Transfer pricing in essence calls for an arm's length pricing between related parties. Thus, if Company A, which is a captive in India, provides software development to its parent in the US, the price it charges needs to be at arm's length (the same price it would charge to third parties). Transfer pricing provisions ensure that revenue is properly captured in the source country (which in this case is India). Thin capitalisation rules by limiting the amount of interest that can be claimed as a tax deduction if loans are from related parties deter income tax arbitrage. This is because interest is allowed as a deduction for computing taxable profits. A company is said to be thinly capitalised when the level of its debt is much greater than its equity capital. tnn