Chapter 24: Transfer Pricing Provisions, ALP, APA & CbCR
1. Associated Enterprise Deemed Status (Section 92A(2))
| Parameter | Statutory Deemed AE Threshold |
|---|---|
| Voting Power | Holds directly or indirectly $\ge$ 26% of voting power in the other enterprise. |
| Loans Advanced | Loan advanced by one enterprise $\ge$ 51% of book value of total assets of other. |
| Guarantees | One enterprise guarantees $\ge$ 18% of total borrowings of the other. |
| Board Composition | Appoints more than 50% of directors / members of governing board. |
| Raw Materials | Manufacture wholly dependent on raw materials supplied by AE ($\ge$ 90%) at controlled prices. |
| Patents / Intangibles | Business wholly dependent on patents, know-how, trademarks owned by other enterprise. |
2. Arm's Length Price (ALP) Methods (Section 92C)
| Method | Mechanism & Ideal Applicability |
|---|---|
| Comparable Uncontrolled Price (CUP) | Compares price charged in uncontrolled transaction. Most direct method for commodities/loans. |
| Resale Price Method (RPM) | $ ext{Resale Price} - ext{Normal Gross Margin} - ext{Expenses}$. Ideal for distributors who add little value. |
| Cost Plus Method (CPM) | $ ext{Direct/Indirect Production Costs} + ext{Normal Gross Profit Markup}$. Ideal for contract manufacturers. |
| Profit Split Method (PSM) | Allocates combined net profit based on relative contribution/functions. Ideal for unique intangibles. |
| Transactional Net Margin Method (TNMM) | Compares net operating margin to an appropriate base (costs, sales, assets). Most widely used in IT/ITeS. |
Tolerance Band Range:
• Wholesale Traders: $\pm \mathbf{1\%}$ of actual transaction price.
• All Other Enterprises: $\pm \mathbf{3\%}$ of actual transaction price.
• Dataset Rule (6 or more comparables): 35th percentile to 65th percentile range is adopted. If transaction falls within range, it is accepted as ALP!
• Wholesale Traders: $\pm \mathbf{1\%}$ of actual transaction price.
• All Other Enterprises: $\pm \mathbf{3\%}$ of actual transaction price.
• Dataset Rule (6 or more comparables): 35th percentile to 65th percentile range is adopted. If transaction falls within range, it is accepted as ALP!
3. Secondary Adjustment (Section 92CE)
Mandatory where primary TP adjustment exceeds ₹ 1 Crore. Assessee must repatriate excess cash to India within 90 days from the specified date.
Non-Repatriation Consequences:
Excess money deemed to be an advance on which interest is computed indefinitely:
• INR Transaction: 1-year SBI MCLR + 3.25%.
• Foreign Currency Transaction: 6-month SOFR + 3.00%.
• Assessee Option: Pay one-time tax @ 18% + 12% surcharge + 4% HEC = 21.112% on un-repatriated amount!
Excess money deemed to be an advance on which interest is computed indefinitely:
• INR Transaction: 1-year SBI MCLR + 3.25%.
• Foreign Currency Transaction: 6-month SOFR + 3.00%.
• Assessee Option: Pay one-time tax @ 18% + 12% surcharge + 4% HEC = 21.112% on un-repatriated amount!
4. Thin Capitalisation (Section 94B)
Deduction for interest paid/payable to non-resident AE is capped at:
$ ext{Maximum Allowable Interest} = \mathbf{30\%} imes ext{EBITDA}$ (or actual interest, whichever is lower).
• Applies where interest expenditure exceeds ₹ 1 Crore in a FY.
• Disallowed interest can be carried forward for up to 8 Assessment Years.
• Exempted: Banking and insurance companies.
$ ext{Maximum Allowable Interest} = \mathbf{30\%} imes ext{EBITDA}$ (or actual interest, whichever is lower).
• Applies where interest expenditure exceeds ₹ 1 Crore in a FY.
• Disallowed interest can be carried forward for up to 8 Assessment Years.
• Exempted: Banking and insurance companies.
5. TP Documentation: Three-Tier Structure (Rule 10DA & Sec 286)
| Tier | Document & Form | Threshold & Filing Deadline |
|---|---|---|
| Tier 1: Local File | Form 3CEB (Accountant Report) | All international transactions. Filed on or before 31st October (Nov 30 for return). |
| Tier 2: Master File | Form 3CEAA (Rule 10DA) | Consolidated MNE turnover > ₹ 500 Crores AND international transactions > ₹ 50 Crores. Due date: 30th November. |
| Tier 3: CbCR | Form 3CEAD (Section 286) | Consolidated group revenue in preceding accounting year ≥ ₹ 6,400 Crores (€750 Million). Due date: 12 months from end of reporting year. |