Transfer pricing law in India governs transactions between related parties, especially when those parties are located in different tax jurisdictions, to ensure that the pricing of goods, services, and intangibles exchanged between them reflects the market value, i.e., the arm’s length price. The law’s primary objective is to prevent the shifting of profits to low-tax jurisdictions and ensure that income is reported where value is created.
Transfer pricing regulations in India are part of the Income Tax Act, 1961 and are governed under Section 92 to 92F. Additionally, detailed rules are provided in Rule 10A to 10T of the Income Tax Rules.
Key features of transfer pricing law in India:
1. Arm’s Length Principle: All transactions between related parties must be conducted at a price that would be charged if the transactions were with an unrelated party, under similar conditions.
2. Covered transactions: Transfer pricing laws apply to transactions involving the exchange of goods, services, intangibles, loans, and guarantees between associated enterprises, whether they are domestic or international.
3. Transfer pricing methods: The law provides five methods for determining the arm’s length price, including the Comparable Uncontrolled Price (CUP) method, Resale Price Method (RPM), Cost Plus Method (CPM), Profit Split Method (PSM), and Transactional Net Margin Method (TNMM).
Entities Covered Under Transfer Pricing Law in India:
1. International Transactions: All cross-border transactions between associated enterprises, as defined under the Income Tax Act. An associated enterprise could be a subsidiary, holding company, or any other entity in which one enterprise holds significant control (directly or indirectly) over another.
Examples of international transactions:
• Transfer of tangible goods.
• Services provided.
• Financial transactions, including loans, advances, or guarantees.
• Transfer of intangibles (patents, trademarks, etc.).
2. Specified Domestic Transactions: Transfer pricing regulations were extended to certain domestic transactions in India under Section 92BA, effective from April 1, 2013. These include transactions between related parties within India, where the aggregate value of such transactions exceeds ₹20 crore (₹200 million).
Covered entities include:
• Transactions between related parties, as defined under Section 40A(2)(b) of the Income Tax Act.
• Any business where profit-linked deductions are claimed under Sections like 80-IA.
3. Associated Enterprises: Two enterprises are considered associated if:
• One enterprise holds a significant (usually 26% or more) interest in the other, directly or indirectly.
• One enterprise exercises control over the other.
• They share significant control over a third enterprise, or a third party holds substantial control over both.
4. Disclosures and Documentation: Taxpayers involved in international or specified domestic transactions must maintain comprehensive documentation substantiating the arm’s length price of their transactions. This includes:
• Nature of the transactions.
• Financial analysis of comparable transactions.
• Transfer pricing study reports.
5. Penalties: Non-compliance with transfer pricing regulations can lead to severe penalties, including a penalty of 2% of the value of international transactions for failure to maintain proper documentation.
Overall, transfer pricing law in India aims to ensure that multinational enterprises and related entities within India do not manipulate prices in a way that erodes the Indian tax base.
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