Transfer Pricing Law in India

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By Gunjan Sinha, Dezan Shira & Associates

DELHI – India’s market began to emerge on the global stage in 1991 with the implementation of several governmental policies relating to foreign trade and foreign direct investment. This move towards globalization brought about new requirements relating to taxation and other laws as multinational corporations began investing in India and acquiring local companies.

There were many transactions taking place between the same group of companies and the transfer price between them started playing a major role in impacting the profits and losses of Indian companies. Amendment in taxation laws for such transactions then became the need of the hour so that tax planning could be kept under check and protect against tax evasion.

With these concerns in mind, the Indian Tax Authorities first introduced the Transfer Pricing Regulations (TPR) through the Finance Act, 2001, and made it effective from the Financial year ending March 2002. These provisions were set to be governed by the Income Tax Act, 1961, and were based on the Transfer Pricing guidelines of the Organization for Economic Co-Operation and Development.

The Transfer Pricing Laws have been enumerated under Sections 92 to 92F of the Indian Income Tax Act and cover intra-group cross-border transactions. Rules and regulations prescribe that income arising from International Transactions or Specified Domestic Transactions between Associated Enterprises (AE) should be computed using the arm’s-length price principle.

“International transactions” refers to transactions between two (or more) AEs involving the sale, purchase or lease of tangible or intangible property, the provision of services or cost-sharing agreements, lending/ borrowing of money or any other transaction having a bearing on the profits, income, losses or assets of such enterprises.

Relationships falling under the AE category include direct/indirect participation in the management, control, or capital of an enterprise by another enterprise. It also covers situations in which the same person participates in the management, control or capital of both the enterprises.

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