Everything you need to know about Transfer Pricing

by Protima Venugopal
by Protima Venugopal

Content Creator

An international transaction implies a transaction between two or more associated enterprises either or both of them are non residents.

In international transactions with a high scope of tax evasion, regulations such as Transfer pricing are mandatory. Transfer Pricing is the price of transactions between two companies (belonging to one group) residing in different geographies. From a tax point of view, Transfer pricing is critical as it involves complex calculations based on the type of transactions. Since transfer pricing impacts the taxation of the states directly, it is one of the most effective methods of optimizing Tax revenue in a country. 

Why is there a need for Transfer Pricing regulations?

Transfer Pricing regulations are mandatory because of

  1. Cross-border transactions like Intra Group Transactions
  2. Different tax rates in countries
  3. The tendency of an enterprise to evade tax in a particular country and enjoy greater profits
Arm's Length Price

Cross-border transactions owing to currency variations become complicated from a tax perspective. To simplify such transactions arising from an International or specified domestic transaction, Transfer pricing regulations use the Arm’s length
Arms Length Price can be defined as a price that is applied in a transaction between persons other than the associated enterprises in uncontrolled transactions.

International Transaction Matrix
UJA Transactions in Transfer Pricing

The above matrix defines an International Transaction. Clearly, any transaction between two resident enterprises cannot be categorized as an International Transaction. 

Methods of determining the Arm’s length Price

Depending on the types of transactions involved, there are five listed methods of calculating the Arm’s Length Price.

UJA methods of calculating the Arm’s Length Price

CUP: Comparable  Uncontrolled Price Method
RPM: Resale Price Method
CPM: Cost Plus Method
PSM: Profit Split Method
TNMM: Transactional Net Margin Method

The above table elaborates these methods applicable to various categories of transactions

MAM (Most Appropriate Method)

One of the above methods, the Most Appropriate Method defines the Arm’s length price of a transaction.

The selection of the MAM depends on many factors some of which are:

  1. Nature and class of international transaction
  2. Class of the Associated Enterprises
  3. Degree of comparability between international transaction and uncontrolled transaction
Arithmetic Mean

In cases where more than one Arm’s Length Price is determined using the MAM, an arithmetic mean would determine the Arm’s length price as per the below table. 





Transaction price



Price computed with MAM












Arithmetic Mean of above 3 methods



Difference between transaction price & Arithmetic Mean



5% of Transaction price

E=5% of A


If D>E

ALP(Arm’s Length Price)=C


If D<E

ALP(Arm’s Length Price)=A

Statutory deadline for submission of transfer pricing documentation?

30th November is the statutory deadline for an accountant’s report in Form 3CEB along with the Income Tax Return after the end of the Financial year under consideration.

Penalty for not complying with the TP regulations

A penalty of 2% of the value of each international/specified domestic transaction is applicable for failing to comply with TP regulations, to maintain TP documentation or any kind of evasive act regarding the same. 

The OECD contains updates and details of Transfer Pricing regulations and is a ready repository for any kind of information required.


Finally, in a bid to ensure compliance with Taxes and to widen the scope of International Taxation, Transfer Pricing guidelines are imperative. Transparency in international transactions leads to responsible business ethics and contributes to the country’s economy. 

Are you looking for an expert to guide you through Transfer Pricing related matters? Get in touch with our team to benefit from continuous assistance in your business journey.

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