A detailed Introduction on Transfer of Pricing.

Written by Disha Mathur and Simran Jethani

April 7, 2022

The idea of switch pricing, which become in advance constrained to overseas multinational groups, is turning more and more substantial for Indian groups because of their growing internationalization. Transfer pricing is most customarily viewed, inside the context of, one earnings center offering services or products to any other earnings center.

Transfer pricing refers to the mechanism through which pass border intra-organization transactions are priced. In different words, switch pricing is the rate this is paid for items or offerings transferred from one unit of an employer to its different gadgets located in extraordinary countries. Transfer pricing (TP) is a financial period utilized in businesses. That happens whilst one organization transfers its services and products from one department to any other.

As a result of their rising globalization, the notion of transfer pricing, which was previously exclusive to foreign multinational firms, is becoming increasingly important for Indian companies. Most people think about transfer pricing in terms of one profit centre supplying a product or service to another profit center. The process through which cross-border intra-group transactions are priced is known as transfer pricing. To put it another way, transfer pricing refers to the price paid for goods or services that are transferred from one unit of an organization to other units in different nations. The word transfer pricing is an economic
term used in the business world. This happens when a company's products and services are transferred from one division to another.

Long Back History of Transfer Pricing-

It took a long time for the transfer pricing regime to be established in Nigeria, and many statutory provisions allowed the Nigerian Tax authorities the authority to make modifications to tax returns if transactions between related persons or parties did not follow the arm's length concept. In April 2001, India enacted transfer pricing legislation as a result of a modification to the Income-tax Act 1961 (ITA), which encompassed intra-group cross-border transactions.

Sections 92 to 92F of the Indian Income Tax Act, 1961, enumerate the Transfer Pricing Laws. Until 2012, when significant revisions were made, the 2001 transfer pricing provisions remained virtually unchanged.

TPR was introduced to provide a detailed statutory framework that can lead to the computation of reasonable, fair, and equitable profits and taxes in India in the case of multinational enterprises. There were numerous transactions between the same group of companies, and the transfer price between them began to have a significant impact on the profits and losses of Indian companies.

What is Transfer?

The process of determining the price charged for goods and services supplied or transferred by one subunit of an organization to another subunit or one member of a group to another is known as a transfer.

What is Pricing?

Pricing of the product is one of the most important functions to do in a market.

What is Transfer Pricing?

Transfer pricing is a method of allocating a Multinational Enterprise's net income (profit or loss) to the tax jurisdictions in which it operates its subsidiary-controlled foreign corporations (CFCs). In an intercompany transaction, the transfer price is the price charged between related corporate entities for goods or services. Profit centers aren’t the only thing to account for when it comes to transferring pricing. It comes in a variety of forms. Transfer pricing is beneficial for tax purposes and thus saves money.

Example: The price at which one piano is sold by X to Y affects their financial results (remember: this is the controlled transaction). If X charges a high price, X makes more profit. If X charges a low price, Y makes more profit.

What is International Transaction?

Section 92(B) talks about what is International Transition
(a) Transaction between two or more Associated Enterprises.
(b) At least One must be Non-Resident.

R=NOR – Right.
R=R – Wrong.

What is Associate Enterprise?

Section 92(A) talks about Associate Enterprise that if any two enterprises shall be treated as

AE’s is at any time during the previous Year:

1. One enterprise should hold at least 26% of share of the other enterprise.
2. Any person holds at least 26% shares of each such enterprises.
Example: There are two companies A Ltd. And B.Ltd.
A. Ltd hold 33% share of B. Ltd and B.Ltd hold 40% of share in C.Ltd.
Goal of Transfer of Pricing –
Transfer Pricing Regulation's Main Goal – The main goal of transfer pricing regulation is to prevent both situations and ensure that profits are taxed where value is created.

The transition should take the form of a property purchase, sale, lease, lending, and borrowing.

What is The Arm’s Length Principle?

According to this principle, the price agreed upon in a transaction between two related parties must be the same as the price agreed upon in a comparable transaction between two unrelated parties.

Good Transfer Pricing Characteristics –

1. Being objective in terms of performance evaluation and investment decisions.
2. Motivate divisions to make decisions that maximise group profits.
3. Allow each division to profit.

Transfer Pricing Purpose –

a. Generate Profits: Transfer pricing is an important process that allows organisations to generate profits for all of their divisions and departments. It also provides them with a dependable metric for determining the performance of each department separately.
b. Allocation of Resources: The transfer pricing document also assists managers and business owners in allocating resources to the appropriate sections of the company.

Advantages of Transfer Pricing:

1. It makes dealings between departments transparent because, in the absence of a transfer price mechanism, department heads will charge prices arbitrarily, resulting in them exploiting the department in need of the product and thus creating animosity between departments, which can cause irreversible damage to the company in the long run.

2. Another benefit of this mechanism is that because goods are manufactured in the company itself, other departments do not have to rely on suppliers because goods are readily available in the company itself, saving the company from the exploitation of the suppliers of the goods.

3. It results in cost savings for departments because the transfer price is usually lower than the market price of the product; for example, if the multinational company manufactures batteries as well as mobiles, the mobile division can purchase batteries from the company's battery division, resulting in cost savings for the company's mobile division.

4. Another advantage of transfer pricing is that it ensures profits for goods and services in many countries with lower tax rates, such as Malaysia.

Disadvantages of Transfer Pricing:

1. TPMs are time-consuming and complicated for large multinational corporations with operations in multiple countries.

2. The most significant disadvantage of transfer price is that it is a complicated process. Unlike market price, which is determined by the demand and supply of the good, transfer price is determined by many other variables, making this process complicated and questionable.

3. If a company follows a transfer pricing strategy than it forces the departments to buy products from within the company even if those products are of inferior quality which in turn make products of other departments also inefficient. In simple words it compels the department heads to buy products from other departments of the company even when there are better substitutes for the product is available in the

Why is Transfer Pricing required?

Transfer Pricing is required because:

1. The tax rates in both countries are different.

2. Transfer Pricing is required in that case to avoid price manipulation on the transfer of goods.

Transfer Pricing Risks:

• There may be disagreements among departments or subsidiaries about the rules governing transfer pricing.
• To properly implement transfer pricing, a company must incur additional costs in terms of workforce, accounting system, and other factors.
• Using transfer pricing for intangible products may be difficult.
• There may be disagreements among the organisations managers about how Transfer Pricing should be determined.

Transfer Pricing’s Importance:

Transfer pricing is related to "Global Stability, Revenue Generation, Economic Growth, Cross-Border Activities, and International Trade" in three ways. A. Encourage the free flow of labour, capital, goods, and services across international borders.

Second, there is the overarching issue of each country’s right to generate the appropriate amount of tax revenue from economic activities conducted within its borders.

Transfer pricing would encourage economic growth at the unilateral, bilateral, and multilateral levels.


Transfer prices are almost inevitably needed whenever a business is divided into more than one department or division. Usually, goods or services will flow between the divisions and each will report its performance separately. The accounting system will usually record goods
or services leaving one department and entering the next, and some monetary value must be used to record this. That monetary value is the transfer price. The transfer price negotiated between the divisions, or imposed by head office, can have a profound, but perhaps arbitrary,
effect on the reported performance and subsequent decisions made.

Case Law :

Case name : San Remo Macaroni Co Pty Ltd V. CMR of Taxation

Facts :

San Remo Macaroni Co Pty Ltd is an Australian company that manufactures and sells pasta products. Italian pastas were purchased by the corporation. Mr. Fernando Segilias, a Swiss accountant, entered into a deal with San Remo for the purchase of pastas.

Segilias formed Bigalle SA, a Swiss company that would be the sole supplier of pastas to San Remo. Bigalle was just to operate as an invoicing agent for these pastas, which were to be made by Italian manufacturers. Bigalle was not to undertake any extra services on the pastas. Geimix, San Remo’s Italian shipping agent, was to function as a coordinator and forwarder between San Remo and Bigalle. San Remo was to buy the total quantity of pastas from Bigalle for a 12 month term at a fixed price. This pricing was not susceptible to modification, and if one was needed at any point in the future, it could only be done with six months’ notice. A revaluation of the Swiss Franc occurred during the contract time, resulting in a change in the purchase price as computed in Australian Dollars. San Remo paid Bigalle a higher amount in Australian dollars than Bigalle paid the Italian firm for the same service.

When all the amounts were converted to liras, this resulted in a mark-up of 40% to 50%. As a result of the mark-up, the Commissioner claimed that transactions were not conducted at arm’s length.

Held :

There was a transfer pricing violation, resulting in Bigalle’s profits being greater than what would have been attributed to it. San Remo and Bigalle did not conduct business at arm’s length. The Commissioner was also found not to have acted in bad faith or manipulated the accounts.

Conclusion :

The terms and circumstances on which related firms agree for their controlled transactions are referred to as transfer pricing. These figures are crucial. They have an impact on the individual performance of related businesses and, as a result, the amount of taxes they pay.

The primary purpose of these regulations is to prevent profit shifting from high-tax to low-tax jurisdictions.

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