What is ‘Transfer Pricing’?
‘Transfer Pricing’ is an art and science of determining the value of transactions that take place between entities of the same multi-national group. It involves the consideration of economic factors to perfectly balance a corporation’s and tax authority’s interest in terms of profitability and taxation.
Why ‘Transfer Pricing’ in ‘Taxes’?
Earlier, the concept of Transfer Pricing was used mainly in setting prices for intra-divisional transfers within a corporation. With the advent of globalisation, multi-national groups began to adopt transfer pricing mechanisms among their own corporations. One of the reasons for this was to manage tax outflows and optimize the profits of the group as a whole. In light of this, the revenue authorities of various countries have incorporated comprehensive ‘Transfer Pricing Regulations’ in their respective tax codes with a view to protecting their tax bases.
The Indian Chapter of Transfer Pricing
In India, the Transfer Pricing era first saw the light of day when the Finance Act, 2001 successfully introduced the Transfer Pricing provisions in the Income-tax Act, 1961 (‘the Act’). Section 92 of the Act is effectively called the ‘charging provision’ which activates the Transfer Pricing compliance in India. This section requires the value of an ‘international transaction’ (defined in section 92B) and a ‘specified domestic transaction’ (defined in section 92BA) between ‘associated enterprises’ (defined in section 92A) to be compliant with the arm’s length principle. For facilitating the application of transfer pricing provisions, certain rules have also been prescribed in the Income-tax rules, 1962. In addition to this, an accountant’s certificate in ‘Form No. 3CEB’ has to be filed on or before 30th November with the Income-tax department after the end of every tax year. (Note: Various sections have been quoted above for a quick and easy reference while going through the Act.)
Getting a ‘Transfer Pricing Compliant’ Tag
Corporations belonging to a multi-national group may plan and implement their international/specified domestic transactions for becoming ‘Transfer Pricing Compliant’ by adopting the following guidance points, as applicable:
1. Putting in place adequate and factually appropriate inter-corporate agreements.
2. Maintaining a Transfer Pricing Policy based on proper planning and analysis.
3. Structuring and devising business models/transactions as per the inter-corporate agreements and Transfer Pricing policies.
4. Benchmarking of transactions and preparation of annual contemporaneous Transfer Pricing Documentation.
5. Filing of Form No. 3CEB on or before 30th November after the end of every tax year.
6. Consider entering into Advance Pricing Agreements as per the requirement of the circumstances.
(Note: The above list intends to provide a general view of the accepted practices for Transfer Pricing compliance in India. These are not exhaustive in nature and may vary on a case to case basis.)
Contributed by Jhelam Popat and Team TransPrice
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