Transfer Pricing in India FY 2026-27: Rules, Methods & Compliance Guide
Transfer pricing refers to the rules and methods for pricing transactions between related parties (associated enterprises) across different tax jurisdictions. It ensures that multinational companies pay tax in the correct country based on arm’s length pricing – preventing profit shifting to low-tax territories.
What is Transfer Pricing?
When a company in India transacts with its associated enterprise (subsidiary, parent company, or affiliate) in another country – for goods, services, loans, IP licensing, or management fees – the price charged in these transactions is called the transfer price. The Indian Transfer Pricing regulations (Sections 92-92F of the Income Tax Act) require these transactions to be at arm’s length price (ALP) – the price that unrelated parties would charge each other in similar circumstances.
Key Concepts in Transfer Pricing
| Term | Definition |
|---|---|
| Arm’s Length Price (ALP) | Price that would be charged between unrelated parties in similar circumstances |
| Associated Enterprise (AE) | Entity with direct/indirect participation in management, capital, or control (typically >26% shareholding) |
| International Transaction | Any transaction between Indian entity and its foreign AE – goods, services, loans, IP royalties, etc. |
| Specified Domestic Transaction (SDT) | Domestic transactions between related parties exceeding ₹20 crore – also subject to TP regulations |
| Transfer Pricing Officer (TPO) | Income Tax officer designated to determine ALP during assessment |
Transfer Pricing Methods
India follows OECD guidelines for determining arm’s length price. The IT Act prescribes five methods (Section 92C):
- CUP (Comparable Uncontrolled Price): Compare the price charged in the controlled transaction with prices in comparable uncontrolled transactions. Most reliable when comparable data is available.
- RPM (Resale Price Method): Start from resale price to end customer, subtract gross margin to arrive at transfer price. Used for distribution transactions.
- CPM (Cost Plus Method): Cost of production + appropriate markup = transfer price. Used for manufacturing or services.
- PSM (Profit Split Method): Split combined profit between AEs based on relative contributions. Used for complex, integrated transactions.
- TNMM (Transactional Net Margin Method): Compare operating profit margin with comparable companies. Most widely used in India.
Transfer Pricing Compliance Requirements
- Form 3CEB: Report of Chartered Accountant certifying ALP – must be filed if international transactions exceed ₹1 crore or SDT exceeds ₹20 crore. Due by 31 October of the assessment year
- TP Documentation (Section 92D): Maintain contemporaneous documentation supporting the ALP determination – to be kept for 8 years
- Country-by-Country Reporting (CbCR): Indian constituent entities of MNC groups with consolidated revenue > ₹5,500 crore must file CbCR (Form 3CEAD)
- Master File (Section 92D): Filed by constituent entities of groups with global revenue > ₹500 crore, India revenue > ₹50 crore, or India transaction value > ₹10 crore
Penalties for Transfer Pricing Non-Compliance
| Violation | Penalty |
|---|---|
| Failure to maintain TP documentation | 2% of transaction value |
| Failure to report international transaction in Form 3CEB | 2% of transaction value |
| TP adjustment by TPO (income under-reported) | 50% of under-reported income (200% for concealment) |
Advance Pricing Agreement (APA)
To provide certainty and avoid disputes, India offers the Advance Pricing Agreement (APA) program – where the taxpayer and CBDT agree in advance on the transfer pricing methodology for future transactions (for up to 5 years). APA significantly reduces litigation risk for MNCs with large India operations.
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