Transfer pricing law in India applies to all the international transactions between the associated / related enterprises and domestic transactions which are above a threshold in terms of value. Transfer Pricing was introduced through inserting Section(s) 92A-F and relevant Rule(s) 10A-E of the Income Tax Rules 1962.
It ensures that the transaction between ‘related’ parties is at a price that would be comparable if the transaction was occurring between unrelated parties.
The following sections of the Income Tax Act, 1961 apply to international transactions in terms of transfer pricing.
Section 92 of the Income Tax Act, 1961 – Computation of income from international transactions having regard to arm’s length price.
This section states that any international or specified domestic transaction between associated enterprises which has been mutually agreed and undertaken for the purpose of allocation or apportionment of any cost or expense incurred or to be incurred for a benefit, service or facility undertaken or to be undertaken by one or more of the enterprises, then the cost or expense allocated, must be contributed having regard to the arm’s length price of such benefit, service or facility.
Section 92B of the Income Tax Act, 1961 – Meaning of international transaction
This section defines international transaction(s) for the purpose of this Section and the Section(s) 92, 92C, 92D and 92E as a transaction between two or more associated enterprises, wherein either one or both the enterprises are non-residents. (Non-resident means a body corporate whose control and management lies outside India)
The nature of transaction can be purchase, sale or lease of tangible or intangible assets, or provision of services, or lending or borrowing money, or any other transaction having an effect on the profits, income, losses or assets of such enterprises.
Section 92A of the Income Tax Act, 1961 – Meaning of Associated Enterprises
For the purpose of Sections 92, 2B, 92C, 92D, 92E, and 92F the term associated enterprises in relation to another enterprise shall mean, an enterprise-
For the purpose of this section, two enterprises will be deemed to be associated enterprises if any time during the previous year at any time-
A report from an accountant has to be furnished by persons who are entering into an international transaction or a specified domestic transaction. A report from an accountant in a prescribed form, duly signed and verified by the accountant must be obtained before the specified date by any person entering into an international transaction or specified domestic transaction in the previous year. The audit is applicable to both international and specified domestic transactions. Form 3CEB must be filed.
The due date for complying with Form 3CEB requirement is 31st October of the Assessment Year and the due date of ITR filing for persons who are subjected to comply with Form 3CEB is 30th November of the Assessment Year.
Arms length is a price at which transaction would have taken place had there been no relation / association between the transacting parties.
Various methods have been prescribed for determination of arms length price between the associated enterprises such as:
Specified Domestic Transaction are those transactions as defined in Section 92BA and where the aggregate of such transactions entered into by the taxpayer in A year exceeds INR 20 crores.
So, transfer pricing regulations are applicable only to those domestic transactions which are in excess of INR 20 crores.