Transfer Pricing
Rules requiring transactions between related entities, like a parent company and its overseas subsidiary, to be priced as if they were between unrelated parties, to prevent shifting profit to lower-tax jurisdictions.
In short
- Applies when related entities, like a parent company and its overseas subsidiary, transact with each other.
- Requires pricing to reflect the 'arm's length price', what unrelated parties would have agreed to.
- Businesses above specified thresholds must maintain documentation and file Form 3CEB, certified by a chartered accountant.
Transfer pricing rules apply when related parties, most commonly a company and its overseas subsidiary or group entity, transact with each other, and require that pricing on those transactions reflect what unrelated, independent parties would have agreed to, the 'arm's length price.' Without such rules, a group could shift profit into whichever jurisdiction taxes it least simply by mispricing intercompany transactions.
Businesses above specified thresholds engaged in international, and certain domestic, related-party transactions are required to maintain transfer pricing documentation and file a specific accountant's report justifying that their pricing is at arm's length. It's a specialized, document-heavy area of tax compliance, and transfer pricing adjustments by tax authorities are a recurring source of disputes for larger multinational operations in India. The full mechanics, including the arm's length methods and Form 3CEB, are in our guide to transfer pricing in India.
Also referred to as: transfer pricing, TP.
Frequently asked questions
Why do transfer pricing rules exist?
To stop a corporate group from shifting profit into a lower-tax jurisdiction simply by mispricing transactions between its own related entities.
Does transfer pricing only apply to foreign transactions?
No, certain domestic related-party transactions, called specified domestic transactions, are covered too, once their aggregate value crosses a specified threshold.
What is Form 3CEB?
The accountant's certified report that documents international and specified domestic transactions and confirms the pricing method used to arrive at arm's length pricing.
Disclaimer
This glossary entry is for general informational purposes only and does not constitute professional tax, legal, or financial advice. Rules and rates change, so consult a qualified Chartered Accountant for advice specific to your situation.