Policy implications of transfer pricing in terms of effectiveness in Indian context: Transfer pricing regime and regulatory mechanisms

Abstract

The internal transactions of all sub units of an organization, with respect to the exchange of goods and services, constitute transfer pricing and values are denoted to these transactions to ascertain the earnings and performance etc. Transfer Pricing is also an important resource for management information system for multifarious applications including appraisals and profit allocations. The cross border transactions involving corporations become important transfer pricing issues when taxation of profits of such transactions is considered in country of residence and operations. Many methods of transfer pricing are used across the globe and the choices vary depending on the nature and purpose of such transactions. The income tax law of India has since 2001 incorporated substantial legal provisions for an equitable administration of the tax issues pertaining to the transfer pricing, because the earlier provisions were perfunctory and left excessive discretion in the hands of the tax authority, whereby the actions were, at times, arbitrary in absence of a well structured legislative framework. The new law is in tune with the OECD guidelines thus ensuring high level of global uniformity for relevant business transactions in India. The endeavour in this dissertation is, to study the transfer Pricing Practices for understanding the usage of methods of transfer pricing by the trans-national companies in India. The basic objective of the study is to study the transfer Pricing Practices for understanding the ways and extent of profit shifting and splitting by the trans-national companies in India. The endeavour in this study is to learn about provisions of Taxation of Transfer Pricing in the Income Tax Act 1961 of India and the effectiveness of the same. The information and literature regarding Transfer Pricing Methods have been studied in the wake of this study. The study is based on the data collected from the Income Tax department in form of the information in the TP returns and the orders of adjustment of the declared arm s length prices in the TP returns. Apart from this, a detailed questionnaire was also administered to the tax practitioners and it throws up certain very interesting findings. This study was also facilitated by informal discussions with the Officers in the Transfer Pricing Cells of the Income Tax Department as well as the professionals. The analysis of the data along with the responses to the questionnaires throw up findings helping in better understanding of the transfer pricing regime in Indian context along with its constraints and limitations as also indicating the need for further strengthening the transfer pricing law and its administration. The primary findings, as seen from the analysis of the data, throw up interesting data on choice of method of transfer pricing with respect to a transaction. The emerging issues, as the taxation of such transactions takes roots, are also highlighted. Transfer pricing is not an exact science and the application involves a fair degree of issues requiring the executive to take a call on choice of a particular alternative. The computation of transfer price at an arm s length assumes significance due to multifarious impact it is likely to have on different areas and entities. In view of this, the policy implications of the transfer pricing law need to be examined and further augmented so that the system can adequately respond to the needs of global business and its taxation.