Transfer Pricing refers to cross-border pricing between two associated enterprises. Transactions can include the purchase or sale of goods, lending of money, use of intellectual property, etc.
Associated enterprises are simply related enterprises. In the word of law, according to Section 92 of the Income Tax Act “Associated Enterprise” to another enterprise, means an enterprise which participates, directly or indirectly, or through one or more intermediaries, in the management, control, or capital of the other enterprise.
Transfer Pricing is triggered when two associated enterprises enter into any international transaction during the year. This should be analyzed on a case-by-case basis every year.
Arm’s length price means the price on which a comparable transaction would have been carried out had it been for two unrelated enterprises.
Transfer Pricing beyond the arm’s length range can lead to tax disputes and thus can give rise to transfer pricing adjustment and tax thereupon. If transfer pricing is set beyond ALP knowingly, it can result in penalties. This is also when an entity doesn’t undertake the applicable TP compliances and/or doesn’t maintain the required documentation.
Transfer pricing involves setting prices for transactions between associated entities to ensure fair tax distribution.
Maintain proper documentation, conduct regular audits, and follow the arm’s length principle.
