Transfer Pricing Reports

What is Transfer Pricing?

The expression "transfer pricing" generally refers to prices of transactions between related parties like parent and subsidiary, which may take place under conditions differing from those taking place between independent enterprises. The transfer price between related parties (associates) may not be at par when compared to the transfer price on transactions with unrelated parties.

Suppose a company A purchases goods for $ 100 and sells it to its associated company B in another country for $ 200, who in turn sells in the open market for $ 400. If A had sold it directly in the latter country, it would have made a profit of $ 300. But by routing it through B, it restricted the profit to $ 100, permitting B to appropriate the balance. The transaction between A and B is arranged and not governed by market forces. The profit of $ 200 is, thereby, shifted to the country of B. The goods is transferred on a price (transfer price) which is arbitrary or dictated ($ 200), but not on the market price ($ 400).

To protect interests of the revenue, the Indian Income Tax Act, 1961 (“the Act”) has vide its chapter X framed certain provisions. The basic principle enunciated through such provisions is to consider “arm’s length price” for international transactions.