Transfer Pricing — Methods and Documentation

Transfer Pricing explained: this guide covers what it 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.

Transfer pricing rules require transactions between associated enterprises to be priced at arm’s length — the price unrelated parties would agree. India prescribes five methods (CUP, RPM, CPM, PSM, TNMM), an accountant’s report in Form 3CEB, and three-tier documentation for larger groups.

Overview

Multinational groups can shift profit by mispricing intra-group dealings. Transfer pricing (TP) law counters this by requiring the arm’s-length price for every international transaction (and specified domestic transaction) between associated enterprises. The framework — originally sections 92 to 92F of the 1961 Act with Rules 10A to 10E, carried into the Income-tax Act, 2025 — combines a pricing standard with a documentation and reporting regime.

Associated Enterprises and International Transactions

Two enterprises are "associated" where one participates in the management, control or capital of the other, or both are under common control — tested through shareholding (26% voting power), loans, guarantees, dependence on know-how, or other prescribed links. An "international transaction" is a cross-border dealing between them in goods, services, intangibles, loans, guarantees or cost-sharing.

The Five Methods

There is also a residual "other method" using the price that has been or would have been charged. No method has strict priority; the most appropriate method is chosen for each class of transaction based on comparability, availability of data and functional analysis (functions, assets, risks).

Arm’s-Length Range

Where a data set of comparables is available, an arm’s-length range (commonly the 35th to 65th percentile) is constructed. If the taxpayer’s tested price or margin falls within the range, it is accepted. If it falls outside, the median of the range is generally taken as the arm’s-length price and an adjustment made to income.

Documentation — Three Tiers

• Local TP study: contemporaneous documentation (ownership, FAR analysis, method selection, comparables) required where aggregate international transactions exceed ₹1 crore. Retain for the prescribed period (generally 8 years).
• Master File (Form 3CEAA): group-level information, required above notified consolidated-revenue and transaction thresholds.
• Country-by-Country Report (Form 3CEAD): for large groups with consolidated revenue above the threshold (around ₹6,400 crore).

Form 3CEB and Deadlines

Every person entering an international or specified domestic transaction must obtain and file Form 3CEB, an accountant’s report, generally by 31 October. The main return due date is extended to 30 November for TP cases. Failure to maintain documentation or file Form 3CEB attracts specific penalties.

Worked Example

An Indian captive IT-services unit bills its US parent cost plus a mark-up. Using TNMM with comparable independent Indian IT firms, suppose the arm’s-length net margin range is 12%–18% and the median is 15%. If the captive earned only a 9% margin, an upward adjustment brings its margin to 15%, increasing taxable profit accordingly.

Common Pitfalls

• Choosing a method to fit the answer instead of the functional analysis.
• Weak or non-contemporaneous documentation, which shifts the burden onto the taxpayer.
• Ignoring the specified-domestic-transaction net once thresholds are crossed.

Related Guides

• Master File and CbCR
• Advance Pricing Agreement (APA)
• More Guides