Transfer pricing
This query is : Resolved
19 June 2013
If an Indian company is providing services to its Associated Enterprise(AE) in USA and the AE is using these services further to complete its contractual obligation to a client based in USA.
The AE adds 4% profit margin to what the Indian company charges from it and provides the service to client at such price.
Will the transfer price on the Indian company be such sale price of service inclusive of 4% profit margin set by AE or without it.
Ex:
Supply price by Indian Co. to AE =Rs. 100
Profit Margin 4% =Rs. 4
Value of service charged =Rs. 104
from client
Will the transfer price for the Indian company be Rs. 100 or Rs. 104?
Please reply. It's very urgent.
The AE adds 4% profit margin to what the Indian company charges from it and provides the service to client at such price.
Will the transfer price on the Indian company be such sale price of service inclusive of 4% profit margin set by AE or without it.
Ex:
Supply price by Indian Co. to AE =Rs. 100
Profit Margin 4% =Rs. 4
Value of service charged =Rs. 104
from client
Will the transfer price for the Indian company be Rs. 100 or Rs. 104?
Please reply. It's very urgent.
19 June 2013
your transfer price would be 104, 100 known as cost and 4 known as markup.
Please refer section 192 of IT Act for better understanding.
Please refer section 192 of IT Act for better understanding.
20 June 2013
Thank You Sir.
One more help Sir....
If in the above case, the Indian company had a direct contract with the client based in USA and the AE was just acting as an intermediary for collecting the revenue from the US client and remitting the balance amount after deducting 5% commission, then what would be the transfer price and will this expense of 5% commission done by the Indian company be allowed as an expense against the revenue earned for Income tax purpose?
The indulgence of AE in this case is due to the Indian company's bank not allowing straight receipt of revenue by the Indian company from the US client.
Ex:
Supply price by Indian Co. to US =Rs. 100
based client
Amount received by AE on behalf
of Indian Company =Rs. 100
Commission @ 5% charged by AE and
tax duly paid in USA on this
amount from client =Rs. 5
Amount remitted to the Indian Co. =Rs. 95
by AE after deducting commission
Will the transfer price for the Indian company be Rs. 100 or Rs. 95.
Will this exp. of Rs. 5 as commission paid be allowed as an expense?
Please reply. It's very urgent.
One more help Sir....
If in the above case, the Indian company had a direct contract with the client based in USA and the AE was just acting as an intermediary for collecting the revenue from the US client and remitting the balance amount after deducting 5% commission, then what would be the transfer price and will this expense of 5% commission done by the Indian company be allowed as an expense against the revenue earned for Income tax purpose?
The indulgence of AE in this case is due to the Indian company's bank not allowing straight receipt of revenue by the Indian company from the US client.
Ex:
Supply price by Indian Co. to US =Rs. 100
based client
Amount received by AE on behalf
of Indian Company =Rs. 100
Commission @ 5% charged by AE and
tax duly paid in USA on this
amount from client =Rs. 5
Amount remitted to the Indian Co. =Rs. 95
by AE after deducting commission
Will the transfer price for the Indian company be Rs. 100 or Rs. 95.
Will this exp. of Rs. 5 as commission paid be allowed as an expense?
Please reply. It's very urgent.
02 August 2025
Thanks for the detailed scenario! Let’s analyze both parts carefully under transfer pricing (TP) and income tax rules:
---
### Part 1: Indian Co. provides service to AE, AE adds 4% profit margin and sells to US client
* **Indian Co charges AE:** Rs. 100
* **AE sells to US client:** Rs. 104 (Rs. 100 + 4% markup)
**Question:** What is the transfer price for Indian Co — Rs. 100 or Rs. 104?
**Answer:**
The transfer price from Indian Co to AE is Rs. 100.
**Explanation:**
* The transfer pricing rules generally consider the price charged **between the associated enterprises** (Indian Co and AE) as the relevant arm’s length price.
* The 4% profit margin added by AE when selling to the unrelated US client is AE’s own margin, and does not affect the price Indian Co charges AE.
* Indian Co’s arm’s length price is the actual price charged to AE, i.e., Rs. 100.
---
### Part 2: Indian Co has direct contract with US client, AE acts as intermediary collecting payment, deducting 5% commission
* Indian Co supplies services to US client directly for Rs. 100.
* AE collects Rs. 100 on behalf of Indian Co, deducts 5% commission (Rs. 5), remits Rs. 95 to Indian Co.
**Questions:**
1. What is the transfer price for Indian Co? Rs. 100 or Rs. 95?
2. Is the Rs. 5 commission paid to AE allowable as an expense for Income Tax?
---
### Answer:
1. **Transfer Price for Indian Co:** Rs. 100 (full value of services supplied)
* Since Indian Co has direct contract with US client, its revenue is Rs. 100.
* The amount remitted by AE (Rs. 95) is just a payment route, not the value of supply.
* For TP and Income Tax, revenue is recognized as Rs. 100, not Rs. 95.
2. **Commission expense of Rs. 5 to AE:**
* This is a genuine business expense incurred to collect revenue and is allowed as a deductible expense under Income Tax, subject to normal provisions of the Act (like reasonableness, arm’s length, etc.).
* For TP, the commission paid should be at arm’s length rate. If 5% is reasonable and documented, it should be allowed.
---
### Summary:
| Scenario | Transfer Price | Commission Expense Allowed? |
| ---------------------------------------------------------------------------------------- | ----------------------------- | ---------------------------------- |
| Indian Co charges AE, AE adds margin and sells | Rs. 100 (price charged to AE) | N/A |
| Indian Co directly contracts with US client, AE collects payment deducting 5% commission | Rs. 100 (full contract value) | Yes, commission expense deductible |
---
**Relevant Sections & Rules:**
* Transfer Pricing provisions under Sections 92 to 92F of Income Tax Act
* Income recognition principles under Indian GAAP / Ind AS
* Commission expense should be reasonable and arm’s length (supported by benchmarking)
---
If you want, I can help draft the working notes or suggest documentation for arm’s length justification. Would you like that?
---
### Part 1: Indian Co. provides service to AE, AE adds 4% profit margin and sells to US client
* **Indian Co charges AE:** Rs. 100
* **AE sells to US client:** Rs. 104 (Rs. 100 + 4% markup)
**Question:** What is the transfer price for Indian Co — Rs. 100 or Rs. 104?
**Answer:**
The transfer price from Indian Co to AE is Rs. 100.
**Explanation:**
* The transfer pricing rules generally consider the price charged **between the associated enterprises** (Indian Co and AE) as the relevant arm’s length price.
* The 4% profit margin added by AE when selling to the unrelated US client is AE’s own margin, and does not affect the price Indian Co charges AE.
* Indian Co’s arm’s length price is the actual price charged to AE, i.e., Rs. 100.
---
### Part 2: Indian Co has direct contract with US client, AE acts as intermediary collecting payment, deducting 5% commission
* Indian Co supplies services to US client directly for Rs. 100.
* AE collects Rs. 100 on behalf of Indian Co, deducts 5% commission (Rs. 5), remits Rs. 95 to Indian Co.
**Questions:**
1. What is the transfer price for Indian Co? Rs. 100 or Rs. 95?
2. Is the Rs. 5 commission paid to AE allowable as an expense for Income Tax?
---
### Answer:
1. **Transfer Price for Indian Co:** Rs. 100 (full value of services supplied)
* Since Indian Co has direct contract with US client, its revenue is Rs. 100.
* The amount remitted by AE (Rs. 95) is just a payment route, not the value of supply.
* For TP and Income Tax, revenue is recognized as Rs. 100, not Rs. 95.
2. **Commission expense of Rs. 5 to AE:**
* This is a genuine business expense incurred to collect revenue and is allowed as a deductible expense under Income Tax, subject to normal provisions of the Act (like reasonableness, arm’s length, etc.).
* For TP, the commission paid should be at arm’s length rate. If 5% is reasonable and documented, it should be allowed.
---
### Summary:
| Scenario | Transfer Price | Commission Expense Allowed? |
| ---------------------------------------------------------------------------------------- | ----------------------------- | ---------------------------------- |
| Indian Co charges AE, AE adds margin and sells | Rs. 100 (price charged to AE) | N/A |
| Indian Co directly contracts with US client, AE collects payment deducting 5% commission | Rs. 100 (full contract value) | Yes, commission expense deductible |
---
**Relevant Sections & Rules:**
* Transfer Pricing provisions under Sections 92 to 92F of Income Tax Act
* Income recognition principles under Indian GAAP / Ind AS
* Commission expense should be reasonable and arm’s length (supported by benchmarking)
---
If you want, I can help draft the working notes or suggest documentation for arm’s length justification. Would you like that?
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