Transfer pricing refers to the rules and methods for pricing transactions within and between enterprises under common ownership or control.
Transfer pricing provisions are applicable on:
In relation to any income, expenditure, interest, and allocation of cost, between associated enterprises (AE), and are computed having regard to Arm’s length price.
For management accounting and reporting purpose, multinational companies (MNCs) have some amount of discretion while defining how to distribute the profits and expenses to the subsidiaries located in various countries. 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 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 transfer pricing concept, particularly for the compliance requirements as per law and to eliminate the risks of non-compliance.
Arm’s Length Price:
According to the Indian Income-tax Act, 1961, income arising from such transactions must be computed using the arm’s length price principle, that is, the amount payable if the trading companies were unrelated or uncontrolled.
Relationships falling under the Associated Enterprise category include direct or indirect participation in the management, control, or capital of an enterprise by another enterprise. They also cover situations in which the same person participates in the management, control, or capital of both the enterprises.
International transactions refers to transactions between two or more AEs, where at least one must be Non Resident, involving one of the following activities:
Specified domestic transactions:
Following transactions with related domestic parties qualify as specified domestic transactions, provided the aggregate value of such transactions exceed Rs 20 Crore :