India put into effect its rules relating to transfer pricing starting April 1, 2001. These rules were designed to prevent a group of affiliated entities (associated enterprise) in more than one country from manipulating prices of goods and services transferred within the group, which include cost-sharing arrangements.
Entities or enterprises are regarded as associated if there is (i) any direct or indirect participation in the management or control or capital of the enterprises or (ii) by the same persons in both the enterprises, or (iii) direct/indirect shareholding giving 26% or more voting power, or (iv) dependence on source of raw materials, consumables, customers, or (v) power to appoint 50% or more of the board of directors, or (vi) dependence on borrowings (i.e. the giving of loans totaling to not less than 51% of the total assets of the enterprise, or (vii) providing a guarantee of not less than 10% of the total loan.
The rules prescribe that the price for goods or services of any international transaction between members of the associated enterprise must be an arms length price. To ascertain whether an arms length price has been paid for a transaction, the following guidelines have been suggested, with the requirement that the one most appropriate be applied to the transaction:
- Comparable uncontrolled price method,
- Resale price method,
- Cost plus method,
- Profit split method,
- Transactional and net margin method.