Business transactions of a multi-national group spreading across different tax jurisdictions have given rise to a more complex issue of taxation by different jurisdictions. Every tax jurisdiction wants a fair share of tax on income arising from cross border transactions entered into between two or more enterprises belonging to the same group falling within their jurisdiction. With a view to provide a detailed statutory framework which can lead to computation of reasonable, fair and equitable profits and tax in respective countries, most of the countries has inducted various statutes keeping in mind economic nexus with their jurisdiction.

India has also enacted detailed Transfer Pricing Regulation in 2001, which has also brought the issue of Transfer Pricing to the forefront amongst the various Indian and foreign multinational corporations operating in India and undertaking cross border transactions with their associates. The Transfer pricing provisions are aimed at ensuring that profits that ought to have been earned in India are not shifted to other jurisdictions either by reducing the income or inflating the expenditure in transactions between various entities belonging to a multi-national group. Emergence of domestic transfer pricing regulations have also given rise to a concern not only for multi-national corporations but also for the domestic players.

Due to involvement of multiple jurisdictions, any adjustment to the transfer price adopted in one jurisdiction requires a corresponding adjustment in the other jurisdiction. If a corresponding adjustment is not made, double taxation will result. The rising volume and variety of intercompany transactions in the midst of a continually evolving transfer pricing regulatory landscape, accompanied by increased enforcement activities worldwide, have made transfer pricing a leading risk management issue for businesses running international operations. To mitigate that risk, irrespective of their size, organizations operating in different jurisdictions, need an effective and dependable Transfer Pricing policy, which takes into consideration the organization’s overall business strategy and operating structure. Further, considering the significant potential to impact tax incidence, it demands extra cautious and attention while designing the policies, having proper documentation and meeting reporting requirements.

Multinational businesses entering the global marketplace enter into a transaction with its associate’s enterprises has to comply with the various compliance and rules related to fair value. This is the major issue and most of the multinational companies are unable to comply with the rules related to transfer pricing and get penalised by income tax authority in India.