It refers to the price charged by an MNC to an associated enterprise for supply of goods and services. Since transfer prices can be used to shift profits out of India and hence avoid taxes, the tax department has a regulation in place since 2001 to check violations. The law mandates MNCs to price their transactions with associated enterprises according to the arm’s length principle. A fairly detailed scheme to compute the arm’s length price has been set out in the income tax law.
MNCs basically need to apply prices that independent enterprises would charge in identical transactions in the market place.
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