25 April 2009
When international transaction is done between associated enterprises, the pricing is not strictly determined by market forces. Hence adjustment can be made in the transaction value to attain arm length prices. The policy to attain arm length price in transfer pricing is the policy you are asking. Under Income Tax Act, it is contained in Sections 92 to 94.
The term originated from the existence of the multinational business corporation having presence in many countries in the different part of the world trough of chain of subsidiaries and associates companies. Such business corporation tend to transfer profits from a high tax jurisdiction to low tax jurisdiction to reduce the overall group tax Burdon. The policy of shifting profits as mentioned herein is called the “Transfer Pricing”
Various countries in the world have introduced regulation tax Laws to prevent such corporations from shifting the profit from their country. India also introduced such regulation by Finance Act 2002 with effect from 01.04.2002. Such regulation are contained in section 92 to 92F of the IT Act.
As per the section 92 to 92F any “international transaction” between two “associated enterprises” has to be at “arm’s Length”
The definitions of the above marked terms is given in the section 92 to 92F Of IT Act. Apart from these section rule 10B to Rule 10 D prescribe the meaning of expression used in computation of arms length price, the most appropriate method of computing the arm’s length price, the documentation requirement to compute arm’s length price and the requirement of certification of arm’s length price.
Hope this write up troughs enough light on Transfer pricing. In case you need further clarification, please feel free to contact.
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