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Transfer Pricing

Transfer pricing (TP)refers to the pricing strategy when there is transfer of goods or services between associated enterprises. It can be defined as the value of goods or services transferred between parties which are related to each other i.e. associate enterprises (known as cross-border transactions).

For instance, if a subsidiary company sells goods or renders services to the holding company, the price charged for these services is referred to as transfer price and the setting is called transfer pricing.

According to the Indian Income-tax Act, 1961, income arising from such transactions must be computed using the arm’s length price, that is, the amount payable if the trading companies were unrelated or uncontrolled.


  • What is the objective of transfer pricing?
  • What are the benefits of transfer pricing?
  • Applicability of Transfer Pricing provisions


What is the objective of transfer pricing?

The main objective of TP law in international transactions is to ensure that transactions between associated enterprises take place at a price as if the transaction was taking place between unrelated parties.


What are the benefits of Transfer Pricing?

The key objectives of TP are:

  • Separate Profits: TP helps in generating separate profits for each of the divisions of an entity, which helps the entities to evaluate the performance of each division separately.
  • Allocation of company’s resources: TP would affect not just the reported profits of every center, but would also affect the allocation of a company’s resources as the cost incurred by one centre will be considered as the resources utilized by them.


Meaning of International transactions

As per the transfer pricing law, an ‘international transaction’ shall include a transaction between two or more associated enterprises.


Meaning of associated enterprises – Section 92A

Section 92A(1) of the Income Tax Act defines the term “associate enterprises” as

(a) an enterprise which participates, directly or indirectly, or through one or more intermediaries, in

  • The management of the other enterprise or
  • Control of the other enterprise or
  • Capital of the other enterprise

(b) If one or more persons participates, directly or indirectly, or through one or more intermediaries, in

  • management of the two different enterprises or
  • Control of the two different enterprises or
  • Capital of the two different enterprises

Then, those two enterprises are associated enterprises.


Applicability of Transfer Pricing Provisions

For the applicability of the provisions of Transfer pricing, the following conditions must be satisfied:

  • There must be the existence of International Transaction
  • Such International Transaction should be between two or more associated enterprises
  • Such transactions should be in the as per the qualified transactions


Arm Length Price – Section 92C of Income Tax Act

Section 92 of the Income Tax Act, 1961 deals with the computation of income from international transactions states that any income arising from an international transaction shall be computed having regard to the arm’s length price.

“Arm length price of a transaction between two associated enterprises is the price which is charged when unrelated parties enter into similar transactions in an uncontrolled condition”.

The OECD TP guidelines provides guidance on the application of the arm’s length principle in order to arrive at the proper transfer pricing range between associated enterprises.


Transactions qualify for Transfer Pricing

The following are some of the international transactions which are governed by the TP rules:

  • Sale of finished goods
  • Purchase of raw material
  • Purchase of fixed assets
  • Sale or purchase of machinery
  • Sale or purchase of Intangibles
  • Reimbursement of expenses paid/received
  • IT Enabled services
  • Support services
  • Software Development services
  • Technical Service fees
  • Management fees
  • Royalty fee
  • Corporate Guarantee fees
  • Loan received or paid.


Methods to determine the arm’s length price – Rule 10AB

Creating a reporting structure among divisions that can measure the allocation of company resources in detail is one of the most critical factors for success

Income-tax Act, 1961 prescribes the following methods to determine the arm’s length price between two affiliated companies:


Following are the transfer pricing methodologies used to determine Arm’s Length Price:

  • Comparable Uncontrolled Price (CUP) Method;
  • Resale Price Method (RPM);
  • Cost Plus Method (CPM);
  • Profit Split Method (PSM);
  • Transactional Net Margin Method (TNMM);
  • Such other methods as may be prescribed by the board


Audit Report under transfer pricing – Section 92E

As per section 92E, every person who enters into an international transaction is required to obtain a report from a chartered accountant.

The report is to be submitted under section 92E in Form 3CEB on or before 30th November of the relevant assessment year.

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