Transfer Pricing and General Anti Avoidance Rules (GAAR): formula sheet

Key formulas

Core rule (section 161(1) and (2))

Income, and allowance for expense or interest = determined having regard to the arm's length price

Applies to international transactions and specified domestic transactions.

Cost sharing (section 161(3))

Cost allocated or contributed by an AE = determined having regard to the arm's length price of the benefit, service or facility

Applies where two or more associated enterprises agree to allocate or contribute to cost.

One-way rule (section 161(4))

Section 161 does not apply if the ALP determination reduces income or increases loss shown in the books

Tested against the entries in the books for the tax year of the transaction.

Methods (section 165(1))

CUP, resale price, cost plus, profit split, TNMM, or other prescribed method: the most appropriate method

Selection depends on the nature of the transaction, the functions performed and other prescribed factors.

Single price tolerance (section 165(3)(a))

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

Applies only where one price results from the most appropriate method. The percentage is notified by the Central Government.

Multiple prices (section 165(3)(b))

More than one price: ALP determined in the prescribed manner

Do not invent a rule such as average or median unless the question gives it.

Meaning of international transaction

International transaction = transaction between 2 or more associated enterprises + at least one non-resident + falls in section 163(1) heads

All three elements must be present. The list in section 163(1)(a) to (g) is inclusive.

Basic test of association

One enterprise participates, directly or indirectly or through intermediaries, in the management, control or capital of the other; or the same persons participate in both

This is the general test. The deeming tests below are in addition to it.

Voting power test

Holding ≥ 26% of voting power in the other enterprise, directly or indirectly

The same applies where one person holds ≥ 26% in each of the two enterprises.

Loan and guarantee tests

Loan ≥ 51% of book value of the borrower's total assets; guarantee ≥ 10% of the borrower's total borrowings

Check the denominator carefully. Loan is measured on total assets, guarantee on total borrowings.

Board control test

Appointment of more than half of the directors or members of the governing board, or of one or more executive directors or executive members

One executive director is enough. A bare majority test applies only to non-executive appointments.

Dependence tests

Wholly dependent on intellectual property owned or controlled by the other; or ≥ 90% of raw materials supplied by the other (or persons it specifies) on influenced prices; or goods sold to persons specified by the other on influenced prices

These tests are about commercial dependence, not shareholding. Verify exact wording in the Act.

Deemed international transaction

Transaction with outsider + (prior agreement with an associated enterprise OR terms determined in substance with it) + enterprise or its associated enterprise non-resident → deemed international transaction

Section 163(2). The outsider may be resident or non-resident.

Arm's length consequence

Income and allowable expense from the transaction are determined at arm's length price

Section 161(1) and (2). Section 161(4): the rule does not apply if it would reduce income or increase loss as computed in the books.

Methods under section 165(1)

CUP | RPM | CPM | PSM | TNMM | other method prescribed by the Board

The ALP is found by the most appropriate method among these.

Comparable uncontrolled price (CUP)

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

Most direct method. Needs close comparability of product and terms.

Resale price method (RPM)

ALP = Resale price to unrelated party − (Resale price × Gross margin %) − other adjustments

Used for a reseller or distributor who adds little value. Gross margin % is taken from comparable uncontrolled deals.

Cost plus method (CPM)

ALP = Direct and indirect cost of production + (Cost × Gross profit mark-up %)

Used for manufacturers, assemblers or service providers selling to associated enterprises. Mark-up comes from comparable uncontrolled deals.

Transactional net margin method (TNMM)

Net profit margin = Net profit ÷ Base (cost, sales or assets)

Compare the tested party's margin with margins of comparable uncontrolled parties, after adjusting for differences.

Profit split method (PSM)

Combined profit split among associated enterprises in proportion to relative contribution

Used for highly integrated transactions or those involving unique intangibles, where one-sided testing is not reliable.

Choice among results (section 165(3))

One price: that price, or actual price if variation ≤ notified % (not above 3% of actual price). More than one price: as prescribed.

The tolerance range is notified by the Central Government.

Reference to TPO (section 166(1))

Assessing Officer considers it necessary or expedient + previous approval of Principal Commissioner or Commissioner → reference to TPO

Applies where the assessee has entered into an international transaction or specified domestic transaction in the tax year.

TPO order time limit (section 166(7))

Order due at least one month before 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 is the position substituted w.e.f. 1-4-2026; earlier it was sixty days before expiry.

Unreported transaction (section 166(5))

Transaction not referred, or not included in report under section 172 → treated as referred to TPO

The TPO can examine it once it comes to his notice in proceedings.

Option for two following years (section 166(9))

ALP determined for a year may apply 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 exercise declaring it valid. It does not apply to proceedings under Chapter XVI-B.

Failure to furnish section 511 report (section 459(1))

₹5,000 per day up to one month; ₹15,000 per day beyond one month

Imposed by the prescribed authority on the reporting entity.

Failure to produce information on notice (section 459(2))

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

Applies to notice under section 511(7).

Continued default after penalty order (section 459(3))

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

Applies if the failure in (1) or (2) continues after the order is served.

Inaccurate report (section 459(4))

Penalty of ₹5,00,000

Applies if the entity knew and did not inform, did not inform and file the correct report within 15 days of discovery, or gave inaccurate information in response to a notice under section 511(7).

Incorrect report or certificate (section 463)

₹10,000 per report or certificate

Applies to an accountant, Category I merchant banker or registered valuer. Payable on directions of the Assessing Officer, JCIT(A) or CIT(A) who finds the error.

APA validity and binding effect

APA period ≤ 5 consecutive tax years; binds taxpayer and tax authorities; not binding on change in law or facts

Section 168(4) to (6). Void ab initio for fraud or misrepresentation, by Board order with Central Government approval.

APA rollback

Rollback period ≤ 4 tax years before the first APA year

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

Safe harbour meaning

Safe harbour = circumstances in which authorities accept the declared transfer price or section 9(2) income

Section 167(3). The Board makes the rules.

Secondary adjustment trigger

Primary adjustment ≥ ₹1,00,00,000 and made under any one of 5 routes

Section 170(1): own return, AO adjustment accepted, APA, safe harbour, or MAP resolution under section 159 agreement.

Excess money

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

Section 170(9)(b).

Deemed advance

Excess money not repatriated in prescribed time → deemed advance to the associated enterprise, with interest as prescribed

Section 170(2) and (4). Needs the primary adjustment to increase income or reduce loss.

Option to pay additional tax

Additional income-tax = 18% × excess money not repatriated

Section 170(5). Final tax: no credit, no deduction; no secondary adjustment or interest from payment date (sub-sections (6) to (8)).

Applicability of GAAR

Section 178(1): an arrangement of an assessee may be declared an IAA, overriding anything else in the Act; section 178(2): the Chapter can apply to any step or part

Applies to a step or a part, not only the whole arrangement.

Impermissible avoidance arrangement

IAA = main purpose is a tax benefit AND at least one of tests (a) to (d) in section 179(1)

Tests: non-arm's length rights or obligations; misuse or abuse of the Act; lack of commercial substance; non-bona fide means or manner.

Presumption of main purpose

Main purpose of a step or part is a tax benefit ⇒ whole arrangement presumed to have that purpose, unless the assessee proves otherwise

Section 179(2). The burden of rebuttal is on the assessee.

Deemed lack of commercial substance

Section 180(1): (a) substance differs from form; (b) round trip financing, accommodating party, offsetting elements, or disguised funds; (c) location without commercial purpose; (d) no significant effect on business risks or net cash flows

Condition (c) and (d) both exclude the tax benefit when judging purpose or effect.

Not sufficient alone

Period of existence, payment of taxes, and an exit route: relevant but not sufficient (section 180(3))

Use these as supporting factors only.

Objection period in the notice

Hearing/objection period ≤ 60 days, as specified in the notice

The Principal Commissioner or Commissioner sets the period; it cannot exceed sixty days.

Panel time limit

Directions due within 6 months from the end of the month in which the reference was received

Counted from the reference under sub-section (4), not the date of the Assessing Officer's reference.

Exclusions from the time limit

Exclude (a) time for treaty-based inquiries, up to 1 year at most, and (b) period of court stay

The stay period runs until the certified copy of the vacating order is received.

Minimum remaining time

If remaining period after exclusions < 60 days, extend it to 60 days

The six-month period is deemed extended accordingly.

Panel composition

3 members: Chairperson (High Court judge, serving or former) + IRS member + academic/scholar

Term ordinarily one year, extendable up to three years.

Assessment order approval

No assessment or reassessment order with Chapter XI tax consequences without prior approval of the Principal Commissioner or Commissioner

This is a safeguard for the assessee.

Monetary threshold

GAAR applies only if the tax benefit exceeds the prescribed limit

Under the earlier rules the limit was ₹3 crore in the year. Confirm the current prescribed amount.

Quick revision

• Section 161: income, and expense or interest allowances, from international or specified domestic transactions follow the arm's length price.
• Section 161(4): the rule does not apply if it would reduce income or increase loss on the books.
• Section 165(1) methods: CUP, resale price, cost plus, profit split, TNMM, and other prescribed method.
• The most appropriate method is chosen by nature of transaction, functions performed and other relevant factors.
• Single price: actual price may be accepted if the variation is within the notified percentage, not above 3%.
• Before determining the price, the Assessing Officer must issue a show cause notice (section 165(5)).
• Section 167: safe harbour means circumstances in which authorities accept the declared transfer price.
• Section 168: APA is valid up to five consecutive tax years and binds the taxpayer and the authorities.
• APA ceases to bind on change in law or facts bearing on it; fraud makes it void ab initio.
• Section 170: secondary adjustment applies where primary adjustment is one crore rupees or more.
• Section 170: excess money not repatriated in time is a deemed advance; the taxpayer may instead pay 18% additional tax, which is final.
• Section 178: an arrangement, or any step or part of it, may be declared an impermissible avoidance arrangement.

Common mistakes

• Applying transfer pricing to every related-party deal. Fix: Check first that the deal is an international transaction or a specified domestic transaction. Otherwise section 161 does not apply.
• Adjusting the price even when it lowers taxable income. Fix: Always test section 161(4). If the ALP reduces income or increases loss against the books, the section does not apply.
• Treating any related parties as having an international transaction even when both are Indian residents. Fix: Always mark residence first. The non-resident element is a necessary part of the definition in section 163(1), subject to the deemed rule.
• Mixing up the loan and guarantee thresholds, such as using 51% for guarantees or 10% for loans. Fix: Remember: loan 51% of total assets; guarantee 10% of total borrowings. Write the base next to the percentage.
• Treating the methods as a strict order where CUP must always be used first. Fix: Quote section 165(2): the most appropriate method is selected on the nature of the transaction, functions performed and other relevant factors. Justify the choice from the facts.
• Confusing RPM and CPM. Fix: RPM deducts a margin from the resale price (reseller). CPM adds a mark-up to cost (producer or service provider).
• Applying ₹15,000 per day from day one of the delay in the section 511 report. Fix: Charge ₹5,000 per day for up to one month and ₹15,000 per day only for days beyond that month.
• Using the old sixty-day rule for the TPO order deadline. Fix: Use the current text: at least one month before the month in which limitation expires, so 31 January for a 31 March expiry.
• Saying an APA can run for any period or is binding in all situations. Fix: Write: valid for the period specified, not more than five consecutive tax years, and not binding if law or facts change.
• Applying secondary adjustment to every transfer pricing adjustment. Fix: Check both the threshold of ₹1 crore or more and the route in section 170(1) first.

Exam tips

• Write the section numbers: 161 for the principle, 165 for ALP and methods, 166 for reference to the Transfer Pricing Officer.
• Always show the section 161(4) test in a computation answer. It is an easy mark.
• Define the arm's length principle in one sentence before you apply it.
• In scenario questions, state the facts, the provision, your analysis and a clear conclusion in that order.
• Mention the Assessing Officer's show-cause notice under section 165(5) when the question is about procedure.
• Write the specific condition that creates association, with numbers. A bare conclusion earns little.
• In case questions, mark residence status at the start of your answer. It is the quickest route to a correct conclusion.
• Quote section 163(1) heads by letter, for example (a) tangible property or (d) services, to show precision.