A transfer price arises for accounting and taxation purposes when related parties, such as divisions within a company or a company and its subsidiary, report their own profits. When these related parties are required to transact with each other, a transfer price is used to determine costs. Transfer prices generally do not differ much from the market price.

Transfer price is a price that represents the value of goods or services between independently operating units of an organization whereas “transfer pricing” refers to prices of transactions between associated enterprises that may take place under conditions differing from those taking place between independent enterprises.

Transfer pricing generally refers to the price at which goods or services are transferred between associated enterprises. These transactions can include sales of products, provision of services, lending of money, and use of (intangible) assets. Thus, the effect of transfer pricing is that the parent company or a specific subsidiary tends to produce insufficient taxable income or excessive loss on a transaction. For instance, profits accruing to the parent can be increased by setting high transfer prices to siphon profits from subsidiaries domiciled in high tax countries, and low transfer prices to move profits to subsidiaries located in a lower tax jurisdiction.

To simplify, the prices and conditions applied between related parties under the transfer pricing policy should be appropriately within the range of prices and conditions charged between independent companies.

What is the objective behind Transfer Pricing?


“Associated Enterprise” means an enterprise that participates or in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in the management, control, or capital of the other enterprise.

“Arm’s Length Price” refers to the price that should have been charged between related parties had those parties been not related to each other.

“Constituent Entity” means:

  • Any entity of the international group that is included in consolidated financial statements for financial reporting purpose or included if equity share of any entity of the group were to be listed; or
  • Any entity of the group which is excluded from consolidated financial statements on the basis of size or materiality; or
  • Any permanent establishment of an entity of the group if separate financial statements are prepared for financial reporting, regulatory, tax reporting, or internal management control purposes.

Part 1: Applicability and Scope of Transfer Pricing

1. On which transactions transfer pricing is applicable?

Question 1

2. Which transactions are covered under transfer pricing?

Following transactions are covered under Transfer Pricing:

International Transactions Specified Domestic Transactions
• Sale of finished goods • Purchase of raw material or fixed assets
• Sale or purchase of machinery or intangibles •  Reimbursement of expenses paid/received
• IT enabled services • Support services
• Software development services • Technical service fees
• Management fees • Royalty fee
• Corporate guarantee fees • Loan received or paid
• Any expenditure with respect to which deduction is claimed while computing income like rent, interest paid, technical fees paid, etc. • Any transaction related to businesses eligible for profit-linked tax incentives, for example, infrastructure facilities and SEZ units
• Transfer of goods from the eligible business of assessee to the non-eligible business of assessee or to a person related to assessee

3. What are the various types of deemed Associated Enterprise (AE)? 

In the case of A Ltd., the following will be associated enterprise if:

  • A Ltd. holds => 26% voting power in B Ltd. Further, B Ltd. holds => 26% voting power in C Ltd.
  • A Ltd. gives loan to B Ltd. => 51% of the book value of total assets of B Ltd.
  • A Ltd. guarantees => 10% of the total borrowings of B Ltd.
  • B Ltd. appoints > 50% of directors/members of the governing board or one or more executive directors of A Ltd.
    Further, C Ltd. appoints > 50% of directors/ members of the governing board or one or more executive directors of B Ltd.
  • Manufacturing of goods of A Ltd. is wholly reliant on intangible assets of B Ltd.
  • B Ltd. supplies > 90% of raw materials to A Ltd. for manufacturing where the price is influenced by B Ltd.
  • A Ltd. sells goods to B Ltd. at the price decided by B Ltd.
  • A Ltd. and B Ltd have a mutual interest.
  • A Ltd. is controlled by Mr. X/HUF and B Ltd. Is controlled by Mr. X/HUF or relatives of Mr. X/HUF.
  • A (firm/AOP/BOI) =>10% of interest in B

For example,

Everything you need to know about transfer pricing 1

Everything you need to know about transfer pricing 2

Part 2: Methods for Computing Arm’s Length Price

1. What are the methods to compute Arm’s Length Price?

The various methods for computing Arm’s Length Price are as follows:

Question 2

Transfer Pricing Question 2.2

2. What will be the ALP when more than one price is determined from the methods?

Pricing Question 2.3

Note: If the variation of arm’s length price does not exceed 1% in case of wholesale trading and 3% in other cases, such transfer price will be deemed to be arm’s length price as per Rule 10CA of Income Tax Rules.

Wholesale trading means the transaction of trading in goods where purchase cost is 80% or more of the total cost and average monthly closing inventory is 10% or less of the sale of such goods.


X Ltd. manufactures engineering goods, Y Ltd. (unrelated party) also manufactures similar grader as compared to that of X Ltd. Z Ltd. is the associated enterprise of X Ltd.

Determine the best suitable method and the arm’s length price of X Ltd for the following transactions.

Sr. No. Nature of Transaction Method Applicable Arm’s Length Price
1 X Ltd. sold the grader to Z Ltd. and either X Ltd. or Y Ltd. sold the grader to a third party. CUPM • Internal CUPM- Price charged by X Ltd. to the third party

• External CUPM- Price charged by Y Ltd. to the third party

2 X Ltd. had purchased the grader from Z Ltd. and sold the grader to the third party. RPM The purchase price derived after considering the resale price margin of the transaction with the third party
3 X Ltd. sold grader to Z Ltd. and mark-up on the cost charged by Y Ltd. on the transaction with a third party is determined. CPM The price after adding the markup percentage applied by Y Ltd. on the cost base.
4 X Ltd. sold grader to Z Ltd. and the net profit margin charged by Y Ltd. is available. TNMM The price after applying the same net profit margin applied by Y Ltd.
5 X Ltd. and Z Ltd. are into a joint venture for manufacturing graders. PSM Split the profit on the basis of profit divided between Y Ltd. and the third party.

Part 3: Documentation and Compliance

1. What is the documentation structure under transfer pricing?

Question 3

2. What are the documents required to be maintained?

Information and documents to be maintained as per Rule 10D of Income Tax Rules

Basic Documents Supporting Documents
• Details of ownership structure of the enterprise

• Profile of the group in which the enterprise is a part

• Business overview of the taxpayer and associated enterprises

• Details of the transaction (name of the associated enterprise, nature, terms, quantity, value)

• Description of functions performed, risk assumed, assets employed

• Record of relevant financial forecasts/ estimates made, economic analysis and budgets

• Details of the uncontrolled transaction (nature, terms, conditions, analysis to evaluate comparability)

• Details of the method selected for determining the arm’s length price

• Record of actual working, assumptions, policies for determining arm’s length price

• Details of adjustments, if any, made to the transfer price

• Government’s publications, reports, databases and studies

• Reports of market research studies and technical publications

• Price publications including stock exchange and commodity market quotations

• Published accounts and financial statements of the associated enterprises

• Agreements and contracts entered into with associated enterprises or with unrelated enterprises

• Letters and other correspondence documenting any terms negotiated with the associated enterprise

• Documents normally issued in connection with various transactions under the accounting practices followed

3. What is Safe Harbour and discuss its applicability?

  • “Safe Harbour” means circumstances under which the Income Tax Authorities shall accept the transfer pricing declared by the assessee.
  • Safe Harbour Rules were applicable from AY 2013-14 and the rules were revised from AY 2017-18.
  • Eligible transactions to apply under safe harbour rules are:
International Transactions Specified Domestic Transactions
• Provision of software development services

• IT services

• Knowledge process outsourcing services

• Provision of intragroup loans

• Provision of corporate guarantees

• Manufacture and export of auto components

• Receipt of low-value intragroup services

• Provision of contract R&D services relating to software development or generic pharmaceutical drugs

• Supply of electricity

• Transmission of electricity

• Wheeling of electricity

• Purchase of milk or milk products by a co-operative society from its members

4. Which forms are required to be filed under transfer pricing?

Forms Particulars Applicability Timeline
Local file
3CEB Report from the accountant relating to the transaction Every entity having international or specified domestic transaction By 31st October of the assessment year
Transfer Pricing Study Report Every entity having international transaction where the value exceeds INR 1 crore and eligible specified domestic transactions By 31st October of the assessment year
Master file

(Part A)

Basic details of the international group and constituent entity by constituent entity Every constituent entity having international transaction By 30th November of the assessment year

(Part B)

Master file information that provides an overview of the international group’s business operations and transfers pricing policies by  constituent entity Consolidated revenue of international group exceeds INR 500 crores; and

The aggregate value of the international transaction exceeds INR 50 crores, or Aggregate value of international transaction pertaining to intangible property exceeds INR 10 crores

By 30th November of the assessment year
3CEAB (Intimation) Intimation for filing Form 3CEAA by constituent entity In case, multiple constituent entities resident in India. By 31st October of the assessment year
Country by Country reporting
3CEAC Intimation of details of parent entity/alternate reporting entity not resident in India by Constituent entity Consolidated revenue of international group exceeds INR 5,500 crores By 31st January of the assessment year
3CEAD Report by a parent entity or the alternate reporting entity resident in India 12 months from the end of the reporting accounting period
3CEAE Intimation on behalf of the international group – no agreement for the exchange of CbCR by Constituent entity By 31st January of the assessment year
Safe Harbour rules
3CEFA/ 3CEFB Application for opting for safe harbour in  respect of international transaction/ specified domestic transaction Every entity having eligible international transaction under safe harbour rules By 30th November of the assessment year

5. What are the penalties in case of non-compliance?

Particulars Section Penalty
Under-reporting of income 270A(7) 50% of the tax payable on under-reported income
Misreporting of Income 270A(8) 200% of the tax payable on misreported income
Failure to maintain transfer pricing documents or furnishing incorrect information or document 271AA(1) 2% of the value of the transaction
Failure to furnish master file

(Form 3CEAA, 3CEAB)

271AA(2) INR 5,00,000
Failure to furnish the Accountant’s Report

(Form  3CEB)

271BA INR 1,00,000
Failure to furnish transfer pricing documentation to the Transfer Pricing Officer 271G 2% of the value of the transaction
Failure to furnish CbCR report (Form 3CEAC, 3CEAD, 3CEAE) 271GB Up to 1 month- INR 5,000 per day
> 1 month- INR 15,000 per day

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A Ltd., B Pte. Ltd., and C Ltd. are companies under the group of ACE Pte. Ltd. A Ltd. and C Ltd. are domestic companies and B Pte. Ltd. is a foreign company. The consolidated revenue of ACE Pte. Ltd. is INR 950 crores for AY 2020-21. A Ltd. holds 49% of voting rights in B Pte. Ltd. and also C Ltd. appointed three executive directors of A Ltd.

A Ltd. and B Pte. Ltd. had an agreement to provide an IT service worth INR 80 crores to an entity, where A Ltd. invested INR 41 crores and B Pte. Ltd. invested INR 39 crores and the profit earned would be distributed on an equal basis. The profit earned from the transaction is INR 8 crores. A similar agreement exists between P Ltd. and Q Ltd.(unrelated parties) where profit is split on the basis of the amount of investment made.

C Ltd. advanced a loan of INR 220 crores to A Ltd @ 11.9% per annum and also advanced loan of INR 220 crores to XY Ltd.(unrelated party) @12% per annum.