Transfer Pricing Methods
Transfer Pricing Methods are various methods which are used for determination of the Arm’s Length Price (“ALP”) in relation to an international transaction. They include various methods like the Comparable Uncontrolled Price Method (‘CUP’), Resale Price Method (‘RPM’), Cost Plus Method (‘CPM’), Profit Split Method (‘PSM’) and the Transactional Net Margin Method (‘TNMM’).
Each of these methods can be applied to a particular set of the transaction, based on their nature and facts.
As per Section 92C of the Income Tax Act, 1961, ALP shall be determined by any of the following Transfer Pricing Methods :
- TRADITIONAL TRANSACTION METHODS –
- Comparable Uncontrolled Price Method (‘CUP’)
- Resale Price Method (‘RPM’)
- Cost Plus Method (‘CPM’)
- TRANSACTIONAL PROFIT METHODS –
- Profit Split Method (‘PSM’)
- Transactional Net Margin Method (‘TNMM’)
- ANY OTHER METHOD PRESCRIBED BY THE CENTRAL BOARD OF DIRECT TAXES – Rule 10AB
Other Method, can be considered as a method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts.
TRANSFER PRICING METHODS – TRADITIONAL TRANSACTION METHOD
COMPARABLE UNCONTROLLED PRICE (“CUP”) METHOD
For CUP Method go through
RESALE PRICE METHOD (“RPM”)
For RPM Method go through
COST PLUS METHOD (“CPM”)
For CPM go through
TRANSFER PRICING METHODS – PROFIT BASED METHODS
When traditional methods of determining the arm’s length price, are not found to be appropriate given the facts of the case, the profit-based methods can be used to determine the arm’s length price.
Profit-based methods examine the profits, that arise from particular transactions among Associated Enterprises, against profits derived by other independent enterprise, who may be involved in the same or similar transaction.
The two profit-based transfer pricing methods, recognised by the TP legislation, are : –
- Profit Split Method (“PSM”) ;
- Transactional net margin method (“TNMM”).
PROFIT SPLIT METHOD (“PSM”)
For Profit Split Method go through
TRANSACTIONAL NET MARGIN METHOD (“TNMM”).
For TNMM go through