Risk, Method, and Benefits of Transfer Pricing Service in India


Transfer Pricing can be technically be defined as the price charged for the transfer of goods and services. It can also be defined as the price charged for the transfer pricing Services between associates and various entities.


Methods of Transfer Pricing in India


  • The CUP Method:  This means comparing the price of service/property transacted in a static transaction vs. comparing the price of service/property transacted in a volatile transaction and comparing them accordingly.

  • The Resale Price Method: Gross Margin in Resale value in a static transaction vs. Gross Margin in Resale in a volatile transaction and compare them accordingly.

  • The Cost-Plus Method: The mark-up on costs that the manufacturer/service provider earns in a static transaction vs. The mark-up on costs that the manufacturer/service provider earns in a volatile transaction and compare them accordingly.

  • The Transactional Net Margin Method: The transactional net margin method takes in the ratio of net profit with an appropriate base (e.g. costs, sales, assets), that a taxpayer realizes from a static transaction (or from transactions that are appropriate to aggregate) with the net profit earned in a volatile transaction and compare them accordingly.

  • The Transactional Profit Split Method: The transactional profit split method takes in the combined profits which are to be split between the Associated Businesses from the controlled transactions in which the Associated Businesses are engaged in.

Benefits/Advantages of transfer pricing 
  • Cost Duty Reduction: Business Entities reduce cost duties by paying minimum transfer prices by shipping goods to countries where tariffs are high. Thereby reducing the duty slabs on which duties must be paid.                          
  • Various Tax Reductions: Business Entities use various methods of Transfer Pricing to reduce income taxes in countries with higher taxes by charging higher prices on goods that can be transferred to countries with lower tax rates. 

Risks of transfer pricing Services
  • Disruption & Disagreement in Organizations: Regarding the policies in relation to the prices is one of the concerning issues company should worry about because it may disrupt operations. 
  • Various additional costs: To make a successful accounting system in compliance with transfer pricing requires huge time and manpower. 
  • Error in Decision Making: To decide the right amount while determining the pricing policy for intangibles like services is a daunting task.
  • Excess Time Consumption: In of Huge companies, the process of transfer pricing becomes highly complicated, time-consuming & dysfunctional between company staff.
  • Risk Factor:  There arises a certain type of risk for buyers & sellers in certain cases eg: like the seller of a product may or may not offer a warranty for a product that is obsolete. Like these there are certain risks that impact this price:
    • Collection Risk
    • Market risks
    • Financial risks
    • Credit Risk
Location: India

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