Transfer Pricing Meaning and Objective of Transfer Pricing

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In this presentation, you will understand how transfer pricing would be applicable on transaction of sale of goods or provision of services. Transfer pricing is applicable on many other transactions but in this presentation, we will understand its applicability in these two transactions only.

 

Transaction of sale of goods or provision of services

In this example, the Foreign company located in USA owns 100% shares in Indian company. So, when Indian company provides IT services to Foreign company, the transfer pricing provisions would be applicable as both Indian company and Foreign company are associated enterprises. Same is the case when foreign company sells goods to Indian company.

EVOLUTION OF TRANSFER PRICING

Transfer pricing, was introduced for setting the right (i.e., arm’s length) price, that should be charged for product sold or services rendered by one segment of an enterprise (Segment A), to another segment (Segment B)/ Branch, of the same enterprise.

In this illustration, transaction made between Segment A and Segment B should be at Arm’s length price. Further, any expense charged or any income received by A from its branch should be at Arm’s length price.

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