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With the increasing economic activities of many multi-national groups in India, new and complex issues emerged between two or more enterprises belonging to the same group.

Urgent need for a uniform and internationally accepted mechanism for determining reasonable, fair and equitable profits and tax in India in such cases.


In India, transfer pricing has been defined under Section 92 of Income Tax Act, 1951.


Transfer pricing  is the price charged by a company for goods, services or intangible property to a subsidiary or other related company.

For example, when a US-based subsidiary of Coca-Cola, buys something from a French-based subsidiary of Coca-Cola, the parties establish a price for the transaction, this is transfer pricing.



To arrive at comparable price as available to any unrelated party in open market conditions.


a)all enterprises that enter into an international transaction with an associated enterprise.

b)all cross border transactions entered into between associated enterprises.

c)transactions involving a mere book entry having no apparent financial impact



as per sec. 92F(iii) is a person who directly or through one or more of its unit engages or carries out activities/ business relating to production, storage, supply, know-how, patents, copyrights, service of any kind, investment activity, etc.

Associated Enterprises:

An enterprise would be regarded as an associated enterprise of another enterprise, when one enterprise controls or is controlled by another, directly or indirectly or when there is a relationship of indirect ownership or of mutual interest between the two.

Uncontrolled Transaction:

Transaction between independent and unrelated enterprises.

Controlled Transaction:

Transactions between two enterprises that are associated enterprises with respect to each other.

Deemed Associated Enterprise:

Two enterprises shall be deemed to be associated enterprises if, at any time during the previous year, one enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in the other enterprise.

International Transaction:

An international transaction is essentially a cross border transaction between associated enterprises in any sort of property, whether tangible or intangible, or in the provision of services, lending of money etc. At least one of the parties to the transaction must be a non-resident.

Arms Length Price:

If two unrelated companies trade with each other, a market price for the transaction will generally result. This is known as Arms Length Price.

Comparable Uncontrolled Price Method (CUPM):

A method used to determine if the prices reported in a transaction are comparable with prices of   similar tangible goods in an arm’s length transaction.

Resale Price Method (RPM):

Method used in transfer pricing between affiliated companies, under which an arm’s length price is ascertained by deducting a normal profit margin from the resale price at which a buyer of inventory assets resells these assets to an unrelated party.

Cost plus method (CPM):

is typically used to test the activities of manufacturing entities by comparing gross profits to cost of sales.

Profit Split Method (PSM):

Where transactions are very interrelated,  the profit split method determines the division of profits that independent enterprises would have expected to realize from engaging in the controlled transaction or transactions.

Transactional Net Margin Method (TNMM):

It compares the tested party's net profitability on a controlled transaction to the net profit obtained by broadly similar uncontrolled companies on similar transactions.

Net cost plus margin:

The net cost plus is the ratio of recent years of operating profit to total cost.

Operating profit margin:

It is the ratio of EBIT to turnover.

Berry ratio:

The Berry Ratio is the ratio of gross profit to operating expenses.


Broadly speaking, a person who spends most of the calendar year outside his country of domicile. Non-residents are usually taxed on income derived from sources within the taxing jurisdiction whereas residents may be taxed on worldwide income.

Transfer Pricing Officer:

The Officer determines the ALP after hearing the arguments of the taxpayer.

Permanent Establishment:

includes a fixed place of business through which the business of the enterprise is wholly or partly carried on.





Niharika singh, student of Chanakya National Law University,–


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