If your business engages in transactions with foreign affiliates or related domestic entities, Transfer Pricing (TP) compliance is a legal necessity.
India’s TP regulations aim to ensure that international and certain domestic transactions between associated enterprises are conducted at arm’s length prices.
This blog explains who must comply with transfer pricing rules, key thresholds, documentation requirements, and penalties for non-compliance under the Income Tax Act, 1961.
Legal Reference
- Section 92 to 92F, Income Tax Act, 1961
- Rule 10A to 10T, Income Tax Rules, 1962
- Section 92BA – Specified Domestic Transactions
- OECD Transfer Pricing Guidelines (India follows broadly aligned principles)
Who Must Comply With Transfer Pricing Rules in India?
You must comply with TP regulations if your entity has:
International Transactions with Associated Enterprises (AEs)
- Sale or purchase of goods/services
- Loans, guarantees, or capital financing
- Intangible assets like trademarks, software, IP
- Royalty or technical service fees
- Reimbursement of expenses
- Cross-border management fees
Specified Domestic Transactions exceeding ₹20 crore
- Transactions between related units enjoying tax benefits (like SEZs, 80IA, 10AA)
- Payment to related parties under Section 40A(2)(b)
- Inter-unit transfers between profit-linked units
Who Qualifies as an Associated Enterprise (AE)?
Two enterprises are deemed AEs if:
- One entity directly/indirectly holds ≥26% voting power or share capital
- There is common management or control
- They have significant dependency in pricing, funding, or supply terms
- Parent-subsidiary or sister concerns with shared ownership or control
Even offshore holding companies or Indian subsidiaries with foreign control may be classified as AEs.
Transfer Pricing Documentation Requirements
- Form 3CEB – Mandatory for all international or specified domestic transactions
- Local File – Detailed TP report maintained under Rule 10D
- Master File (Form 3CEAA) – If consolidated group revenue > ₹500 crore
- CbCR (Form 3CEAD) – If group revenue > ₹6400 crore (INR equivalent of €750 million)
Example Scenarios
- Example 1: Indian company sells IT services to its US-based parent
- Must comply with TP, maintain documentation, and file Form 3CEB
- Example 2: Indian subsidiary pays royalty to Singapore-based AE
- Must benchmark and report under TP
- Example 3: Manufacturing unit in SEZ sells goods to its group unit in DTA
- If value > ₹20 crore → Specified Domestic Transaction → TP compliance applies
Penalties for Non-Compliance
- Failure to file Form 3CEB: ₹1 lakh
- Failure to maintain TP documentation: 2% of transaction value
- Adjustment to income: Risk of additional tax, interest under Section 234B/C, and penalty under Section 270A
- Audit scrutiny and litigation: Higher risk if transfer pricing is not well-documented
Conclusion
Any business dealing with foreign group entities or conducting high-value domestic related-party transactions must comply with India’s transfer pricing framework.
Failure to document and disclose can result in heavy penalties and prolonged assessments. TP compliance is not optional — it is critical for globally connected Indian businesses.
Call to Action
Have cross-border transactions or group company dealings?
You may need immediate Transfer Pricing documentation to avoid penalties and audit flags.
Book a detailed consultation with Anshul Goyal, Chartered Accountant, and secure your TP compliance for FY 2024-25.
https://calendly.com/anshulcpa
Disclaimer
This content is for informational purposes only. Transfer Pricing regulations are highly technical and require professional documentation and legal evaluation.
Frequently Asked Questions
1. What is the due date for filing Form 3CEB?
31st October (unless extended), along with tax audit report.
2. Is TP applicable if the foreign group company is a service recipient only?
Yes. TP applies on both sales and purchases, regardless of direction.
3. What happens if TP documentation is incomplete?
Penalty of 2% of transaction value and possible income addition.
4. Can start-ups ignore TP if they are in early loss-making years?
No. Compliance is mandatory regardless of profit or loss.
5. Is TP required for transactions in foreign currency only?
No. Even INR transactions with AEs may trigger TP if control relationships exist.