Transfer pricing in India refers to the process of setting prices for transactions involving goods, services, or intangible assets between companies belonging to the same group, such as a parent company and its subsidiaries. Its main purpose is to ensure that all intercompany transactions are carried out at reasonable and fair prices, costs and profits are appropriately allocated, and applicable tax regulations are followed.

Main Points:

• Ensure fair pricing between related companies.
• Allocate costs and profits appropriately within the group.
• Follow the Arm’s Length Principle (ALP), which means pricing transactions as if they were between independent companies.
• Maintain proper records and comply with tax regulations.

Transfer Pricing Rule in India

Transfer pricing in India is regulated under Chapter X (Sections 161–173) of the Income Tax Act, 2025, effective from 1 April 2026, which replaced the relevant transfer pricing provisions of the Income Tax Act, 1961 (Sections 92–92F).

Section 161 as per the Income Tax Act

(1) Any income arising from an international transaction or a specified domestic transaction shall be determined having regard to the arm’s length price.

(2) Any allowance for any expense or interest arising from an international transaction or a specified domestic transaction shall also be determined having regard to the arm’s length price.

(3) If in an international transaction or specified domestic transaction, two or more associated enterprises enter into a mutual agreement or arrangement for:
(a) Allocation or apportionment of any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises; or
(b) Any contribution to any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises, the cost or expense allocated or apportioned to, or contributed by any such enterprise, shall be determined having regard to the arm’s length price of such benefit, service or facility.

(4) The provisions of this section shall not apply if the determination under subsection (1) or (2) or (3) has the effect of reducing the income chargeable to tax or increasing the loss, computed on the basis of entries made in the books of account in respect of the tax year in which the international transaction or specified domestic transaction was entered.

Transfer Pricing Compliance in India

International Transactions: Applies to any cross-border transaction between associated enterprises, regardless of turnover or profit size, as long as an international transaction exists.

Specified Domestic Transactions (SDTs): Applies if the aggregate value of specified domestic transactions exceeds INR 200 million (₹20 crore)

Associated Enterprises (AEs): Defined by relationships involving control, voting power (26% or more), common management, or financial/commercial dependence.

Frequently Asked Questions

Q. What is Transfer Pricing?

Transfer pricing means deciding the prices of goods, services, intellectual property or loans exchanged between related companies, such as a parent company and its subsidiaries operating in different countries.

Q: Arm’s Length Principle (ALP)

Arm’s Length Principle (ALP) – Related companies should deal with each other at fair market prices, just like two unrelated companies

Q: What are the 5 main methods of transfer pricing?

• Comparable Uncontrolled Price (CUP): Checking whether a related company is charging a fair price by comparing it with the market price charged by unrelated companies

• Resale Price Method (RPM): Calculate the buying price by deducting the reseller’s usual profit from the final selling price.

• Cost Plus Method (CPM): Calculate the selling price by adding a suitable profit margin to the total cost.

• Transactional Net Margin Method (TNMM): Compare the company’s profit margin with similar independent companies to check whether it is earning a fair profit.

• Profit Split Method (PSM): Share the total profit or loss among related companies according to their respective contributions

Q: What documentation is required?

Aligned with the OECD BEPS Action 13, India mandates a three-tiered documentation structure:

• Local File: Detailed transactional, functional, and risk analysis of the Indian taxpayer and its AEs, maintained annually.

• Master File: High-level overview of the multinational enterprise (MNE) group’s global business, operations, and IP policies (applicable to groups with consolidated turnover above INR 5 billion / ₹500 crore).

• Country-by-Country Report (CBCR): Comprehensive breakdown of global revenue, profit, taxes, and economic activity across tax jurisdictions (applicable to large MNEs crossing prescribed global revenue thresholds).

Q: What Happens If You Don’t Comply?

• Adjustments & Double Taxation: The tax department can adjust the transaction price to the correct market price and increase the company’s taxable profit.
• Penalties: Non-compliance, failure to maintain documentation, or misreporting of income can attract heavy financial penalties (e.g., 2% of the international transaction value for missing documentation or up to 50%–200% for under-reporting income under Indian regulations).
• Dispute Resolution: Taxpayers can mitigate or resolve disputes through Advance Pricing Agreements (APAs) or mutual agreement procedures (MAP).

Written by
Gagan Mishra
Articled Clerk