Transfer Pricing-2
Transfer Pricing Regulations in India –
An Overview
1. Introduction to Transfer Pricing in India
Transfer pricing (TP) refers to the pricing of goods, services, and intangibles between associated enterprises (AEs) located in different tax jurisdictions. With globalization and cross-border trade, multinational corporations (MNCs) often structure their intra-group transactions in a way that may lead to base erosion and profit shifting (BEPS). To prevent such revenue loss, countries have introduced transfer pricing laws based on the arm’s length principle.
In India, comprehensive transfer pricing regulations were first introduced through Finance Act, 2001, by inserting Sections 92 to 92F in the Income-tax Act, 1961, effective from 1st April 2002. These provisions apply to all international transactions and certain specified domestic transactions between associated enterprises. Over time, the Indian TP regime has evolved significantly, aligning itself with global standards such as the OECD Transfer Pricing Guidelines and incorporating measures against BEPS under the G20–OECD framework.
2. Statutory Framework of Indian Transfer Pricing Regulations
The legislative scheme for TP in India is broadly covered under Sections 92 to 92F, supported by Rules 10A to 10E of the Income-tax Rules, 1962.
2.1 Section 92 – Computation of Income from International Transactions
Section 92 mandates that any income arising from an international transaction or specified domestic transaction shall be computed having regard to the arm’s length price (ALP). It also applies to allowances for expenses or interest arising from such transactions.
The central idea is that profits attributable to transactions between AEs should mirror those that would arise if such transactions had been carried out between independent parties under comparable circumstances.
2.2 Section 92A – Definition of Associated Enterprise (AE)
The scope of transfer pricing depends on whether entities are considered "associated enterprises." Section 92A provides both participation in management, control, or capital and a list of deeming relationships (such as direct/indirect shareholding of 26% or more, dependence on intangibles, or common directors) to establish AE status.
Vodafone India Services Pvt. Ltd. v. UOI [(2014) 368 ITR 1 (Bom.)] clarified that mere issue of shares at a premium to an AE does not give rise to income; hence, TP provisions would not apply unless income is chargeable under the Act.
2.3 Section 92B – International Transactions
The definition of “international transaction” under Section 92B is broad and includes purchase, sale, lease of tangible/intangible property, provision of services, cost-sharing arrangements, capital financing, restructuring, and business reorganizations.
Maruti Suzuki India Ltd. v. CIT [(2016) 64 taxmann.com 150 (Del.)] expanded the scope by holding that AMP (advertisement, marketing, and promotion) expenses could constitute an international transaction when incurred for brand promotion of a foreign AE. However, later judgments such as Sony Ericsson Mobile Communications India Pvt. Ltd. v. CIT [(2015) 374 ITR 118 (Del.)] limited the scope, emphasizing that routine AMP expenses for the Indian market may not automatically constitute an international transaction.
2.4 Section 92C – Methods for Determining Arm’s Length Price (ALP)
The Act prescribes five primary methods for determining ALP:
Comparable Uncontrolled Price (CUP) Method
Resale Price Method (RPM)
Cost Plus Method (CPM)
Profit Split Method (PSM)
Transactional Net Margin Method (TNMM)
Additionally, a sixth method was introduced (Rule 10AB) in 2012, which allows “any method” that takes into account price charged in similar uncontrolled conditions.
CIT v. EKL Appliances Ltd. [(2012) 345 ITR 241 (Del.)] recognized that commercial expediency of business decisions should not be questioned, and ALP determination cannot impute notional income unless it arises from real transactions.
2.5 Section 92CA – Role of Transfer Pricing Officer (TPO)
Where the Assessing Officer (AO) considers it necessary, the case can be referred to the TPO for determining ALP. The TPO’s order is binding on the AO.
Sony India Pvt. Ltd. v. CBDT [(2007) 288 ITR 52 (Del.)] upheld the jurisdiction of TPOs in ALP determination but clarified that they cannot adjudicate on whether a transaction exists; their role begins only after the AO identifies such transaction.
2.6 Section 92CB – Safe Harbour Rules
Safe harbour rules (SHR) provide circumstances in which ALP declared by the assessee is automatically accepted, reducing litigation. These cover IT/ITES services, knowledge process outsourcing (KPO), contract R&D, and low-value intra-group services.
2.7 Section 92CC – Advance Pricing Agreements (APA)
APAs allow taxpayers to agree in advance with the CBDT on ALP for future transactions. Introduced in 2012, APAs may be unilateral, bilateral, or multilateral. Rollback provisions allow coverage of previous four years.
While APAs are administrative rather than judicial, they have reduced disputes significantly, with more than 400 APAs signed by 2023.
2.8 Section 92D and 92E – Documentation and Reporting Requirements
Assessees must maintain prescribed documentation (contemporaneous TP study) under Section 92D and furnish a Form 3CEB (Section 92E), certified by a chartered accountant.
2.9 Section 92F – Key Definitions
This section provides definitions of important terms like ALP, enterprise, international transaction, specified domestic transaction, etc., crucial for interpretation.
3. Objectives and Philosophy of Transfer Pricing Law in India
The Indian TP regime is founded on three principal objectives:
Preventing Base Erosion and Profit Shifting (BEPS): Ensuring profits are not artificially shifted out of India through manipulated intra-group pricing.
Ensuring Fair Taxation: Creating a level playing field between domestic companies and MNC subsidiaries.
Promoting Certainty and Reducing Litigation: Through mechanisms such as Safe Harbour Rules and APAs.
In Aztec Software and Technology Services Ltd. v. ACIT [(2007) 107 ITD 141 (SB)(Bang.)], the Special Bench of the ITAT recognized that TP is an anti-avoidance measure but stressed that genuine commercial transactions should not be disturbed without cogent reasons.