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Overview of Transfer Pricing in India

September 06, 2021

What is Transfer Pricing in India and Related Party Transactions in a globalized business world

In an increasingly more globalized and interconnected world where more and more organizations operate across borders, MNE businesses face a range of cross-border taxes. Naturally, these businesses search for ways and means to minimize their tax liabilities. Transfer Pricing is one such method.

Transfer Pricing refers to internal pricing arrangements between related firms within the same multinational entity but located in different countries and tax jurisdictions. Profits are thereby transferred to operations in lower tax jurisdictions. These are called Related Party Transactions, ‘Related Parties’ referring to common ownership or control.

While Transfer Pricing to save on tax is not per se illegal in itself, organizations taking advantage of Double Taxation Avoidance Agreements (DTAA) to manipulate prices or evade tax is a crime of concern for tax authorities worldwide. Transfer Pricing hence is a vital, visible, and very scrutinized part of the global tax system. It is at the heart of OECD’s BEPS (Base Erosion and Profit Shifting) drive against tax avoidance and manipulation. With the need to therefore balance smart tax management with compliance, professional Transfer Pricing Services play an important role for organizations today.

Applicability of Transfer Pricing in India

It being a significant member of the global economy and tax system, the applicability of Transfer Pricing in India is only to be expected. The applicability of Transfer Pricing in India began in FY 2001-02 with the Transfer Pricing Regulations vide the Finance Act, 2001. Transfer Pricing structure in India is regulated by Section 92-94F of the Income Tax Act, 1961 which also deals with cross-border transactions and DTAAs. What is Transfer Pricing in India also incorporates a domestic component when the applicability of Transfer Pricing in India was extended to ‘specified domestic transactions’ through Finance Act, 2012 w.e.f the assessment year 2013-14.

The domestic applicability of Transfer Pricing in India kicks in where the transactional value exceeds INR 20 Crores. Domestic Transfer Pricing in India is applicable for transactions between two companies with the same taxpayer which do not correlate to the market value of the good in transit. Domestic Transfer Pricing applicability holds for expenditures of a firm or person associated with the taxpayer’s business.

The methods of Transfer Pricing in India reference the principle of ‘Arm’s Length Price’ between two related entities as its base. The Arm’s Length Price is the price that would be chargeable if the transacting entities were not related. These methods include:

  • Comparable Uncontrolled Price (CUP) Method
  • Resale Price Method (RPM)
  • Cost Plus Method (CPM)
  • Profit Split Method (PSM)
  • Transactional Net Margin Method (TNMM)
  • Other methods such as may be prescribed (based on non-related entity price)

The most appropriate one depends on the specifics of the type of transaction and associated parties.

The importance of Transfer Pricing

The importance of Transfer Pricing holds for both businesses and the global economy and tax system.

The latter seeks to ensure a fair and level playing field where business is conducted as it should – ethically and benefitting both society at large and individual businesses. Hence it is important that the benefits given to businesses such as DTAAs are not abused by them to evade due and fair taxes. It is a fine line that both the authorities and businesses must not cross.

For businesses, Transfer Pricing done legally is without doubt an effective financial practice that allows them to allocate optimally across tax jurisdictions to maximize profits. Leveraging legal allowances is indeed fair play and smart. However, businesses must not cross the fine line between tax saving and tax evasion. The latter is not only illegal but also unethical. Compliance is a must not only because non-compliance is illegal and attracts strict penalties but also because it is ethical and smart corporate governance on the part of businesses as responsible global citizens.

MBG’s Transfer Pricing services deliver the balance between bottomline and compliance

Given this importance of Transfer Pricing and the accompanying scrutiny on it from a compliance and corporate governance standpoint, Transfer Pricing is a critical item of vigilance for a multinational entity (MNE); and, equally, given its complexities, it is one that demands high quality skill, time, and effort in equal measure. While international tax in itself is demanding, added to that is domestic transfer pricing applicability to reckon with. Overall, achieving the balance between tax compliance and saving is key.

At MBG Corporate Services, our advisory team guides you through the complex areas of international tax as well as the intricacies of domestic Transfer Pricing in India. We develop robust and defensible strategies across various types of Transfer Pricing that both meet regulatory expectations and are aligned with your business goals. We deliver a TP model across these types of Transfer Pricing that is consistent with your value chain and responds to your changing business dynamics.

Our scope of work for Transfer Pricing includes:
  • Transfer Pricing benchmarking services
  • Transfer Pricing transactions advisory
  • Transfer Pricing documentation services
  • Transfer Pricing certification services
  • BEPS (Base erosion and profit shifting) compliance :
    • Master File reporting
    • Country-by-Country Reporting (CbCR)
  • Representation services before Indian tax authorities

Contact us for our Transfer Pricing services and high quality advice on what is Transfer Pricing in India including both international and domestic Transfer Pricing applicability , the importance of Transfer Pricing to your business in terms of both bottomline and tax compliance , the methods of Transfer Pricing in India, and more.

 

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