ABSTRACT

The price at which divisions of a company transact with each other.

Transactions may include the trade of supplies or labor between
departments. Transfer prices are used when individual entities of a
larger multi-entity firm are treated and measured as separately run
entities.
In managerial accounting, when different divisions of a multi-entity
company are in charge of their own profits, they are also responsible
for their own "Return on Invested Capital". Therefore, when divisions
are required to transact with each other, a transfer price is used to
determine costs. Transfer prices tend not to differ much from the price
in the market because one of the entities in such a transaction will lose
out: they will either be buying for more than the prevailing market
price or selling below the market price, and this will affect their
performance.
Transfer Pricing has drawn the attention of tax authorities worldwide.
New rules, documentation requirements and different interpretation
given to the OECD Transfer Pricing guidelines by both tax authorities
and multinationals have created ground for many disputes.
Even though western countries identified and tried avoiding tax
money shifting from their home countries , India like third world or
emerging economies had their limitations in bargaining power with
the MNCs. But recent years shown India also tackling their tax money
outflow and amending the tax laws and synchronizing with the OECD
guidelines which is a worldwide bench mark.

INTRODUCTION
Commercial transactions between the different parts of the
multinational groups may not be subject to the same market forces
shaping relations between the two independent firms. One party
transfers to another goods or services, for a price. That price is known
as "transfer price". This may be arbitrary and dictated, with no
relation to cost and added value, diverge from the market forces.
Transfer price is, thus, a price which represents the value of good; or
services between independently operating units of an organisation.
But, the expression "transfer pricing" generally refers to prices of
transactions between associated enterprises which may take place
under conditions differing from those taking place between
independent enterprises. It refers to the value attached to transfers of
goods, services and technology between related entities. It also refers
to the value attached to transfers between unrelated parties which are
controlled by a common entity.
Suppose a company A purchases goods for 100 rupees and sells it to
its associated company B in another country for 200 rupees, who in
turn sells in the open market for 400 rupees. Had A sold it direct, it
would have made a profit of 300 rupees. But by routing it through B,
it restricted it to 100 rupees, permitting B to appropriate the balance.
The transaction between A and B is arranged and not governed by
market forces. The profit of 200 rupees is, thereby, shifted to the
country of B. The goods is transferred on a price (transfer price)
which is arbitrary or dictated (200 hundred rupees), but not on the
market price (400 rupees).
Thus, the effect of transfer pricing is that the parent company or a
specific subsidiary tends to produce insufficient taxable income or

excessive loss on a transaction. For instance, profits accruing to the

parent can be increased by setting high transfer prices to siphon
profits from subsidiaries domiciled in high tax countries, and low
transfer prices to move profits to subsidiaries located in low tax
jurisdiction. As an example of this, a group which manufacture
products in a high tax countries may decide to sell them at a low
profit to its affiliate sales company based in a tax haven country. That
company would in turn sell the product at an arm's length price and
the resulting (inflated) profit would be subject to little or no tax in that
country. The result is revenue loss and also a drain on foreign
exchange reserves. This is what our Income tax authorities given
definition.
Most larger companies decentralize, treating each division as its own
business earning its own net income. As these different divisions do
business with each other, buying and selling different products, the
transfer prices they set play a critical role in determining how theyll
share profits.
Companies usually organize themselves into divisions that provide
different goods or services and often do business with each other. For
example, a clothing retailer may own several clothing factories; the
retailer and each factory can be treated as separate divisions, sort of
like companies within a company.
Separate divisions of an oil company may produce, refine, and sell
gasoline. Many large entertainment companies own film studios,
movie theaters, and cable networks. The movie theaters and cable
networks both feature movies and shows produced by the film studio

NEED AND RELEVANCE

In the modern world of corporate tax planning and corporate
governance transfer pricing is a hot relevant item which always
becomes a reason for large disputes between governments and MNCs
in big amounts. The recent case of Shell v/s GoI is an example, So as
a management student I expect to crack the loop holes in the current
scenario in India which will be equally helpful for companies and
governments. Also I expect to make a career in corporate consultancy
in which this topic will add value to my portfolio of skills.

OBJECTIVES
1. To find out the transfer pricing techniques used in India used by
both manufacturing and service sector
2. To study in detail the laws and regulations prevailing in India
regarding transfer pricing
3. To compare laws in India and abroad and also to find Indian
laws effectiveness and weaknesses

LITERATURE REVIEW
METHODS OF CALULATION
The socalled traditional transaction methods (Comparable
Uncontrolled Price, Cost Plus and Resale Price Method) are preferred
in certain countries, although no hierarchy of methods is being
advocated in this Transfer Pricing Manual, other than applying a
method that reliably calculates or tests the companys transfer pricing
and application of the arms length standard.1
Considering the difficulty and cost of getting access to reliable data,
taxpayers may want to make use of industry margins when applying
the chosen and appropriate transfer pricing method. However, the use
of industry margins may raise the risk that not only unrelated but also

related party transactions are included in the comparability analysis.

Therefore, it is preferred that when using industry margins, the
majority of participants in the industry do not
1 The OECD Transfer Pricing Guidelines as revised in 2010 also
give no formal hierarchy in methods. have significant related party
dealings and that the industries can be considered comparable Once a
method is chosen and applied, taxpayers are generally expected to
use and apply a method in a consistent fashion. Assuming an
appropriate transfer pricing method is being applied, only if facts or
functionalities change and those changes require a change in methods,
is a change in methods envisaged or alternatively when the available
comparable data change such that a method change is required.
Following is a short summary of several applicable methods [please
refer to the disclaimer at the bottom of this page].
Comparable uncontrolled pricing methodThe comparable uncontrolled price (CUP) method compares prices
charged in controlled transactions with prices charged in comparable
transactions with third parties. Comparable sales may be between two
third parties or between one of the related parties and a third party.
The CUP method is generally the most reliable measure for arms
length results, if the transactions are identical or if only minor, readily
quantifiable differences exist.
Resale price methodThe resale price method (RPM) evaluates whether the amount
charged in a controlled transaction is at arms length, by reference to
the gross margin realized in comparable uncontrolled transactions.
Under this method, the arms length price is measured by subtracting

an appropriate gross profit from the applicable resale price of the

property involved in the controlled transaction. The resale price
method is most often used for distributors that resell products without
physically altering them or adding substantial value to them.
Cost plus methodThe cost plus method compares gross margins of controlled and
uncontrolled transactions. Under this method, the arms length price is
measured by adding an appropriate gross profit to the controlled
taxpayers cost of producing the property involved in the controlled
transaction. The cost plus method is most often used to assess the
markup earned by manufacturers selling to related parties.
Profit split methodThe profit split method allocates operating profits or losses from
controlled transactions in proportion to the relative contributions
made by each party in creating the combined profits or losses.
Relative contributions must be determined in a manner that reflects
the functions performed, risks assumed, resources employed, and
costs incurred by each party to the controlled transaction.
Comparable profits methodThe comparable profits method (CPM) evaluates whether the
amount charged in a controlled transaction is at arms length by
comparing the profitability of one of the parties to the controlled
transaction (the tested party) to that of companies that are similar to
the tested party. The Transactional Net Margin Method (acceptable in
Europe and in the OECD guidelines) is a method similar to the CPM.

METHOD OF STUDY
My main source of information will be interviews which I am
planning with some transfer pricing consultants and industry experts.
Also the large data base available from the cases that had held in
Supreme court of India and High court New Delhi will be help full to
analyse the legal aspects.
I Am concentrating mainly on srevices companies transfer pricing
issue which had recently mentioned by our Finance minister and also
in our manufacturing sector as a whole.

PROGRESS OF STUDY
I am still going through the documents regarding the transfer pricing
cases that came in High Court of Maharashtra, High Court of Delhi,
and Supreme Court of India. I am expecting to complete it in coming
few days and I will start interviewing professionals in the field.