Transfer Pricing Under ITA explained: this guide covers what Transfer Pricing Under ITA means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
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.