Transfer Pricing Laws in India — Chapter X | Savlana Init

Transfer Pricing · Statutory Framework

Transfer Pricing Laws — Priced at Arm’s Length, or Adjusted.

Chapter X requires every transaction between associated enterprises to be priced as unrelated parties would price it. Everything else in transfer pricing follows from that one requirement.

Chapter X of the Income Tax Act, 1961 — Sections 92 to 92F together with Rules 10A to 10THD — requires that income arising from an international transaction between associated enterprises be computed having regard to the arm’s length price. The premise is straightforward: related parties can set prices that shift profit across borders in a way unrelated parties never would, so the law substitutes the price that independent enterprises would have agreed. The consequence of failing the test is an upward adjustment to Indian income, and the adjustment cannot reduce income or create a loss.

Two definitions gate the entire chapter. Section 92A defines associated enterprise by reference to participation in management, control or capital, and then supplies a list of deemed relationships — holding twenty-six per cent or more of voting power, advancing loans amounting to fifty-one per cent or more of the book value of assets, guaranteeing ten per cent or more of borrowings, appointing more than half the board, dependence on intellectual property, and supply of ninety per cent or more of raw materials on influenced terms, among others. Section 92B defines international transaction to include tangible and intangible property, services, lending and borrowing, cost-sharing arrangements and business restructuring. Section 92BA extends a narrower version of the regime to specified domestic transactions above a prescribed threshold.

The machinery sits alongside. Section 92C prescribes six methods — comparable uncontrolled price, resale price, cost plus, profit split, transactional net margin and the residual other method — with the most appropriate method to be selected on the facts, and provides for the range and arithmetic mean concepts with an annually notified tolerance band. Section 92CA allows the assessing officer to refer the determination to a Transfer Pricing Officer. Section 92CB provides safe harbour rules, Sections 92CC and 92CD provide for advance pricing agreements with rollback, Section 92D prescribes documentation, and Section 92E requires an accountant’s report in Form 3CEB. Penalties under Sections 271AA, 271BA and 271G attach to documentation and reporting failures independently of any adjustment. We advise across the whole chapter.

Our Transfer Pricing Law Services

Associated Enterprise Determination

Analysis of shareholding, funding, guarantees, board composition and dependence to establish which counterparties fall within Section 92A.

Transaction Coverage Review

Identification of all international transactions and specified domestic transactions requiring benchmarking and reporting, including those often missed.

Method Selection Advisory

Selection and justification of the most appropriate method under Section 92C and Rule 10C for each class of transaction.

Transfer Pricing Policy Design

Design of an intra-group pricing policy that is defensible at the outset rather than rationalised after the transactions have happened.

Safe Harbour Evaluation

Assessment of eligibility under the safe harbour rules and of whether the certainty they offer is worth the margins they require.

Advance Pricing Agreements

Unilateral, bilateral and multilateral APA applications under Sections 92CC and 92CD, including rollback for earlier years.

Secondary Adjustment Advisory

Section 92CE compliance where a primary adjustment exceeds the threshold, including repatriation, imputed interest and the one-time tax option.

Thin Capitalisation Review

Section 94B analysis where interest paid to a non-resident associated enterprise exceeds the threshold, limiting deduction by reference to EBITDA.

Our Process

Group Structure Mapping

We map the group, the shareholding and funding relationships, and identify every enterprise that qualifies as associated under Section 92A.

Transaction Identification

All covered transactions are catalogued — goods, services, royalties, interest, guarantees, cost allocations and restructuring — with values and counterparties.

Functional Analysis

Functions performed, assets employed and risks assumed by each entity are analysed, because characterisation drives method and comparables.

Method and Benchmarking

The most appropriate method is selected and applied, and the arm’s length range is determined under the range or arithmetic mean rules.

Compliance and Certainty

Documentation, Form 3CEB and the Master File and Country-by-Country filings are completed, and safe harbour or an APA is pursued where useful.

Why It Matters

✓Associated enterprise status determined on the statute, not on group charts

✓Every covered transaction identified, including the ones usually missed

✓Method selected and justified rather than adopted by default

✓Policy designed in advance so pricing is defensible when tested

✓Safe harbour assessed honestly against its cost in margin

✓APA route evaluated for genuine multi-year certainty with rollback

✓Secondary adjustment exposure managed before it compounds

✓Section 94B interest limitation modelled before the funding is drawn

Frequently Asked Questions

Where an assessee enters into an international transaction with an associated enterprise, Chapter X applies regardless of value — there is no minimum threshold for international transactions. A separate regime applies to specified domestic transactions under Section 92BA, which is subject to an aggregate monetary threshold. Once the provisions apply, benchmarking, documentation and the Form 3CEB report all become mandatory.

An enterprise that participates directly or indirectly in the management, control or capital of another, or where the same persons participate in both. Section 92A(2) then deems specified relationships to constitute association, including holding twenty-six per cent or more of voting power, advancing loans of fifty-one per cent or more of book value of assets, guaranteeing ten per cent or more of borrowings, appointing more than half the directors, and dependence on intellectual property or on a dominant supplier.

Six: comparable uncontrolled price, resale price, cost plus, profit split, transactional net margin, and the other method prescribed under Rule 10AB which permits use of the price that would have been charged in a comparable uncontrolled transaction. There is no hierarchy; the most appropriate method must be selected on the nature of the transaction, availability of reliable data and the degree of comparability achievable.

The safe harbour rules under Section 92CB allow specified categories of transaction — software development services, information technology enabled services, knowledge process outsourcing, intra-group loans, corporate guarantees, contract research and receipt of low value-adding services — to be accepted at prescribed margins without further scrutiny. The certainty is real, but the prescribed margins are often above commercial reality, so the trade-off should be quantified before opting in.

An agreement between the taxpayer and the Central Board of Direct Taxes determining the arm’s length price or the methodology for future international transactions, valid for up to five years, with a rollback available for up to four preceding years. It may be unilateral, bilateral or multilateral. The process is lengthy and document-intensive, but for groups with substantial recurring cross-border transactions it is the most durable form of certainty available.

Where a primary transfer pricing adjustment exceeds the prescribed threshold, Section 92CE requires that the excess money be repatriated to India within the prescribed time. If it is not, the amount is deemed to be an advance to the associated enterprise and interest is imputed on it year after year. A one-time option exists to pay additional tax on the excess instead, which closes the exposure without repatriation.

Transacting with group companies across borders?

Send us your group structure and intra-group transaction list. We will identify what is covered, recommend the method, and set a pricing policy that holds up when it is tested.