Transfer pricing in India was introduced on 1 st April 2001. Very recently India has addressed the issue of Transfer Pricing and amended the Income Tax Act. India is gearing up to face international challenges with regard to Transfer Pricing.
The following diagram explains the basic components of transfer Pricing provisions incorporated in Sections 92 to 92F of the Act.
The main features of these regulations are discussed hereunder:
- The provisions apply to international transactions. An international transaction includes the transactions of following types entered between associated enterprises of which at least one enterprise is non-resident.
- Transactions of purchase, sale or lease of tangible or intangible property., or
- Provision of services., or
- Lending or borrowing money., or
- Agreement or arrangement for sharing of cost, expenses for mutual benefit.
- The arm's length principle is the core principle followed for computing transfer prices in respect of transactions between related to an entities. The law provides that any income arising from or expenses and interest payments relating to an international, shall be computed having regard to the arm's length price.
- Under transfer pricing regulations the arm's length price is arrived at by following the most appropriate method considering the nature of transactions or class of associated enterprises or functions performed by such enterprises.
- The law follows the internationally recognized methods for computing the arm's length prices. The methods prescribed in this regard are comparable uncontrolled price method, cost plus method, profit split method, and Central Board of Direct Taxes may prescribe transactional net margin method or any other method as.
- The Assessing Officer can determine the arm's length price after making adjustment in respect of the price charged or paid in an international transaction, any information and / or documents relating to an international transaction have not been kept or maintained by the assesses or the information or data utilized for computing arm's length price is not reliable or correct or the assessee has failed to furnish the required information within the specified time.
- The provisions dealing with the documentation provide that every person who has entered into an international transaction should keep and maintain such information and documents as prescribed by rules made by the Board.
- The penalties are also prescribed in the law to curb tax avoidance by abuse of legislation. Penalty up to 300 % of tax sought to be evaded may be levied if transfer price adjustment is made by Assessing Officer and the assessee is unable to prove good faith and due diligence in computing arm's length price. Besides penalty of 2 %of the value of international transaction may also be levied if the assessee has failed to maintain the prescribed information or documents or failed to furnish information or document as may be required by the Assessing Officer.
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