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Transfer pricing
A ltd a foreign company holds 40% equity of B ltd, Indian company. B ltd purchased goods from A ltd at $90 per piece. Thereafter, B ltd sell these goods in India at $160 per piece to unrelated parties. Cost/Expenses incurred by A ltd is $45 per piece, while cost incurred by B ltd in India is $63 per piece. Considering asset employed, risk assumed and functions performed, factor for distribution of profit between A ltd and B ltd is 60:40. Compute arms length price.
Replies (4)
Nirav,
What is the cost of purchase of similar goods by B Ltd from unrelated parties from India or abroad.
Thanks,
Profit Split Method:
Total profit for the group = 160 - 45 - 63 = 52
Allocated to A = 52 x 60% = 31.20
Allocated to B = 52 x 40% = 20.80
Selling price for A to B = cost + profit allocated
= 45 + 31.20 = 76.20
Shouldn't a total profit of a group i.e combined profit be $142 i.e. [($90-$45)+($160-$63)]??
If uncontrolled prices are available then ALP can be computed with CUP method otherwise Profit Split Method (as calculated above by @ suicide squad) would be the most appropriate transfer pricing method for calculating ALP.
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