Transfer Pricing in India — Section 92 to 92F, ALP and Documentation

Transfer pricing refers to the pricing of transactions between related or associated enterprises — typically a parent company and its subsidiaries or group entities. Indian tax law (Sections 92 to 92F of the Income Tax Act) requires that these transactions be conducted at an "Arm's Length Price" (ALP) — the price that would be charged between unrelated parties in similar circumstances. Transfer pricing regulations prevent profit shifting to low-tax jurisdictions.

Who Does Transfer Pricing Apply To?

• International transactions: Between a resident and a non-resident associated enterprise (subsidiary, parent, group company with 26%+ shareholding or effective control)
• Specified domestic transactions (SDT): Between domestic related parties where the aggregate transaction value exceeds ₹20 crore — applies to transactions with specified persons (holding/subsidiary/related) under the Income Tax Act

Arm's Length Price — Methods

• Comparable Uncontrolled Price (CUP): Compare price with similar transactions between unrelated parties
• Resale Price Method (RPM): Based on resale price to independent party minus gross margin
• Cost Plus Method (CPM): Manufacturer's cost plus mark-up earned in comparable transactions
• Profit Split Method (PSM): Split combined profits proportionally by each party's contribution
• Transactional Net Margin Method (TNMM): Compare net profit margin with comparable uncontrolled transactions — most commonly used in India

Documentation Requirements

• Maintain contemporaneous TP documentation before filing ITR
• If international transactions exceed ₹1 crore — obtain and file Form 3CEB (Transfer Pricing Audit Report) from a Chartered Accountant along with ITR
• Master File (Form 3CEAA) — for companies with consolidated group revenue above ₹500 crore
• Country-by-Country Report (Form 3CEAD) — for Indian MNEs with consolidated revenue above ₹5,500 crore

Advance Pricing Agreement (APA)

Businesses can enter into an APA with the CBDT to pre-agree on the transfer pricing methodology for future transactions — providing certainty for 5 years (extendable). Bilateral APAs are available for transactions involving DTAA countries.

Conclusion

Transfer pricing compliance requires selecting the right ALP method, maintaining proper documentation and obtaining Form 3CEB — all before filing the tax return. SPOTON provides transfer pricing advisory, benchmarking and Form 3CEB services for companies with international and domestic related-party transactions. Contact us for expert transfer pricing compliance.