The Income-Tax Department surveys at the premises of the British Broadcasting Corporation (BBC) in Delhi and Mumbai on February 14 were conducted in view of the BBC’s “deliberate non-compliance with the transfer pricing rules” and its “vast diversion of profits”.
What is a “transfer price”?
- A party may transfer goods or services to another party for a price, which is known as a “transfer price”.
- However, commercial transactions between different parts of a multinational group may not be subject to the same market forces that shape the relations between two independent firms.
- According to the Income Tax Department, “transfer pricing generally refers to prices of transactions between associated enterprises which may take place under conditions differing from those taking place between independent enterprises”.
- Transfer pricing refers to the “value attached to transfers of goods, services, and technology between related entities, and between unrelated parties that are controlled by a common entity”.
Example of Transfer pricing
- Suppose a company A purchases goods for 100 rupees and sells it to its associated company B in another country for 200 rupees, who in turn sells in the open market for 400 rupees.
- Had A sold it (the good) direct, it would have made a profit of 300 rupees. But by routing it through B, it (A) restricted it (profit) to 100 rupees, permitting B to appropriate the balance.
- The transaction between A and B is arranged and not governed by market forces. The profit of 200 rupees is, thereby, shifted to the country of B. The goods is transferred on a price (transfer price) which is arbitrary or dictated (200 hundred rupees), but not on the market price (400 rupees).
- According to the I-T Department, the effect of transfer pricing is that the parent company — or a specific subsidiary — tends to produce insufficient taxable income or excessive loss on a transaction.
(Source: Indian Express)
