1. What is Transfer Pricing?
Transfer pricing refers to pricing of goods, services, or intangibles transferred between associated enterprises within a corporate group.
The key goal is to ensure that such intra-group transactions are priced at arm’s length, i.e., similar to those between unrelated parties, to prevent profit shifting and tax base erosion.
2. Why Transfer Pricing Matters
- Ensures fair taxation and prevents tax avoidance
- Promotes compliance with international tax standards
- Reduces disputes with tax authorities
- Supports global expansion and foreign investments
3. Key Principles – Arm’s Length Price
- Based on OECD Guidelines, adopted in India
- Methods include Comparable Uncontrolled Price, Resale Price, Cost Plus, Transactional Net Margin, etc.
- Must reflect functions performed, risks assumed, and market factors
4. Types of Transactions Covered
Indian transfer pricing rules apply to:
- International Transactions (cross-border)
- Specified Domestic Transactions (SDTs) (with related parties)
Examples include:
- Sale of goods
- Provision of services
- Intra-group loans, guarantees
- Royalty and licensing arrangements
5. Compliance Requirements & Documentation
Obligations include:
- Maintain documentation (Master & Local Files)
- Prepare Form 3CEB audit report
- File Form 3CD under Section 44AB
- Submit returns by December 30 (FY) & November 30 (AY)
Documentation thresholds:
- International: ₹1 crore+
- SDT: ₹20 crore+
Records must be retained for 8 years.
6. Safe Harbour Rules – Expanded Benefits
Safe Harbour Rules allow pre-defined margins/rates, reducing audit risks.
April 2025 updates include:
- Eligibility threshold increased from ₹200 crore to ₹300 crore in specified transactions
- Extended to FY 2024–25 and 2025–26
- Inclusion of new service types like li-ion battery manufacturing
7. Block Assessment Scheme – New Option
2025 Finance Act introduces an optional 3-year block assessment:
- Taxpayer can apply once ALP is accepted in “lead year”
- Same pricing applies for next two years if conditions remain unchanged
- Offers certainty, consistency, and administrative ease
- Voluntary scheme with defined opt-in procedure
8. Advance Pricing Agreements (APA)
APAs allow taxpayers to lock in pricing method in advance:
- Types: Unilateral, Bilateral, Multilateral
- Provide certainty for 5 years
- 2024–25 saw record-signings, boosting transparency and trust
9. Penalties for Non-Compliance
Incorrect or missing documentation can attract:
- Penalty of 2% of transaction value under Section 271AA
- Interest at 12% for late payment
- Further penalties for non-reporting or filing inaccuracies
10. Practical Tips for Businesses
✅ Document value chain and business context
✅ Choose suitable pricing method and apply consistently
✅ Evaluate safe harbour or APA options
✅ Maintain detailed transaction logs and comparables
✅ Regularly review safe harbour margins and block assessment eligibility
✅ Engage specialist help where needed
❓ FAQs
- What is arm’s length price?
The price that would be paid between unrelated parties under market conditions. - Who is an associated enterprise?
Entities with common control, ownership, or significant influence. - What is Safe Harbour?
Pre-approved margins where pricing is accepted without detailed audit. - What is block assessment?
Optional 3-year TP assessment based on a lead year’s ALP. - What is APA?
Agreement with tax authorities on pricing methodology for a set period.
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