Transfer Pricing & International Tax
Transfer Pricing & International Tax
Complete guide to transfer pricing provisions under the Income Tax Act 2025 — arm's length price, associated enterprises, international transactions, ALP methods, TPO reference, safe harbour, Advance Pricing Agreements, secondary adjustments, BEPS interest limitation, and notified jurisdictional areas.
🔄 Replaces: Sections 92–92F, 92BA, 92CB, 92CC, 92CD, 94, 94A, 94B of the Income Tax Act 1961
Overview — Why Transfer Pricing Exists
When two related (associated) enterprises transact with each other — a parent company and its subsidiary, for example — they can manipulate the price of goods, services, loans, or intangibles to shift profits to a lower-tax jurisdiction. Transfer pricing provisions require that all such transactions be priced at the arm's length price (ALP) — the price that would have been agreed between unrelated parties in comparable circumstances.
Section 162 — Associated Enterprise (AE)
An enterprise is an "associated enterprise" in relation to another if it participates in the management, control, or capital of the other — or if any of the following tests are met:
| Clause | Test | Threshold / Details |
|---|---|---|
| (a)(ii) | Shareholding / voting power | One enterprise holds ≥ 26% voting power in the other at any time during the tax year (directly or indirectly) |
| (b) | Loan constituting assets | Loan advanced by one enterprise constitutes ≥ 51% of book value of total assets of the other |
| (c) | Guarantee | One enterprise guarantees ≥ 10% of total borrowings of the other |
| (d)/(e) | Board control | More than half of the board of directors / executive directors appointed by the other enterprise, or appointed by the same person |
| (f) | Know-how / IP dependence | Manufacturing wholly dependent on know-how, patents, trademarks, or IP owned / exclusively held by the other |
| (g) | Raw material supply | ≥ 90% of raw materials supplied by the other enterprise at prices influenced by it |
| (h) | Sales control | Goods sold to or through the other enterprise and prices influenced by it |
| (i)/(j) | Common control — individual / HUF | Both enterprises controlled by the same individual (or relative) or same HUF (or member/relative) |
| (k) | Firm / AOP interest | Other enterprise holds ≥ 10% interest in a firm, AOP, or BOI |
Section 163 — International Transaction
A transaction between two or more associated enterprises, at least one of which is a non-resident. Covers:
Purchase, sale, transfer, lease or use of goods, machinery, equipment, commodities
Copyrights, patents, trademarks, know-how, brand, customer lists, franchises — detailed 12-category definition
Borrowing/lending of money, guarantees, marketable securities, advances, deferred payments
Market research, management, technical services, R&D, legal, accounting, repairs, consultancy
Any business restructuring or reorganisation — regardless of whether it has immediate profit impact
Mutual agreements for allocation / apportionment of costs for shared benefits, services, or facilities
Section 164 — Specified Domestic Transaction (SDT)
SDT covers transactions between related domestic parties — not international — where the aggregate exceeds ₹20 crore in the tax year. Includes:
- Transactions between units of the same assessee — one claiming deduction under Section 144 or special Chapter VIII provisions
- Transfer of goods/services between related domestic persons under Section 140(9) or 140(13)
- Transactions attracting profit-linked deduction provisions
TP rules apply to SDTs in the same manner as international transactions — the same ALP methods, TPO reference, documentation, and accountant report requirements apply.
Section 165 — Arm's Length Price: Methods
The ALP must be determined by the most appropriate method from the following five prescribed methods:
| Method | Name | How it Works |
|---|---|---|
| CUP | Comparable Uncontrolled Price | Compare price in controlled transaction with price in a comparable uncontrolled transaction — most direct; preferred for commodity transactions |
| RPM | Resale Price Method | Start from resale price to independent party; deduct appropriate gross margin; result is ALP. Used for distribution functions |
| CPM | Cost Plus Method | Start from cost of production; add appropriate gross markup. Used for manufacturing and service transactions |
| PSM | Profit Split Method | Split combined profits from controlled transaction among AEs based on relative contribution. Used where both parties contribute unique intangibles |
| TNMM | Transactional Net Margin Method | Compare net profit margin earned in controlled transaction with comparables. Most commonly used in India for services and distribution |
Section 166 — Reference to Transfer Pricing Officer (TPO)
The Assessing Officer may (with prior approval of the Principal Commissioner/Commissioner) refer the determination of ALP to the Transfer Pricing Officer — a Joint/Deputy/Assistant Commissioner authorised by the Board for TP functions.
- TPO serves notice on the assessee requiring production of evidence and TP documentation
- TPO determines ALP by order in writing — copy sent to AO and assessee
- AO then computes total income in conformity with TPO's ALP order
- Roll-forward option [Sec 166(9)]: TPO's ALP determination for a year can apply to the two consecutive following years if the assessee exercises the option and TPO declares it valid
- TPO order must be passed at least 60 days before the limitation period for assessment expires
Sections 167–169 — Safe Harbour & Advance Pricing Agreements
The Board (with CG approval) may prescribe safe harbour rules — circumstances where the tax authorities will automatically accept the transfer price or income declared by the assessee, without requiring ALP analysis.
Safe harbour rules currently exist for IT/ITES services, KPO, contract R&D, financial transactions (loans, guarantees), and intra-group services. If the assessee's margin falls within the safe harbour threshold, no TP adjustment is made.
An APA is a binding agreement between the assessee and the Board (with CG approval) determining the ALP or the manner of its computation for future international transactions — valid for up to 5 consecutive tax years.
- Binding on the assessee and on the Principal Commissioner and subordinate authorities
- Not binding if there is a change in law or material facts
- Can be declared void ab initio if obtained by fraud
- Rollback [Sec 168(9)]: APA can also cover up to 4 preceding tax years — allowing resolution of past years in line with the APA
Section 170 — Secondary Adjustment
Where a primary TP adjustment of ₹1 crore or more is made (by the assessee voluntarily, by AO, through APA, safe harbour, or MAP), a secondary adjustment is required to align the books of the assessee and its AE with the adjusted transfer price.
| Concept | Details |
|---|---|
| Excess money | The difference between the ALP (after primary adjustment) and the actual transaction price — represents money that should have been received by the Indian entity but wasn't |
| Deemed advance | If excess money is not repatriated to India within the prescribed time, it is deemed to be an advance made by the assessee to the AE — and interest is imputed on it |
| Alternative option | Instead of repatriation + interest, the assessee may opt to pay additional income-tax at 18% on the excess money — treated as final tax, no further credit |
| Threshold | Applies only where primary adjustment is ≥ ₹1 crore |
Sections 171–172 — Documentation & Accountant Report
Every person who has entered into an international transaction or SDT must maintain prescribed documentation — including a master file (group-level) and local file (entity-level). Constituent entities of international groups must also maintain and file a Country-by-Country Report (CbCR) under Section 511. AO or CIT(A) can call for documents within 10 days (extendable by 30 days).
Every person who has entered into an international transaction or SDT must obtain a report from a Chartered Accountant in the prescribed form (Form 3CEB equivalent) and furnish it by the specified date — one month before the ITR due date (i.e., 30 September for companies). Failure attracts penalty under Section 431.
Sections 176–177 — Notified Jurisdictional Areas & Interest Limitation (BEPS)
Section 176 — Notified Jurisdictional Area (NJA)
The Central Government may notify any country/territory as an NJA (due to lack of effective information exchange). Transactions with persons located in an NJA attract:
- All parties deemed to be associated enterprises — full TP rules apply automatically (without the normal AE tests)
- No deduction for any payment to a financial institution in the NJA unless a prescribed authorisation is furnished
- No deduction for any other expenditure from NJA transactions unless full documentation is maintained
- Any unexplained sum received from an NJA person is deemed income
- TDS at highest rate — rate in force, or rate specified in the Act, or 30%, whichever is highest
Section 177 — Interest Limitation (BEPS Action 4)
Limits deductibility of interest paid by an Indian company or PE of a foreign company to a non-resident associated enterprise — implementing the BEPS Action 4 thin capitalisation rule.
| Rule | Detail |
|---|---|
| Threshold | Applies if interest to non-resident AE exceeds ₹1 crore in the tax year |
| Disallowed amount | Excess interest = interest exceeding 30% of EBITDA, or interest paid to AEs, whichever is less |
| Carry forward | Disallowed interest can be carried forward for 8 years and set off against future PGBP income |
| Exemptions | Does not apply to: banking/insurance companies, Finance Companies in IFSC, interest paid to a PE in India of a non-resident bank |
Practical Q&A
| Question | Answer |
|---|---|
| My Indian subsidiary provides IT services to its US parent. The parent holds 100% shares. Is TP applicable? | Yes — parent holds 100% voting power (≥26% threshold under Sec 162(a)(ii)). The IT service fee is an international transaction. Maintain Form 3CEB equivalent documentation and file accountant's report. |
| My Indian company's EBITDA is ₹10 crore. It pays ₹4 crore interest to a Singapore AE. How much is disallowed under Sec 177? | 30% of EBITDA = ₹3 crore. Interest to AE = ₹4 crore. Excess interest = min(₹4Cr − ₹3Cr, ₹4Cr) = ₹1 crore disallowed. This ₹1Cr can be carried forward 8 years. |
| TPO made a primary TP adjustment of ₹2 crore. We didn't repatriate the excess. What happens? | Sec 170 applies (adjustment ≥ ₹1Cr). The ₹2Cr is deemed an advance to the AE — interest is imputed at prescribed rates. Alternatively, pay 18% additional tax on ₹2Cr (₹36L) as final tax and avoid secondary adjustment entirely. |
| We provide management services to our sister concern (both Indian). Can TP rules apply? | Only if it qualifies as a Specified Domestic Transaction — i.e., the transaction falls within Sec 164 categories (e.g., one unit claiming Chapter VIII deduction) AND aggregate SDTs in the year exceed ₹20 crore. Pure domestic related-party transactions below ₹20Cr are not covered. |
| We have an APA for 5 years covering our software licensing fees. Can it also resolve the past 3 years which are under assessment? | Yes — the rollback provision under Section 168(9) allows the APA to cover up to 4 preceding years. File a modified return within 3 months of APA signing; pending assessments are completed per the APA terms [Section 169(3)]. |
| Our company's ITES margin is 14%. Safe harbour for ITES is 17-18%. Can we avoid TP scrutiny? | If your margin is below the safe harbour threshold, you cannot claim safe harbour — safe harbour applies only if your declared margin is within/above the prescribed band. At 14%, you are below the threshold and must demonstrate ALP through full TP documentation and the most appropriate method. |