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1) Introduction:

Transfer pricing was introduced basically to curb the tax evasion practices followed by many Multinational Groups having presence in India. These Multinational Groups normally transfer their taxable profits earned in India to some other country, where the rates of tax are lower than in India.

2) Applicability of Transfer Pricing

Earlier the Transfer pricing clause was applicable to the International Transaction only, but now it has been extended to Domestic transaction.

A) International Transaction:

Any international transaction undertaken between associated enterprises would be subject to transfer pricing regulations and the transfer price charged/paid should be at arm’s length.

Wherein International Transaction means a transaction which satisfies the following three criteria:

1. It is a transaction between two or more Associated Enterprises were either of them or all of them is a Non Resident in India. (If all of them are resident of India, then the provision of this chapter does not apply to such situation.)

2. It is a transaction in the nature of:

a. Buying/selling/leasing of any tangible /intangible property, or

b. Lending/ Borrowing Money, or

c. Provision of services, or

d. Any other transaction, which has bearing on Profits/Losses/Income/Assets of Such enterprises.

3. It is a transaction in the nature of Allocation of / Apportionment of/ contribution to any cost/expense, which is incurred or is to be incurred by such Associated Enterprises, in relation to any Service/Benefit/Facility, provided or to be provided to all or any of them.

B) Domestic Transaction:-

As said earlier the Transfer Pricing Clause was earlier applicable to the International Transaction only, but now the Central Government of India has extended it to Domestic transaction also.

What was the purpose of introducing Domestic Transfer Pricing?

It was realized by the government that:

• Presently, there is no method prescribed to determine reasonableness of expenditure to re-compute the income in related party transactions

• There is need to provide objectivity in determination of income and determination of reasonableness of expenditure in domestic related party transactions

• There is need to create legally enforceable obligation on assessee to maintain proper documentation.

Based on the above observations of the H’ble Supreme Court, the Finance Act, 2012 has extended the applicability of the transfer pricing provisions for specified domestic related party transactions.

What are these Specified Domestic Transaction:-

Section 40A - Expenditure paid or to be paid to related party as defined under section 40A(2)(b)

Section 80IA - Inter unit transfer of goods and services as referred to in section 80IA(8)

Section 80IA - Transaction between the tax payer and any other person owing to close connection as referred to in section 80IA(10) where more than ordinary profits are earned by business unit claiming tax holiday/deduction

Section 10AA - Any transaction under Chapter VIA or Section 10AA to which the provisions of 80IA apply, ie: 1) inter-unit transfers 2) more than ordinary profits earned by tax holiday/ exemption unit.


• Payment for purchase of semi-finished goods

• Transfer of machinery, technology, etc

• Sharing of common costs

• Job work charges

• Payment of interest /royalty charges

• Transfer of goods from one unit to another (in specific cases)

• Payment made to key personnel/relatives

• Rent charged


• Domestic Transfer pricing is applicable only where value of Specified Domestic Transactions crosses 5 Crs

• While computing the aggregate value of transactions:

a. Value of the International transactions to be excluded

b. Value of transactions between 2 units of the same company to be covered (when undertaken with a tax holiday unit)

c. Inter-company transactions to be covered (when undertaken with a company having a tax holiday unit)

d. Transactions with a person having a close connection as mentioned in section 80IA(10) to be covered

e. Payment of expenses to related person defined under section 40A(2)(b) to be covered.

3) Arm’s Length Price (ALP) :

Arm’s length price means a price applied or proposed to be applied in a transaction between persons other than Associated Enterprises in an uncontrolled condition.

• Arm’s length price can be determined by any of the following methods:

– Comparable Uncontrolled Price Method (CUPM)

– Resale Price Method (RPM)

– Cost plus Method (CPM)

– Profit Split Method (PSM)

– Transactional Net Margin Method (TNMM)

– Other Method as prescribed under Rule 10AB

• Where arm’s length price is within 5% range of the transaction price, no adjustment is warranted but if it is beyond 5% range, adjustment is required to be made to the transfer price and benefit of 5% is not available (5% range is applicable for A.Y.2012-13). For A.Y.2013-14 onwards, tolerance range would be notified by the central government subject to maximum 3%

4) The Transfer Pricing Regulation in India

In order to curb the practice of avoiding tax by the foreign companies in India, a legislation under the name ‘Transfer Pricing Regulation’ has been introduced.

The following are the important statutes of the law.

1) Each person or association who has involved in an international transaction should maintain an up-to-date record of each transaction as prescribed by the legislation.

2) All income acquired by the company by means of any international transaction shall be calculated at arm’s length price. There are various methods to calculate the arm’s length price, depending on the nature and type of the transaction, the nature of the group or the association involved, or any other features of the transactions involved. These methods are introduced by the Central Board of Direct Taxes, generally known as the ‘Board’. Some of them include the resale price method, cost plus method, comparable uncontrolled price method, and transactional net margin method.

3) If there are two or more appropriate prices assumed for a certain transaction, the arm’s length price will be calculated as the average of the prices.

4) At the end of a financial year, the person or group involved in an international transaction should submit the report of it in Form 3CEB under the guidance of a Chartered Accountant. This form has to be filed before he files the Income Tax return of the same period.

The various Arm’s Length Price Method, Compliances & Penalties and on other detail I will come up with my next article.


CA Vinay Parmar


Published by

CA Vinay parmar
(Chartered Accountant)
Category Income Tax   Report

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