Transfer Pricing in India

The transfer pricing regime applies to both domestic and international transactions that fall above a threshold in terms of deal value.

According to the rules and regulations, income arising from international transactions or specified domestic transactions between Associated Enterprises (AE) should be computed using the arm’s-length price principle.

India’s TP regulations provide a detailed statutory framework for the computation of reasonable, fair, and equitable profits and tax.

Important Tip
‘International transactions’ refers to transactions between two (or more) AEs involving the sale, purchase, or lease of tangible or intangible property, the provision of services or cost-sharing agreements, the lending/borrowing of money, or any other transaction with a bearing on the profits, income, losses, or assets of such enterprises.

Relationships falling under the AE category include direct/indirect participation in the management, control, or capital of an enterprise by another enterprise. They also cover situations in which the same person participates in the management, control, or capital of both enterprises.

For tax purposes, companies are required to record the exchange of goods using the arm’s-length principle, which states that the prices charged by affiliated companies should be equivalent to the prices that would have been charged by an unrelated third party.

Transfer pricing provisions under India’s Income Tax Act

  • Two or more enterprises are associated enterprises if:
    • One of them participates in the management, control, or capital of another; or
    • There is common management, control, or capital exercised by some persons.

Conditions in Which Two Enterprises Will be Deemed Associated Enterprises




Shareholding having at least 26% voting power


Shareholding having at least 26% voting power by the same person


Advancement of the loan - a loan advanced by one enterprise to another enterprise constitutes not less than 51% of the book value of the total assets of the other enterprise


Guarantee of borrowings - one enterprise guarantees not less than 10% of the total borrowings of the other enterprise


Appointment of board of directors - at least 51% of the board of directors or members of the governing board are appointed by the other enterprise


Appointment of board of directors by the same person - at least 51% of the board of directors or members of the governing board are appointed by the same person


Commercial rights of manufacture/ processing


Supply of raw materials/ consumables - at least 90% of the raw materials and consumables required for the manufacture or processing of goods or articles carried out by one enterprise are supplied by the other enterprise


Sale of goods/articles


Control by the same person/relative

  • An international transaction is a transaction between two or more associated enterprises (AEs), and either or both of them are non-residents.
  • Arm-length price refers to a price that is applied to transactions between persons other than AEs in uncontrolled conditions.
  • Five methods prescribed for the computation of arm’s-length price are as follows:

Methods for Determining Arm’s Length Price

Comparable Uncontrolled Price (CUP) Method

The price charged or paid for property transferred or services provided in a comparable uncontrolled transaction + Adjustments

Re-sale Price Method (RPM)

Resale Price charged by the tested party for the goods or services obtained from the AE to the unrelated party minus the normal uncontrolled gross profit and the expenses incurred by the assessee + Adjustments

Cost Plus Method (CPM)

A sum of direct and indirect costs incurred and [normal uncontrolled gross profit + Adjustments]

Profit Split Method (PSM)

Employed in transactions involving the transfer of unique intangibles. The combined net profit of the AEs in a transaction is compared to their relative contribution to arrive at an apportioned transfer price profit

Transaction Net Margin Method (TNMM)

The net profit of the tested party is determined against costs incurred, sales affected assets employed or any other relevant base, and the same is compared against the net profit of comparable determined against the same base + Adjustment.

Other Method

The other method can be any method that considers the price that has been charged or paid or would have been charged or paid for the same or similar uncontrolled transaction with or between unrelated parties under similar circumstances, considering all the relevant facts.

  • Specified domestic transactions (SDT): Transfer pricing regulations are applicable to domestic transactions that fall under domestic pricing only if the aggregate value is more than the threshold limit of INR 200 million (US$2.7 million). Transactions with related domestic parties that qualify as SDT include: 
    • Two or more enterprises are associated enterprises if:

⇒ One of them participates in the management, control, or capital of another; or

⇒ There is common management, control, or capital exercised by some persons.

  • Transactions relating to the transfer of goods or services, such as profit-linked deductions for enterprises engaged in infrastructure development or industrial undertakings, producers and distributors of power, or telecommunication service providers.
  • Transactions between the entity located in a tax holiday area and the one which is situated in a non-tax holiday area in case both are under the same management structure.

Safe harbor rules

The safe harbor provisions provide relief from compliance and litigation, as well as simplify the administrative process. They prescribe the eligibility criteria for taxpayers, eligible international transactions, the target operating margin, procedural aspects, timeline for audit, etc.

Safe harbor rules refer to those legal provisions that reduce or eliminate the liability of the taxpayers given certain conditions are fulfilled, as they provide for circumstances in which a certain category of taxpayers can follow a prescribed set of rules under which transfer prices are automatically accepted by the income tax authorities.

Introduction of a master file and country-by-country reporting (CbCR)

The efforts by OECD’s BEPS project have led to the formulation of proposals to implement the “minimum standards,” including Country-by-Country Reporting (CbCR). Globally, CbCR applies to MNCs with a combined revenue of US$890 million or more. Under the CbCR requirement, large MNCs have to provide an annual return, which breaks down key elements of the financial statements by jurisdiction.

Transfer pricing compliance

All income acquired by a company or associated enterprise by means of any international transaction is calculated at the arm’s-length price.


Transfer Pricing Knowledge You Should Have for Doing Business in India

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The respective methods to calculate the arm’s-length price are applied depending on the nature and type of the transaction, the nature of the group or the association involved, or any other features of the transactions involved. If there are two or more appropriate prices assumed for a certain transaction, the arm’s-length price will be calculated as the average of the prices.

The group or person who does not adhere to these rules is liable to pay the penalties as imposed by the CBDT.

Maintaining TP documentation

Taxpayers are required to maintain information related to international transactions undertaken with AEs. The rules prescribe detailed information and documentation that must be maintained by the taxpayer.

Such requirements can broadly be divided into two parts:

  • Information on the ownership structure of the taxpayer, a group profile, and a business overview of the taxpayer and AEs, including prescribed details such as the nature, terms, quantity, and value of international transactions. The rules also require the taxpayer to document a comprehensive transfer pricing study.
  • Adequate documentation must be maintained to substantiate the information, analysis, and studies documented under the first part of the rule. It also contains a recommended list of such supporting documents, including:
    • Government publications;
    • Reports, studies, technical publications, and market research studies undertaken by reputable institutions;
    • Price publications;
    • Relevant agreements,
    • Contracts, and 
    • Correspondence.

Taxpayers having aggregate international transactions below the prescribed threshold of INR 10 million and specified domestic transactions below the threshold of INR 200 million are relieved from maintaining the prescribed documentation.

It is essential that the documentation maintained should be adequate to substantiate the arm’s-length price of the international transactions or specified domestic transactions.

Companies to which transfer pricing regulations are currently applicable are required to file their tax returns on or before November 30, following the close of the relevant tax year.

The prescribed documents must be maintained for a period of eight years from the end of the relevant tax year and must be updated annually on an ongoing basis. It is also imperative to obtain an independent accountant’s report with respect to all international transactions between AEs, and the same must be submitted by the due date of the tax return filing, on or before November 30.

Transfer Pricing Related Penalties

Nature of default and relevant sections under the Income Tax Act, 1961

Nature of penalty

Section 270A: Under-reporting or misreporting of income

  • A sum equivalent to 50% of the amount of tax payable on under-reported income.
  • A sum equal to 200% of the amount of tax payable on under-reported income where under-reported income is in consequence of any misreporting.
  • Underreporting of income does not include a transfer pricing adjustment where the taxpayer has declared the international transaction, maintained information and documents as prescribed, and disclosed all the material facts relating to the transaction

Section 271AA: Failure to maintain transfer pricing documentation, failure to report the transaction, maintenance or furnishing of incorrect information/document

  • 2% of the value of the international transactions

Section 271BA: Failure to furnish accountant’s report

  • INR 100,000 (US$1346.20)

Section 271G: Failure to furnish documents/report transaction

  • 2% of the value of the international transactions

271GB: Failure to furnish the documents prescribed under Section 286.

  • INR 5,000 (US$67.33) per day up to service of penalty order.
  • INR 50,000 (US$673.30) per day for default beyond the date of service of the penalty order.



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