Introduction To Transfer Pricing concept international tax law cs notes
Introduction To Transfer Pricing
Transfer pricing is a profit allocation method used to attribute acorporation’s net profit or loss before tax to tax jurisdictions. Sections 92to 92F of the Income Tax Act, 1961 deal with a transferpricing. Due to the increasing participation of multinational groups in India,there have been new complex issues emerging from transactions between two ormore enterprises belonging to the same group. The price at which the goods andservices are transferred between independent units of an organization is termedas “transfer price”. Such a price can be arbitrary and not in accordance of themarket forces. This leads to the parent company or subsidiary incurring hugelosses or producing insufficient taxable income. Hence these sections wereframed, in order to provide guidelines for the computation of transfer priceand documentation procedures. These are broadly based on the OECD guidelines(organization for economic co operation and development).
This legislation mainly deals with cross border transactions, “internationaltransactions” are defined as transaction between two or more associatedenterprises involving the sale, purchase or lease of tangible or intangibleproperty; provision of services; cost sharing arrangements; lending/ borrowingof money; or any other transaction having a bearing on the profits, income,losses or assets of such enterprises.
The various methods of computing arm’s length price are:
(a) Comparable uncontrolled price method
(b) Resale price method
(c) Cost plus method
(d) Profit split method
(e) Transactional net margin method
(f) Any other method prescribed by the board
If price is determined by more than one method, the arms length will bedetermined as the arithmetic mean of the prices so determined.