Transfer pricing in relation to International Transactions under The Indian Scenario :
In order to provide a statutory framework empowering the tax authorities to determine reasonable, fair and equitable profits and tax in respect of cross-border transactions, sections 92 to 92F had been included in Chapter X of the Income-tax Act, 1961, through the Finance Act, 2001, providing for a transfer pricing mechanism based on computation of income from cross-border transactions. The following conditions must be satisfied in order to attract the special provisions of Chapter X relating to avoidance of tax:
(i) There must be an international transaction;
(ii) Such international transaction should be between two or more associated enterprises either or both of whom are non-residents;
(iii) Such international transaction should be in the nature of:
(a) purchase, sale or lease of tangible or intangible property; or
(b) provision of service; or
(c) lending or borrowing money; or
(d) any other transaction having a bearing on the profits, income, losses or assets of such enterprise.
(iv) Further, such transaction may also involve allocation or apportionment of, or any contribution to any cost or expenses incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of the associated enterprises on the basis of mutual agreement or arrangement between such associated enterprises.
(v) Such international transaction must be done at arm‟s length price and if such international transaction has been done at less than the arm‟s length price, it shall require determination of income or apportionment of cost or expense on the basis of arm‟s length price.
(vi) The above adjustment should either result in an increase of income or decrease of loss returned by the assessee. In other words, the adjustment should not have the effect of reducing the income chargeable to tax or increasing the loss.
The Finance Act, 2001, has introduced provisions relating to pricing of international transaction between the assessee and associated enterprises. These provisions are contained in sections 92 to 92F of the Income-tax Act, 1961. These provisions apply to international transactions entered into with effect from 1st April, 2001. Rules 10A to 10E have been inserted in the Income-tax Rules, 1962 by a notification dated 21st August, 2001. These sections and rules of the Income-tax Act, 1961 and the Income-tax Rules, 1962 respectively, will affect all non-corporate and corporate assessees who have dealings with non-residents for import or export of goods, properties or services. In other words, price paid for import of goods, properties or services and price received for export of goods, properties or services will now be subject to scrutiny by the Assessing Officer. Therefore, it is necessary to make a detailed study of these provisions. All assessees who have such dealings with non-residents will have to keep detailed records as prescribed under the Rules and will have to furnish audit report every year with the return of income about their international transactions.
The presence of multinational enterprises in India and their ability to allocate profits in different jurisdictions by controlling prices in intra-group transactions prompted the Government to set up an Expert Group to examine the issues relating to transfer pricing. There is a possibility that two or more entities belonging to the same multinational group can fix up their prices for goods and services and allocate profits among the enterprises within the group in such a way that there may be either no profit or negligible profit in the jurisdiction which taxes such profits and substantial profit in the jurisdiction which is tax haven or where the tax liability is minimum. This may adversely affect a country’s share of due revenue. The increas ing participation of multinational 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 multinational group. The profits derived by such enterprises carrying on business in India can be controlled by the multinational group, by manipulating the prices charged and paid in such intra-group transactions, which may lead to erosion of tax revenue. Therefore, transfer pricing provisions have been brought in by the Finance Act, 2001 with a view to provide a statutory framework which can lead to computation of reasonable, fair and equitable profits and tax in India, in the case of such multinational enterprises.