Intercompany Transfer Pricing
International transactions dealt between two or more Associated Group Enterprises or entities, are called Intercompany Transfer Pricing.
How to substantiate the pricing under Arm’s Length standard ?
First look at the international transactions viz., software development services, purchase of goods or sale of finished goods, or reimbursements etc. The international transactions among the Indian entity i.e. tested party and the Group associated companies are to be arrived as per books of account.
Secondly, select the most appropriate method i.e. Cost plus method ; Resale price method ; Profit split method ; Comparable Uncontrolled Price method ; or Transactional Net Margin Method ( TNMM).
- Under Cost plus method, Gross profit margins of the tested party have to be compared with the Average Gross profit margins of the comparables ( either Indian or foreign comparables from the public data bases ).
- Under Resale Price Method , first ascertain the sale price and resale price of the goods and arrive Gross profit margins reducing the marketing, selling and distribution expenses and compare with the average gross profit margins of the comparable companies.
- Under Profit Split Method , it relates to intangibles mostly and split the profits among the associated enterprises and arrive the margins and compare with independent entities in a similar business and in a similar functionality.
- Under Comparable Controlled Price Method, the Unit price of the tested party with the AE (s) is to be compared with the Unit price of the independent third party (s) or compare the Unit price between two Independent third parties, so as to substantiate the pricing at Arm’s Length standard.
- Transactional Net Margin Method, first select the profit level indicator (PLI) and then tested party as Indian entity. Later on, for all transactions aggregating together, analyse under TNMM. Take out the comparables from the public data bases in a more systematic manner and as per search criteria or search process. The net margins of the tested party have to be compared with the Average net margins of the comparables are to be examined and accordingly, pricing of the tested party is to be substantiated at Arm’s Length Standard.
From the above, all the intercompany TP transactions have to be examined and compare under any of the above methods and see that they are at Arm’s Length Standard and as per industry’s average margins.