Companies and persons related to each other are able to contract with each other to manipulate the prices of goods and services exchanged between them. These manipulated prices would ordinarily be of no concern to the tax revenue except when such manipulation results in less taxes owed compared to situations where goods and services are valued among unconnected parties. The legal regime relating to transfer pricing in India seeks to remedy the domination of contact through a statutory structure that allows related parties (or associated enterprises as the ITA terms it) to contractually determine the price between them in an international transaction as long as it is an arm’s length price and is determined through one of the methods prescribed by the regulations issued under the statutory provisions of the ITA.1 The five methods are the comparable uncontrolled price method (CUP), the cost plus method, the transactional net margin price method, the resale price method, and the profit split method.
- Vasal V (2019) Transfer pricing: advance pricing pact vs safe harbour provision, livemint, 10th May, 2019. Available at https://www.livemint.com/money/personal-finance/transfer-pricing-advance-pricing-pact-vs-safe-harbour-provision-1557417827008.html