Transfer Pricing

Chapter X of the Income Tax Act 2025 (transfer pricing provisions, formerly Sections 92-92F of the 1961 Act) applies to international transactions between associated enterprises (AEs) — entities related by 26% or more equity, management control, or board composition. Any person who has entered into international transactions with AEs and whose aggregate transaction value exceeds 1 crore in a tax year must: (a) maintain documentation under Rule 10D of the Income Tax Rules; and (b) obtain a Form 3CEB certification from a CA — due October 31 of the relevant assessment year. Domestic transfer pricing provisions under the Income Tax Act 2025 apply to Specified Domestic Transactions (SDTs) between related parties if their aggregate value exceeds 20 crore in the tax year.

Rule 10B of the Income Tax Rules prescribes: (1) Comparable Uncontrolled Price (CUP) — most reliable when identical third-party transactions exist; (2) Resale Price Method (RPM) — for distributors who buy and resell without significant value addition; (3) Cost Plus Method (CPM) — for contract manufacturers and service providers with ascertainable costs; (4) Profit Split Method (PSM) — for highly integrated, unique transactions between AEs; (5) Transactional Net Margin Method (TNMM) — the most widely used method, comparing net profit margins with uncontrolled comparable companies. The Most Appropriate Method (MAM) rule under Rule 10C requires the taxpayer to select and document the method that gives the most reliable arm's-length result for the specific transaction.

The Income Tax Act 2025 retains the APA framework (formerly Section 92CC of the 1961 Act) — a binding agreement between the taxpayer and the CBDT specifying the TP methodology for future international transactions. A prospective APA covers up to 5 years; a rollback covers the 4 preceding years, providing certainty retroactively. Unilateral APA: only between the taxpayer and the CBDT — does not bind the foreign tax authority, so double taxation risk remains. Bilateral APA: negotiated between CBDT and the competent authority of the treaty partner country — eliminates double taxation on covered transactions. APAs are recommended for taxpayers with annual TP adjustments above 5 crore, complex intercompany IP or service charge structures, or pending MAP proceedings under a DTAA.

CBDT Safe Harbour Rules under Rule 10TD of the Income Tax Rules (amended in 2023) allow eligible taxpayers to declare specific international transactions as arm's length if: IT or ITeS software development and BPO services — operating profit margin at least 17% for transactions up to 200 crore; KPO (knowledge process outsourcing) — at least 24%; contract manufacturing — at least 10%; intra-group loans in Indian rupees — interest rate between 8% and 12%; financial guarantees issued to AEs — commission of at least 1%; receipt of low-value-adding intra-group services — cost plus 5%. If the taxpayer files Form 3CEFA electing safe harbour and meets the applicable condition, no benchmarking study is required and that transaction is not selected for TP scrutiny.

If a case is selected for TP scrutiny, the Transfer Pricing Officer issues Form 3D calling for documentation maintained under the Income Tax Act 2025. If the TPO makes an upward adjustment, the Assessing Officer passes a draft assessment order and the taxpayer can file objections before the Dispute Resolution Panel (DRP) within 30 days — the DRP framework is preserved under Section 275 of the Income Tax Act 2025 (formerly Section 144C of the 1961 Act). Penalty for underreporting arising from a TP adjustment: 50% of tax on underreported income, or 200% if deemed misreporting — under Section 439 of the Income Tax Act 2025 (formerly Section 270A of the 1961 Act). A separate documentation penalty of up to 2% of the international transaction value applies for failure to maintain or furnish TP documentation — even when no TP adjustment is ultimately made.