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What is transfer pricing under Income Tax law? |
What is transfer pricing under Income Tax law? Hi, Your question's answer is as follows: Transfer Price: Price charged between associated enterprises. Market Price: Price charged between independent enterprises. (Also known as Arm鈥檚 Length Price) The concept of Transfer Pricing is normally used in international transactions between associated enterprises. The rationale behind the various Transfer Pricing regulations is as follows, 1.To compute reasonable, fair and equitable profits and corresponding tax 2.To protect the right of a country to collect fair share of tax in respect of cross border transactions between related entities. 3.The absence of regulations will lead to manipulation of the prices and ultimately shifting of profits to low tax jurisdiction. (To curtail Tax avoidance) The price, which would have been agreed upon between unrelated parties engaged in the same or similar transactions under the same or similar conditions in the open market is referred to as the Arm鈥檚 Length Price. Many methods are prescribed by the Taxation Laws to determine it, amongst which the most suitable method or methods may be adopted with or without combinations. The various methods are as follows; 1.Comparable Uncontrolled Price (CUP) Method 2.Resale Price (RSP) Method 3.Cost Plus (CP) Method 4.Profit Split (PS) Method 5.Transactional Net Margin (TNM) Method 6.Any other method as may be prescribed by CBDT. I am a tax consultant and feel free to contact me for any further queries. |
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