The case for transfer pricing taxation arises when two related parties conduct a transaction across different tax regimes, at a price that is outside an arm's length range. Transfer pricing rules therefore involve comparing prices charged in related party transactions to those charged in similar transactions by unrelated parties.
However, since the price at which transactions are actually conducted is not usually available, transfer pricing rules permit the use of profitability as an alternate measure to the arm's length price.
In making comparisons between the profitability of the target company and the unrelated companies, it is imperative that the unrelated companies are selected such that they reflect the same or similar business and business environment as of the target company.
Prowess is an indispensable tool in finding such comparable but unrelated parties and also in determining the "arm's length" profitability.