Many of us are not very well aware of the methodologies and purpose of transfer pricing in India. Let’s grasp some knowledge on this topic. In this article, we will give you an overview of Transfer pricing in India. What is Transfer Pricing in India? Transfer pricing is the value attached to the goods or services that are transferred between related parties. In layman language, transfer pricing is just like the price which is paid to for the goods or services transferred from one unit of an organization to its other units situated in different countries. Not all transferring of price comes under the topic but there is a list of the following transaction that subjects to transfer pricing. What are the transactions subject to Transfer Pricing in India? The following are the transaction that is counted as transfer pricing in India- Sale or purchase of machinery etcSale or purchase of intangiblesSale of finished goodsPurchase of raw materialPurchase of fixed assetsReimbursement 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. Now, comes the reason what is the reason of transfer pricing in India. What are the Purposes of Transfer Pricing in India? So, the main reasons for the transfer pricing of India are as follows- Enabling performance evaluation of each division separately and generating separate profit for each of the divisionsTransferring the price not only affect the reported profits of every center but would also affect the allocation of a company’s resource. The cost incurred by one center will be considered as the resource utilized by them. Now, if we talk about the purpose of transfer pricing in organizations then it quite useful. The organization can use it for management accounting and reporting multinational companies. This also helps the organization to have some amount of discretion while defining how to apportion the profit and distribute the expense to the subsidiaries located in various countries. Sometimes, a subsidiary company could be divided into segments or might be accounted for as a standalone business. Now, in that case, transfer pricing helps in allocating the revenue and expenses to those subsidiaries in the correct manner. Hence, the profitability of a subsidiary depends on a price at which the intercompany transaction occurred. Nowadays, the government had tightened their belts the and with that intercompany transaction is facing the strict scrutiny. Therefore, when transfer pricing is applied, it usually could affect the shareholder wealth as this influence the company’s taxable income and it’s after-tax free cash flow. It is very stringent for a business having cross- border intercompany transactions to understand transfer pricing concept. It clearly focuses on the compliances requirement to eliminate the risks of non- compliances in the transaction and to avoid the future issue. Also, Read: What is Transfer Pricing in India. Explain the Transfer Pricing Methodologies The organization for economic co-operation and Development Guidelines explains the Transfer Pricing methods that could be used for examining the arms-length price of the transactions that are completely controlled. Now, let’s us know about arms- length price little more. Arms- length price means the price which is applied or proposed or charged when the un-related parties enter into similar transactions in out of hand conditions. Following are the most commonly used transfer pricing methodology- Comparable Uncontrolled Price method (CUP) – Under CUP method, a price is charged with an uncontrollable transaction between the comparable firms. It is recognized and evaluated with a verified entry price for determining the arms-length price. This method is one of the most reliable and is considered to be the direct way of applying arms- length principle and for determining the prices for related party transactions. However, while calculating the controlled and uncontrolled transactions are comparable you need to take high care. Hence, this way of calculating the transfer price doesn’t apply unless products or service meet the stringent requirements of high comparability. Resale Price method or Resale minus method- Now the second method for transfer pricing is the resale price method. This method takes the prices at which the associated seller the product to the third party. The gross margin that is determined by comparing the gross margins in a comparable uncontrolled transaction is then reduced to the resale price. Thereafter, the costs that are associated with the purchase of such product like custom duty are then deducted. The remaining is noted as arm’s length price for a controlled transaction between the associated enterprises. Cost Plus Method In this method, the organization emphasizes on costs of the supplier of goods or services in the controlled transactions. Once you are aware of the costs you don’t need any markup to add. The mark-up shall reflect the profit for the associated enterprise on the basis of risks and functions performed. The end result will be the arms’ length price. Usually, the mark up in the cost-plus method would be calculated after the direct and indirect cost related to production’s or supply. In addition to this, the operating expenses of an enterprise aren’t part of this markup. What are the Transfer Pricing Problems? There are handful problems that are attached to the transfer pricing. Some of these issues include- There could be differences in opinions among organizational divisional managers with respect to transfer price needs to be set.Additional time, costs and manpower would be required for executing the transfer prices and designing the accounting system to match the requirements of transfer pricing rules.Arm’s length prices sometimes cause dysfunctional behavior among the managers of organizational units.Some of the divisions or departments, for example, a service department, arm’s length prices don’t work equally well as such departments don’t offer measurable benefits.Transfer pricing issue in a multinational setup is quite complicated. Domestic Transfer Pricing The transfer pricing provisions are limited to international transactions alone. From April 2013, transfer pricing provisions are extended to SDTs and are applicable from the assessment year 2013-14. Following are the transactions which are under the specified Domestic Transaction includes- Expenditures in which payment had been made or would be made to- A directorA relative of the directorAn entity where the director or the company has the voting interests exceeding 20% Transactions that relates to transfer of goods or services provided in section 80-IAFor an undertaking that is established in SEZs, free trade zone or EOUs that involves a transfer of goods and services to any another unit under the same management at the non- market price. We have tried to give you an overview of transfer pricing in India. To know more kindly contact us. Our Trending Post: Difference Between PAN and TAN.