What is transfer pricing and what are the methods of computing arm’s length price ?

Due to the increasing participation of multinational groups in India, there have been new complex issues emerging from transactions between two or more enterprises belonging to the same group. The price at which the goods and services are transferred between independent units of an organization is termed as “transfer price”. Such a price can be arbitrary and not in accordance of the market forces. This leads to the parent company or subsidiary incurring huge losses or producing insufficient taxable income. Hence sections relating to transfer pricing, were framed, in order to provide guidelines for the computation of transfer price and documentation procedures. These are broadly based on the OECD guidelines (organization for economic co operation and development). This legislation mainly deals with cross border transactions, “international transactions” are defined as transaction between two or more associated enterprises involving the sale, purchase or lease of tangible or intangible property; provision of services; cost sharing arrangements; lending/ borrowing of money; or any other transaction having a bearing on the profits, income, losses or assets of such enterprises.

The various methods of computing arm’s length price are:
(a) Comparable uncontrolled price method
(b) Resale price method
(c) Cost plus method
(d) Profit split method
(e) Transactional net margin method
(f) Any other method prescribed by the board






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