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Transfer pricing is a critical area of compliance for businesses engaged in international or specified domestic transactions in India. The transfer pricing rules, enshrined in India's Income Tax Act, aim to ensure that income from such transactions is computed at an arm’s-length price—essentially, the price that would be charged between unrelated entities under similar circumstances.
What Are Transfer Pricing Rules?
In India, transfer pricing applies to transactions exceeding certain thresholds between Associated Enterprises (AEs). AEs are defined as two or more enterprises where:
One entity participates in the management, control, or capital of another; or
Common management, control, or capital is exercised by the same person or group.
These rules also extend to specified domestic transactions, ensuring a fair computation of profits within the Indian market.
The Price of the Arm’s-Length: The Core Principle
The cornerstone of India’s transfer pricing framework is the arm’s-length price. To determine this price, a set of prescribed methods is applied based on the transaction's nature, the characteristics of the group, and other relevant factors.
If multiple appropriate prices are determined for a transaction, the arm’s-length price is calculated as the average of these prices. Non-compliance can lead to hefty penalties imposed by the Central Board of Direct Taxes (CBDT).
Recent Developments: Master File and Country-by-Country Reporting (CBCR)
India’s transfer pricing framework aligns with global standards through the introduction of the Master File and Country-by-Country Reporting (CBCR), inspired by the OECD’s Base Erosion and Profit Shifting (BEPS) project.
The CBCR mandates that multinational corporations (MNCs) with consolidated revenue exceeding USD 837 million provide transparency regarding:
Revenue, income, taxes paid, and accrued;
Employment levels;
Capital and retained earnings;
Tangible assets;
Business activities across jurisdictions.
This initiative empowers tax authorities to analyze whether MNCs allocate profits appropriately across jurisdictions or engage in profit-shifting strategies.
Compliance and Documentation: What Taxpayers Need to Know
Indian businesses must maintain extensive documentation for international and specified domestic transactions with AEs. This includes two main categories:
Ownership and Transactional Information- Taxpayers must document:
Ownership structure;
Group profile;
Detailed information on international transactions, including terms, nature, quantity, and value.
Supporting Documentation- Supporting pieces of evidence such as:
Government publications;
Market research studies;
Relevant agreements and contracts;
Correspondence and technical reports.
Taxpayers engaging in smaller transactions are exempt from these rigorous requirements. International transactions below INR 10 million and specified domestic transactions below INR 200 million are not required to maintain the prescribed documentation.
However, companies must ensure their documentation is robust enough to substantiate the arm’s-length price of their transactions.
Filing Deadlines and Retention Requirements
Companies subject to transfer pricing regulations must file their tax returns by November 30 of the following financial year. Additionally, all prescribed documents must be retained for at least eight years from the end of the relevant tax year. This ensures the records can withstand scrutiny during audits or assessments.
Why Compliance Matters in the present scenario?
Transfer pricing compliance isn’t merely about avoiding penalties—it’s about protecting a company’s reputation and ensuring ethical business practices. Non-compliance can lead to financial penalties, reputational damage, and legal complications. By adhering to these rules, businesses can foster transparency and trust with tax authorities and stakeholders.
India’s transfer pricing rules offer a robust framework to ensure fair and equitable profit computation in international and domestic transactions. Integrating global practices like CBCR has enhanced transparency and accountability, making India a strong proponent of global tax compliance standards.
For businesses, navigating the complexities of transfer pricing requires diligence, strategic documentation, and a proactive approach to compliance. Staying updated and seeking expert guidance can go a long way in ensuring seamless adherence to these regulations.
Sources Referred-
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