In today’s business environment, intra-group transactions are quite prevalent especially cross-border transactions between enterprises of a multinational group. Commercial transactions between such different enterprises of the same organization may not be subject to the same market forces shaping relations between two independent firms. Transfer price is the consideration for which goods or services are traded between independently operating units of an organization.
As is the global practice, in India also the law mandates that such transactions are made at arm’s length, i.e. it should be the market price as applicable for two unrelated independent enterprises. Transfer pricing laws in India are largely based on the Transfer Pricing Guidelines of the Organization for Economic Co-operation and Development.
Transfer pricing regulations are applicable in case of most of the cross-border transactions between associated enterprises. The transfer pricing regulation are also applicable for transactions within domestic territory, above a threshold limit, on certain specified transactions. The regulations specify the methods for computation of arm’s length price, documentation required to be maintained, reporting to tax authorities, audit requirements, safe harbour rules and advance pricing agreements.