Overview of transfer pricing in india

Commercial transactions between the different parts of the multinational groups may not be subject to the same market forces shaping relations between the two independent firms. One party transfers to another goods or services, for a price. That price is known as transfer price. This may be arbitrary and dictated, with no relation to cost and added value, diverge from the market forces. Transfer price is, thus, a price which represents the value of good; or services between independently operating units of an organization. But, the expression transfer pricing generally refers to prices of transactions between associated enterprises which may take place under conditions differing from those taking place between independent enterprises. It refers to the value attached to transfers of goods, services and technology between related entities. It also refers to the value attached to transfers between unrelated parties which are controlled by a common entity.
Suppose a company A purchases goods for 1000 rupees and sells it to its associated company B in another country for 2000 rupees, who in turn sells in the open market for 4000 rupees. Had A sold it direct, it would have made a profit of 3000 rupees. But by routing it through B, it restricted it to 1000 rupees, permitting B to appropriate the balance. The transaction between A and B is arranged and not governed by market forces. The profit of 2000 rupees is, thereby, shifted to the country of B. The goods is transferred on a price (transfer price) which is arbitrary or dictated (2000 hundred rupees), but not on the market price (4000 rupees)