India: Transfer pricing in international transactions – An overview

January 29, 2018

Income Tax Department



Transfer pricing refers to the pricing strategy in play when there is transfer of goods/ services between associated enterprises. Transfer pricing law aims to ensure that transactions between associated enterprises[1] does not happen at an unreasonably favorable and controlled price.

Objective of transfer pricing law

The main objective of transfer pricing law in international transactions is to ensure that transactions between associated enterprises take place at a price as if the transaction was taking place between unrelated parties.

International Transactions between two associated enterprises :[2]

An ‘international transaction’ in the context of transfer pricing law shall include a transaction between two or more associated enterprises, either or both of whom are non-residents wherein there is purchase, sale or lease of tangible or intangible property, or there is provision of services, or there is lending or borrowing of money.

It becomes important to note here that a transaction entered into by an enterprise with a person other than an associated enterprise shall be deemed to be an international transaction entered into between two associated enterprises, if:

  • there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or
  • the terms of the relevant transaction are determined in substance between such other person and the associated enterprise where the enterprise or the associated enterprise or both of them are non-residents irrespective of whether such other person is a non-resident or not.

Arm’s Length Price:

Section 92 of the Income Tax Act, 1961,[3] which deals with the computation of income from international transactions lays down that any income arising from an international transaction shall be computed having regard to the arm’s length price. Note that ‘arm’s length price’[4] means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions.[5]

Most appropriate Method:

As per the nature of the transaction, the most appropriate amongst the following methods [6] shall be utilized to compute the arm’s length price:

  • Comparable uncontrolled price method;
  • Resale price method;
  •  Cost plus method;
  • Profit split method;
  • Transactional net margin method;
  • such other method as may be prescribed by the Central Board of Direct Taxes.

The most appropriate method to be applied for determination of arm’s length price shall be applied in the manner as prescribed under rules 10A, 10AB, 10B, 10C and 10CA of Income-tax Rules, 1962 [7].

Maintenance and keeping of information and document:

It is mandatory for every person who has entered into an international transaction to keep and maintain certain information and documents in that respect. Such information and documents are prescribed under Rule 10 D of Income-tax Rules, 1962.[8] Note that failure to keep and maintain such information would attract a penalty of a sum equal to two per cent of the value of each of such international transaction.[9]

Reference to Transfer Pricing Officer:

If a person enters into an international transaction and the Assessing Officer considers it necessary then he may, with the previous approval of the Principal Commissioner or Commissioner, refer the computation of the arm’s length price in relation to the said international transaction to the Transfer Pricing Officer. [10] Consequently, an adjustment will be made by the concerned officer, if needed.


Associated enterprises entering in international transactions need to ensure that the transactions takes place at an arm’s length price as if the transactions was taking place between unrelated parties in an uncontrolled manner. If such arm’s length price is not ensured and documents are not maintained in respect thereof, adjustments and penalties may be attracted.


Defined under Section 92A of Income Tax Act, 1961. Available at:,%

[2] Defined under Section 92B of Income Tax Act, 1961. Available at:,%

[3] Available at:

[4] Section 92(1) of Income Tax Act, 1961.
[5] 92F (ii) of Income Tax Act, 1961.
[6] 92C (1) of Income Tax Act, 1961.

[7] Available at:

[8] Section 92D of Income-tax Act, 1961.

[9] Section 271AA of Income Tax Act, 1961.

[10] Section 92CA of Income Tax Act, 1961.

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