Transfer Pricing

If it has international transactions with associated enterprises, the accountant's report is required regardless of size. Detailed documentation applies above the prescribed transaction limit.

Broadly, two enterprises are associated when one participates in the management, control or capital of the other, or the same persons participate in both. Specific tests include holding 26% or more of voting power, providing loans of 51% or more of the other's assets, or appointing more than half its board.

The law prescribes the comparable uncontrolled price method, resale price method, cost plus method, profit split method, transactional net margin method and other methods. The most suitable method is chosen for each transaction; the transactional net margin method is the most commonly used in India.

Form 3CEB is the accountant's report certifying international and specified domestic transactions. It is filed one month before the due date of the income tax return for transfer pricing cases. Under the Income-tax Act, 2025 the form is renumbered, but the requirement continues.

When the aggregate value of international transactions in a year exceeds ₹1 crore. Below that, the accountant's report is still required, but the full documentation set is not, although the pricing must still be supportable.

Failure to keep or furnish the required documentation can attract a penalty of 2% of the value of each international transaction, and failure to file the accountant's report a penalty of ₹1 lakh. Adjustments made on assessment also carry tax, interest and possible under-reporting penalties.

Large multinational groups file a master file describing their global business when consolidated group revenue exceeds ₹500 crore and the Indian entity's international transactions cross specified limits. Groups with consolidated revenue of ₹6,400 crore or more also file a country-by-country report or notify where it is filed.

Certain transactions between related domestic parties, mainly where one of them enjoys a profit-linked tax holiday or a concessional rate, which are covered by transfer pricing if their aggregate value exceeds ₹20 crore in a year.

Safe harbour rules let eligible taxpayers in specified activities, such as IT services or low-value intra-group services, accept prescribed margins and avoid disputes. An advance pricing agreement is negotiated with the tax department, alone or with the other country, and fixes the method or price for up to five future years, with a possible rollback to earlier years.

Yes. Recharges of salaries, software, insurance and other costs between group companies are international transactions. They are usually acceptable at cost when they are genuine pass-through costs, but they must be documented with agreements and evidence of the benefit received.

Courts have held that issuing shares to a non-resident group company does not give rise to income, so no transfer pricing adjustment arises on the share premium. The transaction is still reported in the accountant's report, and FEMA pricing rules apply to the issue.

Interest paid on loans from associated enterprises must be at an arm's length rate. In addition, interest above ₹1 crore paid to non-resident associated enterprises is deductible only up to 30% of the Indian company's EBITDA, with the excess carried forward.

If a transfer pricing adjustment above ₹1 crore is made or accepted, the excess money is expected to be brought back to India within 90 days. If it is not, it is treated as an advance to the associated enterprise and notional interest is taxed in India.

Transactions between an Indian branch or project office and its foreign head office, and with other group entities, can be international transactions. A liaison office does not earn income in India but still reports its activities under FEMA.

Through a benchmarking study: identifying comparable independent companies or transactions from databases, comparing margins or prices, and documenting why the comparables and method fit. The study is updated each year with current data.