This document contains notes on the regulations around international transfer pricing in India. Document elaborates - > Meaning of International Transaction > Meaning of Associated Enterprises > Meaning of Arm's Length Pricing > Methods of Arm's Length Pricing > TP Certification and Documentation and > Penalties

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Note on International Transfer Pricing Regulations in India
In the wake of globalization, we frequently come across entities having branches/subsidiaries/other
related parties in multiple countries. With different countries taxing income at different rates, multi-
national companies constantly strive to minimise tax burden by trying to shift profits in tax jurisdictions
with lower tax rates. Hence, to avoid this situation, Transfer Pricing Regulations in India mandate
international transaction between related parties (term used in the regulations in Associated Enterprises)
to be carried out at Arm’s Length Pricing (ALP) principles. In simple terms, ALP requires international
transactions among related parties to be priced in the same way as a transaction between
independent/unrelated enterprises.
To understand Indian regulations around International Transfer Pricing, it is important to understand –
> Meaning of International Transaction
> Meaning of Associated Enterprises
> Meaning of ALP
> Methods of ALP
> TP Certification & Documentation
> Penalties
Meaning of International Transaction
International transaction is a transaction between two or more associated enterprises, either or both of
whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or
provision of services, or lending or borrowing money, or any other transaction having a bearing on the
profits, income, losses or assets of such enterprises.
Meaning of Associated Enterprises
Associated Enterprise means an enterprise –
a. which participates, directly or indirectly, or through one or more intermediaries, in the
management or control or capital of the other enterprise; or
b. in respect of which one or more persons who participate, directly or indirectly, or through one
or more intermediaries, in its management or control or capital are the same persons who
participate, directly or indirectly, or through one or more intermediaries, in the management or
control of the other enterprise.
Regulations also provide additional conditions under which the relationship of associated enterprises is
deemed.

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Meaning of Arm’s Length Pricing
The Arm’s Length Price of a transaction between two associated enterprises is the price that would be
paid if the transaction had taken place between two comparable independent and unrelated parties,
where the consideration is only commercial.
Methods of ALP
Following 5 methods are used to determine ALP –
> Comparable Uncontrolled Price (CUP) Method
Under this method, the price charged for property or services transferred in a controlled
transaction between associated enterprises is compared with the price charged for comparable
property or services transferred in an uncontrolled transaction between independent
enterprises under comparable circumstances.
> Resale Price Method
This method determines the appropriate transfer price by ascertaining the price at which a
product that has been purchased from a related enterprise is resold to an independent
enterprise.
> Cost-plus method
Under this method, the arm’s length price is determined by adding an arm’s length
mark-up to the costs of the supplier supplying goods to a related purchaser.
> Profit Split Method
This method seeks to eliminate the effect on profits of special conditions made or imposed on
a controlled transaction by determining the division of profits which the independent
enterprises would have expected to realise from engaging in the transaction or transactions.
> Transactional net margin method (TNM)
This method determines the net profit margin relative to a base of costs, sales, or assets, etc.
that a taxpayer realises from a controlled transaction.
TP Certification & Documentation
Every person who enters into an international transaction during a previous year is required to obtain
an audit report in Form 3CEB from a Chartered Accountant certifying correctness of the international
transactions; documents maintained and other allied aspects.

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Penalties
Stringent penalties are provided for non-compliance with the transfer pricing regulations. The penalty
for under-statement of profits is minimum 100% and maximum 300% of tax on differential profits.
Failure to file CA’s report under Form 3 CEB attracts penalty of Rs. 1 Lac. Further, penalty@2% of the
value of the international transaction entered into by him, if the person:
> fails to keep and maintain any such document and information as required;
> fails to report such international transaction which is required to be reported; or
> maintains or furnishes any incorrect information or document.
Lately, India has seen significant litigations in the area of international transfer pricing. This necessitates
a careful analysis and planning before entering into international transactions with associated
enterprises to mitigate transfer pricing adjustment risk. Our range of advisory services in the domain of
international transfer pricing include –
> Planning & advisory; and
> Audit; Compliance & Documentation
About I+B
I+B is a Pune (India) based firm of Chartered Accountants and Business Advisors. We are an A-Team of
finance professionals on a mission to help businesses improve their profitability. We work closely with
businesses of varied size and industries to grow their business profitably. We deliver cutting edge
solutions in the domains of assurance, tax, advisory and outsourcing.
Disclaimer
The above piece of information is only a gist of quoted regulatory provisions and does not constitute an
advice on any particular matter. Professional advice must be sought before acting upon this update. I+B
expressly disclaims any liability of whatsoever nature arising out of any action taken on the basis of this
update. Without prior permission of I+B, this update may not be quoted, in whole or in part or otherwise
referred to in any communications.