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Transfer pricing-“arm’s length price”

 

Source: FE 

Context: The recent Supreme Court ruling that the “arm’s length price” determined by the Income Tax Appellate Tribunal (ITAT) cannot be treated as final in disputes related to alleged income suppression by multinational companies could potentially increase fresh litigation and delay final decisions.

What is Transfer pricing?

Transfer pricing refers to the pricing of goods, services, or intellectual property that is sold between two or more companies that are part of the same multinational enterprise (e.g., subsidiaries).

What is the “arm’s length price”?

Arm’s length price is a transaction in which buyers and sellers of a product act independently and have no relationship with each other.

Impact of the Judgement:

  • It may delay and increase the litigation
  • The ruling may increase the use of conciliatory mechanisms like advance pricing agreements (APAs)
  • It could also increase the utility of MAP (mutual agreement procedure), as an alternate dispute resolution mechanism.
  • It will increase the usefulness of Safe Harbour rules—which restrain the tax authority from questioning the pricing of certain transactions between multinational companies and their subsidiaries.