How Is Arm's Length Price Calculated?

Arm's Length Price (ALP) is the price at which transactions between related parties, such as parent and subsidiary companies, should occur as if they were unrelated parties. This ensures fair taxation and prevents profit shifting.

Methods to Calculate ALP:

1. Comparable Uncontrolled Price (CUP) Method:
   • Compares the price charged in a controlled transaction with the price charged in an independent transaction under similar circumstances.
2. Resale Price Method (RPM):
   • The price at which a product purchased from an associated enterprise is resold to an unrelated party, reduced by an appropriate gross margin.
3. Cost Plus Method (CPM):
   • The cost of production or acquisition of goods/services is increased by a reasonable profit mark-up to determine the ALP.
4. Profit Split Method (PSM):
   • The combined profit from a controlled transaction is divided between associated enterprises based on their relative contributions.
5. Transactional Net Margin Method (TNMM):
   • Compares the net profit margin of a controlled transaction with the net profit margin of similar independent transactions.

Summary: ALP is calculated using methods like CUP, RPM, CPM, PSM, and TNMM, ensuring fair pricing between related parties to prevent tax avoidance.