Background

 

Since 1991, with the liberalization of trade and foreign exchange policy India has started integrating its economy with global economy. This has led to increased cross border flow of goods, services, funds and even intangibles. There was a large inflow of Foreign Direct Investment (FDI). Monetary controls were relaxed and quantitative import barriers were lifted. Obviously, with the growing MNEs interested in India, it has become imperative for tax authorities in India to take cognizance of transfer pricing issues. It is relevant to note that many of the Indian companies have also become large global players with major acquisitions in recent past and with overseas subsidiaries in many tax jurisdictions.


Transfer Pricing in India


In order to curb the practice of avoiding tax by the foreign companies in India, a legislation under the name ‘Transfer Pricing Regulation’ has been introduced.

The following are the important statutes of the law.

 

  • Each person or association who has involved in an international transaction should maintain an up-to-date record of each transaction as prescribed by the legislation.
  • All income acquired by the company by means of any international transaction shall be calculated at arm’s length price.
  • There are various methods to calculate the arm’s length price, depending on the nature and type of the transaction, the nature of the group or the association involved, or any other features of the transactions involved.
  • These methods are introduced by the Central Board of Direct Taxes, generally known as the ‘Board’. Some of them include the resale price method, cost plus method, comparable uncontrolled price method, and transactional net margin method.
  • If there are two or more appropriate prices assumed for a certain transaction, the arm’s length price will be calculated as the average of the prices.
  • At the end of a financial year, the person or group involved in an international transaction should submit the report of it in Form 3CEB under the guidance of a Chartered Accountant.
  • This form has to be filed before he files the Income Tax return of the same period.
  • The group or person who does not adhere to these rules is liable to pay the penalties as imposed by the Board.

We provide services for proper compliance of Transfer Pricing Regulations in India