Oct 29, 2024 04:05 PM IST
Transfer pricing is an accounting mechanism to determine the price of a good and service transferred from one arm of a company to another arm
The Central Board of Direct Taxes (CBDT) notified the tolerance range for assessment year (AY) 2024-25, which will provide certainty to taxpayers and reduce the risk perception associated with pricing of a transaction in transfer pricing, a finance ministry statement said on Tuesday.
“The tolerance ranges shall be 1% for transactions in the nature of wholesale trading and 3% for others, respectively, as notified last year,” the statement said.
Transfer pricing is an accounting mechanism to determine the price of a good and service transferred from one arm of a company to another arm. It is particularly significant for multinational companies (MNCs). Tolerance range is the acceptable variation between the arm’s length price determined and the price at which specific international or domestic transaction was actually undertaken.
The term ‘wholesale trading’, shall be defined as an international transaction or specified domestic transaction of trading in goods which fulfil all the following conditions — purchase cost of finished goods is 80% or more of the total cost pertaining to such trading activities; and average monthly closing inventory of goods is 10% or less of sales pertaining to such trading activities, the statement said.
According to an official, the provisions pertaining to transfer pricing (TP) were introduced in the Income Tax Act in 2001, by-and-large in sync with the Organisation for Economic Co-operation and Development (OECD) guidelines.
“In the globalised world, intragroup trade is growing steadily to take advantage of supply chains spread across the world. Transfer pricing refers to determining prices for transactions between associated enterprises involving the transfer of goods or services,” said the official who wished not to be named.
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These transactions are also referred to as controlled transactions, as distinct from uncontrolled transactions between companies that are not associated and can be assumed to operate independently on an arm’s length basis.
Transfer of goods and services between related parties could be based on arbitrary pricing (not associated with market forces), hence under-priced or overpriced, impacting tax revenues. Thus, transfer pricing is the mechanism to determine the price that represents the value of goods or services between independently operating units of an organisation, he said.
“The effect of transfer pricing is that the parent company or a specific subsidiary tends to produce insufficient taxable income or excessive loss on a transaction. For instance, profits accruing to the parent can be increased by setting high transfer prices to siphon profits from subsidiaries domiciled in high tax countries, and low transfer prices to move profits to subsidiaries located in low tax jurisdiction. The result is revenue loss and also a drain on foreign exchange reserves,” he said.
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