"Transfer pricing" refers to the transaction prices of transactions between related parties like the parent and subsidiary, which may take place under the conditions differing from those taking place between independent enterprises. The transfer price between related parties may not be at par when compared to the transfer price on transactions with unrelated parties.
For example, company X purchased the goods for Rs. 1000/- and sells it to its associated company Y in another country amounted for Rs. 2000/-, who in turn sells in the open market for Rs. 4000/-. If company X had sold it directly in the latter country, it would have made a profit of Rs. 3000/-. But by routing it through company Y, it restricted the profit to Rs. 1000/-, permitting company Y to appropriate the balance. The transactions between X and Y is arranged and are not governed by market forces. The profit amounting to Rs. 2000/- is, thereby, shifted to country of Y. The goods are transferred on a price (transfer price) which is arbitrary or dictated (Rs. 2000/-), but not on the market price (Rs. 4000/-).
To protect interests of the revenue, the Income Tax Act, 1961 ("the Act") has vide its chapter -X framed specific provisions. The basic principle enunciated through such provisions is to be considered "arm's length price" for the international transactions. Almost every entity associated with an international entity faces the issue of transfer transfer price regulation in India. We help those entities in determining the transfer pricing in India in the form of providing transfer pricing reports for Indian companies within the timeframe adopting complete legal framework.
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