What Is Transfer Pricing? A Plain-English Guide for Indian Businesses
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Two companies in the same group buy and sell from each other all the time — a parent charges its Indian subsidiary for software, an Indian exporter bills its US affiliate for services. The price they set is not a private matter; the tax department has a view on it. Transfer pricing is the set of rules that decides whether that internal price is acceptable, and getting it wrong is one of the most litigated areas in Indian tax. This guide explains what transfer pricing means, when it applies in India, how the arm's length price is worked out, and which methods the law recognises — in plain language, for finance teams and advisors who want the fundamentals right. The same primary-source approach drives AskSolique's tax research platform for CA firms.
What transfer pricing means
At its simplest, transfer pricing is the price charged in a transaction between two related parties — typically companies within the same multinational group, called associated enterprises. Because the two sides are not independent, they could set a price to shift profit to wherever tax is lowest. Transfer pricing rules exist to stop that, by requiring the price to match what unrelated parties would have agreed in the open market.
That open-market benchmark is the arm's length price. The whole regime rests on one principle: a transaction between associated enterprises should be priced as if it were between strangers dealing at arm's length. In India, this is set out in Sections 92 to 92F of the Income-tax Act, 1961 and the related rules, and you can see the primary sources AskSolique indexes for this chapter of the Act.
When transfer pricing applies in India
The rules bite in two situations, both turning on a relationship between the parties rather than the size of the deal alone.
- International transactions: any transaction between associated enterprises where at least one is a non-resident — services, goods, loans, royalties, guarantees, cost-sharing. There is no minimum value for the Form 3CEB report; detailed documentation under Rule 10D becomes mandatory once the aggregate crosses ₹1 crore.
- Specified domestic transactions: certain specified domestic transactions covered by Section 92BA, but only where the aggregate exceeds ₹20 crore in the year.
An associated enterprise is, broadly, one that participates in the management, control or capital of the other — directly or through common control. A subsidiary, holding company or commonly controlled affiliate may be an associated enterprise, but the specific conditions in Section 92A should be checked. The domestic side is covered in detail in our guide to domestic transfer pricing and Section 92BA.
How the arm's length price is determined
You cannot simply assert that a price is fair. The arm's length price is established under Section 92C by comparing the controlled transaction with comparable uncontrolled transactions — deals between independent parties in similar circumstances. This comparability analysis, supported by benchmarking against databases of independent companies, is the heart of a transfer pricing study.
Where Rule 10CA's range mechanism applies, a dataset of six or more entries can produce an arm's length range from the 35th to the 65th percentile, subject to the prescribed conditions; multiple-year data may also be relevant where the rules permit its use. The conclusion is documented in the study, with the required Rule 10D documentation prepared contemporaneously and existing latest by the specified date — one month before the return due date — rather than being assembled after a notice arrives.
The transfer pricing methods India recognises
Section 92C read with Rule 10B prescribes five methods for computing the arm's length price, plus a residuary "other method" under Rule 10AB. India applies no fixed hierarchy — the taxpayer selects the most appropriate method for the transaction, and must justify that choice.
| Method | In short | Typically suits |
|---|---|---|
| Comparable Uncontrolled Price (CUP) | Compares the price directly with an independent transaction | Commodities, loans, royalties with close comparables |
| Resale Price Method (RPM) | Works back from the resale price less a normal gross margin | Distributors reselling without adding much value |
| Cost Plus Method (CPM) | Adds a normal gross mark-up to the supplier's cost | Manufacturers and service providers to the group |
| Profit Split Method (PSM) | Splits combined profit by each party's contribution | Highly integrated operations, unique intangibles |
| Transactional Net Margin Method (TNMM) | Compares net profit margins against comparables | Captive service units; the most commonly used |
In Indian practice, TNMM is the most frequently applied method, particularly for captive IT and back-office units billing a foreign parent. Choosing and defending the method is where a research tool earns its place — AskSolique's research workspace lets you reason over the Act, rules and tribunal decisions on method selection with every citation shown.
What compliance actually involves
Knowing the concept is one thing; the annual obligations are another. For a company with qualifying transactions, three things typically follow: a transfer pricing study justifying the pricing, the maintenance of documentation under Rule 10D, and the accountant's report in Form 3CEB certified by a chartered accountant. Eligible multinational groups may also have Master File (Form 3CEAA) and Country-by-Country reporting obligations, subject to the prescribed conditions and thresholds.
The report is time-bound and the deadlines sit apart from the ordinary tax-audit calendar — a point worth checking every year. We cover the filing mechanics, the current deadlines and this year's deadline anomaly in our guide to the transfer pricing audit and Form 3CEB due dates.
Why it matters more than most compliance
India is one of the most active transfer pricing jurisdictions in the world, and adjustments run into large numbers each year. An unsupported price is not merely a disclosure gap — it can lead to an addition to income, interest, and penalties, and often years of litigation before the tribunals and courts. Because the documentation must be contemporaneous, the work cannot be back-filled once a query lands. Treating transfer pricing as a year-round discipline, rather than an October scramble, is what separates a defensible position from an expensive one.
The bottom line
Transfer pricing is the rulebook for pricing transactions between related companies at arm's length, so that profit is taxed where the real economic activity happens. In India it applies to international transactions of any value and to specified domestic transactions above ₹20 crore, with the arm's length price set under one of five prescribed methods plus a residuary option. Get the method, the benchmarking and the documentation right, and the annual Form 3CEB becomes a formality rather than a risk. If your firm wants every transfer pricing position reasoned over Indian primary sources with the citation attached, explore how AskSolique supports tax research for CA firms.
Frequently Asked Questions
What is transfer pricing in simple terms?
Transfer pricing is the price charged in a transaction between two related companies, such as a parent and its subsidiary. Because the parties are not independent, tax law requires the price to equal what unrelated parties would agree in the open market — the arm's length price. The rules prevent groups from shifting profit to low-tax locations by manipulating internal prices.
What is the arm's length price?
The arm's length price is the price that would be charged if the same transaction took place between independent, unrelated parties under comparable conditions. It is the benchmark the entire transfer pricing regime rests on. In India it is determined under Section 92C by comparing the controlled transaction against comparable uncontrolled transactions, using one of the prescribed methods and, where needed, the range concept under Rule 10CA.
What are the methods of transfer pricing in India?
India prescribes five methods under Section 92C read with Rule 10B: Comparable Uncontrolled Price (CUP), Resale Price Method, Cost Plus Method, Profit Split Method, and Transactional Net Margin Method (TNMM), plus a residuary "other method" under Rule 10AB. There is no fixed hierarchy; the taxpayer must select and justify the most appropriate method for each transaction. TNMM is the most commonly used in practice.
When does transfer pricing apply in India?
Transfer pricing applies to international transactions between associated enterprises where one party is a non-resident — with no minimum value for the Form 3CEB report — and to specified domestic transactions under Section 92BA where the aggregate exceeds ₹20 crore in the year. Detailed documentation under Rule 10D becomes mandatory once international transactions cross ₹1 crore in aggregate.
Is transfer pricing only for large multinationals?
No. Any company with a cross-border transaction with an associated enterprise is covered, regardless of size, because there is no minimum value for the Form 3CEB report. A small subsidiary billing its foreign parent is in scope. Only the additional Master File and Country-by-Country reporting obligations are reserved for larger groups above specified revenue thresholds.
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