Transfer Pricing Laws

Key Aspects of Transfer Pricing Laws in India

1. Arm’s Length Principle:

   • Transactions between related parties must be conducted at arm’s length prices.
   • The arm’s length price is the price that would have been charged if the transactions were between unrelated parties.

2. Related Parties:

   • Entities are considered related if they have common control, management, or significant influence over each other.
   • This includes subsidiaries, branches, and companies under common ownership.

3. Specified Domestic Transactions (SDTs):

   • Transfer pricing regulations also apply to specified domestic transactions exceeding INR 20 crore.
   • This includes transactions between related domestic entities and those benefiting from certain tax holidays or exemptions.

Methods for Determining Arm’s Length Price

1. Comparable Uncontrolled Price (CUP) Method:

   • Compares the price charged in a controlled transaction to the price charged in a comparable uncontrolled transaction.

2. Resale Price Method (RPM):

   • Compares the gross profit margin of a controlled transaction to that of a comparable uncontrolled transaction, after subtracting the resale price margin.

3. Cost Plus Method (CPM):

   • Adds an appropriate profit margin to the direct and indirect costs incurred in a controlled transaction.

4. Profit Split Method (PSM):

   • Splits the combined profits from controlled transactions among related parties based on their relative contributions.

5. Transactional Net Margin Method (TNMM):

   • Compares the net profit margin of a controlled transaction to that of comparable uncontrolled transactions.

6. Other Methods:

   • Any other method prescribed by the Central Board of Direct Taxes (CBDT) for determining arm’s length prices.

Documentation and Compliance Requirements

1. Transfer Pricing Documentation:

   • Maintenance of detailed documentation supporting the arm’s length nature of transactions is mandatory.
   • This includes an overview of the business, the nature of the transactions, the transfer pricing method used, and a detailed functional and risk analysis.

2. Master File and Country-by-Country Reporting (CbCR):

   • Large multinational enterprises (MNEs) must maintain a Master File and submit Country-by-Country Reports as per BEPS Action Plan 13.

3. Accountant’s Report (Form 3CEB):

   • Taxpayers must file an annual report in Form 3CEB, certified by a Chartered Accountant, detailing international transactions and SDTs.

Penalties for Non-Compliance

• Failure to Maintain Documentation:

  • Penalties can be imposed for failing to maintain proper transfer pricing documentation.
  • Penalty: 2% of the value of each international transaction or SDT.

• Failure to Furnish Documentation:

  • Failure to provide the required documentation upon request can result in additional penalties.
  • Penalty: 2% of the value of each international transaction or SDT.

• Incorrect or Misleading Information:

  • Providing incorrect or misleading information can lead to severe penalties.
  • Penalty: Up to INR 5 lakh.

Advance Pricing Agreements (APAs)

• Unilateral and Bilateral APAs:

  • Taxpayers can enter into Advance Pricing Agreements with the tax authorities to agree on transfer pricing methodologies for future transactions.
  • APAs can be unilateral (with Indian tax authorities) or bilateral/multilateral (involving tax authorities of other countries).

• Benefits of APAs:

  • Provide certainty and avoid disputes on transfer pricing issues for a specified period.
  • Reduce the risk of double taxation and ensure compliance with international transfer pricing standards.

Conclusion

Transfer pricing laws in India are designed to ensure that transactions between related parties are conducted fairly and at market value. Compliance with these regulations is critical to avoid penalties and ensure smooth international and domestic transactions. At MDCO, we provide expert guidance on transfer pricing compliance, documentation, and dispute resolution to help businesses navigate these complex regulations effectively.

Contact us today to learn more about how we can assist you with your transfer pricing needs and ensure compliance with Indian transfer pricing laws.