Home

Internal

Deutsch|English

Insights: Employer of Record – a country overview of opportunities and limits » |

Worldwide

India: FAQ – Transfer Pricing regulations in India

published on 26 July 2023 | Reading time approx. 13 minutes

In an era of liberalisation and globalisation of trade and investment and the emergence of the digital economy, there is a huge increase in the number of cross-border transactions and the complexity and speed with which global business can be transacted. The bulk of this global trade revolves around Multinational enterprises (“MNEs”) and their businesses, and it is usually implied that MNEs structure their cross-border transactions in a manner that enables them to utilise their resources optimally and to save on their operational costs (which may also include an element of tax cost related savings). In such a situation, when the consideration between related parties does not reflect the market determined prices, the profit arising from such transactions, the consequent tax liabilities of related parties, and the tax revenues of the host countries, can be distorted.

Given this background, the respective host country needs to ensure that its tax base is protected, and for this reason, specific Transfer Pricing Regulations play a pivotal role for each country including India.

In this regard, we have provided brief responses to the most commonly asked questions regarding Transfer Pricing Regulations (“Indian TP Regulations”/“TP Regulations”/“Regulations”) in India. These responses can serve as preliminary guidance for your Organisation, if you are contemplating entering India either through the establishment of an Indian subsidiary and/or Project or Branch office and/or under a Joint Venture, etc. and such a resultant entity may be subject to these Regulations.

Frequently asked questions on Indian TP Regulations:

When were the TP Regulations in India introduced? »
What is the meaning of the term “Associated Enterprise”? »
What is the meaning of the term “International Transaction”? »
What are the conditions for the applicability of Indian TP Regulations to an Indian entity? »
Do Indian TP Regulations also apply even to a non-resident enterprise? »
What is the meaning of “Arm’s Length Price” and what are the various methods provided to determine the same? »
Are Indian TP Regulations aligned with OECD TP Guidelines? »
Do Indian TP Regulations cover even transactions carried out by two Indian AEs? »
Do Indian TP Regulations cover transactions by a taxpayer with a third-party entity? »
Are Indian TP Regulations even applicable to a “Permanent Establishment” of a foreign enterprise in India? »
What type of documentation requirements has been prescribed under Indian TP Regulations? »
Is there any penalty prescribed for failure to comply with Indian TP Regulations? »
Is there any mandatory TP audit required on the part of the taxpayer? »
What is the penalty for not furnishing a report from an accountant under section 92E? »
What is the tax assessment mechanism provided under Indian TP Regulations? »
What kind of alternate dispute resolution mechanisms are available under the Indian TP Regulations, to resolve TP disputes with Indian tax authorities? »
Is there an alternative way to achieve Tax and TP related certainty w.r.t the International Transactions of the taxpayer? »
Has India adopted the Thin Capitalisation Rules and has put restrictions in place to limit the Interest payment being made to foreign AE? »
What if in a case if a TP adjustment is made in a case of a taxpayer, then is there any obligation on the taxpayer to repatriate the amount of TP adjustment from its foreign AE? »
What are some of the essential safeguards that an Indian entity shall consider while transacting with its AEs? »

1. When were the TP Regulations in India introduced?

The TP Regulations in India were introduced in the year 2001, vide Finance Act 2001, and are provided under Chapter X of the Income-tax Act, 1961, (“the Act”), and the relevant Rules are provided in Income Tax Rules, 1962 (“the Rules”).

These Regulations were introduced to ensure that any income and/or expense arising to a taxpayer in India, as a result of an international transaction with its Associated Enterprises (“AEs”), shall be computed after the application of an arm’s length principle or to put it in simple terms, to essentially examine whether the transactions with related parties are carried out at arm’s length price.

2. What is the meaning of the term “Associated Enterprise”?

Two or more enterprises are said to be Associated Enterprises (“AEs”) of each other, when one enterprise participates directly or indirectly or through one or more intermediaries, in the management, control, or capital of the other enterprise or in each of the enterprises.

The same is illustrated through a diagram below wherein the entities involved will be considered as AEs of each other:

In addition to the above, certain conditions are provided in the Indian TP Regulations with respect to deemed participation by an enterprise in the management, control, or capital of another enterprise. Some of these important conditions have been specified below:

If an enterprise holds shares carrying 26 percent or more voting power in the other enterprises;
If the loan provided by an enterprise is not less than 51 percent of the book value of the total assets of other enterprises;
If guarantees provided by an enterprise are not less than 10 percent of the total borrowings of other enterprises;
If an enterprise has the power to appoint half of the board of directors/one or more of the executive director in the other enterprise;
If the manufacturing process of one enterprise is wholly dependent on know-how, patent, copyright, trademarks, etc. provided by the other enterprise;
If 90 percent or more of the raw material and consumables required for manufacturing of goods by one enterprise are supplied by the other enterprise; etc.

3. What is the meaning of the term “International Transaction”?

International transaction means a transaction between two or more Associated Enterprises, where either or both of the entities are non-residents.

It is important to note that there has to be a presence of a non-resident AE in the transaction chain, to call it a “International transaction” under the Indian TP Regulations.

Below are a few examples of International Transactions that are usually covered within the domain of the Indian TP Regulations:

Sale of finished goods/traded goods;
Purchase of raw materials/traded goods;
Provision/receipt of intra-group services such as information technology related support/management support/technical support;
Intangible transactions such as royalty/trademarks/patent/know-how/copyrights;
Financing arrangements i.e. receipt of equity share capital, receipt of loan; etc.

4. What are the conditions for the applicability of Indian TP Regulations to an Indian entity?

The Indian TP Regulations apply to an Indian taxpayer (or Indian entity), if such an entity has entered into an International Transaction with its non-resident AE, which eventually gives rise to the taxable income or it gives rise to an expenditure claim for such entity during a relevant financial year (“FY”) (i.e. a period of 1 April to 31 March).

These International Transactions, as described in the above point, can be in the nature of the purchase, sale, or transfer of tangible and/ or intangible property, provision of services, financial arrangements, etc.

It is important to note that the TP Regulations apply to a taxpayer even if the total value of such transactions is negligible like say just Indian Rupees (“INR”) 1 or even if there are any free-of-cost transactions between such taxpayer and its AEs.

5. Do Indian TP Regulations also apply even to a non-resident enterprise?

The Indian TP Regulations also apply to a non-resident AE, in a situation where a particular International Transaction entered into with an Indian resident AE, gives rise to a taxable income in India in the hands of such non-resident AE.

These International Transactions can be in the nature of the receipt of a technical service fee, receipt of royalty, receipt of interest income, etc.

In addition to the above, the TP Regulations in India are also applicable to transactions between two non-resident AEs, however again the precondition is the same, to evaluate whether such a particular international transaction gives rise to a taxable income for such non-resident AE in India.

The International Transactions that may get covered under this scenario would include the transfer of shares by a non-resident AE to another non-resident AEs, wherein the capital gain on such transfer is subject to tax in India.

6. What is the meaning of “Arm’s Length Price” and what are the various methods provided to determine the same?

Arm’s Length Price (“ALP”) is a price that is applied or can be proposed to be applied in a transaction between two unrelated entities i.e. not influenced by one another and carried out in an open market scenario.

The arm’s length price can be determined by the application of the most appropriate method from one of the prescribed six methods, as mentioned below.

Comparable Uncontrolled Price (CUP) Method
Resale Price Method (RPM)
Cost Plus Method (CPM)
Profit Split Method (PSM)
Transactional Net Margin Method (TNMM)
Other Method as prescribed (i.e. Residuary method)

The Most appropriate method to be selected is to be based on the given facts of the case and circumstances surrounding the International Transaction(s) under consideration, carried out by the taxpayer.

7. Are Indian TP Regulations aligned with OECD TP Guidelines?

The Indian TP Regulations were framed with the intention that they can be aligned with the international best practices and Organisation for Economic Co-operation and Development (“OECD”) TP Guidelines.

Given the same, the Indian Tax Authorities and/or the Indian Appellate Authorities usually refer to the OECD TP Guidelines while conducting Transfer Pricing audits and assessments, and/or for guidance and interpretation of TP principles if the same is not expressly covered within Indian TP Regulations.

Further, in the year 2017, India also updated its Regulations to incorporate the recommendations of the OECD Base Erosion and Profit Shifting (“BEPS”) project, and accordingly, it implemented the “Three Tier Documentation” structure for maintaining Transfer Pricing documents as recommended by the OECD.

8. Do Indian TP Regulations cover even transactions carried out by two Indian AEs?

The scope of TP Regulations vide Finance Act, 2012, was widened to cover even certain categories of transactions between two or more domestic enterprises, subject to conditions. These transactions are termed “Specified Domestic Transactions”.

However, it is provided that a transaction shall be regarded as a Specified Domestic Transaction only if the aggregate value of such transaction(s) exceeds the threshold limit of INR 200 million.

In essence, the Specified Domestic Transaction provision covers the transactions of a taxpayer, which is enjoying a tax holiday (i.e. tax exemption) in India and can take advantage of domestic tax arbitrage.

9. Do Indian TP Regulations cover transactions by a taxpayer with a third-party entity?

In general, the Indian TP Regulations are formulated to evaluate whether the cross-border transactions between the Indian entity with its overseas group entity are being carried out at arm’s length or not.

However, the Indian TP Regulations have proceeded a step further and also cover under its ambit, any transaction between an Indian entity with an unrelated entity (Indian or foreign), if:

1. There is a prior agreement between such an unrelated entity and the AE of the taxpayer;

2. The important terms and conditions of the relevant transaction are pre-determined between the unrelated entity and the AE.

In essence, if any transaction is entered into with a third party, wherein the AE of the taxpayer has pre-decided/pre-agreed the important terms (i.e. prices, quantity, credit terms, etc.) of such transaction, and the taxpayer simply enters into that transaction without its involvement in pricing related decisions, then this kind of a transaction(s) are also covered under the Indian TP Regulations, and arm’s length analysis is required to be carried out along with other TP compliances.

10. Are Indian TP Regulations even applicable to a “Permanent Establishment” of a foreign enterprise in India?

In India, the Permanent Establishment (“PE”) of a foreign enterprise is treated as a separate taxable entity from its foreign enterprise, and accordingly, the Indian TP Regulations are also applicable to a PE of a foreign enterprise, to ensure that the Income in the hands of such PE in India, is aligned and allocated after application of Transfer Pricing principles.

11. What type of documentation requirements has been prescribed under Indian TP Regulations?

In the table below, a brief description of the prescribed documentation along with due dates and the threshold limits for applicability of the same to a taxpayer, has been provided:

Type of documentation and due date	Applicability	Threshold (if any)
Local File (Due Date – On or before one month from the due date for furnishing the return on income. For FY 2022-23 it is 31 October)	Every person who has entered into an International Transaction during the year	If the aggregate value of the International Transaction exceeds INR 10 million (i.e. approx. Euro 112,360) in a financial year
Master File: (Due Date – On or before the due date for furnishing the return on income. For FY 2022-23 it is 30 November)	Every constituent entity of the international group operating in India	PART A of Form 3CEAA – No threshold PART B of Form 3CEAA: Consolidated Group revenue > INR 5,000 million (i.e. approx. Euro 56.18 million), and The aggregate value of International transactions in an accounting year: > INR 500 million (i.e. approx. Euro 5.62 million) crores, OR > INR 100 million (i.e. approx. Euro 1.12 million) in intangible property related transactions
Country-by-Country reporting (Due date – Within 12 months from the end of the group accounting year	Every parent entity or the alternate reporting entity, which is a resident of India	Consolidated Group revenue of the Group > INR 64,000 million (i.e. approx. Euro 750 million)

12. Is there any penalty prescribed for failure to comply with Indian TP Regulations?

Various penal consequences may apply to a taxpayer, depending on the type of non-compliances with the Indian TP Regulations, and the same has been provided below:

Type of documentation	Particulars	Penalty
Local File	Failure to maintain information and documents, as required Failure to report International Transactions Maintains or furnishes incorrect information/documents	2% of the value of each such International Transaction
Masterfile	Fails to furnish the information and documents	INR 500,000 (i.e. approx. Euro 5,618)
Country-by-Country Report	Failure to furnish the report to the authority	INR 5,000 – INR 50,000 per day (i.e. approx. Euro 56 – Euro 561)

Non-compliance with the TP Regulations might also lead to additional risk of tax scrutiny of the International Transactions entered into by the taxpayer, which can be time-consuming and could lead to high litigation costs.

13. Is there any mandatory TP audit required on the part of the taxpayer?

As per Section 92E of the Act, every taxpayer who has entered into an International Transaction or Specified Domestic Transaction during the financial year is required to obtain a report from an accountant, certifying that the International Transactions between the Indian company and its AE are at arm’s length.

This report is required to be furnished to the income tax authorities on or before one month, from the due date for furnishing the return of income i.e. for FY 2022-23 the due date is 31 October 2023, since the due date of filing the return of income is 30 November 2023.

14. What is the penalty for not furnishing a report from an accountant under section 92E?

Non-filing of a report from an accountant could attract a penalty of INR 100,000 (i.e. approx. Euro 1,124).

15. What is the tax assessment mechanism provided under Indian TP Regulations?

The Indian TP Regulations provide for a self-assessment mechanism i.e. taxpayer is primarily responsible for determining the arm’s length price, computing its taxable income, and paying the required taxes.

However, the case of a taxpayer can be selected for tax scrutiny, based on certain internal risk assessment parameters adopted by the Income-tax department, then the arm’s length price concerning the International Transactions is examined by the “Transfer Pricing Officer”. The flow of the assessment and dispute resolution process is depicted below:

16. What kind of alternate dispute resolution mechanisms are available under the Indian TP Regulations, to resolve TP disputes with Indian tax authorities?

The Indian TP Regulations provide for the following alternate dispute resolution mechanisms, in a situation when a transfer pricing adjustment has been made or proposed to be made in the hands of a taxpayer:

Dispute Resolution Panel (“DRP”) – It is an alternate dispute resolution mechanism aimed at providing speedy disposal of litigations related to Transfer Pricing matters. The DRP panel consists of 3 Commissioner of Income Tax officers, and proceedings are time bound to provide their decision within 9 months.
Mutual Agreement Procedure (“MAP”) – It is an alternative available to taxpayers under the Tax Treaties (i.e. DTAAs) for resolving disputes arising due to double taxation of incomes/receipts whether it is juridical Double Taxation (When the same income is taxed twice in the hands of a same entity by two or more countries) or economic in nature (When same income is taxed twice in the hands of two separate entities, who are AEs but located in two different tax jurisdictions).

17. Is there an alternative way to achieve Tax and TP related certainty w.r.t the International Transactions of the taxpayer?

The Indian TP Regulations have provided for certain mechanisms in the Act, through which a taxpayer can avoid a possible tax dispute with the Indian Tax Authorities and/ or can achieve tax certainty for the international transactions being carried out or to be carried out with its AE. This can be achieved through the following options:

Advance Pricing Agreement ("APA") – An APA is an agreement between the taxpayer and Indian tax authorities to determine in advance the arm's length price or specify the manner in which an arm's length price is to be determined, for the international transactions to be entered into by the taxpayer. There are specific rules prescribed for filing and entering into an APA, and the same can be evaluated subject to the nature, quantum, and complexity of international transactions under consideration.
Safe Harbour Rules – These rules provide a taxpayer with a simplified and administratively efficient way to determine the arm's length price for its international transactions. The main aim is to reduce the compliance burden and uncertainty associated with transfer pricing by prescribing predefined acceptable profit margins or pricing methodologies.

To illustrate, Safe Harbour Rules under the Indian TP Regulations provide for a minimum profit margin of 17 percent on the operating costs, for an Indian taxpayer providing software development and/ or information technology-enabled services to its foreign AE. Further, a profit margin of 12 percent and 8.5 percent on the operating costs have also been provided for a taxpayer, who is engaged in the manufacture and export of core and non-core auto components respectively.

It's important to note that Safe Harbour Rules are optional and not applicable to all transactions, and are subject to applicable conditions, which are required to be evaluated by the taxpayer based on specific facts of its transactions.

18. Has India adopted the Thin Capitalisation Rules and has put restrictions in place to limit the Interest payment being made to foreign AE?

In general, the aim of implementing the Thin Capitalization Rules in India is to limit the deductibility of interest expenses on loans availed from foreign AE and to restrict the profit shifting by way of excess interest deductions in the hands of the taxpayer.

In this regard, Section 94B of the Act provides that the interest expenses being claimed by a taxpayer shall be restricted to 30 percent of its earnings before interest, taxes, depreciation, and amortization (‘EBITDA’) or interest paid or payable to foreign AE, whichever is less.

However, the said provision does allow for the carry forward of disallowed interest expenses for up to eight subsequent years and is applicable only if the interest expenses paid/ payable to AE exceed INR 10 million in a particular financial year.

19. What if in a case if a TP adjustment is made in a case of a taxpayer, then is there any obligation on the taxpayer to repatriate the amount of TP adjustment from its foreign AE?

In India, the secondary adjustment provision is prescribed under Section 92CE of the Act, which provides for a mechanism to align the actual profits of a taxpayer with the arm's length price determined for its International transactions.

This provision, subject to prescribed conditions, primarily requires a taxpayer to repatriate the amount of actual TP adjustment from its foreign AE, or else a notional interest is added as deemed income in the hands of the taxpayer if funds are not received within the prescribed period.

It's important to note that the secondary adjustment provision in India applies only when the TP adjustment exceeds a prescribed threshold, which is currently specified as INR 10 million.

20. What are some of the essential safeguards that an Indian entity shall consider while transacting with its AEs?

Follow the arm’s length principle while formulating intra-group transfer pricing policies and perform benchmarking analysis to determine the arm’s length price.
Availability of Inter-company agreement between the Indian entity and its AEs, describing the nature of service availed/provided, consideration, duration of the contract, responsibilities of each party to contract, conditions for prior termination, force-majeure clause, etc.
Maintain adequate transfer price documentation to justify the arm’s length price of the International Transactions under consideration.
Check alignment of International Transactions with other statutory regulations i.e. Foreign Exchange Management Act (“FEMA”); Goods and Service Tax (“GST”), Indian Companies Act, etc.

NOTE: Please note that the various compliances related due dates and the monetary threshold limits provided above are applicable for FY 2022-23, as of the date of publishing this article. The same is subject to change in the future, and therefore it is advised to kindly reconfirm the same before relying on the information provided above.

Further, to convert the monetary limits into foreign currency, an exchange rate of INR 89 per Euro has been consistently used, wherever requried. However, it is important to note that exchange rates are subject to frequent fluctuations, so it is recommended to verify the current exchange rate before relying on the information provided above.

Contact

Contact Person Picture

Gauri Bivare

Associate Partner

+91 20 6625 7100

Send inquiry