Cost Plus Method Transfer Pricing – International Taxation Case Study
Doorlock India is a company incorporated under the Companies Act, 2013, a wholly owned subsidiary of Doorlock USA, and has a factory in Haryana. It is engaged in manufacture of door locks , door handle and other security product. Amongst several other products, the company manufactures, Category A door lock for which the details are as under : –
| Expenditure | Amount |
| Cost of Steel to manufacture Door Lock | 40 |
| Other Direct Cost | 20 |
| Total Direct Cost | 60 |
| Indirect Cost | 20 |
| Total Cost | 80 |
During FY 2018-19, it sold 5,00,000 pieces of such locks toDoorlockUSA @ Rs.100 per lock (including transportation cost). There were following differences which were available between sale of Category A door lock to third party buyers (included in the above cost ) : –
a)Third parties require affixing their Logo on the Locks for which indirect cost of Rs. 2 per lock is incurred.
b)Credit period of 6 months is given to third parties while sale to Doorlock USA is on advance basis. The credit cost can be assumed at 0.5% per month of Direct Cost of the Product
c)Goods are sold and delivered to Doorlock USA at their warehouse while in case of third parties, goods are delievered at the Godown of seller. Additional transportation cost is Rs. 10 per unit. Assume there is no mark up on freight charged by company.
Compute the arm’s length price, assuming a margin of 25% on Cost is earned from unrelated parties.
Cost Plus Method Transfer Pricing – International Taxation Case Study – Solution:-
| Particulars | Amount |
| Total Cost – Direct + Indirect | Rs. 80 per unit |
| Less : – | |
| Six months credit to Third Parties based on Direct Cost (Rs. 60 * 6*0.5 %) | Rs. 1.80 per unit |
| Cost of affixing the Logo on Locks | Rs. 2 per unit |
| Less: – | |
| Value of freight paid for Doorlock USA – Since its not included in the cost above | Rs. Nil per unit |
| Cost adjusted for differences in Pricing | Rs. 76.20 per unit |
| Mark Up @ 25% on cost | Rs. 19.05 per unit |
| Rs. 95.25 per unit | |
| Add : – Additional transportation cost | Rs. 10 per unit |
| Arm’s length Price to be charged from Doorlock USA | Rs. 105.25 per unit |
| Price actually charged from Doorlock USA | Rs. 100 per unit |
| Increased income | Rs. 5.25 per unit |
| Quantity | 5,00,000 units |
| Total increased income | Rs. 26,25,000 |
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