Transfer pricing in India

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 16. Briefly explain the transfer pricing provisions in India.

Transfer pricing regulations in India require transactions between related parties to be priced at an "arm's length price"—as if the entities were independent. Governed by Sections 92 to 92F of the Income Tax Act, the rules prevent multinational companies from shifting profits to lower-tax jurisdictions. [1, 2]




Key provisions include:
  • Applicability: Applies to all cross-border "international transactions" and certain "specified domestic transactions" between Associated Enterprises (AEs) exceeding INR 20 crores.
  • Associated Enterprises (AE): Entities are considered related if there is direct or indirect participation in management, control, or capital (e.g., holding ≥ 26% voting power, or one company supplying ≥ 90% of the other's raw materials).
  • Arm’s Length Price (ALP) Methods: Indian tax laws outline six methods to determine the ALP:
    1. Comparable Uncontrolled Price (CUP)
    2. Resale Price Method (RPM)
    3. Cost Plus Method (CPM)
    4. Profit Split Method (PSM)
    5. Transactional Net Margin Method (TNMM)
    6. Any other prescribed method [4, 5]
  • Documentation: Taxpayers must maintain detailed documentation. Form 3CEB, certified by a Chartered Accountant, must be filed for transactions exceeding INR 1 crore.
  • Compliance Mechanisms: India offers tools like Advance Pricing Agreements (APAs) and Safe Harbour Rules to provide upfront certainty on transfer pricing methodologies. [2, 7]
Failure to comply or maintain documentation can attract heavy penalties, often reaching up to 2% of the value of the international transaction. Detailed guidelines and updates can be reviewed on the Income Tax Department portal. [1, 2, 8, 9]





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