Transfer pricing laws are closely attached to cross border transactions which are taking place between the nations, since Transfer Pricing Laws govern cross border transactions we can say that these laws are as old as the cross border transactions. Due to the advent of industrial revolution accompanied by development in mass communication, transportation, etc has changed the scenario. There started development of Multinational Companies and cross border exchanges of goods between them. The transactions between multinational companies are estimated to account 60% of the global trade according 1995 reports (UNCTAD World Investment Report-1995). “Thus to price the transaction takingplace between the associated companies the Transfer Pricing Laws were introduced”.
When the multinational companies enters into cross border transactions with their associated companies, the prices are fixed by the parties and hence prices are under their control ( Controlled Transaction), parties used this opportunity to commit frauds, misappropriation of money and creating false accounts. As the parties to the transactions agrees to price the transaction as low as possible with an intention to reduce the tax liability, and in turn pay tax only on the amount agreed or which is mentioned in books of account, such a practice gave raise to evasion of tax and in turn loss to the state exchequer, to prevent this practice transfer pricing laws were introduced (Reference: law.incometaxindia.gov.in). Finance Act 2001 introduced Transfer Pricing Laws, S. 92 to S. 92F of the Income Tax Act, 1961 deals with this provisions, where the price of the transaction is determined according to the provisions of the Act and taxed accordingly.
In the absence of definite Transfer Pricing laws in India courts have evolved different judicial interpretations, which gave raise to different doctrines such as Principle of Apportionment, doctrine of Substance over, to prevent shifting income from India. It is also important to observe that although S.92 was replaced with detailed regulations; all other provisions would continue to apply, the law on transfer pricing is enacted in the line of the law prevailing in OECD countries.
Supreme court (34 ITR 368) has held that“the fact that the business was being carried out in a such a manner that no profits were being made by the resident company was irrelevant, what is to be seen is that what was the amount of profit that would have been earned by the resident company and not by the non-resident companies in the absence of the arrangement”.
The OECD defines transfer prices as the prices at which an enterprises transfers physical goods and intangibles or provides services to associated enterprises (Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration, OECD, 1995). When the transaction takes place between the enterprises whether related or not, the price has to be fixed, the price will be fixed by the parties which ultimately depends upon negotiations, but in case of transfer pricing prices are not either determined by the parties or by the market forces, it is determined independently.
In the case of Aztec Software and Technology Service Ltd. vs. ACIT (2007) 294 ITR 32 (Bang) it was held that exercise to evaluate controlled and uncontrolled transactions by finding comparables and making adjustments for the difference, if any, through different methods of fixing Arm’s length price is known world over as “transfer pricing”
For the Applicability of Transfer Pricing Regulations there should be:
According to S.92B of the Act lays down the definition of ‘International Transactional’, which is defined broadly, it says that “for the purpose of S.92B, 92C, 92D and 92E International Transactional means a transaction between two or more associated enterprises either or both of whom are non- resident, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services or lending or borrowing of money or any other transaction having a bearing on the profits, income, losses or assets of such enterprises and shall include a mutual agreement or arrangement between two or more associated enterprises for allocation or apportionment of, or any contribution to, any cost or expenses incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to anyone or more of such enterprises”
According to S. 92A (1) of the Act defines as, an associated enterprises in relation to another enterprises means, an enterprises, which participates directly or indirectly or through one or more intermediaries in the management or control or capital of the other enterprises or in respect of which one or more persons who participate directly or indirectly or through one or more intermediaries in its management and control or capital, are the same persons who participate directly or indirectly or through one or more intermediaries in the management or control or capital of the other enterprises.
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