Transfer Pricing in India: Key Rules & Compliance Guide

A Complete Guide to Transfer Pricing in India

Globalization has made it easier for companies to expand operations across borders. But with that comes a crucial tax aspecttransfer pricing. For businesses with international dealings or transactions with associated enterprises, understanding transfer pricing in India is not just importantits essential to stay compliant and avoid hefty penalties.

This blog walks you through the key elements, compliance requirements, and strategies to manage transfer pricing risks effectively.

What is Transfer Pricing?

Transfer pricing refers to the pricing of goods, services, or intangibles transferred between associated enterprises (AEs). These enterprises may be located within or outside India. The main objective of transfer pricing regulations is to ensure that transactions between AEs are conducted at arms length, meaning the price should be similar to what unrelated parties would charge under similar circumstances.

Why Does Transfer Pricing Matter in India?

India has a robust transfer pricing framework to curb tax avoidance and profit shifting. The Income Tax Act, 1961, especially Sections 92 to 92F, outlines the legal provisions. The Central Board of Direct Taxes (CBDT) also issues regular guidance.

Key reasons why businesses must comply with transfer pricing laws in India:

• To avoid penalties for under-reporting or mispricing

• To ensure fair allocation of income and taxes

• To strengthen international tax transparency

• To safeguard the reputation of the business

Who is Subject to Transfer Pricing Regulations?

Transfer pricing laws apply to both international and specified domestic transactions. These include:

• Sale or purchase of goods and services with foreign subsidiaries

• Lending or borrowing of funds with AEs

• Use or transfer of intangibles like patents, trademarks, etc.

• Cost-sharing arrangements

Even domestic transactions exceeding ?20 crore with related parties (under certain specified conditions) fall under the purview of transfer pricing rules.

Key Compliance Requirements

Businesses in India dealing with AEs need to follow several compliance obligations under the Income Tax Act:

1. Maintaining Transfer Pricing Documentation
   A company must maintain detailed records supporting the nature and arm's length pricing of transactions. This includes:

   • Functional analysis

   • Economic analysis

   • Comparability study

   • Selection of appropriate method

2. Filing Form 3CEB
   This is a mandatory disclosure form certified by a Chartered Accountant, filed along with the income tax return.

3. Master File & Country-by-Country Report (CbCR)
   For larger multinational groups, the Master File (Form 3CEAA) and CbCR (Form 3CEAD) are essential under BEPS Action Plan 13 guidelines.

Transfer Pricing Methods in India

The law allows businesses to choose from five internationally recognized methods to justify arms length pricing:

• Comparable Uncontrolled Price (CUP) Method

• Resale Price Method (RPM)

• Cost Plus Method (CPM)

• Profit Split Method (PSM)

• Transactional Net Margin Method (TNMM)

The most appropriate method depends on the transaction type, availability of data, and business model.

Common Challenges Faced by Businesses

Despite clear guidelines, many companies face issues such as:

• Difficulty in selecting the right method

• Inadequate documentation

• Improper benchmarking

• Transfer pricing adjustments leading to tax liabilities

• Facing audits and notices from tax authorities

To manage these risks, proactive planning and expert advisory are key.

How Enterslice Can Help

With years of experience in cross-border taxation, Enterslice offers end-to-end assistance for transfer pricing in India. From identifying related party transactions to preparing robust documentation and defending your case during audits, our team ensures that you stay compliant and minimize risks.

Whether you're a startup scaling internationally or an established MNC, our tailored solutions cover everything from method selection to global reporting needs.

Final Thoughts

In a globally connected economy, transfer pricing is more than a tax compliance issueit's a strategic financial tool. With regulations tightening, businesses in India must ensure they adhere to arms length principles and maintain proper documentation.

Consulting experts like Enterslice can help you navigate the complexities of transfer pricing in India and build a compliant, audit-ready framework.

FAQs

1. What is the penalty for non-compliance with transfer pricing regulations in India?
Penalties can range from 2% of the value of the transaction to ?1,00,000 for failing to furnish Form 3CEB or documentation.

2. When is Form 3CEB required?
Form 3CEB is required when an Indian company has international or specified domestic transactions with associated enterprises during the financial year.

3. Can domestic transactions be subject to transfer pricing in India?
Yes, if the value exceeds ?20 crore and meets specified criteria under Section 92BA, domestic transactions may be covered.

4. What is the arms length principle?
It means that transactions between related parties should be priced similarly to what independent parties would agree to under similar conditions.