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Transfer Pricing
It also enables savings in costs of manpower by streamlining processes and methods. Transfer pricing helps in achieving higher profitability and also focusses on strategising business operations.
Importance of Transfer Pricing
For the purpose of management accounting and reporting, multinational companies (MNCs) have some amount of discretion while defining how to distribute the profits and expenses to the subsidiaries located in various countries.
Sometimes a subsidiary of a company might be divided into segments or might be accounted for as a standalone business. In these cases, transfer pricing helps in allocating revenue and expenses to such subsidiaries in the right manner.
The profitability of a subsidiary depends on the prices at which the inter-company transactions occur. These days the inter-company transactions are facing increased scrutiny by the governments. Here, when transfer pricing is applied, it could impact shareholders wealth as this influences company’s taxable income and its after-tax, free cash flow.
It is important that a business having cross-border intercompany transactions should understand the transfer pricing concept, particularly for the compliance requirements as per law and to eliminate the risks of non-compliance.
Transfer pricing has been implemented to ensure all commercial transactions between different entities of a multinational group are transacted at an arm’s length price. In case of any concerns with transfer pricing valuation, the Assessing Officer can refer the transaction to a Transfer Pricing Officer. In this article, we discuss the steps to be initiated by an Assessing Officer for referring assessments and the role of a Transfer Pricing Officer.
The role of Transfer Pricing Officer commences after the receipt of a reference from an Assessing Officer. This role is restricted to the determination of the arm’s length price in relation to any particular international transaction referred to him by the Assessing Officer. If the officer discovers the existence of a few transactions which haven’t been referred to him by the Assessing Officer, the officer needs to address the matter with the Assessing Officer so that a fresh reference is received with regard to such transactions.
Section 92 of the Income Tax Act, 1961 – Computation of income from international transactions having regard to arm’s length price.This section states that any international or specified domestic transaction between associated enterprises which has been mutually agreed and undertaken for the purpose of allocation or apportionment of any cost or expense incurred or to be incurred for a benefit, service or facility undertaken or to be undertaken by one or more of the enterprises, then the cost or expense allocated, must be contributed having regard to the arm’s length price of such benefit, service or facility.
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