Transactions between two or more companies/entities in India are governed and guided by a specific set of rules and laws. However, this is not in the case where transactions happen between two related entities overseas.
There are separate sets of rules in various statutes in INDIA to guide these and to have control over such transactions.
From a taxation and accounting perspective, transfer pricing refers to the set of regulations and methods involved in pricing such transactions, related to the transfers of tangible as well as intangible property, such as services, loans, supplies or even labor.
In some instances, 'transfer price' is also referred to as 'transfer cost.' Since different entities in a company are in charge of their profits as well as their return on invested capital, a transfer price is used to arrive at a cost for the transactions among these divisions.
Transfer pricing regulations exist to ensure that transactions among commonly owned entities occur on fair and accurate terms, which is known as "ARM'S LENGTH PRICE."
What does it mean for the company involved? These laws imply that a company needs to record the financial reporting documents strictly. If the transactions are not correctly documented, it can lead to additional expenses for the company - in the form of added taxation or expenses involved in restating financial accounts.
As explained, transfer pricing leads to revenues and profits for one or more of the business entities involved, and hence, it is taxable. Typically, the parties involved have the freedom to set transfer prices for particular transactions; however, tax authorities can adjust transfer prices when those costs are beyond what is termed "an arm's length range," or the comparable prices in an open market.
In India, transfer pricing rules came into being in the fiscal year 2001. The country's rules require that transfer pricing costs are documented and certified by a chartered accountant even before a company files a tax return. Inappropriate transfer pricing can lead to transfer pricing litigation and even penalties.
One of the aspects of managing accounting services for small businesses is to help them meet the transfer pricing regulations. In cities like Bangalore, a chartered accountant can assist you towards arriving at transfer pricing, managing related documentation, analyzing transactions involving transfer costs as well as services like transfer pricing audit and submission of regulatory documents.