The enactment of detailed Transfer Pricing Laws in India in 2001 has brought the issue of Transfer Pricing to the forefront amongst multinational as well as Indian companies. Transfer Pricing is one of the most important tax issues requiring senior management’s time and attention. Irrespective of size, companies need an effective and defendable Transfer Pricing policy, which takes into consideration group’s overall business strategy and operating structure.
As is common knowledge, Transfer pricing regulations have been in place since 2001. The Transfer Pricing legislation requires that income from cross border transactions between Associated Enterprises be computed after considering the arm’s length price. The term “arm’slength price” primarily refers to the price that would be charged for a similar cross-border transaction between unrelated parties.
Businesses should proactively formulate a Transfer Pricing policy based on commercial realities with active involvement of finance, operating and tax personnel. Also, timely and proper documentation needs to be maintained which would be useful during assessment proceedings. Such documentation should clearly specify the Transfer Pricing approach that was adopted when the particular international transaction was entered into. Non-maintenance of documentation would result in serious consequences like additional taxes, interest and penalties.