Ideally, the commercial arrangements between the parties to a transaction should determine the value of the supplies. This principle should also hold true in transactions between related parties. However, under tax laws, there is a presumption that the value of supplies between related parties is influenced by their relationship. To refute this presumption, the assessee needs to establish that the value is not influenced by the relationship, i.e. the value is based on arm’s length pricing.
In India, both the Income Tax Act, 1961, and the Customs Act, 1962, which are applicable to cross-border transactions, provide mechanisms to compute appropriate values in transactions between related parties. The aim of both laws is to ensure that taxes and duties are paid on the correct values.
India’s transfer pricing (TP) regulations are based on the principles and methods prescribed in the Organization for Economic Co-operation and Development Guidelines. India’s customs valuation (CV) regulations are based on the General Agreement on Tariffs and Trade and the World Trade Organization Agreement on Customs Valuation. Under both sets of regulations, the assessee is required to establish an arm’s length price (ALP) in transactions with a related party.
Rohit Jain is a partner and Bharath M is an associate manager at Economic Laws Practice in Mumbai. ELP is a full-service law firm which also has offices in New Delhi, Pune and Ahmedabad.
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