Transfer pricing is that the setting of the value for the products and services sold between the related entities within an enterprise. for instance, if a subsidiary sells goods or services to its parent company, the value of these goods and services which will be paid to the subsidiary are going to be Transfer Pricing.

Transfer pricing must be set up between two related entities. like wholly-owned subsidiary and therefore the parent company or Sister companies or in between companies who have an equivalent personal as directors or shareholders and transacting with one another.

Transfer pricing documentation and transfer pricing policies lay down the suitable transfer pricing arrangements. These agreements help to justify that the transactions are happening at arm’s length price and also are usually required for submitting with revenue authorities.

There are 5 transfer pricing methods, which are categorized in 2 parts, traditional transaction methods and transactional profit methods.

1. Comparable Uncontrolled Price (CUP) Method:
   This method compares the price and conditions of products or services between the related party entities and Unrelated party entities. the unrelated party transactions should meet the high standards of comparability. It is considered the most effective and reliable method to apply an arm’s length pricing to a related party transaction.
2. The Resale Price Method:
   In this method it uses the resale value of the product or services. Later this number is reduced with the gross margin, determined by comparing the gross margin in similar transactions made by similar but unrelated entity. Then the cost occurred with the purchasing of the product are deducted from the total. The final value is considered as arm’s length price.
3. The Cost-Plus Method:
   This method works by comparing the company’s gross profit with the overall sale cost of sale. In this method the cost of goods and services will be figured out and later a market-based mark-up will be applied to the total cost, to account for an appropriate profit.

In Transaction Profit method following types will come

4. The Comparable Profits Method:
   This method is also known as transactions net margin method. In this method net profit of a related party transaction is compared with the net profit of unrelated party transactions. This is the most commonly used and broadly applicable for transfer pricing methods.
5. The Profit Split Method:
   This method is used by two or more companies operating under the same brand name. the related companies agree to split the profit earned amongst them at a fixed price.