Transfer pricing is an important concept in accounting that describes the rules and regulations regarding pricing transactions within an organisation or between organisations under common ownership. It is an accounting practice that helps to establish a price that one division in an organisation charges another for providing goods or services. It is a great way for organisations to reduce their tax liability legally. However, at times some tax establishments might contest their claims. 

A glimpse into the Indian transfer pricing law

The transfer pricing law in India was introduced under section 92A-F of the Income Tax Act, 1961. It is applicable for both domestic and overseas transactions that fall above a given deal value threshold. The main objective behind the law related to transfer pricing in India is to ensure that the transactions between related parties are at an optimum price as per the market conditions. They should not take undue advantage of being related to the same organisation. Let’s dig deeper into some relevant sections of the Income Tax Act 1961 that applies to transfer pricing in India. 

 

  • Section 92: Income should be calculated for arm’s-length price

 

Section 92 (1) states that any income that is obtained from an international transaction should be calculated based on the arm’s-length prices. Section 92 (2) provides extensive coverage on the cost contribution arrangements. As per Section 92 (3), the application of the transfer pricing provision should not lead to any reduction in income that is calculated based on books of accounts. 

 

  • Section 92A: Associated enterprises    

 

Section 92A of the Income Indian Tax Act 1961 sheds light on the definition of ‘Associated Enterprises’. It states that two or more enterprises are associated if one of them takes part in the management, capital structure or control of another. In addition to this, enterprises are also related if there is common management, capital, or control exercised by some people. 

 

  • Section 92B: International transactions

 

Section 92B covers what an international transaction entails. As per this section, a transaction that occurs between two or more associated enterprises falls under the international category if one or both parties are non-residents. The international transactions can include purchase, sale, lease of properties, borrowing or lending money, etc. In short, any transaction that has some impact on the income, assets, profits and losses should be included. 

 

  • Section 92C: Calculation of arm’s-length price

 

The definition of arm’s length price is stated under Section 92F, it is the price that is applicable on transactions between people other than AEs in uncontrolled settings. Section 92C describes the methods for the calculation of arm’s length price. There are five methods prescribed under this section. 

  • CUP: Comparable Uncontrolled Price 
  • RPM: Resale Price Method
  • CPM: Cost Plus Method
  • PSM: Profit Split Method
  • TNMM: Transactional Net Margin Method

Any other methods that are used to compute the arm’s-length price are classified as “Other Method”.

Conclusion

The above-mentioned sections under the Indian Income Tax Act 1961 extensively cover all-important transfer pricing rules in India.