Transfer Pricing Compliance & Documentation For Offshore Subsidiaries In India

For offshore subsidiaries operating in India,transfer pricing compliance is not an optional exercise — it is a statutory requirement under the Income Tax Act, 1961. As multinational groups expand into India through wholly-owned subsidiaries, joint ventures, or other affiliate structures, the transactions between these entities come under strict scrutiny to ensure they reflect an arm's length price (ALP).

The purpose of transfer pricing rules is to prevent profit shifting and ensure that cross-border transactions between related entities are priced fairly, thereby protecting the Indian tax base. The regulations are set out under Section 92 to Section 92F of the Income Tax Act and supplemented by detailed rules and guidelines issued by the Central Board of Direct Taxes (CBDT).

For offshore subsidiaries in India, this compliance carries dual significance: it ensures adherence to Indian law, and it safeguards the entity and its foreign parent from adverse tax assessments, penalties, and reputational risks.

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Legal & Regulatory Framework for Transfer Pricing Compliance in India

Transfer pricing compliance for offshore subsidiaries in India is primarily governed by the Income Tax Act, 1961, specifically Sections 92 to 92F, along with the Income-tax Rules, 1962 (Chapter X). These rules are designed to ensure that transactions between related parties — including a foreign parent and its Indian subsidiary — are conducted at an arm's length price (ALP), i.e., the price that would be charged between independent enterprises under comparable circumstances.

Key Legal Provisions

1. Section 92 — Requires every entity engaged in an international transaction or a specified domestic transaction with an associated enterprise to compute its income in accordance with the arm's length principle.
2. Section 92A — Defines an "associated enterprise" and covers the scope of related-party relationships. For offshore subsidiaries, this includes transactions with the foreign parent or sister companies within the multinational group.
3. Section 92B — Defines "international transaction," which includes:
   • Sale/purchase of goods or services.
   • Lending/borrowing of funds.
   • Use or transfer of tangible or intangible property.
   • Provision of guarantees.
   • Business restructuring transactions.
4. Section 92C — Deals with the computation of the arm's length price and stipulates the methods to be applied, such as:
   • Comparable Uncontrolled Price Method (CUP)
   • Resale Price Method (RPM)
   • Cost Plus Method (CPM)
   • Profit Split Method (PSM)
   • Transactional Net Margin Method (TNMM)
5. Section 92D & 92E — Require maintaining and furnishing transfer pricing documentation and an accountant's certification to the Income Tax Department.

Scope for Offshore Subsidiaries

For offshore subsidiaries, transfer pricing compliance extends to all cross-border transactions with the parent company or other group entities, including:

• Inter-company loans and interest charges.
• Payments for management or technical services.
• Royalties and intellectual property licensing.
• Purchase/sale of goods or services within the group.

These transactions must be supported by proper transfer pricing documentation, demonstrating that the pricing is in line with the arm's length principle.

Penalties for Non-Compliance

Non-compliance with transfer pricing provisions attracts severe penalties, including:

• Penalty of 2% of the value of international transactions under Section 271AA.
• Additional penalties for failure to maintain proper documentation or furnish information.
• Potential re-characterisation of transactions and adjustments to taxable income.

Transfer Pricing Documentation Requirements for Offshore Subsidiaries

Under Indian transfer pricing regulations, offshore subsidiaries must maintain robust documentation to substantiate that cross-border transactions with their foreign parent or related group entities are conducted at an arm's length price (ALP). This documentation is not optional — Section 92D of the Income Tax Act mandates maintaining a contemporaneous transfer pricing report and related records for every financial year.

Key Components of Transfer Pricing Documentation

The required documentation generally comprises three broad parts:

1. Master File (As per OECD Guidelines adopted in India)

The master file provides a high-level overview of the multinational group and the global allocation of income and economic activity. For offshore subsidiaries, it typically includes:

• Group organisational structure and ownership details.
• Description of the global business operations and supply chain.
• Details of the intangible assets owned or used by the group.
• Consolidated financial and tax positions of the group.

2. Local File

The local file focuses specifically on the offshore subsidiary's transactions with associated enterprises in India or abroad. It includes:

• Nature and terms of the controlled transactions.
• Industry analysis and economic conditions in which the subsidiary operates.
• Functional analysis of the subsidiary (functions performed, assets used, risks assumed).
• Financial data supporting the pricing of the transaction.
• Selection and application of the transfer pricing method.

3. Country-by-Country Report (CbCR)

Applicable for parent companies of multinational groups with consolidated revenues exceeding ₹5,500 crore in the preceding year. This report provides a breakdown of global allocation of income, taxes paid, and business activities of each constituent entity in each jurisdiction.

Specific Documentation for Offshore Subsidiaries

Offshore subsidiaries should maintain:

• Detailed agreements for all related-party transactions (e.g., service agreements, royalty/license agreements, loan agreements).
• Invoices and payment records substantiating the transactions.
• Transfer pricing study/report prepared by a qualified professional.
• Board resolutions approving inter-company transactions and transfer pricing policies.
• Comparability analysis and benchmarking reports to demonstrate ALP compliance.

Timelines for Documentation and Filing

Conclusion

For offshore subsidiaries, transfer pricing is not merely a compliance checkbox; it is a strategic tool for aligning group operations, managing tax risks, and reinforcing legal certainty. Robust transfer pricing practices ensure that subsidiaries not only meet regulatory expectations but also contribute to sustainable and compliant growth for the parent group in India.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.