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Cost Plus Method Transfer Pricing Case Study

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May 5, 2021

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5 mins read

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:-

International Taxation Services

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

For any queries, please write them in the Comment Section or Talk to our tax expert

Arinjay Jain

Bio of author

Arinjay is a Chartered Accountant with more than 20 years of post-qualification experience. He worked as Director, in the M&A Tax Division at KPMG in India. Presently, he is advising several MNCs in UAE on Economic Substance Regulations and impact of the UAE Corporate Tax Law on their business and clients across globe on International Tax issues . He is a well recognised Trainer of International Tax and UAE Corporate Tax. The areas of service include the following : - Advise and Compliance relating to International Tax Issues; Advise relating to UAE Corporate Tax Issues; Advise and Compliance relating to UAE Economic Substance Regulations; Advise and Compliance relating to Indian Income Tax Issues; Other connected matters from a Regulatory perspective.

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