Transfer Pricing for Domestic Transactions in India
TRANSFER PRICING IN INDIA FOR DOMESTIC TRANSACTIONS
Vishal Achanta, No.632
All references to the ‘statute’ must be construed to mean the Income Tax Act, 1961, as amended by the Finance Act, 2012.
Transfer pricing is a relatively new concept in the Indian taxation regime, and transfer pricing with respect to domestic transactions is barely a year or two old. This article aims to explore the basics of transfer pricing and specified domestic transactions in India, and identify areas of improvement.
This is the basic rationale of transfer pricing with respect to domestic transactions: Consider a situation wherein there are two sister concerns A and B, which are owned by a business house, ABC Ltd. One of them, A, is profit making (and has to pay a heavy tax) and the other, B, is located in an SEZ and therefore enjoys a tax holiday. Companies such as A & B very often take advantage of the tax arbitrage by initiating a transaction between A and B which is not at a fair, market rate, but is grossly under invoiced or over invoiced. In such a manner, the profit making company, A, is able to disguise its taxable income and ‘park’ its profits in Company B due to the fact that the transaction between them is subject to the directives of their parent, ABC Ltd., and not to market forces. These monies will then be subject to a lesser rate of taxation that is prevalent for company B (by virtue of its location in an SEZ), and the parent company ABC Ltd., will have managed to avoid paying a hefty slice of tax.
Transfer pricing basically allows the Revenue to make an ‘adjustment’ to the transaction and ‘disallow’ what it regards as over-invoicing or under-invoicing. It is allowed to do so with reference to the ‘Arm’s Length Price’. This is the price at which the transaction which is the subject of over or under invoicing would or should have taken place at had the two parties to the transaction not been sister concerns but been at ‘arm’s length’. In the statute, this
Vishal Achanta, No.632
All references to the ‘statute’ must be construed to mean the Income Tax Act, 1961, as amended by the Finance Act, 2012.
Transfer pricing is a relatively new concept in the Indian taxation regime, and transfer pricing with respect to domestic transactions is barely a year or two old. This article aims to explore the basics of transfer pricing and specified domestic transactions in India, and identify areas of improvement.
This is the basic rationale of transfer pricing with respect to domestic transactions: Consider a situation wherein there are two sister concerns A and B, which are owned by a business house, ABC Ltd. One of them, A, is profit making (and has to pay a heavy tax) and the other, B, is located in an SEZ and therefore enjoys a tax holiday. Companies such as A & B very often take advantage of the tax arbitrage by initiating a transaction between A and B which is not at a fair, market rate, but is grossly under invoiced or over invoiced. In such a manner, the profit making company, A, is able to disguise its taxable income and ‘park’ its profits in Company B due to the fact that the transaction between them is subject to the directives of their parent, ABC Ltd., and not to market forces. These monies will then be subject to a lesser rate of taxation that is prevalent for company B (by virtue of its location in an SEZ), and the parent company ABC Ltd., will have managed to avoid paying a hefty slice of tax.
Transfer pricing basically allows the Revenue to make an ‘adjustment’ to the transaction and ‘disallow’ what it regards as over-invoicing or under-invoicing. It is allowed to do so with reference to the ‘Arm’s Length Price’. This is the price at which the transaction which is the subject of over or under invoicing would or should have taken place at had the two parties to the transaction not been sister concerns but been at ‘arm’s length’. In the statute, this