Financial transactions between two entities that belong to the same parent company or corporate group.
Intercompany Transactions occur between subsidiaries, parent-subsidiary, or divisions within the same corporate group. These include sales of goods/services, loans, management fees, royalties, and asset transfers. While legitimate for operations, they must be eliminated during consolidated financial statement preparation to avoid double-counting revenue or inflating assets. Transfer pricing regulations (Section 92 of Indian IT Act) require these transactions to be at arm's length price — the same price that would apply between unrelated parties.
Parent company in India sells software licenses to its Singapore subsidiary at ₹50,00,000. The subsidiary resells to end customers at ₹80,00,000. In individual books: Parent records ₹50L revenue, Subsidiary records ₹80L revenue. In consolidated statements: Only ₹80L external revenue is shown (₹50L intercompany sale is eliminated). Transfer pricing officer verifies ₹50L is arm's length.
Ensures accurate financial reporting and record-keeping
Helps maintain regulatory and tax compliance
Enables better-informed business decisions
Improves operational efficiency and cash flow management
Because they represent internal movement of money/goods within the same economic entity. Including them would double-count revenue, inflate assets, and misrepresent the group's actual business with external parties. Consolidated statements should reflect only transactions with the outside world.
Tax authorities can adjust the transaction to arm's length price and tax the difference. In India, this means: addition to taxable income, interest under Section 234B/C, and potential penalty of 100–300% of tax on adjusted amount under Section 271G. Maintaining proper transfer pricing documentation is critical for multinational groups.
Formal records of a business's financial activities, comprising the Balance Sheet, Profit & Loss Statement, Cash Flow Statement, and Notes to Accounts.
The legal framework of laws, regulations, and filings that a business must adhere to, including tax filings, labor laws, corporate regulations, and industry-specific requirements.
The accounting principle that determines when and how revenue is recorded in the financial statements, based on when it is earned rather than when cash is received.
A department, team, or function within a business that incurs costs but does not directly generate revenue.
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