Increasing participation of multi-national groups in economic activities in India has given rise to new and complex issues emerging from transactions entered into between two or more enterprises belonging to the same group. Hence, it was pertinent to introduce a uniform and internationally accepted mechanism of determining reasonable, fair and equitable profits and tax in India in the case of such multinational enterprises. Accordingly, the Finance Act, 2001 introduced law of transfer pricing in India through sections 92A to 92F of the Indian Income Tax Act, 1961 (‘the Act’). The Indian Transfer Pricing Regulation (TPR) is in line with the OECD guidelines. These regulations have increased the onus on taxpayers to demonstrate arm’s length price in controlled transactions. In a global economy, where 2/3rd of the trade is carried on by Multinational Enterprises (MNEs) it is imperative for revenue to ensure that the taxable profits of the MNEs are not artificially shifted to low tax jurisdictions.
2. Indian Income Tax Provisions relating to Transfer Pricing As per Indian Income Tax Provisions any income arising from an international transaction shall be computed having regard to the Arm’s Length Principle which includes even allowance of expenses or interest. Certain specific terms are defined in the Act for the purposes of simplifying the provisions of the TPRs.
3. Concept of Associated Enterprises
Associated Enterprises (AE) is the most common term used in the OECD guidelines. In the Act they have been defined as an enterprise which participates directly or indirectly, through one or more intermediaries, in the management, control or capital of the other enterprise. In addition, where one or more persons participate in the management or control or capital directly or indirectly or through one or more intermediaries in two separate enterprises, the said enterprises would be AEs. The concept of control...