Transfer Pricing
Rules requiring transactions between related entities, like a parent company and its overseas subsidiary, to be priced as if they were between unrelated parties, to prevent shifting profit to lower-tax jurisdictions.
Transfer pricing rules apply when related parties, most commonly a company and its overseas subsidiary or group entity, transact with each other, and require that pricing on those transactions reflect what unrelated, independent parties would have agreed to, the 'arm's length price.' Without such rules, a group could shift profit into whichever jurisdiction taxes it least simply by mispricing intercompany transactions.
Businesses above specified thresholds engaged in international, and certain domestic, related-party transactions are required to maintain transfer pricing documentation and file a specific accountant's report justifying that their pricing is at arm's length. It's a specialized, document-heavy area of tax compliance, and transfer pricing adjustments by tax authorities are a recurring source of disputes for larger multinational operations in India.
This glossary entry is for general informational purposes only and does not constitute professional tax, legal, or financial advice. Rules and rates change, so consult a qualified Chartered Accountant for advice specific to your situation.