Transfer Pricing

Transfer Pricing refers to the pricing of goods, services, or transactions between related parties (such as group companies or associated enterprises). The price must be set at Arm’s Length Price (ALP)—as if the transaction were between unrelated parties.

It ensures that profits are not shifted to reduce tax liability.

1. Where Transfer Pricing Applies

Transfer pricing provisions apply to:

• International transactions between associated enterprises (AEs)
• Certain Specified Domestic Transactions (SDT) within India

2. Arm’s Length Principle

The core rule is:

• Transactions must be priced as if they were between independent parties
• Prevents manipulation of profits between related entities

3. Common Transfer Pricing Transactions

• Sale or purchase of goods between group companies
• Provision of services (management, technical, consultancy)
• Royalty payments and licensing
• Loans and financial transactions
• Cost-sharing arrangements

4. Methods to Determine ALP

Common methods include:

• Comparable Uncontrolled Price (CUP) Method
• Resale Price Method (RPM)
• Cost Plus Method (CPM)
• Transactional Net Margin Method (TNMM)
• Profit Split Method (PSM)

Selection depends on nature of transaction.

5. Compliance Requirements

• Maintain detailed transfer pricing documentation
• Obtain audit report in Form 3CEB
• File disclosures in Income Tax Return

6. Tax Implications

• If pricing is not at arm’s length:
  • Income may be adjusted by tax authorities
  • Additional tax, interest, and penalties may apply

7. Importance of Transfer Pricing

• Prevents tax base erosion
• Ensures fair taxation across jurisdictions
• Promotes transparency in group transactions

8. Common Mistakes

• Ignoring applicability in domestic transactions (SDT)
• Inadequate documentation
• Using incorrect pricing method
• Not benchmarking transactions properly

Practical Insight

Most businesses think transfer pricing is just documentation.

It’s not.

It’s about:
👉 how you structure transactions
👉 how profits are allocated

Poor structuring today becomes:

• tax adjustments tomorrow
• penalties later

How N D Savla & Associates Can Help

At N D Savla & Associates, we help you:

• Analyse applicability of transfer pricing
• Determine arm’s length pricing
• Prepare documentation and Form 3CEB
• Handle assessments and disputes