What is Transfer Pricing?
Transfer Pricing refers to the pricing of goods, services, and intangibles transferred between related entities (associated enterprises) within a multinational enterprise group. Tax authorities scrutinize these transactions to ensure they are conducted at arm's length, meaning the prices are similar to what would be charged between unrelated parties.
Objectives of Transfer Pricing Regulations
- Prevent Profit Shifting: Stop MNEs from shifting profits to low-tax jurisdictions
- Ensure Fair Taxation: Each jurisdiction gets fair share of tax revenue
- Arm's Length Principle: Transactions should reflect market conditions
- Combat Base Erosion: Prevent artificial reduction of taxable base
- Transparency: Increase visibility of cross-border transactions
Arm's Length Principle
The cornerstone of transfer pricing is the Arm's Length Principle, which states that the price charged in a controlled transaction (between related parties) should be the same as the price charged in a comparable uncontrolled transaction (between unrelated parties).
Applicability and Thresholds
| Type of Transaction | Threshold (per FY) |
|---|---|
| International Transaction | > ₹1 crore (aggregate) |
| Specified Domestic Transaction | > ₹20 crores (aggregate) |
| Master File | Consolidated revenue > ₹500 crores |
| CbCR | Consolidated revenue > ₹6,500 crores |
Transfer Pricing Documentation
The Income Tax Act mandates three levels of TP documentation: Local File, Master File, and Country-by-Country Report (CbCR).
Local File
- • Entity-specific information
- • Description of local operations
- • Controlled transactions details
- • Functional analysis (FAR)
- • Benchmarking study
- • TP method selection
Master File
- • Group organizational structure
- • Group business description
- • Intangible assets overview
- • Financial activities
- • Group TP policies
- • Financial and tax positions
CbCR
- • Global revenue by jurisdiction
- • Profit before tax by country
- • Income tax paid
- • Number of employees
- • Capital and assets
- • Business activities
Benchmarking Methods
The OECD and Indian TP regulations prescribe several methods to determine arm's length price.
| Method | Best Suited For |
|---|---|
| CUP (Comparable Uncontrolled Price) | Product transactions with identical/similar goods |
| RPM (Resale Price Method) | Distributors/resellers who add limited value |
| CP (Cost Plus Method) | Manufacturing, assembly, service providers |
| TNMM (Transactional Net Margin) | Most commonly used; services, complex transactions |
| PSM (Profit Split Method) | Highly integrated operations, joint IP development |
Form 3CEB and Accountant Report
Every person who enters into international transactions or specified domestic transactions must obtain a report from a Chartered Accountant in Form 3CEB.
Form 3CEB Key Information
- • Description of each international transaction
- • Names of associated enterprises
- • Nature and value of transactions
- • Transfer pricing method applied
- • Arm's length price determination
- • CA's opinion on arm's length compliance
Due Date: November 30 (extended from October 31) of the assessment year.
Transfer Pricing Audit Process
Case Selection
Cases selected based on risk parameters, high-value transactions, or random selection.
Notice u/s 92CA
Transfer Pricing Officer (TPO) issues notice requiring submission of information.
Submission of Documents
Taxpayer submits TP documentation, financials, and responses to queries.
TP Adjustment Order
TPO determines arm's length price and proposes adjustment if required.
DRP/Appeal
Taxpayer can approach Dispute Resolution Panel or file appeal before ITAT.
Transfer Pricing Adjustments
If the TPO determines that the transaction price is not at arm's length, an adjustment is made, leading to additional tax liability.
Consequences of TP Adjustment
- • Additional taxable income
- • Tax at 30% (plus surcharge and cess) on adjusted amount
- • Interest u/s 234B and 234C
- • Penalty u/s 271G (for failure to furnish documentation)
- • Secondary adjustment provisions may apply
Frequently Asked Questions
What is Safe Harbour in Transfer Pricing?
Safe Harbour provisions provide predetermined margins/conditions under which transactions are accepted as arm's length. If taxpayers meet these conditions, they are not subject to TP audit for those transactions.
What is an Advance Pricing Agreement (APA)?
APA is an agreement between taxpayer and tax authority determining TP methodology for future transactions. Provides certainty and avoids disputes. Can be unilateral, bilateral, or multilateral.
Are intra-group loans covered under TP?
Yes, international transactions involving loans, guarantees, or advances between associated enterprises are covered under TP regulations and require benchmarking for interest rates.