Transfer pricing has been gaining substantial recognition amongst multinational enterprises (MNEs) with the rising globalization and cross-border business activities in India. Whether you are managing an international grouping of firms or signing cross-border transactions with associated enterprises (AEs), you must know and comply with Indian norms of transfer pricing to avoid substantial penalties and maintain tax efficiency. Legal-N-Tax is among the trusted transfer pricing firms in Delhi with a dedicated team of professionals specializing in transfer pricing compliance.
This contains an in-depth synopsis of transfer pricing in India about its definition, legal foundation, norms of compliance, modes, rules of documentation, and current developments.
What is Transfer Pricing?
Transfer pricing is the price of goods, services, and intangibles transferred between one affiliated undertaking and another operating in distinct tax jurisdictions. Prices are occasionally not market-determined but rather the result of internal business judgments of the multinational group itself. As such, transfer pricing can be directly or indirectly used to shift income between countries and consequently lead to base erosion of the tax base.
In response, countries have established transfer pricing rules that require transactions among related parties to take place at Arm's Length Price (ALP), i.e., the price that unrelated parties would transact at under analogous conditions.
Transfer Pricing in India: Legal Environment
Transfer pricing in India is governed by the Income Tax Act of 1961, subsections 92 to 92F, and the corresponding rules (Rule 10A to Rule 10T) of the Income Tax Rules of 1962. These rules came into operation in the year 2001 and are consistent with the OECD Transfer Pricing Guidelines.
India's transfer pricing law applies to:
- International Transactions between associated enterprises.
- Specified Domestic Transactions (SDTs) of more than ₹20 crores in aggregate.
What is an Associated Enterprise (AE)?
An Associated Enterprise has been clarified under Section 92A of the Income Tax Act. It is treated as an AE if one of the enterprises in the other or using another enterprise in the two enterprises is involved in management, control, or capital.
Examples include:
- One company holds over 26% voting power in the other.
- Common management control.
- Exclusive supply or purchase agreements.
- Typical application of intellectual property.
What is an International Transaction?
As per Section 92B, international transactions between associated enterprises include:
- Sale or purchase of goods or services
- Leasing of tangible or intangible property
- Lending or borrowing of funds
- Cost-sharing schemes
- Business restructuring or reorganization
- Any AE-related transaction involving profit, income, loss, or assets
Arm's Length Price (ALP): The Basic Concept
ALP refers to the price that unrelated parties would transact at under similar conditions. The Indian Income Tax Rules lay down five methods to determine ALP:
- Comparable Uncontrolled Price (CUP) Method
- Resale Price Method (RPM)
- Cost Plus Method (CPM)
- Profit Split Method (PSM)
- Transactional Net Margin Method (TNMM)
Additionally, Other Method (Rule 10AB) is permitted where prescribed methods are not suitable.
Transfer Pricing Documentation Requirements
Indian taxpayers engaging in international transactions or SDTs must maintain Rule 10D-prescribed documentation, which includes:
- Characteristics and nature of transactions
- Business profile of the taxpayer and AEs
- Transfer pricing method applied
- Comparability analysis
- Economic analysis and benchmarking
- Pricing assumptions, strategies, and policies
Documentation is mandatory if international transactions exceed ₹1 crore (₹10 crores for SDTs).
Accountant's Report – Form 3CEB
Taxpayers must file Form 3CEB, certified by a Chartered Accountant, providing details of international and domestic transactions. This must be filed by the due date of the income tax return (31st October for corporates).
Failure attracts a penalty of ₹1,00,000 under Section 271BA.
Transfer Pricing Audit and Assessments
A Transfer Pricing Officer (TPO) can initiate a detailed audit of a taxpayer's arrangements. After examination, ALP may be revised, increasing taxable income. Businesses often hire transfer pricing consultants in Delhi to manage audits and defend compliance.
Penalties for Non-compliance
|
Nature of Default |
Section |
Penalty |
|
Non-compliance with documentation |
271AA |
2% of the amount of each transaction |
|
Not furnishing documents |
271G |
2% of the amount of each transaction |
|
Failure to furnish Form 3CEB |
271BA |
₹1,00,000 |
|
Transfer pricing adjustment |
270A |
50%-200% of tax due on underreported income |
Advance Pricing Agreements (APA)
The APA scheme (Section 92CC) provides certainty by pre-agreeing methods of pricing transactions for up to 5 years. APAs can be unilateral, bilateral, or multilateral, and are highly effective in avoiding disputes.
Safe Harbour Rules (SHR)
Safe Harbour Rules simplify compliance by prescribing acceptable margins for eligible sectors like IT/ITES, KPO, intra-group loans, company guarantees, and R&D services.
New Trends in Transfer Pricing (2024-25 and onwards)
- Increased audits in pharmaceuticals, IT, and e-commerce
- Alignment with OECD BEPS Action Plan, including CbCR reporting
- Faceless GST assessments for transparency
How Legal-N-Tax Advisory Can Help
As one of the leading transfer pricing firms in Delhi, Legal-N-Tax provides end-to-end support, including:
- Economic & functional analysis
- Preparation of Transfer Pricing Report in Delhi
- Documentation & benchmarking
- Filing Form 3CEB
- Handling Transfer Pricing Audit Service in Delhi
- Assistance with APA applications & Safe Harbour filings
- Representation before tax authorities
Our transfer pricing consultants in Delhi ensure that your business remains compliant while optimizing tax efficiency.
Final Considerations
Transfer pricing is not just about compliance — it's a critical element of tax planning. With growing regulatory focus and complex cross-border structures, businesses must maintain accurate documentation and seek expert guidance.
Whether you are an Indian company or an MNC, expert consultants can safeguard your interests and minimize risks.
Looking for trusted Transfer Pricing Consultants in Delhi? Contact Legal-N-Tax today at mail@legalntaxindia.com or +91 9810911733.
