Legal Reference
Sections 304-315 (transfer pricing), Section 311 (APA), Section 316 (CbCR), Safe Harbour Rules, ITA 2025 | Corresponds to Sections 92-92F and 92CC of ITA 1961
1. What is Transfer Pricing?
Transfer pricing rules under ITA 2025 require that transactions between related parties in different countries (international related-party transactions, or "international transactions") are priced at arm length — i.e., at the price that unrelated parties would agree to in similar circumstances. The objective is to prevent profit shifting to lower-tax jurisdictions through artificially mispriced transactions.
2. Who is Covered?
Transfer pricing applies to:
- Indian company with a foreign associated enterprise (AE) — any transaction between them
- Foreign company with an Indian AE
- Two Indian entities where one has a foreign AE and the domestic transaction affects international tax
- Associated enterprise (AE) = entity with more than 26% shareholding, loan exceeding 51% of book value, or other specified control criteria
3. Transfer Pricing Methods
| Method | Full Name | Best Used For |
|---|
| CUP | Comparable Uncontrolled Price | Commodity transactions, standard products |
| RPM | Resale Price Method | Distribution companies buying from AE |
| CPM | Cost Plus Method | Manufacturers/service providers selling to AE |
| TNMM | Transactional Net Margin Method | Most widely used — services, distribution |
| PSM | Profit Split Method | Unique intangibles, highly integrated transactions |
4. Advance Pricing Agreement (APA)
An APA pre-determines the transfer pricing methodology and arm length price for related-party transactions for 3-5 years. Types:
- Unilateral APA: India only — between taxpayer and CBDT
- Bilateral APA: India + treaty partner country — both tax authorities agree
- Multilateral APA: Multiple countries involved
Rollback: APA can be applied to 4 preceding years (bilateral/unilateral). Application: Form 3CED with Rs 20L application fee (large cases). India APA programme is highly active.
5. Country-by-Country Reporting (CbCR)
MNE groups with consolidated group revenue above Rs 5,500 crore must file CbCR (Section 316) — reporting country-wise revenue, profit, employees, tax paid, and assets. This allows tax authorities globally to identify profit-shifting. Master File and Local File are also required. India participates in automatic CbCR exchange with 100+ countries.
6. Penalty for TP Adjustment
If the AO makes a transfer pricing adjustment (determines ALP is different from the price used), penalties apply:
- 100% of the additional tax on the adjustment — if books were maintained but TP was wrong
- 200-300% if no TP documentation maintained
7. Why TaxClue
Transfer pricing documentation — benchmarking, functional analysis, Form 3CEB — is complex and penalty-heavy. TaxClue provides TP documentation, APA applications, and CbCR filing. Contact us for TP advisory under ITA 2025.
Disclaimer
This article is for general informational and educational purposes only. It does not constitute legal, financial, or professional tax advice. Readers are advised to consult a qualified Chartered Accountant or tax professional before making any decisions. TaxClue Consultech Pvt Ltd accepts no liability. All case studies and examples in this article are illustrative only and do not represent actual persons or transactions.
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❓ Frequently Asked Questions
What is transfer pricing?
Transfer pricing under ITA 2025 requires that transactions between related parties in different countries (international transactions) are priced at arm length — the price that independent parties would agree to. Indian companies with foreign associated enterprises must document that their pricing (of goods, services, royalties, loans) is at arm length. The AO can adjust income if the price used deviates from arm length — resulting in additional tax and penalties.
What is an Advance Pricing Agreement?
An APA under Sections 311-315 of ITA 2025 pre-determines the arm length price or methodology for specified related-party transactions for 3-5 years — providing certainty. Unilateral APA involves India only; bilateral involves India and the treaty partner country. The APA can also be applied to 4 preceding years (rollback). Application is via Form 3CED with CBDT. India has one of the most active APA programmes globally.
What is TNMM?
TNMM (Transactional Net Margin Method) is the most widely used transfer pricing method in India. It compares the net profit margin earned on a transaction by the tested party (typically the Indian entity) with the net margin earned by comparable uncontrolled companies. It is flexible and works for services, manufacturing, and distribution. TNMM is the default method for IT/ITeS companies and other service providers.
What is CbCR?
Country-by-Country Reporting (CbCR) under Section 316 of ITA 2025 is mandatory for MNE groups with consolidated global revenue above Rs 5,500 crore. The filing (Form 3CEAD) reports country-wise: revenue, profit before tax, income tax paid and accrued, stated capital, accumulated earnings, number of employees, and tangible assets. India exchanges CbCR data automatically with 100+ countries — allowing global tax authorities to identify profit-shifting patterns.
What is the penalty for incorrect transfer pricing?
If the Assessing Officer makes a transfer pricing adjustment, penalty of 100% of the additional tax on the adjustment is levied — when the taxpayer maintained TP documentation but the price was found to be non-arm length. If TP documentation was not maintained at all (Form 3CEB not filed, benchmarking not done), penalty rises to 200-300% of the tax on the adjusted amount. Always maintain contemporaneous TP documentation before filing ITR.
