When there is supply of goods or services from one enterprise to another then price agreed between them becomes sole consideration in terms of money value of such supply of goods and services. This price agreed in relation to supply of goods and services are not questionable if the transaction existed between two independent enterprises not commonly controlled by another entity.

If there existed any transaction between associated enterprises or between unrelated parties which are commonly controlled by common entity, then such transaction value becomes questionable by the tax authorities on following grounds:

• Profit accruing to holding company (Parent company) can be increased by setting high transfer prices which makes decline in profit of subsidiary companies located in high taxed countries.
• Low transfer price can move profit from Holding companies to subsidiary companies located in low taxed countries.

Above two instances result in loss of revenue and drastically reduce foreign exchange reserves. In order to curb these illicit practices, concept of transfer pricing comes into effect.

Transfer pricing refers to valuation of transaction between associated enterprises / related entities / unrelated entities having common control, which may take place under circumstances differing from those taking place between independent enterprises.

The revenue authorities who are responsible for adherence of tax laws always refer to “arm’s length price”. Arm’s Length Price is the valuation of a transaction relating to supply of like and similar goods and services to persons other than associated enterprises or related entities in uncontrolled situations.

For the computation of Arm’s length price relating to any transfer pricing in relation to an international transaction or specified domestic transaction can be values as per under-mentioned methods which may be most appropriate considering the nature of transaction:

• Comparable uncontrolled price method
• Resale price method
• Cost plus method
• Profit split method
• Transactional net margin method

If any entity has executed any international transaction and the Assessing officer may at its own motion of considered necessary and with the prior approval of Principal Commissioner or commissioner may refer computation of arm’s length price to the transfer pricing officer.

On referring any case from Assessing Officer to Transfer Pricing officer, the transfer pricing officer shall issue a notice and call for evidence and documents supporting the arm’s length price.

The assessee (tax payer) need to furnish a transfer pricing report to the officer along-with documentary evidences in supporting of valuation of arm’s length price.

The Transfer Officer shall make self-assessment of arm’s length price based upon the evidence provided; thereafter transfer officer shall send his independent report to the Assessing Officer from where the reference has been made along-with a copy to assessee.

The entity engaged in related party international transaction shall also require furnishing a CBC report. CBC report is “Country by Country Reporting” which came into effect from 25^th April 2019 due to agreement between Government of Republic of India and Government of United States of America on exchange of country-by-country reports. All the Multi-national enterprises (MNEs) shall mandatorily require reporting their related party transaction.

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