Endowed with the advantages of low-cost base and a large, growing English- speaking workforce, India has emerged as a globally preferred outsourcing destination. The growth achieved by India’s information technology (IT) services and information technology enabled services (ITeS) sectors stand testimony to this. Indian transfer pricing regulations require captive units having international transactions with its associated enterprises to be remunerated on an “arm’s-length” basis, leading to the often vexed question of what constitutes an arm’s-length remuneration for a captive unit
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Rules of transfer pricing
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| Originally posted by :CA. Awanish | ||
| " | Endowed with the advantages of low-cost base and a large, growing English- speaking workforce, India has emerged as a globally preferred outsourcing destination. The growth achieved by India’s information technology (IT) services and information technology enabled services (ITeS) sectors stand testimony to this. Indian transfer pricing regulations require captive units having international transactions with its associated enterprises to be remunerated on an “arm’s-length” basis, leading to the often vexed question of what constitutes an arm’s-length remuneration for a captive unit | " |
When we speak of captive units we need to take into consideration the capacity utilisation, the risk undertaken and the functional profile of the tested party vis - a - vis comparables. In a captive service provider model the ultimate risk are borne by the Holding Co. Nevertheless the captive units have one risk of "single customer". Taking all the factors into account, while benchmarking the transactions pricing needs to be modelled after considering the identified comparables' mean. The best practical method to be applied is TNMM. Further, as the financial records of captive units are not available on the public databases, the comparables would be independent service providers.
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