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"Transfer pricing" refers to the transaction prices of transactions between related parties like the parent and subsidiary, which may take place under the conditions differing from those taking place between independent enterprises. The transfer price between related parties may not be at par when compared to the transfer price on transactions with unrelated parties.
For example, company X purchased the goods for Rs. 1000/- and sells it to its associated company Y in another country amounted for Rs. 2000/-, who in turn sells in the open market for Rs. 4000/-. If company X had sold it directly in the latter country, it would have made a profit of Rs. 3000/-. But by routing it through company Y, it restricted the profit to Rs. 1000/-, permitting company Y to appropriate the balance. The transactions between X and Y is arranged and are not governed by market forces. The profit amounting to Rs. 2000/- is, thereby, shifted to country of Y. The goods are transferred on a price (transfer price) which is arbitrary or dictated (Rs. 2000/-), but not on the market price (Rs. 4000/-).
For example, company X purchased the goods for Rs. 1000/- and sells it to its associated company Y in another country amounted for Rs. 2000/-, who in turn sells in the open market for Rs. 4000/-. If company X had sold it directly in the latter country, it would have made a profit of Rs. 3000/-. But by routing it through company Y, it restricted the profit to Rs. 1000/-, permitting company Y to appropriate the balance. The transactions between X and Y is arranged and are not governed by market forces. The profit amounting to Rs. 2000/- is, thereby, shifted to country of Y. The goods are transferred on a price (transfer price) which is arbitrary or dictated (Rs. 2000/-), but not on the market price (Rs. 4000/-).
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