TRANSFER PRICING

Transfer pricing can be defined as the value which is attached to the goods or services transferred between related parties. In other words, transfer pricing is the price that is paid for goods or services transferred from one unit of an organization to its other units situated in different countries (with exceptions).

Transactions Subject to Transfer Pricing
The following are some of the typical international transactions which are governed by the transfer pricing rules:

  1. Sale of finished goods
  2. Purchase of raw material
  3. Purchase of fixed assets
  4. Sale or purchase of machinery etc.
  5. Sale or purchase of intangibles
  6. Reimbursement of expenses paid/received
  7. IT enabled services
  8. Support services
  9. Software development services
  10. Technical Service fees
  11. Management fees
  12. Royalty fees
  13. Corporate Guarantee fees
  14. Loan received or paid

Purposes of Transfer Pricing
The key objectives behind having transfer pricing are:

1. Generating separate profit for each of the divisions and enabling performance evaluation of each division separately.
2. Transfer prices would affect not just the reported profits of every centre, but would also affect the allocation of a company’s resources (Cost incurred by one centre will be considered as the resources utilized by them).