Transfer pricing (TP) rules under the Income Tax Act 2025 ensure that transactions between associated enterprises (AEs) in different countries are priced at arm's length — i.e., as if the parties were unrelated. India's TP framework applies to international transactions as well as specified domestic transactions above prescribed thresholds.
Applicability
- International transactions: Between AEs where at least one is a non-resident. No monetary threshold — applies to every transaction.
- Specified domestic transactions: Between domestic AEs if aggregate exceeds Rs. 20 crore in a Tax Year.
Who are Associated Enterprises?
Entities are AEs if one enterprise participates directly/indirectly in the management, control, or capital of the other. Key indicators: 26%+ shareholding, common directors, financing of 51%+ borrowings, dependence for key materials.
Methods to Determine Arm's Length Price
| Method | Description | Best Used For |
|---|---|---|
| CUP (Comparable Uncontrolled Price) | Compare price with unrelated transactions | Commodity transactions, simple goods |
| RPM (Resale Price Method) | Backward from resale price minus margin | Distribution/trading |
| CPM (Cost Plus Method) | Cost plus appropriate markup | Manufacturing, services |
| PSM (Profit Split Method) | Split combined profit per functions/assets | Highly integrated transactions |
| TNMM (Transactional Net Margin Method) | Compare net profit margins with comparables | Most common — services, software |
Documentation Requirements
Entities with international transactions must maintain contemporaneous documentation including:
- Profile of the group, business description, industry analysis
- Description of each international transaction with financials
- Method applied and comparable analysis (benchmarking study)
- Economic analysis supporting the arm's length range
Form 3CEB — Transfer Pricing Report
A Chartered Accountant must certify the TP report in Form 3CEB covering all international transactions and specified domestic transactions. Filing deadline: 31 October of the Tax Year (along with ITR for TP cases).
Safe Harbour Rules
CBDT has prescribed Safe Harbour margins — if an entity declares profits within these margins, the TP adjustment is deemed accepted without scrutiny:
- Software development services: 17-22% operating margin (on costs)
- IT-enabled services: 17-18% operating margin
- KPO services: 18-24%
- Intragroup loans in INR: SBI MCLR + spread
Advance Pricing Agreement (APA)
APAs allow taxpayers to agree in advance with CBDT on the TP method and price for a specific transaction. APAs cover 5 years forward and can include a rollback of 4 prior years. India has signed 300+ APAs, providing certainty to multinationals.
TP Penalties Under ITA 2025
- Concealment of income due to TP adjustment: 100%-300% of tax on adjusted income
- Failure to maintain documentation: 2% of international transaction value
- Failure to file Form 3CEB: Rs. 1 lakh + 2% per transaction
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