Determination of exchange price when different business units within a firm exchange the products and services Commercial transactions between the different parts of the multinational groups may not be subject to the same market forces shaping relations between the two independent firms. One party transfers to another goods or services, for a price. That price is known as “transfer price”. As per section 92 (1) of the Income Tax Act, 1961 – Income from an international transaction shall be computed having regard to the Arm’s length Price (correct market price). Transfer pricing is the process of setting transfer prices between associated enterprises or related parties where at least one of the related parties is a non-resident. Transfer Price is the price at which an enterprise transfers goods and services, intangible and intangible assets, services or lending/ borrowing money to associated enterprises. Transfer prices are generally decided prior to entering the transaction and they are audited/ reviewed by the auditor after the year finalization. 

1. Presented By:
Sakshi Gupta

2. Introduction:
Determination of exchange price when different business
units within a firm exchange the products and services
Definition:
As per section 92 (1) of the Income Tax Act, 1961 – Income from
an international transaction shall be computed having regard
to the Arm’s length Price (correct market price).
Commercial transactions between the different parts of the
multinational groups may not be subject to the same market forces
shaping relations between the two independent firms. One party
transfers to another goods or services, for a price. That price is known
as “transfer price”.

3. Competitiveness in the international marketplace
Reduction of taxes and tariffs
Management of cash flows
Minimization of foreign exchange risks
Avoidance of conflicts with home and host governments over
tax issues and repatriation of profits
Internal concerns - goal congruence or subsidiary manager
motivation

4. Transfer pricing is the process of setting transfer prices between associated
enterprises or related parties where at least one of the related parties is a
non-resident. Transfer Price is the price at which an enterprise transfers
goods and services, intangible and intangible assets, services or lending/
borrowing money to associated enterprises. Transfer prices are generally
decided prior to entering the transaction and they are audited/ reviewed by
the auditor after the year finalization.

5. Example:In the example, we see that ABC (India)
and ABC (UK) are related parties or
associated enterprises while XYZ is an
independent enterprise. It is expected
that the prices at which ABC (India) deals
with ABC (UK) are expected to be at par
with the price at which it deals with XYZ
i.e. the fact that ABC(India) and ABC(UK)
are related parties should not have any
influence on the price at which transfers
take place between them.

6. Market
Prices
Cost -
based
Prices
Negotiated
Prices
Arbitrary
Prices

7. The selling division sells to buying division at the cost
of production incurred by the selling division.
Two decision must be made:
How to define cost
How to calculate Profit Markup

8. 1. Cost basis
• Standard cost is the base
2. The Profit Markup
• What the profit is markup is based on
• The level of profit allowed
• Agreement among business unit

9. 3. Two step pricing
-Transfer price includes two charges
• Standard variable cost per unit
• Fixed cost associated with unit
“take or pay” pricing

10. Under this method, selling division sells to buying
division at prevailing market price. In other words, the
two divisions will be operating at arms’s length.

11. Under this method, the selling division and buying
division agree in advance to use mutually accepted
transfer prices.

12. Under this method, the transfer price is determined
centrally based on what top management conceived
to be most beneficial to the company as a whole.
Individual divisional managers may have some say but
no control over the price set.