Transfer Pricing Documentation & Study

Transfer pricing provisions under Sections 92 to 92F of the Income Tax Act apply to international transactions between associated enterprises and specified domestic transactions exceeding INR 20 crore. International transactions include the sale or purchase of goods, provision of services, lending or borrowing, intellectual property arrangements, and any other transaction that has a bearing on profits, income, or assets of the enterprise.

Non filing of Form 3CEB attracts a penalty of INR 1,00,000 under Section 271BA. Failure to maintain prescribed documentation under Section 92D or failure to furnish information during assessment under Section 271G attracts a penalty of 2% of the value of the international transaction or specified domestic transaction. These penalties apply in addition to any transfer pricing adjustment and consequential interest under Section 234B.

The Master File requirement applies to constituent entities of MNE groups whose consolidated group revenue exceeds INR 5,500 crore. Country by Country Reporting is mandatory for ultimate parent entities of MNE groups with consolidated annual turnover exceeding EUR 750 million or INR 6,400 crore in the preceding accounting year. Both filings follow prescribed formats and must be submitted within the statutory deadlines under Rule 10DA and Rule 10DB respectively.

Safe harbour provisions under Section 92CB allow eligible assesses to declare their international transactions at or above prescribed margins, which the tax authority accepts without further scrutiny. For AY 2026-27, the Union Budget has revised the safe harbour margin for IT and IT enabled services to 15.5% for transactions up to INR 2,000 crore. Safe harbour elections are made through Form 3CEFA and offer certainty and reduced compliance burden for qualifying transactions.

An Advance Pricing Agreement is a binding arrangement between a taxpayer and the Central Board of Direct Taxes that determines the arm's length price or pricing methodology for future international transactions over a specified period, typically five years with a possible rollback of four preceding years. APAs provide certainty on transfer pricing positions, eliminate the risk of adjustment for covered transactions, and significantly reduce litigation exposure for recurring intercompany arrangements.

While documentation is typically finalised after the financial year closes, it must be contemporaneous meaning it should reflect the facts, functions, and economic conditions as they existed during the year, not reconstructed to fit a desired outcome. The documentation must be in place before the Form 3CEB filing deadline of 31st October and must be furnished to the Assessing Officer within 30 days of a written request during assessment proceedings.

Rule 10C of the Income Tax Rules requires that the Most Appropriate Method be selected based on the nature of the transaction, the availability of reliable data, and the degree of comparability between the controlled and uncontrolled transactions. The prescribed methods under Rule 10B include the Comparable Uncontrolled Price method, Resale Price method, Cost Plus method, Transactional Net Margin method, and Profit Split method. The selection must be documented with a reasoned analysis of why the chosen method produces the most reliable arm's length result.