Transfer Pricing in India – Provisions, Deadlines, and Penalties

In the modern-day global business environment, cross-border transactions are routine. However, they must be sold at a fair price to avoid tax disputes and comply with regulatory requirements. This is where transfer pricing regulations become important, and in India, these norms are very detailed and are strictly enforced by the authorities.

Let us understand the key provisions, important deadlines, and possible penalties related to transfer pricing in India.

Understanding Transfer Pricing

It refers to the pricing of goods, services, and intangibles between associated enterprises (AE), which are entities that have a common control. The primary objective of transfer pricing is to ensure that transactions between related parties are executed at an arm’s length. In other words, the prices charged to related parties must be in line with those charged to unrelated third parties.

Key Provisions

Sections 92 to 92F of the Income Tax Act primarily govern transfer pricing regulations in India. The important provisions include:

• Arm’s Length: All domestic and international transactions between AEs must be executed at an arm’s length
• Associated Enterprises: Two entities are considered as associated if they directly or indirectly participate in the capital, control, and management
• Specified Domestic Transactions: Since FY 2012 – 2013, all domestic transactions exceeding INR 20 crore also fall under the purview of transfer pricing regulations

Transfer Pricing Methods

• Comparable Uncontrolled Price (CUP): The charged price in a comparable uncontrollable transaction plus adjustments
• Resale Price: Charged by the tested party procured from the AE to the unrelated party after deducting normal uncontrolled gross profits and incurred expenses, plus adjustments
• Cost Plus: Sum of direct and indirect costs and normal gross profits plus adjustments
• Profit Split: Relate to transactions related to the transfer of intangibles; combined net profit in comparison to their relative contributions to determine the apportioned transfer price profit
• Transaction Net Margin: Net profit earned by the tested party, determined against costs, sales, and other relevant bases is compared to the net profit of comparable companies using the same base, plus adjustments
• Other Method: Any method that considers price is the same as that charged for a similar transaction to an unrelated party under similar circumstances

Transfer Pricing Documentation

All information related to international transactions between AEs must be maintained. According to the regulations, all taxpayers must maintain detailed documents and information, which includes the following:

• Information related to ownership structure, group profile, and business overview
• Maintaining sufficient documentation to substantiate the analysis, information, and studies documented in the first part of the rule; supporting documents required include:
• Contracts
• Correspondence
• Relevant agreements
• Reports, studies, and market research studies done by reputed institutions

All this information should be safely stored and easily accessible in case of any audit or query.

Consequences of Non-Compliance

Non-compliance may result in significant reputational and financial risks. Some penalties include:

• Up to INR 50000 as a penalty if your organization does not comply with CbCR obligations
• Failing to file Form 3CEB may result in an INR 10,000 penalty
• Misreporting or under-reporting income may result in a penalty, which may be between 50% and 200% of the total tax payable
• INR 100,000 for failing to file Form 3CEB

Evolving global standards like BEPS, OECD, and more make compliance strategically important. Companies with large-scale domestic or cross-border related party transactions must ensure proper documentation, benchmarking analysis, and timely filings.

If you are navigating this complicated landscape, collaborating with experienced advisors to stay updated with changing regulatory norms, ensuring compliance, and minimising risks becomes very important.

At Greenvissage, our experts specialize in working with global companies to maintain accurate documentation, benchmark studies, and ensure complete compliance. Reach out to us; call on +91 8237857853 or drop us a mail at info@greenvissage.com.