Transfer pricing in India covers transactions completed by local and foreign companies that exceed a certain value. These transactions are governed by Section 92A-F and Rule 10A-E of the Income Tax Rules of 1962 which has been modernized in 2001.
Below, our Indian company formation officers explain the main requirements imposed by the law, as well as the practical side of such transactions. In such cases, the assistance of accredited accountants in India is recommended, and our team can help you.
What does transfer pricing in India entail?
Transfer pricing refers to the prices of controlled transactions between associated enterprises (AE) operating in and outside India (cross-border transaction), which may occur under different circumstances than those that apply to independent enterprises because intra-group transactions are not subject to market considerations. This is a common method used for tax minimization purposes, which is why strict regulations apply.
In order to implement Indian transfer pricing regulations (TPR) in accordance with Article 9 of the Organization for Economic Co-operation and Development (OECD) guidelines on transfer pricing, the Income Tax Act, 1961 was amended in April 2001. This was done as a measure to stop erosion of India’s tax base.
If you need more information on transfer pricing rules, you can contact our local agents.
Transfer pricing methods in India
The following 6 procedures are listed in the Indian transfer pricing regulations for determining the arm’s length price:
- the transactional net margin approach;
- the comparable unregulated price method;
- the resale price method;
- the cost plus method,
- the profit split method;
- the other approach.
According to the Central Board of Direct Taxes, the 6th method (the other method) is an approach that takes into account the price that has been charged or paid or would have been charged or paid, for the same or similar uncontrolled transactions, with or between non-associated enterprises, under similar circumstances, taking into account all pertinent facts.
The best approach can be any of the six suggested methods, as there is no imposition as to the approach that can be used by Indian companies.
If you need advice on choosing the best transfer pricing method, you can rely on our Indian accountants.
Transfer pricing and the arm’s length principle
As mentioned above, transfer pricing in India is based on the arm’s length principle which relies on Section 92 in the Income Tax Law.
According to section 92F, the arm’s-length price is used in transactions between parties other than AEs under unregulated circumstances. The arm’s-length price will be determined in accordance with the procedures prescribed in Section 92C and shall be determined using the most appropriate approach, as follows:
- according to Section 92(1), all income from overseas transactions must be calculated in respect to the arm’s-length;
- arrangements for cost contribution are covered by section 92(2);
- according to Section 92(3), the income calculated using books of account should not be decreased as a result of applying the transfer pricing regulations.
Moreover, two or more businesses are considered associated enterprises if:
- one of them takes part in the management, control, or capital of another;
- there is also a common share in terms of management, control, or capital in both entities.
Should you need support in setting up a company in India, you can rely on our professionals. As for the accounting part, we can also help with payroll in India.
If you need support in transfer pricing in India, do not hesitate to contact our specialists who are at your disposal with tailored solutions.