Transfer Pricing (Sections 92 to 92F)

Transfer pricing is DT's highest-stakes chapter — 8-14 marks every attempt

under the new scheme, often the deciding margin between a 60 and a 75. The

core idea is straightforward (cross-border transactions between related

parties must be at arm's length); the complexity sits in the methods,

compliance, and the safe-harbour / advance-pricing-agreement framework.

1. The Arm's Length Principle (ALP)

When an Indian enterprise transacts with an Associated Enterprise (AE)

outside India, the price of the transaction must be the same as it would

have been between unrelated parties dealing at arm's length under

comparable circumstances. If the actual price differs, the income is

adjusted upward (downward adjustments are not allowed under Indian law).

The principle was originally drawn from the OECD Transfer Pricing

Guidelines and codified in the Indian Income Tax Act under Section 92.

2. Associated Enterprise (Section 92A)

Two enterprises are AEs if any of several relationships apply — direct or

indirect participation in management, control, or capital. The thresholds

include 26% voting power, advance of >51% of book value of assets as loan,

guaranteeing more than 10% of borrowings, and similar tests across 13

deeming clauses.

Crucial nuance: deemed AE relationships (Section 92A(2)) often catch

students out — for example, an enterprise that purchases 90%+ of its raw

material from a single supplier is deemed an AE even with no equity

linkage.

3. International transaction (Section 92B)

An "international transaction" between AEs covers:

• •Sale or purchase of tangible or intangible property
• •Provision of services
• •Lending or borrowing of money
• •Mutual agreement for cost or expense sharing
• •Any transaction having a bearing on profits, income, losses, or assets
• •Restructuring or reorganisation transactions (deeming provision)

The transaction does not need to be between an Indian and a foreign

party for Section 92B(2) deemed cases — specified domestic transactions

above ₹20 crore are also covered (Section 92BA).

4. The five (now six) methods

Section 92C and Rule 10B specify the methods. The "most appropriate

method" (MAM) is selected based on the nature of the transaction, the

class of comparables available, and the availability of reliable data.

TNMM dominates Indian practice — ~70% of TP studies use it. ICAI questions

often test TNMM mechanics: identify the tested party, select the Profit

Level Indicator (PLI — typically OP/OC or OP/Sales), benchmark against

comparables, compute the arm's length range.

5. The arm's length range (Section 92C(2))

If a dataset of comparables yields:

• •One value → that's the ALP
• •2-5 values → arithmetic mean; tolerance band of ±3% (or ±1% for wholesale

trading) applies

• •6 or more values → the 35th-65th percentile range; if the tested price

falls within, no adjustment; if outside, the ALP is the median (50th

percentile)

Examiners love a 6-mark sub-part on this — given 6+ comparable margins,

identify the range, locate the tested party's margin, and state whether an

adjustment is required.

6. Documentation (Section 92D + Rule 10D)

Every entity with international transactions above ₹1 crore in aggregate

(or specified domestic transactions above ₹20 crore) must maintain:

• •Master File (Section 92D + Rule 10DA) — group-level structure and

policies, filed by the Indian entity if the group exceeds prescribed

consolidated revenue thresholds

• •Local File (Rule 10D) — Indian entity's local TP analysis, retained for

8 years

• •Country-by-Country (CbC) report — for parent of MNE group with

consolidated revenue ≥ €750 million (Section 286)

7. Compliance and dispute machinery

• •Form 3CEB: every entity with international transactions files this

CA-certified report by the due date for filing the return (Section 92E)

• •Advance Pricing Agreement (APA): Section 92CC. Unilateral, bilateral,

or multilateral. Can be rolled back for 4 prior years. APAs have become

the de facto dispute-prevention mechanism for large MNEs in India

• •Safe Harbour (Section 92CB + Rule 10TA-10TG): pre-set margins for

specified sectors (IT/ITES, KPO, contract R&D). Opting in eliminates the

audit risk for that year

• •Transfer Pricing Officer (TPO, Section 92CA): the AO may refer the

case to a TPO; the TPO's order is binding on the AO

• •Dispute Resolution Panel (DRP, Section 144C): for an "eligible

assessee", any TP adjustment requires a draft assessment first; the

taxpayer can approach the DRP within 30 days

8. ICAI exam patterns

Transfer pricing is the single highest-marks topic in DT under the new

scheme — typically 12-14 marks total across compulsory and optional Qs.

9. The 60+ marks topper convention

• •Always cite the section first: "Per Section 92(1) read with Rule

10B..." — earns the authority mark

• •State the relationship test explicitly — name the clause of Section

92A(2) that establishes the AE relationship

• •Justify the MAM before computing — never jump straight to TNMM

numbers without explaining why

• •Show the comparables table with column headings: Company / OP / OC /

PLI. Compute the median or arithmetic mean depending on count

• •State the conclusion as a sentence: "Since the tested party's margin

(X%) falls within the 35th-65th percentile range, no TP adjustment is

required" — earns presentation marks