Transfer pricing involves determining the fair market price for transactions between related parties. There are several methods prescribed by Indian law for computing an arm's length price (ALP) for transfer pricing purposes, including comparable uncontrolled price (CUP), resale price method (RPM), cost plus method (CPM), profit split method (PSM), transactional net margin method (TNMM), and any other method. The most appropriate method must be selected based on the nature of the transaction and availability of reliable comparable data. Tax authorities emphasize use of the method that provides the most reliable measure of an arm's length result.

2. Transfer Pricing Methods
Due to increasing cross border transactions, Transfer pricing has become an important international tax issue affecting the MNCs. One of the most essential
and contentious facets of transfer pricing provisions is to derive an accurate ALP. Section 92 of Income Tax Act lays down that any income arising from an
international transaction or a specified domestic transaction shall be computed having regard to the ALP. The ALP can be computed using any methods laid
down under Section 92C read with rules 10B and 10AB. It has been constantly stressed upon by the Tax department that a Most Appropriate Method (MAM)
should be used for computing the ALP of any international or specified domestic transaction.
Process of Computation of Alp
Analysis of specific features of Controlled Transactions
Search for comparable Uncontrolled Transactions
Comparability Analysis
Selection of "Most Appropriate Method "
Applicaction of Most Appropriate Method to compute
ALP

3. Methods for computing ALP (SECTION 92C READ WITH RULE 10B)
➢ The ALP shall be determined by any of the following methods being the most appropriate method. The methods prescribed under the Act are:
Resale price
method
(RPM)
Comparable
Uncontrolled
Price Method
(CUP)
Profit split
method
(PSM)
Any Other
Method
(Rule 10 AB)
Transactional net
margin method
(TNMM)
Cost plus method
(CPM)

4. Three conditions for determination of ALP
ALP must be computed according
to the Most Appropriate Method
It must be determined after
considering the relevant factors laid
down by the Board.(Rule 10B &
10C of Income tax Rules)
It must be determined after
consideration of the nature of
transactions or class of transaction
or a class of associated persons or
functions performed by such
persons.

5. Classification of Methods
Most Appropriate Methods
The income tax authorities have not specified any hierarchy of methods. They insist on using the most appropriate method for computing ALP. The term “Most
Appropriate Method” is defined under rule 10F. It entails that the method used must be best suited to the facts and circumstances of transaction, should be the
most reliable measure of an arm’s length price and must take into consideration all relevant factors prescribed in Rule 10B and 10C.
Price based methods
1. Comparable uncontrolled price
method (CUP)
2. Resale Price Method (RPM
Profit based methods
1. Profit Split Method (PSM)
2. Transactional net Margin
Method (TNMM)
Any other method
(Rule 10 AB)

6. Comparable uncontrolled price method (CUP)
It is one of the most comprehensive methods to determine ALP. Under this method, price of a controlled transaction is compared to price of an uncontrolled
transaction1
.The price derived is then adjusted for various differences which could materially affect the price in the open market.
Types of CUP
➢ Internal CUP
Under this method, comparable properties/services from transactions entered into by the assessee with the third parties are considered for benchmarking the
price of transactions with associated enterprises. This method can be mostly applied wherein the nature of goods and services transacted between the enterprise
and its AE is similar to that transacted with the third party. This method is considered as a litigation proof method to determine ALP.
➢ External CUP
Under this method, comparable properties/services from transactions entered into by a competitor of the assessee with unrelated parties are considered for
benchmarking the price of the transactions of the assessee with associated enterprise. However this method is impractical as in this competitive world rivals do
not reveal their confidential information.
Transaction where CUP can be adopted:
➢ Transfer of goods
➢ Provision of services
➢ Intangibles
➢ Interest on loan
1
Rule 10AB defines "uncontrolled transaction" means a transaction between enterprises other than associated enterprises, whether resident or non-resident.
Uniliver U.S.A holds 30% of shares in Hindustan Lever, An Indian Company. HUL manufactures compact disc writers and sells them to Unilever
and TATAs Ltd.
During the year HUL supplied 10,000 CD writers to Unilever at a price of Rs 2000 per unit.and 100 CD writers to Tatas Ltd at the price of Rs 3000
per unit

7. The Transactions of HUL with Unilever and TATAs differences comparable subject to following differences
➢ While sale to Unilever is at FOB, sale to TATAs is at CIF. The freight and insurance paid by Unilever for each unit is Rs 550
➢ The sale to TATAs is backed by a free warranty for 6 months whereas sale to Unilever are not backed by any such warranty. The estimated cost of executing
the warranty may be Rs 250
➢ Since Unilever places a larger order, HUL offers quantity discount for RS 20 per unit to Unilever.
Computation of ALP
Particulars Amount in Rs
Sale Price of per unit of CD writer sold to TATA s 3000
Less: Differences to be adjusted for:
• On account of freight and insurance charges 550
• On account of cost of warranty 250
• On account of bulk order 20
Total ( 820)
Arm’s Length Price of CD writer sold to Unilever
2180
Prices charged from Unilever (10,000 units x 2000 ) 2,00,00,000
Arm’s Length Price for 10,000 units (10,000 units x 2180) 2,18,00,000
Income of Unilever Increased by 18,00,000

8. Limitations of CUP
➢ Difficulty in availability of reliable comparable data, especially in case of external comparables.
➢ Absence of an objective method to monetize differences in contractual obligations.
➢ Not suited for niche business where the product or service range is unique.
Resale Price Method (RPM)
In this method the purchase price paid to the related entity is compared to the resale price charged to an unrelated party. This method is used when the assessee in
question is a distributor who makes purchases from a related party .RPM can be used on aggregate basis where the assessee distributes various products of similar
class. Application of RSP is difficult in cases where the reseller adds substantial value to the end product or service.
Non availability of reliable comparable data in case of external comparables is another limitation for application of RPM.
Transactions where RPM can be adopted
➢ Distribution of goods and services involving no or little value addition
➢ Resale of packaged services like software licenses etc
➢ Resale and distribution of tangible goods like cars and other FMCG products
Example:
Computation of ALP
S co. in India is engaged in the business of selling premium bikes, X. The company imports the bikes from its parent company in London as completely
finished and built up unit for sale in India. The company imports the car @Rs 12 lakhs and sells it @Rs 13.5 Lakh in India. M.co India is a dealer for
comparable bike Y.M co imports bikes from Portugal @Rs 11.5 and sells at Rs 14 lakhs.

9. Particulars Rs in Lakhs
Sale Price of Y 14.00
Purchase Price of Y 11.50
Gross Profit Margin per car 2.50
Gross Profit Margin Ratio = Sale price – Purchase price 100
Sale price
18%
Sale Price of X 13.50
Gross Profit Margin @ 18% 2.43
Arm’s Length Purchase Price under RPM 11.07
Actual Purchase Price of X 12.00
Transfer Pricing Adjustment Per Car 0.93
Limitations of RSP
➢ Application of RSP is difficult in cases where the reseller adds substantial value to the end product or service.
➢ Non availability of reliable comparable data in case of external comparables.
Cost plus method (CPM)
Under this method the costs incurred by the supplier of property or services in a controlled transaction is compared to supplier of service or property in an
uncontrolled transaction to determine an appropriate profit mark-up. This mark-up is determined by the reference to the mark-up the same supplier earns in
comparable uncontrolled method.
Transactions where CPM can be adopted
➢ Provision of services
➢ Joint facility arrangement
➢ Transfer of semi-finished goods
➢ Long term buying and selling arrangements.

10. Example
The transactions of B.LTD with A Ltd & C. Ltd are comparable subject to the following differences
➢ B .Ltd derives technological support from A Ltd, There is no such support from C Ltd. The value of technological received from A Ltd may be put at 20% of
normal Gross Profits
➢ Discount given by B Ltd to A Ltd due to business in large volumes. Quantity discount may be valued at 10% of normal gross profits.
➢ In case of rendering services to A.Ltd, B Ltd neither runs any risk nor incurs any marketing costs. On the other hand, in case of services to C Ltd, B Ltd has to
assume all the risks and costs associated with marketing function which may be estimated at 10% of normal gross profits.
➢ B Ltd offered one month credit to A. Ltd. The cost of providing such credit may be valued at 3% of gross profits. No such credit was given to C Ltd.
Particulars
Price charged to C ltd 3000
Gross Profit mark up in case of C Ltd 50%
LESS : Differences to be adjusted for:
 Technology support from A.Ltd (20% of 50%)
 Quantity Discount to A.Ltd (10% of 50%)
 Risk Factor (10% of 50%)
10%
05%
05%
Total (A) 30%
Add: Cost of Credit to A Ltd (B) 1.50%
A ltd Germany holds 35% shares in B ltd India. B ltd develops software and does both onsite and offsite consultancy services for various customers.
B ltd during the year billed A ltd Germany for 100 man hours at the rate of Rs 2000 per man hour. The total cost (direct & indirect) for executing this
work amounted to Rs 175000
B ltd billed C ltd at the rate of Rs 3000 per man-hour for the similar level of man power and earned a gross profit of 50% on its cost.

11. Arm’s length Gross Profit Mark Up (A + B) 31.50%
Direct & Indirect Cost 1,75,000
Arm’s Length Income (1, 75,000* 31.50%) (C) 2,30,125
Income Actual (100 man hours x 2000) (D) 2,00,000
Increased Income (C - D) 30,125
Profit split method (PSM)
Owing to the complexity of certain transactions, which involves transfer of unique intangibles or consisting of multiple transactions which are so interrelated that
they cannot be evaluated separately for the purpose of determining the arm’s length price of any one transaction, profit split method is applied.
Transactions where PSM can be adopted
➢ Integrated services provided by more than one enterprise
➢ Transfer of unique intangibles
Example
The ALP shall be determined as under
ZMC technology Singapore holds 27 % shares in Amco Ltd India. Further, Crest Ltd U.S.A holds 32% shares in Amco Ltd India. Amco ltd India
develops software and does both onsite and offsite consultancy. Crest Ltd U.S.A has a worldwide presence.
Crest ltd U.S.A received an order from Tirum Ltd U.S.A for developing a software product. In order to execute the same, ZMC Technology Singapore,
Crest ltd U.S.A & Amco Ltd India has contributed integrally to the development of the software product. Crest Ltd U.S.A finally delivers the product
to Tirum Ltd and receives consideration of $50,000.
Crest Ltd USA in turn pays to ZMC technology Singapore and Amco Ltd India a sum of $10000 and12000 respectively to keeps the balance to itself
In the entire transaction a profit of $1000 is earned. Amco ltd India incurred total cost of $9500 in executing its functions relating to above project.
On the basis of functions performed, risks assumed and assets employed, the relative contribution may be taken at 50%, 20 %, 30% for Amco ltd
India, ZMC Technology Singapore, Crest Ltd USA respectively.

12. Particulars Amount in USD
Price charged by Crest ltd to Tirum ltd $50000
Amco ltd India’s share of revenue $12000
ZMC ltd Technology Singapore’s share of revenue $10000
Crest Ltd USA’s share of revenue $28000
Combined total profits $10000
Evaluation of relative contribution:
Amco ltd 50% $5000
ZMC ltd Technology Singapore 20% $2000
Crest Ltd USA 30% $3000
Total cost of Amco Ltd India $9500
Income of Amco Ltd India on Arm’s length price $14500
Actual revenue of Amco Ltd $12000
Increased income $2500
Transactional Net Margin Method (TNMM)
This is one of the most widely used methods. Under this method a ratio of net profit margin is derived by using an appropriate base such as sales costs assets that
an assessee realises from a controlled transaction. This is compared to the net profit ratio similarly derived in case of a comparable uncontrolled transaction.
External as well as internal comparables can be used for comparison. However, this method is used in cases where the activities are not complicated, the products
and services are standardized and comparable. Relevant and reliable data is required to compute ALP under TNMM method.
Transactions under which TNMM method can be adopted
➢ Provision of services
➢ Distribution of finished products where resale price method cannot be applied
➢ Transfer of semi- finished goods cost plus method cannot applied
➢ Transactions involving intangibles where profit split method cannot be applied

13. Example
Any other method (Rule 10 AB)
The introduction of the sixth method widens the horizons for the Assesses wherein they can compute the ALP using any other method which takes into
consideration:
➢ Price which has been charged or paid; or
➢ Would have been charged or paid for the same or similar uncontrolled transactions
With or between non-associated enterprises, under similar circumstances considering all the relevant facts.
Process for calculation of ALP as per OECD guidelines
HUL exports shampoos to UL United Kingdom, an associated enterprise and earns a net profit of 10% on sales. The sales are Rs 10,000 crores and net
profit is Rs 1000 crores.
Procter and Gamble India also exports shampoos to other countries and earning a net profit of 25% on its sales. Procter and Gamble’s net profit is
higher by 2% since its sales are to European Countries only where 2% higher margin on sales exists.
Adjusted net profit (25%-2%) 23% on basis of TNMM .When applied to sales of HUL, 23% of 10,000 crores comes to 2300 crores. Hence an addition
of Rs 1300 crores shall be made to income of HUL.

14. The process of determination suggested by OECD Guidelines is an accepted Good Practice, However, it is not a mandatory to follow these guidelines. OECD
stresses upon the principle “Reliability of outcome is more important than the process”. The steps to compute ALP as per OECD Guidelines are given below;
Step 1: Determination of Years to be covered
Step 2: Broad-Based Analysis of Tax-payer’s circumstances
Step 3: Understanding the controlled transactions under examination, based on functional analysis, in order to choose:
➢ The tested party
➢ The Most Appropriate Method
➢ To identify the significant comparability factors
Step 4: Review of existing internal comparables, if any
Step 5: Determination of available sources of information on external comparables
Step 6: Selection of Most Appropriate Transfer Pricing Method
Step 7: Identification of potential comparables
Step 8: Determination of and making comparability adjustments where appropriate
Step 9: Interpretation and use of data collected, determination of the Arm’s Length Remuneration.

15. About Taxpert Professionals :
Taxpert Professionals is a conglomeration of multi-diverged professionals known for providing concentrated services in relation to taxation and corporate laws in a
seamless manner. Taxpert professionals believe in the creation of value through advising and assisting the business. The pool of professionals from different
spectrum like tax, accountancy, legal, costing, management facilitate the conversion of knowledge into beneficial transaction.
About Transfer Pricing
In the globalised environment where business houses are getting smart the tax authorities are getting smarter with Indian transfer pricing regime getting closer to
global best practices day by day by importing the concepts like BEPS (Base Erosion and profit shifting), thin capitalisation and secondary adjustments either taking
birth or getting adopted. With the newer ways of doing business in global space it is essential that all the business strategies are aligned to proper and planned taxation
policy.
With ever increasing cross border transactions, it is essential that the Transfer pricing policies and solutions are tailored made to needs, uncomplicated, innovative,
effective, forward-thinking, complaint and practical to implement.
We are taxpert professionals have dedicated team for handling the International Transaction Advisory services. We have handled most complicated cases in the most
seamless manner. We have perfect blend of professionals which provide the spectrum of services in the area customised to the needs of our clients. We have lot of
esteemed business houses, NRI, HNI as our clients. We always strive for the best for our clients.
About our Team
CA. Sudha G. Bhushan , Partner
A qualified Chartered Accountant and a Company Secretary with more than a decade of experience in the Foreign Exchange Management Act, RBI, Transfer pricing
and International taxation matters, Sudha is a Founder Director of Taxpert Professionals. She is a noted speaker and has addressed various national and international
forums on various topics relating to international transactions.
Her articles are regularly published in the Journals of several institutes and at various other forums and has authored the following books:
• Practical aspects of FDI in India published by Institute of Company secretaries of India

16. • Due Diligence under Foreign Exchange Management Act, 1999 published by CCH.
• Comprehensive Guide to Foreign Exchange Management in two volumes published by CCH.
• Practical Guide to Foreign Exchange Management published by CCH, a Walter Kluwers company.
• Handbook on FEMA, Publication of Institute of Chartered Accountants of India
She is regular contributor to various business journals and magazines. A scholar through out her life she has been awarded many awards and recognitions including
“Women Empowerment through CA Profession” by Northern India Regional Council (NIRC) of CA Institute.
Backed by experience in International firms (Penguin Books, Deloitte, Rodl and Partner, CRH) she has extensive experience of handling international transactions.
She advises corporate as well as government authorities in lot of intricate transactions. Rendering tax and regulatory advisory services, she has overseen and played a
crucial role in the execution of complex international transactions involving issues revolving around tax, repatriation, minimization of tax exposure, Foreign
Investment (Inbound and outbound) etc.
She is on the Board of many esteemed listed companies as Independent director. She is member of Committee of International Taxation of WIRC, Institute of
Chartered Accountants of India(ICAI), Member of Editorial Committee of WIRC of ICAI and Committee of women empowerment of ICAI.
CA. Neelam Parekh, Partner
She is a Chartered Accountant. She is self-motivated and optimistic, professional with good communication skills and has ability to work as individual and in group.
A dynamic professional having experience in the areas like Transfer Pricing, international Taxation, Foreign Exchange Management Act, Companies Act, 2013 and
Indian Accounting Standards. She has gained her experience in representation in taxation matters and has represented in appellate proceedings including
representation till ITAT in direct tax.
Get in touch with us
sudha@taxpertpro.com || info@taxpertpro.com
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