The pricing of goods, services, and intangibles transferred between related entities (associated enterprises) across tax jurisdictions.
Transfer Pricing rules (Sections 92–92F of Indian IT Act) ensure that transactions between related parties (parent-subsidiary, commonly controlled entities) are priced at arm's length — i.e., the same price that unrelated parties would agree to in similar circumstances. Without these rules, multinational companies could shift profits to low-tax jurisdictions by manipulating intercompany prices. The arm's length price is determined using prescribed methods: CUP (Comparable Uncontrolled Price), RPM (Resale Price), CPM (Cost Plus), TNMM (Transactional Net Margin), and PSM (Profit Split). Documentation requirements are extensive.
Indian subsidiary provides IT services to its US parent company. It charges $50/hour (its cost is $30/hour). Tax officer checks: similar Indian IT companies charge $55–65/hour to unrelated US clients. The $50/hour rate is below arm's length range. Adjustment: Taxable income increased by ($55–$50) × hours = additional tax liability in India. Penalty possible if documentation is inadequate.
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Any entity that has 'international transactions' with 'associated enterprises' (broadly: holding >26% shares/voting power, or common management/control). Also applies to 'specified domestic transactions' between related Indian entities if aggregate exceeds ₹20 crore in a year. Even payments to foreign subsidiaries, royalties, management fees, and loans are covered.
Three levels: 1) Local File — Detailed analysis of each international transaction with associated enterprises, including functional analysis, method selection, and benchmarking. 2) Master File — Global group information (if consolidated revenue >₹500 crore). 3) Country-by-Country Report (if group revenue >₹5,500 crore). Due date: Same as tax return filing. Penalty for non-maintenance: 2% of transaction value.
Financial transactions between two entities that belong to the same parent company or corporate group.
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.
Tax deducted at the time of making a payment to a non-resident or on specified transactions, remitted directly to the government.
A tax paid directly by an individual or organization to the government, where the burden cannot be shifted to another person. Examples include income tax, corporate tax, and capital gains tax.
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