Every effort is being made by the corporate world to maximize profits and minimize tax liability by inventing new and creative methods from time to time. In the past, the best method to achieve this objective was by invoicing commercial transactions within group companies located at different locations or in different countries by using progressive pricing, especially by multinational companies. The prices for non-group companies used to be higher than the prices for group companies to allow every group company to earn a part profit resulting in the reduction of tax liabilities or transact with group companies in tax haven countries or where tax rates are lesser than the ultimate destination country. These transactions are called related party transactions and are lesser in value compared to non-related companies usually termed as related party transactions. If not detected by revenue authorities, such transactions usually attract less tax liability than arm’s length transactions resulting in a loss of revenue to the national exchequer.
Tax authorities in their continuous efforts with the help of other countries constantly take steps to control this menace and have evolved a few pricing methods/modules to apply to such transactions to conclude whether there is any loss of revenue to the exchequer by practicing related party transactions or not. These pricing methods/modules are explained in brief as under:
Transfer Pricing Methods
Usually, the ‘Traditional transaction method’ and ‘Transaction profit method’ are applied to authenticate the conditions dictated in the ‘commercial or financial relations’ regarding the associated enterprises are compatible with the arm’s length principle. The traditional methods include the Comparable Uncontrolled Price Method, Resale Price Method, and Cost-Plus Method.
The Comparable Uncontrolled Price Method 
compares the financial value of the property or services in a controlled transaction with the financial value of a similar property or services transferred in a comparable uncontrolled transaction with a similar and comparable situation.
The Resale Price Method mainly concerns the amount at which the goods are acquired from an associated enterprise and then sold again to an independent enterprise. The resale amount is lowered by the resale amount margin. The leftover amount after deducting the resale price margin after adjusting for other costs involving the purchase of the goods, can be viewed as an arm’s length price of the initial transfer of goods or property between associated enterprises.
The cost-plus Method involves the cost brought upon oneself by the supplier of goods in a controlled transaction. We add an appropriate cost-plus markup to this amount, in order to make an applicable profit with regards to the functions carried out and the conditions of the market. The amount we receive after including the cost-plus markup to the above amount can be referred to as an arm’s length prince in the initial controlled transaction.
Transactional Profit Methods
This method in particular analyses the profits arising from a specific controlled transaction of one or more of the associated enterprises taking part in them.
The transactional Net Margin Method considers the net profit margin with respect to an applicable base like the cost, assets, or sales that a taxpayer gains from a controlled transaction.
The profit Split Method determines the profit needed to split for the associated enterprises in a controlled transaction and then splits those specific profits among associated enterprises relying upon a genuine economic basis that approaches the split of profit which would have been predicted and emulated in an arm’s length agreement.
OECD Guidelines Para 2.4
 OECD Guidelines Para 2.3
 OECD Guidelines Para 2.45
 OECD Guidelines Para2.64
(Author ‘Hritik Raina’ is Bachelor’s in law at the University of Birmingham & Master’s in International Tax Law at the King’s College London.)