Chartered Accountant · ICAI M.No. 153926 · FRN 136869W
The arm's-length principle
When an Indian company transacts with related parties abroad (its parent, fellow subsidiaries), the price must be the arm’s-length price — what unrelated parties would have agreed. This stops profit being shifted out of India by over- or under-pricing inter-company services, goods, loans or royalties. It applies to a foreign subsidiary in both directions.
Methods, documentation and 3CEB
You determine the arm’s-length price using a prescribed method (such as TNMM or CUP), maintain transfer-pricing documentation justifying it, and file an accountant’s report in Form 3CEB with your return. For larger groups, master-file and country-by-country obligations can also apply. TP rules and thresholds are detailed — confirm what applies to you.
Why it matters — an example
Example: an Indian subsidiary bills its US parent for software development. If it charges a thin margin, the tax officer can make a transfer-pricing adjustment, treating more profit as taxable in India, plus interest and penalty. Robust benchmarking and a clean 3CEB defend the margin. TP is the most litigated area for foreign-owned companies, so it pays to get it right early. Our team can prepare your TP study and 3CEB.