Transfer pricing

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CA Tejas Andharia (Querist)
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02 May 2013 As we know the transfer pricing is applicable to specified domestic transactions w.e.f. FY 2013-14, my question is as under

It is first of all clarified that transfer pricing provisions are applicable to following person.

Suppose, one person has paid interest to his brother which is 9% p.a. but the same person has paid interest @ 18 % p.a. to outsiders.

Now, as far as I know, transfer pricing is applicable when excessive expense is debited and profit is reduced which is not there in this case. Further, for the brother of this person, interest is income and not an expense, so his income can also not be increased.

Is it ok?

CA. Anuj Gupta

CA. Anuj Gupta (Expert)
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03 May 2013 Domestic TP is applicable if the amount exceeds Rs. 5 crore.

Anuj
femaquery@gmail.com

CA Tejas Andharia

CA Tejas Andharia (Querist)
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03 May 2013 Sir, I have already clarified in my question that TP provisions are applicable in this case, so please come to the main question.

Thanks

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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02 August 2025 Got it! Let’s dive deeper into your scenario:

**Situation:**

* Person A pays interest to his brother (related party) at 9% p.a.
* Person A pays interest to outsiders at 18% p.a.

**Question:**
Since Person A pays lower interest to related party (brother) and higher to outsiders, is there a TP adjustment?

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### Key points on Domestic Transfer Pricing:

1. **Domestic TP applies to specified domestic transactions** where the aggregate value exceeds ₹5 crore. Interest payments between related parties fall under this.

2. **TP aims to ensure that transactions between related parties are at 'arm’s length price' (ALP).** Here, the ALP is usually the market rate (similar to what is charged to unrelated parties).

3. If Person A is paying **only 9% interest to his brother**, but **18% to outsiders**, the ALP for interest expense would likely be closer to 18%, not 9%.

4. The **difference between actual interest paid (9%) and ALP (18%) can be disallowed as expense** in the hands of Person A, increasing his taxable income.

5. On the other hand, for the brother (recipient), **income will be considered at actual receipt (9%)**, but the tax department can apply TP adjustments under Section 92 to compute income as if he received 18%, which means the brother’s income could be increased.

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### Why both sides can be adjusted:

* The transfer pricing law allows the tax officer to determine the arm’s length price for such transactions and adjust the income/expense accordingly in the hands of either party.

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### Summary:

* Even though Person A pays a **lower interest to brother**, the ALP (market rate) is higher (18%).
* TP provisions allow the tax authorities to **increase Person A’s interest expense to 18% for tax purposes (disallowing 9%)**.
* Likewise, **brother’s income can be increased to reflect 18% interest income**.
* The fact that Person A pays 18% to outsiders strengthens the argument that 18% is the ALP.

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If you want, I can share the relevant Sections and case laws related to domestic TP on interest transactions too! Would you like that?

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