INTERNATIONAL TAXATION AND TRANSFER PRICING

ISSUES

Biographical details of author

Name: Krishna B.A.

Designation: B.Com., LL.B (Hons.) – IVth Year.

Institutional Affiliation: Tamil Nadu National Law University (TNNLU)

Contact Nos.: +917200163616

E-mail Address: krishna6100@gmail.com

 TRANSFER PRICING AND ITS EFFECT ON TAXATION IN INDIA

Transfer pricing is the pricing of intra firm transactions of both tangible and intangible goods.
The fixation of prices with respect to the transfer of goods between subsidiaries has led to
loss of revenue for governments around the world. The determination of the value of such
transactions is difficult as they are not exposed to the same market conditions like a normal
transaction is, as they take place intra firm and are manipulated to suit the firm’s needs which
has led to reduction in revenue for different tax jurisdictions. It is very difficult for tax
authorities to handle transfer pricing issues intra-firm because there are two related entities
involves in different tax jurisdictions. It has also become a point of contention in India since
the introduction of the free trade regime in 1991.

Transfer Pricing has been given its due importance with Section 92 of the Income Tax Act
dealing with the determination of arm’s length price of transactions. But these measures have
not been enough due to the fact that such transactions are dynamic and complex and are a
result of various factors. Hence, it is very difficult for the tax authorities to monitor intra-firm
transactions and also ascertaining the value of such transactions.

One suggestive solution is by bringing in good levels of co-operation between the countries
in these matters. Another possible suggestion can be to identify potential common factors in
various sectors in order to make sure they can form the basis of fixing an approximate value
of intra-firm transactions. The objective of this paper is to understand the problems posed by
transfer pricing and to find if there are any solutions to solve this issue. The scope of this
study is limited to transfer pricing practices engaged by MNCs/TNCs. A solution which can
at least bring in a legal basis for taxing intra-firm transactions at a nominal rate will give lots
of revenue for tax jurisdictions.