Transfer Pricing

Transfer price is the price at which one part of an entity sells a product or service to another part of the same entity. In principle a transfer price should match either what the seller would charge an independent, arm's length customer, or what the buyer would pay an independent, arm's length supplier.

Transfer pricing is sometimes misused to lower profits in order to avoid paying income taxes in high-tax regions by shifting profits to related entities situated in less – tax regions that levies no or low taxes

Domestic Transfer pricing

In domestic transactions, the under-invoicing of sales and over-invoicing of expenses ordinarily will have no revenue impact in nature, except in two circumstances such as where one of the related entities is (i) loss making or (ii) liable to pay tax at a lower rate as some specified categories of business activities are given tax holidays by the government and the profits are shifted to such entity from the profit making related domestic entity in order to pay low or nil taxes. Here domestic transfer pricing arises.

In order to reduce the tax evasion by way of domestic transfer pricing, a concept of specified domestic transaction was inserted in Indian income tax act 1961 where provisions of transfer pricing would be applicable.

Threshold limit – For a taxpayer entity, if the aggregate of specified domestic transactions exceeds INR 20 crore (increased from INR 5 crore in budget 2015-16) in any year, provisions of transfer pricing would be applicable.