Transfer pricing methods
This query is : Open
Querist : Anonymous
Querist :
Anonymous
(Querist)
03 June 2010
We have started an offshore project and have deputed some resources to work for the project. I would like to know more in detail about the cost-plus method and its applicability in accounts.
If my outgoing expenditure is say Rs.20 L p.a can i account a revenue of Rs.2 L per month. please explain the procedure
If my outgoing expenditure is say Rs.20 L p.a can i account a revenue of Rs.2 L per month. please explain the procedure
04 June 2010
In order to answer your question I would need to know the exact facts of the case. So I request you to throw some more light on the facts. However, please find below an extract explaining the cost plus method-
Cost Plus Method (CPM)
As per the OECD, the CPM is applicable when semi-finished goods are sold between associates, where there are long term supply and buy agreements, provision of services, contract manufacturing, particularly where these are of a subsidiary or peripheral nature’.
Rule 10B (C) describes the Cost Plus Method by which:
The direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an Associated Enterprise is determined,
The amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions,
The normal gross profit mark-up is adjusted to take into account the functional and other differences, if any, between the transactions or enterprises, which could materially affect such profit mark-up in the open market.
The costs are increased by the adjusted profit mark-up to lead to arm’s length price.
Based on the Guidance Note on Report on International Transactions under Section 92E of the Income Tax Act, 1961, issued by the Institute of Chartered Accountants of India, typical transactions where the cost plus method may be used are transactions involving:
• Provision of services.
• Joint facility arrangements.
• Transfer of semi finished goods.
• Long term buying and selling arrangements.
Cost Plus Method (CPM)
As per the OECD, the CPM is applicable when semi-finished goods are sold between associates, where there are long term supply and buy agreements, provision of services, contract manufacturing, particularly where these are of a subsidiary or peripheral nature’.
Rule 10B (C) describes the Cost Plus Method by which:
The direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an Associated Enterprise is determined,
The amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions,
The normal gross profit mark-up is adjusted to take into account the functional and other differences, if any, between the transactions or enterprises, which could materially affect such profit mark-up in the open market.
The costs are increased by the adjusted profit mark-up to lead to arm’s length price.
Based on the Guidance Note on Report on International Transactions under Section 92E of the Income Tax Act, 1961, issued by the Institute of Chartered Accountants of India, typical transactions where the cost plus method may be used are transactions involving:
• Provision of services.
• Joint facility arrangements.
• Transfer of semi finished goods.
• Long term buying and selling arrangements.
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