Transfer pricingrefers to value attached to transfer of goods or services between related parties.

Thus, transfer pricing can be defined as the price paid for goods transferred from one economic
unit to another, assuming that the two units involved are situated in different countries, but
belong to the same multinational firm.

Aims & Objective ofTransfer Pricing:

1. Transfer pricing minimizes the tax burden or arranging direction of cash flow:

Transfer price, as aforesaid, refers to the value attached to transfer of goods, services, and
technology between related entities such as parent and subsidiary corporations and also between
the parties which are controlled by a common entity. Its essence being that the pricing is not set
by an independent transferor and transferee in an arm’s length transaction. Transaction between
them is not governed by open market considerations.

2. Transfer pricing results in shifting profits:

Whatever the reason for fixing a transfer price which is not arm’s length, the result is the shift of
profit. The effect is that the profit appropriately attributable to one jurisdiction is shifted to
another jurisdiction. The main object is to avoid tax as also to withdraw profits leaving very little
for the local participation to share. Other object is avoidance of foreign exchange restrictions.

3. Shifting of Profits- Tax avoiding not the only object:

Transfer between the enterprises under the same control and management, of goods,
commodities, merchandise, raw material, stock, or services is made at a price which is not
dictated by the market but controlled by such considerations.

INTERNATIONAL TRANSACTIONS

An 'international transaction' in the context of transfer pricing law shall include a transaction
between two or more associated enterprises, either or both of whom are non-residents wherein
there is purchase, sale or lease of tangible or intangible property, or there is provision of services,
or there is lending or borrowing of money.

It becomes important to note here that a transaction entered into by an enterprise with a person
other than an associated enterprise shall be deemed to be an international transaction entered into
between two associated enterprises, if there exists a prior agreement in relation to the relevant
transaction between such other person and the associated enterprise, or the terms of the relevant
transaction are determined in substance between such other person and the associated enterprise
where the enterprise or the associated enterprise or both of them are non-residents irrespective of
whether such other person is a non-resident or not.

ASSOCIATED ENTERPRISES.

Under Section 92A of the Income Tax Act, two enterprises are treated as Associated Enterprises
only when one of the enterprises participates in “management, control or capital” of the other
enterprise. Section 92A(1) of the Income-tax Act specifies that and “Associated Enterprise” in
relation to another enterprise, means an enterprise which participates, directly or indirectly, or
through one or more intermediaries, in the management, control, or capital of the other
enterprise. Hence, if an entity participates in the management, capital or control of another
enterprise, the latter will be regarded as an associated enterprise of the participating enterprise.
Such participation may be direct or indirect, or through one or more intermediaries. Moreover, if
one or more persons participate in the management, capital or control of one enterprise and the
same personnel performs these functions in another enterprise, both the enterprises will be
termed as associated enterprises.

Section 92A (2) of the Income Tax act starts with the term- “For the purposes of sub-section (1),
two enterprises shall be deemed to be associated enterprises. Then the sub-section gives various
criterions on which two enterprises shall be deemed to be associated enterprises.