Three-Tier Transfer Pricing Documentation under Indian Law

In order to address the issues arising from the shifting of the tax base from higher-tax jurisdictions to lower-tax jurisdictions and to restrict aggressive tax planning practices, the Organisation for Economic Co-operation and Development (OECD) introduced Base Erosion and Profit Shifting (BEPS) Action Plan 13 in October 2015. With 13 Action Plans, the OECD provided detailed recommendations to curb tax base erosion globally. To align with the OECD BEPS Action Plan 13, Indian legislation amended Section 92D of the Income Tax Act and inserted Section 286 via the Finance Act, 2016. These amendments introduced a three-tier transfer pricing documentation framework in India.

The transfer pricing documentation would help the tax authorities to gather more information in relation to multinational enterprise (MNE). The three tier documentation structure as provided under the Act is  summarised as follows:

Local File Transfer Pricing Requirements in India

The Local File requirement applies to all taxpayers engaging in international transactions aggregating INR 10 million or more during the previous year.

The local file includes:

• Details of the local entity and its associated enterprises.
• Information about international transactions undertaken during the year.
• The method used to determine the arm’s length price and related computations.

While there is no requirement to submit the local file with the tax authorities at the time of filing the return, taxpayers must maintain adequate documentation before filing the transfer pricing form (Form 3CEB) by 31 October of the relevant assessment year.

Master File Transfer Pricing and Threshold Criteria

The Master File provides a qualitative overview of the group’s global activities and transfer pricing policies. Under Section 92D of the Income Tax Act, every taxpayer that is a constituent entity of an international group must furnish information in Form 3CEAA.

The Master File in India is divided into two parts:

Part A:

Requires basic information about the international group and its constituent entity operating in India. Every constituent entity must file Part A, irrespective of whether international transactions occurred during the previous year.

Part B:

Must be filed by constituent entities meeting the following thresholds:

• Consolidated revenue of the international group exceeds INR 5,000 million; and
• Either of the following conditions is met:

  • • Aggregate value of international transactions exceeds INR 500 million; or

    • Aggregate value of international transactions involving intangible property (sale, purchase, transfer, lease, or use) exceeds INR 100 million.

Part B includes information such as group structure, business descriptions, details of intangibles, inter-company financial activities, and overall transfer pricing policies. Both Part A and Part B must be submitted by the due date for filing the income tax return.

Country-by-Country Reporting (CbCR) in India

Country-by-Country Reporting (CbCR) requires taxpayers to furnish quantitative and qualitative information annually for each tax jurisdiction where the MNE group operates. This includes:

• Revenue and profit details
• Income tax paid and accrued
• Number of employees
• Capital and retained earnings
• Tangible assets

CbCR applies to constituent entities of international groups in India when the consolidated revenue of the group, as reflected in its consolidated financial statements, exceeds INR 64,000 million during the preceding accounting year.

This requirement ensures transparency in global operations and allows Indian tax authorities to assess whether income and taxes are appropriately aligned with the group’s economic activities.

Compliance Framework under Section 92D and Section 286 of the Income Tax Act

The introduction of three-tier transfer pricing documentation under Section 92D and Section 286 of the Income Tax Act aligns India with global best practices. By ensuring robust compliance with MCA accounting standards notification and OECD BEPS principles, Indian entities can strengthen transparency and mitigate risks of transfer pricing adjustments and penalties.