Transfer Pricing Methodologies The Organisation for Economic Co-operation and Development (OECD) guidelines discuss the transfer pricing methods which could be used for examining the arms-length price of the controlled transactions. Here, arms-length price refers to the price which is applied or proposed or charged when unrelated parties enter into similar transactions in an uncontrolled condition. The following are three of the most commonly used transfer pricing methodologies. For the purpose of understanding,  associated enterprises refer to an enterprise that directly or indirectly participates in the management or capital or control of another enterprise. Comparable Uncontrolled Price (CUP) Method Under the CUP method, a price that is charged in an uncontrolled transaction between the comparable firms is recognized and evaluated with a verified entity price for determining the Arm’s Length Price. Example: A Ltd. purchases 10,000 MT metal from B Ltd. its subsidiary @INR 30,000 /MT. Also purchase from C Ltd. 2,500 MT @ INR 40,000/MT.  A Ltd. received a discount of INR 500 /MT as a quantity discount from B Ltd. B Ltd. allows credit of one month at 1.25% pm. The transaction with B Ltd. is at FOB (Free on board) whereas with C Ltd. is at CIF (Cost, Insurance, and Freight). The cost of freight and Insurance is INR 1,000. Here, the terms of transactions are not the same and hence, it has affected the cost of the crude metal. Hence, adjustments are needed. Adjustments required for differences in; 1. Quantity discount: In case a similar discount is offered by C Ltd., the price that was charged by C Ltd. would have been lower by INR 500/MT.  2. Freight & Insurance (FOB Vs CIF): In case the purchase from C Ltd. was also on FOB, then the price charged by C Ltd. would have been lesser. Hence, the cost of freight & insurance must be reduced from the purchase price. 3. Credit period: In case similar credit was offered by C Ltd., then the price charged by them would have been more after factoring in such cost. Hence, 1.25% pm must be added to the purchase price.  Cost Plus Method

State Bank of India (SBI) offers a vast array of loans to cater to the financial needs of the Small and Micro Enterprises (SME) sector. Individuals who are engaged in income-generating activities in the manufacturing, trading, and services sectors can avail loans ranging between Rs.5 lakh and Rs.500 crore. The interest rates charged on these loans range between Amount of Loan The minimum and maximum amount of loan can be acquired specified below: Minimum: The minimum loan amount of above Rs.50 Lakhs can be obtained. Maximum: The maximum loan amount of up to Rs. 500Lakhs can be obtained. Security Primary Security: Hypothecation of stocks and assignment of receivables. Collateral Security: Minimum 35% collateral (in the form of SARFAESI compliant land/building, and liquid securities in the way of Bank Deposits, LIC, NSC, KVP pledged or specified to the Bank). Guarantee:  Personal guarantee of all the Directors or Partners or Promoters of the unit. Purpose of SME eBiz Loan SBI SME eBiz Loan is a cash credit facility introduced by SBI to provide financial assistance to people who sell products online through e-commerce portals. It is a small business loan given to authorised sellers of products on e-commerce websites such as Amazon or Flipkart. Processing Fee First Year: 1.00% of limit sanctioned and additionally with the applicable taxes. Second year onwards: 0.35% and additionally with the applicable taxes. Eligibility Criteria The sellers registered on e-Commerce portal for selling products online with at least six months track report on any of the major e-Commerce player are eligible to avail the SME eBiz Loan benefits. Documents Required Documents regarding registration of firm/shop/manufacturing unit. Registration certificate of the firm under MSME. Copies of sales-tax return filing documents. Copies of income tax-return filing documents. Drug license (if running a pharmaceutical manufacturing/selling enterprise). Application Procedure for SME eBiz Loan Visit Official Portal of SBI Step 1: The applicant has to visit the official portal of the State Bank of India. Small and Medium Enterprise Step 2: Click on “SME” tab which is present on the homepage of the portal. Step 3: After clicking on “SME” tab a pop-up screen appears where you have to select the “SME” link from the list of options. Apply for SME Step 4: On the next page, click on “Click here to Apply” button to apply for SBI SME eBiz Loan online. Complete the Details Step 5: Now, the form will appear on the next page fill the form with the required details such as Name of Company Date of firm creation Address of the firm Operating address of the firm E-mail address of the firm Contact Details Sector/Industry code Permanent Account Number GST Number. Submit your Application Step 6: After entering the details, click on the “Submit” button to submit your details successfully. Upload the Documents Step 7: Finally upload the documents required along with the application form to complete the process. FAQs What is the SBI SME eBiz Loan? The SBI SME eBiz Loan is a financial product offered by the State Bank of India (SBI) to meet the working capital and term loan requirements of Micro, Small, and Medium Enterprises (MSMEs). It is designed to provide easy access to funds for business expansion, equipment purchase, and operational needs.   Who is eligible for the SBI SME eBiz Loan? Be registered under the MSME Act. Have a minimum operational history, which may vary based on specific loan conditions. Maintain a good credit score and financial history.

The Indian Contract Act, of 1872 primarily governed the employment contract in India. An employment agreement is a mutual contract between the Employee and the employer that rules the terms of employment. Like any other agreement under the standard law system, the vital requirements of the employment contract letter include an offer, consideration, acceptance, lawful object, competent parties, and free consent. Legally Binding In India: Employment Bond Employment bonds are employment contracts with a negative covenant. Under the Indian Regulation, employment contracts with negative covenants are legal and legally enforceable if the parties settle with their free consent, i.e. without coercion, fraud, mistake, undue influence, and misrepresentation. The Indian courts have held that in the incident of a breach of Contract by the Employee. The employer should be allowed to recover damages only if the company had substantial expenses. Indian law mandates the employment bonds to be “rational” and legal. The term rational remains undefined anywhere in Indian law, so the courts have given meaning to “rational” depending on the circumstances and facts of the cases. The intention which has emerged till now is that conditions specified in the Agreement should be essential to protect the company’s interest and compensate for the loss reasoned by the break of the Contract. Also, the penalty or obligatory employment period agreed upon should not be exorbitant. Legal Implications of Employment Contracts in India An employment contract sets out the terms and conditions of employment, including salary, working hours, job duties, and benefits. It also includes provisions regarding termination of employment, notice periods, and non-compete clauses. The legal implications of employment contracts in India are significant and have to be taken seriously by both employers and employees. From the employee’s point of view, it is essential to carefully review and understand the terms of the employment contract before signing. Employees should read the contract thoroughly, negotiate the terms if necessary, seek legal advice if required, and understand the consequences of a breach before signing the agreement. While employment contracts provide protection to employees by outlining their rights and obligations, they also create legal obligations for both the employer and the employee. Employers are required to provide the agreed-upon terms and conditions, while employees must fulfill their job duties. Termination of employment is a crucial aspect of an employment contract, and the contract specifies the grounds for termination of employment and the notice period required. Employers must comply with these provisions when terminating an employee’s contract, failing which the employee can challenge the termination in court. Non-compete clauses are also included in some employment contracts to restrict employees from working for competing companies after leaving their current employer. Non-compete clauses are legally enforceable in India if they are reasonable and necessary to protect the employer’s legitimate business interests. Employee Bond in India An employee bond is a legal agreement between an employer and an employee that requires the employee to work for the employer for a specified period. Employee bonds are common in certain industries, such as IT and BPOs, where companies invest heavily in employee training. While employee bonds are legally valid in the court of law in India if they are reasonable and do not violate any laws, they have been controversial in India, with many experts criticizing them for being exploitative and restrictive. From an employee’s perspective, it is essential to understand the terms of the employee bond before signing. The bond must be in writing, and the employee must sign it voluntarily. The bond must specify the duration of the bond, the compensation payable if the employee breaches the bond, and the reasons for the bond. If employees violate any of the terms of the employee bond, they may be subject to penalties or legal action. From the employer’s perspective, employee bonds can be a useful tool for retaining employees and preventing them from leaving for better opportunities. However, employers cannot use employee bonds as a tool to exploit or unfairly restrict employees. If an employer breaches the terms of the employee bond or violates any employment laws, employees may be able to take legal action against the employer. What are the main clauses and terms of an employment contract? We’ve compiled a list of the most crucial phrases and conditions that should be included in the contract. Though this list is thorough, an employer or organisation can always add additional terms and conditions to protect their employer’s interests. Parties– Both the employer and the employee are parties to the agreement, and both must sign it. Location of Work- The place where the employee will be working should be specified in the agreement. Effective Date– The effective date is the date on which the agreement takes effect; in this case, the employee’s joining date will be used as the effective date. Working Hours and Job Timings- The agreement should explicitly outline the working hours and work timings. Job Description- The agreement should contain the key responsibilities that the employee will be responsible for, as well as the job description that was included in the offer letter that was provided to the employee. Details about the department in which the employee will be working, as well as information about his trainer/reporting head, should be included. Legal policy- The details of the public holidays and paid leaves an employee is entitled to within a year should be included in the leave policy. Probationary Period- At the start of the job, a probationary period may be agreed upon. The probationary period cannot exceed six months. In a fixed-term job, the probationary period cannot be longer than half the duration of the contract. Employees are paid their regular salaries throughout this time. Remuneration- The gross wage that is being offered to the employee must be specified in the agreement. Any salary deductions, such as taxes, insurance, and so on, must be indicated in the contract. The mechanism of reward payment must be agreed upon by both parties. Notice Time- Both the employer and the employee must be given a notice period. Neither party should

The Indian Contract Act, of 1872 primarily governed the employment contract in India. An employment agreement is a mutual contract between the Employee and the employer that rules the terms of employment. Like any other agreement under the standard law system, the vital requirements of the employment contract letter include an offer, consideration, acceptance, lawful object, competent parties, and free consent. What is Interim Dividend? Interim dividend meaning: It is a cash payment given by a firm to its shareholders on a regular basis. Depending on how frequently financial statements are released, they can be paid quarterly or annually. They are often less than dividend payments issued at the conclusion of a fiscal year; these large distributions are typically paid once per quarter during an earnings report known as dividend day. The most frequent interim dividend amount is roughly 10% of shares held in any one payout period.  However, because companies do not always keep all of their cash reserves in liquid assets like stock market securities, such dividends may also include stock options or new shares issued by certain companies. These types of dividends can also be used to predict whether a firm will achieve analyst expectations when it discloses full-year earnings later in the year. Insider trading occurs when non-public information about a company’s finances is released prior to official statements. Calculation and Interim Dividend Example Explained Dividends can be calculated as a proportion of earnings and paid out per share. The interim dividend formula is as follows: (Earnings of the company* Dividend payout ratio)/Number of shares Company X Ltd., for example, allocates 40% of its earnings to its stockholders. So if they earn Rs. 10 lakhs and have 20 lakhs shares outstanding, each share will be worth Rs. (10,00,000*40%) divided by 20,00,000 shares equals a dividend payout of Rs.0.2 per share. Interim Dividend as Per Companies Act Section 2(35) of the Companies Act, 2013 describes the interim dividend as follows: The dividend for a financial year of the company which is called as a final dividend is payable only if the company declares it at its annual general meeting on the recommendation of the Board of directors. The Board of Directors of a firm can declare interim dividend during any financial year or at any time during the period from the closure of the fiscal year till holding of the annual general meeting. An interim dividend will be declared by the board of directors at any time before the closure of fiscal year, whereas a final dividend is reported by the members of a company at its annual general meeting  Payment of Interim Dividend by Board of directors An interim dividend will be paid by the Board of directors of the private limited company. The interim dividend will be paid out of the surplus in the profits and loss accounts or out of profits of the fiscal year for which such dividend is sought to be declared or out of profit generated in the fiscal year till the quarter preceding the date of declaration of the interim dividend. In case the private limited company has incurred a loss during the current financial year up to the end of the quarters immediately preceding the date of declaration of the interim dividend, such interim dividend will not be declared at a rate higher than the average dividends declared by the firm during the immediately preceding three financial years. Procedure for Declaration of Interim Dividend Note on Record Date Before knowing about the procedure for declaration of interim dividend, you should familiarise with the Record Date. The record rate will be decided for ascertaining who are eligible to receive the interim dividend and to pay the interim dividend. The shareholders who are members as on the record rate will be eligible to receive the dividend as approved by the company. Step 1: The private limited company will have to be authorised by its articles for the payment of the dividend. Issue Notice for Holding Meeting Step 2: According to section 173 of the companies act, the company is required to issue notice for holding the meeting of the board of directors of the company to consider the matter. Holding the Meetings Step 3: The company is required to consider the following matters while holding the meetings: Ascertain whether the financial position of the Company allows the payment of Interim dividend out of profits available for distribution. Recommending the rate and quantum of dividend Deciding a record date Pass a Board Resolution for approving the payment of dividend Pass a Resolution for the opening of an account in the name of the private limited company Open Account Step 4: Open the separate account in the name of the company with a scheduled bank and deposit the dividend payable in the prescribed account within five days of the declaration of the dividend. Payment of Dividend Step 5: Dividend payable in cash will be paid by or warrant or Cheque or through any other electronic mode to the shareholder entitled for the payment of the dividend. The dividend will not be paid by a company in respect of any share except to the registered shareholders of such share or to his order or his banker. The dividend will be paid within 30 days from the date of declaration of dividend. Punishment for Failure to Distribute Dividends A dividend has been declared by a private limited company but has not been paid or the warrant has not been posted within thirty days from the date of declaration to any shareholder entitled, every director of the company will be punishable with imprisonment of two years and with a fine of thousand rupees for every day during which such default continues, and the company will be liable to pay an interest at the rate of eighteen per cent per annum. In the following cases, no offence under this section 127 of companies act will be deemed to have been committed: If the dividend could not be paid because of the operation of any law; Directions of the shareholders regarding the payment of dividend cannot be complied with, and the same has been communicated to him In case any a dispute regarding the right to receive the dividend If the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder; or For any other reason, if the dividend is not paid or to post the warrant within the period was not due to any default on the part of the firm. FAQs Who is eligible for an interim dividend? It is a distribution to the shareholders that are issued and paid before a company’s full-year earnings are calculated. Dividends of this type are typically paid to holders of a company’s common stock on a quarterly or semi-annual basis. Does interim dividend mean profit or loss? Like a final dividend, it is a profit appropriation that must be recorded on the debit of the profit or loss appropriation account.

Preference shares or preferred stocks are company stocks which extend dividends to its shareholders. Though such shares extend a fixed dividend, they do not come with any voting rights. Notably, a company often issues different types of preference shares which are distinct in their features and associated benefits. What are Preference Shares? Preference shares or preferred stocks come with a preferential right when it comes to the distribution of dividends or during the liquidation of a company. It means, in both situations, preference shareholders are given more priority than other shareholders. Typically, preference shares are released to raise capital for the company, which in turn is known as preference share capital. It must be noted that preferred stockholders are partial owners of a company, but unlike common shares, preferred shares do not come with any voting rights. However, shareholders’ opinions may be taken into consideration during dissolution or altering the functions of an existing venture. Notably, the decision to announce dividends on preference shares lies entirely on the company’s management. Experienced investors and those who wish to stay invested in the market for a long time, find this share suitable. The fact that preference shares generate substantial earnings makes it a viable option for risk-takers. Types of Preference Shares Cumulative Preference Shares Holders of cumulative preference shares are entitled to receive the divided for a year in which dividends could not be paid due to losses or inadequate profit in the subsequent year(s) whenever there are sufficient profits. Non-Cumulative Preference Shares Holders of non-cumulative preference shares are NOT entitled to receive the dividend for a year in which dividends could not be paid in the subsequent year(s). Therefore, for non-cumulative preference shares, the right to dividend for a year cannot be carried over in subsequent years. Participating Preference Shares Participating preference shares are eligible to receive surplus profit or dividends in the company, in addition to being entitled for fixed dividend. Non-participating Preference Shares Non-participating preference shares are those shares that are not entitled to participate in surplus profits of the company. Non-participating preference shares are only entitled to fixed dividend payments. Redeemable Preference Shares Redeemable preference shares are those shares that would be redeemed by the company within a period of 20 years from the date of issue. Irredeemable Preference Shares Irredeemable preference shares are those preference shares that would NOT be redeemed by a company. Companies in India are not allowed to issue irredeemable preference shares. Convertible Preference Shares Convertible preference shares can be converted into equity shares of the company as per the terms and conditions of their issue. Non-convertible Preference Shares Non-convertible preference shares are not convertible into equity shares of the company but still have preferential rights to payment of capital in the event of winding up of the company. Issuing Preference Shares in a Private Limited Company A private limited company or limited company having share capital may issue preference shares, if authorized by the articles of association of the company, subject to the following conditions: The issue of preference shares by the company is authorized by passing a special resolution in a general meeting of the company; AND The company, at the time of such issue of preference shares, has not defaulted in the redemption of preference shares issued either before or after the commencement or in payment of dividend due on any preference shares. In addition to the above, the company issuing preference shares must set out in the articles of association of the company, the following regulations: Priority of preference shares with respect to dividend payment and repayment of capital over equity shares; Participation in surplus funds of the company; Participation in surplus assets and profits, on winding up of the company; Payment of dividend on cumulative or non-cumulative basis; Conversion of preference shares into equity shares; Voting rights of the preference shares; Redemption of preference shares; Difference Between Equity Shares and Preference Shares This table highlights the basic differences between equity shares and preference shares. Parameter Preference Share Equity Share Definition It offers preferential rights in terms of receiving dividend or capital amount. It represents shareholders’ ownership in a company. Rate of dividend Dividend payout’s rate is fixed. Dividend payout’s rate fluctuates with more earnings. Dividend payout Preferred stockholders are given more priority over common stockholders during dividend payment. Shareholders avail dividend only after other liabilities have been paid. Bonus shares Shareholders may receive bonus shares against current shareholdings. Shareholders may receive bonus shares against their shareholdings. Capital repayment Capital repayment is made before equity shares. Capital is repaid at the end. Voting rights Shareholders do not enjoy voting rights. Shareholders avail voting rights. Participation in management Shares do not come with management rights. Equity share allows shareholders to partake in company management. Convertibility Preferred stocks can be converted. Equity stocks cannot be converted. Arrears of dividend Shareholders may receive a cumulative dividend. Shareholders are not entitled to avail cumulative dividends. Types Preference shares and its types include, convertible, non-convertible, participatory, non-participatory, cumulative, non-cumulative, etc. They are simply classified as ordinary or common stock of a company. Issuance It is not mandatory to issue preference shares. Companies must issue equity shares. Suitability It is considered suitable for investors with low risk-taking capacity. It is considered for investors who can take risks. FAQs What is redeemable and non-redeemable preference shares? The redeemable preference shares are repurchased at a fixed rate on a certain fixed date or by an advanced announcement. On the other hand, non-redeemable preference shares cannot be redeemed or repaid during the company’s operational lifespan. What is the meaning of cumulative and non-cumulative preference shares? A cumulative preference share entitles an investor to dividends that were missed previously. While a non-cumulative preference share doesn’t provide investors to avail of any dividends that were missed earlier.