Transfer Pricing in India: Concepts, Compliance, and Taxation
Transfer pricing shapes how multinational companies price transactions across their group
companies. It comes into play for international dealings— goods,
services, loans, or even licensing—between associated businesses. India’s transfer
pricing rules also extend to some domestic transactions between related
parties, mainly when tax incentives could be exploited. Getting transfer pricing
right is not just about tax
savings; it’s central
to avoiding big penalties, reducing
audit risks, and ensuring
compliance. India’s law has grown stricter, and so have the consequences for ignoring it.
Core Principles and Regulatory Framework of Indian Transfer Pricing
The Indian
transfer pricing regime
is rooted in the arm’s-length principle. This means associated enterprises should price their transactions
as if they were unrelated, acting independently in the open market. Introduced in 2001, India’s
rules target both cross-border dealings and some high-value domestic
transactions where profit shifting might occur.
Any Indian
business engaging with foreign group
companies for goods, services,
loans, or intangible property needs to comply
with this principle. After amendments,
some large domestic related-party deals also fall under these rules if values exceed
?200 million. For internationals, the threshold is a modest ?10 million.
Arm's-Length Principle and Associated Enterprises
The arm's-length principle underpins India’s
transfer pricing law. In practice,
this means MNCs should
use prices that ordinary, unrelated buyers and sellers
would agree on.
Associated enterprises are group firms under common control, managed or owned jointly—either directly or indirectly. Indian law sets out several tests to decide ‘association’: direct or indirect ownership of 26% or more shares, participation in management, or family connections, among others. If these thresholds are crossed, transactions are regulated.
Permitted Transfer Pricing Methods in India
India allows six methods
to pin down the right price for each transaction:
1. Comparable Uncontrolled Price (CUP): Compares the price charged in a controlled deal to similar market transactions between unrelated parties.
2. Resale Price Method: Starts from the resale price for goods
or services, then works backwards.
3.
Cost Plus Method:
Adds a suitable mark-up
to the supplier’s direct and indirect costs.
4. Profit Split Method: Allocates combined profit among associated firms, based on how
much value each party adds.
5. Transactional Net Margin Method (TNMM): Looks at net profit margins earned in comparable uncontrolled
transactions.
6. Other Method:
Allows for a method justified by the facts, provided it respects
arm’s-length standards.
There’s no fixed order; the most suitable method must fit the facts and the data available.
Documentation and Reporting Requirements
Indian
transfer pricing law demands robust, contemporaneous
documentation for every applicable transaction. This shows the tax office
how prices were set and that
the methods used are sound.
Key requirements:
·
Local File : These focus on the financials and intercompany transactions of your local entity
·
Master File : These provide
comprehensive information about
your multinational enterprise's global operations.
·
Country-by-Country Report (CbCR): These offer an overview of income allocation, taxes
paid, and business
activities across jurisdictions. It is needed for groups with annual
revenue over ?6.4 billion (about
US$83 million)
·
Form 3CEB: This form is mandatory for reporting intercompany transactions in India. It must be certified by a Chartered
Accountant and submitted by the due date for
filing the annual tax return.
Missing these deadlines, or providing incomplete information, can trigger swift financial penalties.
Stay Tuned For Part 2
-- Team ELPL