Transfer Pricing: formula sheet

Key formulas

Core rule: income

Income from international transaction or specified domestic transaction = determined having regard to arm's length price

Section 161(1). Applies to income.

Core rule: expense and interest

Allowance for expense or interest = determined having regard to arm's length price

Section 161(2). The deduction allowed may be restricted to the arm's length figure.

Cost sharing rule

Cost allocated or contributed by an associated enterprise = arm's length price of the benefit, service or facility

Section 161(3). Applies where associated enterprises agree to allocate or contribute to costs.

One-way rule

Section 161 not applicable if the ALP determination reduces income or increases loss (as per books)

Section 161(4). No downward adjustment is allowed under this section.

Adjustment amount

Primary adjustment = Arm's length price − Price actually charged (where it increases income)

Use for a sale or income item. For an expense, adjustment = Price paid − ALP.

Methods

CUP, Resale price, Cost plus, Profit split, TNMM, or other prescribed method

Section 165(1). Use the most appropriate method (covered in detail in Arm's Length Price and Computation Methods).

Methods under section 165(1)

CUP | RPM | CPM | PSM | TNMM | other prescribed method

Choose the most appropriate method, not the one that gives the lowest adjustment.

CUP method

ALP = price in comparable uncontrolled transaction (after adjustments for differences)

Adjust for differences such as quantity, credit terms, freight and quality.

Resale price method

ALP = Resale price to independent party − Gross profit margin − Other costs (customs duty etc.)

Gross margin = resale price × gross profit rate earned in comparable uncontrolled transactions.

Cost plus method

ALP = Direct and indirect cost of production + Normal gross mark-up on that cost

Mark-up % is applied to cost, not to selling price.

TNMM

Net profit margin = Operating profit ÷ Base (cost, sales or assets); ALP operating profit = Base × comparable margin

Compare margin of the tested party with margins of comparables. Choose a base that fits the functions.

Tolerance rule, section 165(3)(a)(ii)

Actual price accepted if |ALP − actual price| ≤ notified % of actual price (not above 3%)

The percentage is notified by the Central Government. Tolerance is tested against the actual price.

Adjustment to income

Primary adjustment = ALP − Actual price (for a sale by the assessee); Actual price − ALP (for a purchase)

Income of the assessee goes up. No deduction under Chapter VIII on the enhanced income, section 165(7).

Arm's length price where one price is determined

ALP = price determined by the most appropriate method (section 165(3)(a)(i))

Used when the method gives a single price.

Tolerance band

If |ALP − actual price| ≤ notified % of actual price (notified % not above 3%), ALP = actual price

The band is a percentage of the actual price, not of the ALP. The Act says 'does not exceed', so a variation exactly at the limit is within the band. Use the percentage the question gives.

Primary adjustment

Adjustment = ALP − actual price (for an expense or purchase paid, the excess of actual over ALP is disallowed; for a sale or receipt, the shortfall is added)

Applies only when the adjustment increases total income or reduces loss. Where tolerance applies, no adjustment arises.

Arithmetic mean

Mean = (sum of the prices) ÷ (number of prices)

Used where the prescribed manner requires it, usually when the set is small. Check the question for the instruction.

Comparability factors

Product or service characteristics + functions, assets, risks (FAR) + contract terms + economic conditions + business strategies

List these when asked how comparables are selected.

No Chapter VIII deduction on enhanced income

Deduction under Chapter VIII not allowed on income by which total income is enhanced (section 165(7))

A standard conditional statement for adjusted income.

Conditions for reference (s.166(1))

Transaction in tax year (international / specified domestic) + AO considers it necessary or expedient + previous approval of Pr. CIT / CIT

The AO may refer; reference is not automatic.

Time limit for TPO order (s.166(7))

Order on or before one month prior to the month in which the assessment limitation expires

If limitation expires on 31 March, order by 31 January; if on 31 December, order by 31 October. This replaced the earlier 60-days-before rule from 1-4-2026.

Minimum time for TPO (s.166(8))

If remaining time is under 60 days in cases under s.286(3)(b) or (h), extended to 60 days

Applies to the TPO's limitation period.

Roll-forward of ALP (s.166(9))

ALP fixed for a tax year applies to similar transactions of the next 2 consecutive tax years

Needs the assessee's option in prescribed form, manner and time, and a TPO order within one month from the end of the month of option declaring it valid.

Bar on reference (s.166(2))

No reference if TPO has declared the s.166(9) option valid for that tax year

Under s.166(3), a reference made before or after the declaration is treated as not made.

Rectification (s.166(13))

TPO may amend his own order for mistake apparent from record; s.287 applies; copy to AO, who amends assessment

Rectification, not re-opening on merits.

Who files the CbC report

Parent resident in India → parent (or alternate reporting entity) files within 12 months from the end of the reporting accounting year

Section 511(2). For an Indian parent, the accounting year is the tax year.

Indian subsidiary of a foreign group

Notify under s.511(1); file only if s.511(4) applies

Applies if parent's country has no filing obligation, no exchange agreement with India, or there is a systemic failure intimated to the entity.

Several Indian entities

One entity may file for all if the group designates it and informs the authority in writing

Section 511(5).

Threshold exemption

Section 511 does not apply if consolidated group revenue of the preceding accounting year does not exceed the prescribed amount

Section 511(8). The amount is prescribed, not in the Act.

Notice response time

30 days from receipt of notice + extension up to 30 more days on application

Section 511(7).

Penalty for not filing the CbC report

₹5,000 per day (failure up to one month); ₹15,000 per day for days beyond one month

Section 459(1).

Penalty for not answering a notice

₹5,000 per day from the day after the period expires

Section 459(2).

Continued default after penalty order

₹50,000 per day from the date of service of the order

Section 459(3). It replaces the earlier daily rates.

Inaccurate information

₹5,00,000

Section 459(4): known at filing and not reported, found later and not corrected within 15 days, or inaccurate reply to a notice.

APA validity

APA period ≤ 5 consecutive tax years

Section 168(4). The period is as specified in the agreement.

APA roll back

Roll back period ≤ 4 tax years before the first APA year

Section 168(9). Subject to prescribed conditions, procedure and manner.

Threshold for secondary adjustment

Primary adjustment ≥ ₹1 crore

Section 170(1). It applies where the adjustment is made by the assessee in the return, made by the AO and accepted, determined by an APA, made as per safe harbour rules, or arises from a mutual agreement procedure (MAP) resolution.

Excess money

Excess money = ALP determined in primary adjustment − price actually charged

Section 170(9)(b). It is the amount to be repatriated.

Optional additional tax

Additional tax = 18% × excess money not repatriated

Section 170(5). It is final tax. No credit is allowed and no other deduction applies to that amount. After payment, no secondary adjustment or interest from that date.

Modified return after APA

Time limit = 3 months from the end of the month in which the APA was entered into

Section 169(1). The return is limited to the agreement.

Quick revision

• Transfer pricing aims to make related-party cross-border pricing match the arm's length price.
• An adjustment that raises total income or reduces loss is a primary adjustment.
• Pick the most appropriate method, and justify the choice in your answer.
• ALP adjustment equals ALP minus actual price, applied in the direction that increases income or reduces loss.
• Section 167: safe harbour means circumstances in which the tax authorities accept the declared transfer price.
• Section 168: an APA is entered into by the Board with Central Government approval.
• An APA is valid for a period not exceeding five consecutive tax years, as specified in it.
• An APA is binding on the assessee and on the tax authorities for that transaction, but not if law or facts change.
• An APA obtained by fraud or misrepresentation can be declared void ab initio.
• Section 170: secondary adjustment applies where the primary adjustment is ₹1 crore or more.
• Unrepatriated excess money is deemed an advance to the associated enterprise, with interest computed as prescribed.
• Option to pay additional tax at 18% on the excess money; it is final, with no credit and no deduction, and ends the secondary adjustment from the date of payment.

Common mistakes

• Applying transfer pricing to every transaction between two Indian companies Fix: Domestic deals are covered only if they are specified domestic transactions. Check the listed kinds first.
• Calling a transaction international when both parties are Indian residents Fix: Test the parties. At least one must be a non-resident, and the parties must be associated enterprises.
• Applying the cost plus mark-up to the selling price instead of to cost. Fix: For CPM, ALP = cost × (1 + mark-up %). For RPM, margin is a % of resale price, so ALP = resale price × (1 − margin %).
• Testing the tolerance limit against the ALP instead of the actual price. Fix: Section 165(3)(a)(ii) measures the variation as a percentage of the actual price. Compute the percentage on the actual price.
• Computing tolerance on the arm's length price instead of the actual price. Fix: Section 165(3)(a)(ii) says the percentage is of the price at which the transaction was actually undertaken. Always multiply by the actual price.
• Adjusting only the excess over the tolerance band. Fix: If the variation exceeds the band, the ALP replaces the actual price entirely. The adjustment is the full difference.
• Saying the AO must refer every international transaction to the TPO. Fix: The section says the AO "may" refer when he considers it necessary or expedient. It is discretionary.
• Forgetting the approval of the Principal Commissioner or Commissioner. Fix: Always list approval as a condition of a valid reference.
• Saying every Indian subsidiary of a foreign group must file the CbC report. Fix: Section 511(1) requires notification. Filing arises only under s.511(4) triggers, and s.511(6) can switch it off.
• Applying ₹15,000 per day from the first day of delay. Fix: Use ₹5,000 per day up to one month and ₹15,000 per day only for days beyond that. Show both slabs.

Exam tips

• Write the section number (161 for the charging rule, 165 for ALP determination) beside each point. It shows you know the law.
• In case questions, spell out why the parties are associated and why the transaction is international or specified domestic before you compute.
• Always do the section 161(4) check. Examiners often set a trap where the ALP is more favourable to the assessee.
• Keep the definitions of associated enterprise, international transaction and specified domestic transaction from the Act's definition provisions ready to quote, since the MCQs test their conditions.
• Show the adjustment as a one-line subtraction. It earns method marks even if a later step slips.
• In MCQs, the usual traps are mark-up versus margin and the base for the tolerance test. Read the base word before computing.
• In case-study answers, always give one reason for your choice of method, tied to functions and the nature of the transaction.
• Quote section 165(3), 165(4), 165(5) and 165(7) precisely. Only the cap of 3% is fixed in the Act; the actual percentage is notified.