Transfer pricing is one of the most underestimated compliance areas for Indian startups with foreign investors or overseas group entities.
When Does Transfer Pricing Apply?
TP regulations apply to international transactions between associated enterprises. An overseas entity is associated with your Indian company if it holds 26% or more equity. This threshold means almost every VC-funded Indian startup with a foreign investor has TP obligations.
Form 3CEB — the CA certificate for transfer pricing — must be filed by September 30 each year. Failure to file attracts a penalty of 2% of the transaction value.
Benchmarking Methods
| Method | Best For |
|---|---|
| CUP (Comparable Uncontrolled Price) | Commodity transactions, standard services |
| TNMM (Transactional Net Margin Method) | Most IT services, software development |
| CPM (Cost Plus Method) | Manufacturing, contract R&D |
| PSM (Profit Split Method) | Unique intangibles, integrated operations |
Practical Tips
- Set up intercompany agreements before transactions begin, not after the fiscal year ends
- TNMM is generally most defensible for Indian IT services entities
- Prepare transfer pricing documentation contemporaneously — not at the time of audit
- File Form 3CEB before September 30