Transfer Pricing

Transfer pricing refers to the principles and methods for pricing transactions within and between enterprises under common ownership or control. Which means if two are more entities related to each other are transacting with each other, Transfer Pricing will be applicable.
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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

  1. 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.
  2. 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.

Benefits of Transfer Pricing

Reduced Duty Cost

Transfer pricing allows companies to cut back duty costs. It enables business entities to shipping goods to high-tariff countries paying the minimum transfer prices. Hence the duty base related to the transactions becomes low.

Higher Profit Margins

Using the methods of transfer pricing companies reduce income taxes in countries that have comparatively high tax charges by overpricing goods they transfer to countries where they will have the leverage of lower tax rates. In this way, business entities successfully earn higher profit margins.

Separate Performance & Profit

Transfer pricing allows business organizations to achieve profit separately for all the divisions they need. Not only that but also it allows them to judge the performance of every plant individually.


  • Details of parent and subsidiary company
    1. MOA and AOA of the company
    2. Directors’ details
    3. Stamp Paper

    Process of Transfer Pricing

    Step 1: Share your requirement and documents

    Step 2: Starting the Initial draft of transfer Pricing agreement

    Step 3: Finalizing the Transfer Pricing Agreement

    Step 4: Stamping and signing the transfer pricing agreement

    Key Deliverables

    1. Transfer Pricing Agreement
    2. Stamp Paper

    Transfer Pricing

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    We believe that cost plays a vital role in any company’s growth stage, that’s why we do not surprise our clients with hidden charges, you pay what you see in the initial proposal.

    Frequently Asked Questions

    A very simple example of transfer pricing is as follows:
    1. USINC, a fictional U.S. based pen company, manufactures pens in the U.S. at the cost of 10 Cents per pen.
    2. Parentco's Indian subsidiary, IndiPLC, sells the pens to Indian customers for $1 (or 100 cents) per pen and spends 10 cents per pen in distribution and marketing costs.
    3. The group's total profit on the sale of every pen is 80 cents (revenue of 100 cents, less cost of 20 cents).
    4. Transfer price is the price charged by USINC to IndiPLC and is likely to somewhere between 20 cents (which will leave all of the profit in India) and 80 cents (which will leave all of the profit within the US).
    There are many drivers to creating a TP agreement:
    1. Type of services performed by the subsidiary
    2. Legal entity risk distribution
    3. Comparable transactions in an uncontrolled environment between two unrelated parties (i.e., related parties arm’s length transaction)
    4. Stage of the contemporaneous documentation in parent and subsidiary
    No, transfer pricing is an accurate taxation tool. Transfer pricing is strictly a tax strategy designed to transfer profits from one entity to another based on their risk profile for getting a product to market.