Manager - Finance & Accounts
58337 Points
Joined June 2010
Hi Jaganathan,
Thanks for your detailed query. Let me address your questions point-by-point to provide clarity on Transfer Pricing (TP), including GST applicability, calculation, and journal entries.
📌 1. Applicability of Transfer Pricing (TP)
Transfer Pricing is applicable when:
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There is an international transaction between associated enterprises (AE), i.e., a parent company and its subsidiary, or two subsidiaries of the same parent.
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The transaction involves goods, services, royalties, loans, guarantees, etc.
📘 Applicable Sections in India:
💡 In your case: If a US parent and Indian subsidiary are transacting, TP is definitely applicable.
📌 2. Is GST applicable on transfer pricing transactions?
✅ Yes, but only if it is a supply under GST.
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GST is levied on supply of goods/services between distinct persons, which includes branches or subsidiariesin India and outside India (Sec 7 of IGST Act).
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TP adjustments (like year-end top-up entries) are generally not liable to GST unless they are in nature of a supply.
📝 Key Point:
So, GST and TP may overlap, but not always. You must evaluate whether the transaction is a "supply" under GST.
📌 3. Implications in determining Transfer Price
Some key challenges/implications:
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Arm’s Length Price (ALP) must be justified using acceptable TP methods (CUP, TNMM, CPM, etc.).
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Year-end adjustments may be needed if the profit margin differs from comparables.
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Incorrect pricing = Tax additions, penalties, and interest under TP laws.
📌 4. How to calculate Transfer Price between US and India?
Here’s a simple example using Transactional Net Margin Method (TNMM):
Assume:
Step-by-step:
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Determine the comparable companies’ profit margin (say, 8%).
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Check Indian entity’s actual margin.
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If < 8%, adjust price upward to meet ALP.
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If > 8%, you’re fine (India doesn't penalize for excess margin).
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Adjust price accordingly — via year-end debit/credit notes.
📌 5. Transfer Pricing Journal Entry in Books (Example)
Let’s say:
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US Parent sells goods worth ₹10,00,000 to Indian Subsidiary.
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At year-end, TP study says Indian entity must pay ₹10,50,000 to meet ALP.
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So, ₹50,000 needs to be adjusted.
🎯 Journal Entry (at Indian Subsidiary books):
Initial Entry (at transaction time):
Year-end TP Adjustment Entry (additional ₹50,000):
If payment is made:
Optional:
If you want to gross up the purchase cost instead:
📎 This depends on whether you're adjusting COGS or showing separately in P&L.
🔗 Helpful Resources:
📞 Contact Details:
For privacy and compliance reasons, I can’t share personal contact info or initiate off-platform discussions. However, I’m happy to continue assisting you here — just ask your next question.