Over US-India transactions, you must document arm's-length pricing to avoid steep penalties and adjustments, while sound policies deliver tax savings and protect your operations.
Understanding the Indian Transfer Pricing Landscape
You operate under rules that align intercompany pricing with the arm's length standard; incorrect allocations can invite audits and severe penalties, so ongoing diligence is vital.
Tax authorities prioritize contemporaneous documentation and demonstrated economic substance, so you should maintain clear benchmarking, intercompany agreements and functional analyses to reduce audit risk.
Statutory Framework and the Arm's Length Principle
India prescribes Sections 92-92F of the Income Tax Act to enforce transfer pricing, and you must apply prescribed methods to reflect transactions as if between unrelated parties, supporting the arm's length outcome.
Methods include CUP, resale price, cost plus, TNMM and profit split; you will need to select and justify the most reliable method with credible comparables and analysis to avoid adjustments.
Compliance Requirements for US Multi-National Enterprises
US parented groups must prepare a master file, local file and a transfer pricing study; you must ensure these documents are contemporaneous, complete and readily available for review.
Filing Form 3CEB by the Indian entity and retaining invoices, contracts and transfer pricing calculations is mandatory; you face penalties and unilateral adjustments if documentation is deficient.
Ensure you keep detailed benchmarking reports, intercompany agreements and evidence of economic substance, since auditors will test functional profiles and comparables when proposing transfer pricing adjustments.
Primary Types of Transfer Pricing Methodologies
Transfer methods are grouped into Traditional Transaction Methods and Transactional Profit Methods, each with different evidence needs and arm's length benchmarks you must document. You should evaluate functional differences and availability of comparables before selecting a method.
This table breaks down the five common approaches and their typical use cases so you can match facts on the ground to the appropriate method.
| CUP | Best when identical third-party prices exist; demands strong comparables. |
| Resale Price | Useful for distributors; focuses on gross margin to cover functions and risks. |
| Cost Plus | Applies to manufacturing/provision of goods; marks up costs to reach arm's length. |
| TNMM | Common for service and distribution models; compares net margins to comparables. |
| Profit Split | Used for integrated operations with high intangibles; splits residual profit per contribution. |
- CUP - direct market prices
- Resale Price - distributor margins
- Cost Plus - manufacturer markup
- TNMM - net margin comparisons
- Profit Split - shared residuals for intangibles
Traditional Transaction Methods
You will rely on the CUP, Resale Price, and Cost Plus methods when direct transaction-level comparables exist or functions are routine. You must document comparable contracts and adjustments to support an arm's length result.
Costs should be allocated carefully and any allocation errors can trigger penalties and transfer pricing challenges by Indian authorities, so maintain robust supporting analyses and intercompany agreements.
Transactional Profit Methods
When transaction-level comparables are scarce, you should turn to TNMM or Profit Split, which use entity-level profitability to assess arm's length outcomes. You must perform a detailed functional analysis to justify the chosen profit indicator.
Profitability measures require careful selection of comparable companies and may need adjustments for differences in risk, assets, or market conditions; weak comparability raises audit risk.
Knowing the TNMM relies on comparable operating margins while the Profit Split suits integrated value chains with significant intangibles, you should model sensitivity scenarios and retain transfer pricing documentation to defend your method choice.
Step-by-Step Compliance and Implementation Process
| Identifying & Categorizing | Method Selection & Application |
|---|---|
Identifying and Categorizing Intercompany TransactionsMap your intercompany transactions by type-services, goods, financing, IP-and assign functional profiles, risk levels, and value drivers so you can create clear documentation and reduce exposure to India's transfer pricing scrutiny. | Selection and Application of the Most Appropriate MethodCompare comparable uncontrolled transactions and choose among methods (CUP, resale, cost-plus, TNMM, profit split) based on data quality, with emphasis on arm's length outcomes and defensible assumptions when you prepare reports. Apply the chosen method consistently, maintain contemporaneous studies and benchmarking, and note that failing documentation can trigger penalties and adjustments during Indian audits, so you must keep reproducible analyses. |
Pros and Cons of Dispute Avoidance Mechanisms
You can achieve greater certainty and lower audit exposure through dispute avoidance mechanisms, while accepting higher upfront compliance costs and potential disclosure that constrains commercial flexibility.
| Pros | Cons |
|---|---|
| Binding rulings (APAs) | Lengthy negotiation and review periods |
| Reduced audit risk | Significant upfront fees and advisory costs |
| Predictable cash flows | Limited eligibility or scope for some transactions |
| Faster resolution vs litigation | Possible public disclosure of terms |
| Stronger cross-border tax certainty (MAP) | No absolute protection from adjustment |
| Improved tax authority relationships | May lock you into outdated methodologies |
Advantages of Advance Pricing Agreements (APAs)
APAs give you binding pricing certainty for covered transactions, significantly reducing the likelihood of future audits and costly disputes while enabling more predictable tax provisioning.
Limitations of Safe Harbour Rules and Cost-Benefit Analysis
Safe Harbour rules can simplify compliance for low-risk transactions, but you may face limited protection if your facts fall outside strict thresholds or if authorities update parameters.
Consider the trade-off between reduced documentation burden and the risk of paying higher taxes when safe-harbour margins do not reflect your actual functions, assets, and risks.
Summing up
Summing up, you must apply arm's-length pricing, maintain contemporaneous transfer-pricing documentation, and choose reliable comparables and methods for intercompany transactions. You should comply with Indian reporting and withholding rules, evaluate APAs or safe-harbour provisions when appropriate, and prepare documentation to defend positions during audits to minimize adjustment risk and penalties.