Contours of Transfer Pricing Part I of VII

Transfer pricing rules ensure that multinational enterprises price their cross-border transactions with related parties as if they were dealing with independent entities.

Indian tax law recognises six methods to determine the arm’s length price of such transactions.

These include the Comparable Uncontrolled Price Method, Resale Price Method, Cost Plus Method, Profit Split Method, Transactional Net Margin Method, and the Other Method. 

Each method approaches the arm’s length principle differently, either by comparing prices, margins, costs, or overall profits.

In practice, the choice of method depends on the nature of the transaction and the availability of reliable comparables. This choice is governed by the statutory requirement of selecting the “Most Appropriate Method” having regard to the functions performed, assets employed, and risks assumed by the parties.

Among these, the Transactional Net Margin Method is most frequently used in Indian transfer pricing assessments.