Transfer price is the price at which two divisions of the same company supply goods or services or labour to each other, assuming that both the divisions are separately managed profit centres.
Income tax law enforces arm's length transaction rule on transfer pricing transactions which means sale value of a transaction between related parties must be based on similar transaction done between unrelated parties. We, at Especia Associates LLP, ensure that all transactions related to transfer pricing must be based on arm length price and both the parties should comply with the transfer pricing rules. As such, our dedicated team keeps an eye on all such transactions and keeps updating our clients about the ambit of transfer pricing.
Choosing the appropriate method:
It is essential to choose an appropriate method for determining the arm length price for the transactions under review. There are 5 main methods of transfer pricing and all of them have their own characteristics and pros & cons. Before assisting on choosing an appropriate method, our team conducts a financial analysis to identify the functions of the two entities involved in the transaction, capacity of the entities to bear risk and the involvement of assets.
Our expert team considers the following aspects to provide better understanding on an appropriate method:
Nature of the transaction,
Class of the associated enterprises,
Availability and reliability of data necessary for applying a particular method,
Comparable grounds between the transfer pricing transaction and the uncontrolled transaction,
Nature and extent of assumptions required in the application of the method.