Introduction: Making Sense of the “Transfer Pricing” Puzzle                      

What is Transfer Pricing, Really?

In plain terms, transfer pricing refers to the pricing of goods, services, or intangibles transferred between associated enterprises (AEs) situated in different tax jurisdictions.

Let’s say your Indian subsidiary builds software for your U.S. parent company. When the Indian entity charges the U.S. company for its services, that’s a related-party international transaction. The price charged is called the transfer price.

Now here’s the twist: The Indian tax authorities want to ensure that this price is arm’s length—meaning it should be the same as if the Indian subsidiary had been working with an unrelated third party.

Why Transfer Pricing Matters (Especially in India)

• Revenue Protection: The government wants its fair share of taxes and wants to prevent profit shifting to low-tax jurisdictions.

• Global Growth: With India being a global outsourcing hub, cross-border related transactions are frequent.

• Foreign Subsidiaries: Increasing foreign direct investment (FDI) means more companies face scrutiny under Indian transfer pricing laws.

In short, if your business has a foreign parent or sister concern and engages in cross-border dealings, you need to be transfer-pricing compliant.

The Legal Backbone: Transfer Pricing Regulations in India

Applicable Law

Transfer pricing in India is governed by Sections 92 to 92F of the Income Tax Act, 1961, and detailed rules have been framed under Income Tax Rules 10A to 10E.

Who Needs to Comply?

Any Indian entity (like a foreign subsidiary) engaged in an international transaction with its associated enterprise is covered. Typical transactions include:

• Sale or purchase of goods

• Provision of services

• Interest on intercompany loans

• Use of intellectual property

• Cost-sharing arrangements

• Management fees

Determining the “Right” Transfer Price: The Arm’s Length Principle (ALP)

The golden rule in transfer pricing is the Arm’s Length Principle—the price should be what unrelated parties would have charged in a similar transaction under similar conditions.

To determine ALP, Indian law provides five methods:

1. Comparable Uncontrolled Price (CUP) Method

2. Resale Price Method (RPM)

3. Cost Plus Method (CPM)

4. Profit Split Method (PSM)

5. Transactional Net Margin Method (TNMM)

For software, IT, and BPO services (which most foreign subsidiaries in India deal with), TNMM is the most commonly used.

Transfer Pricing Documentation: The Must-Have Shield

Indian regulations mandate detailed documentation under Rule 10D. This includes:

• Profile of the group and the Indian entity

• Nature and terms of the international transactions

• Functional analysis (Functions, Assets, Risks - FAR)

• Economic analysis and benchmarking study

• Selection and justification of the most appropriate method

The documentation must be prepared contemporaneously—by the due date of filing the return of income (typically 30th November for companies subject to TP audit).

Transfer Pricing Audit & Form 3CEB

All Indian companies entering into international transactions must get their accounts audited under Form 3CEB, certified by a Chartered Accountant.

Form 3CEB is a statement containing the nature, value, and method used for determining ALP. It is submitted electronically along with the income tax return.

Penalties for Non-Compliance

Here’s where things get serious. Non-compliance can attract stiff penalties:

Advanced Pricing Agreements (APA): A Smart Strategic Tool

To avoid future disputes, Indian law allows businesses to enter into Advance Pricing Agreements (APA) with the tax authorities. You can agree in advance on the pricing methodology for up to 5 years, with rollback options for 4 previous years.

APAs come in three flavors:

• Unilateral (with Indian tax authority)

• Bilateral (with foreign authority)

• Multilateral (involving more than two jurisdictions)

Common Challenges for Foreign Subsidiaries

• Benchmarking comparable companies in Indian markets

• Currency fluctuation impacts on pricing

• Justifying cost allocations (e.g., management fees)

• Transfer of intangibles (like software licenses or trademarks)

• Balancing global and Indian tax compliance

That’s where a specialized CA firm like TAXAJ can step in—to help structure transactions, ensure robust documentation, and handle audits or disputes.

Conclusion: Transfer Pricing is Not Just a Compliance Tick Box

Transfer pricing is strategic. Done right, it not only protects you from legal hassles but also aligns your global operations. For foreign subsidiaries in India, getting transfer pricing right means better cash flow management, tax optimization, and peace of mind.

Created & Posted by Sony Garg

Accounts & Finance Executive at TAXAJ

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