COST ACCOUNTING
TRANSFER PRICING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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There are only 5 methods that can be used in transfer pricing, namely CUP, Cost Plus, Resale Price, TNMM, Profit Split.
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Methods that can be used in transfer pricing are CUP, Cost Plus, Resale Price, and other methods.
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The CUP method is only appropriate for commodity products whose market prices are available.
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The Profit Split method can be used for contract manufacture companies.
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Detailed explanation-1: -The CUP method is the most direct way of ascertaining an arm’s length price. It compares the price charged for a property or services transferred in a controlled transaction to the price charged for a property or services transferred in a comparable uncontrolled transaction, in comparable circumstances.
Detailed explanation-2: -In general, the traditional transaction methods is preferred over the transactional profit methods and the CUP method over any other method. In practice, the TNMM is the most used of all five transfer pricing methods, followed by the CUP method and Profit Split method.
Detailed explanation-3: -Transfer Pricing was introduced through inserting Section(s) 92A-F and relevant Rule(s) 10A-E of the Income Tax Rules 1962. It ensures that the transaction between ‘related’ parties is at a price that would be comparable if the transaction was occurring between unrelated parties.