Transfer Pricing for Automotive OEM-Vendor Related Party Arrangements

The automotive industry relies on complex supply chains where Original Equipment Manufacturers (OEMs) and component vendors have long-standing relationships — often involving related-party transactions. These arrangements are subject to transfer pricing rules under the Direct Tax Code (DTC) 2025 and must be priced at arm's length. This guide analyses the transfer pricing implications for automotive OEM-vendor related party arrangements.

The Transfer Pricing Framework

Section 161 — The Arm's Length Principle

Section 161(1) requires that "Any income arising from an international transaction or a specified domestic transaction shall be determined having regard to the arm's length price". Section 161(2) extends this to "Any allowance for any expense or interest".

Section 162 — Associated Enterprise

The OEM and the vendor become associated enterprises (AEs) under Section 162 when:

• One holds, directly or indirectly, shares carrying not less than 26% of the voting power in the other
• One participates in the management or control or capital of the other
• One has the power to appoint more than half of the board of directors

Section 163 — International Transaction

If the OEM or the vendor is non-resident, the transaction may constitute an international transaction.

Common Automotive OEM-Vendor Transactions

1. Component Supply

• Supply of components from the vendor to the OEM
• Pricing of components
• Volume discounts and incentives

2. Tooling and Moulds

• Development of tooling and moulds
• Ownership of tooling and moulds
• Amortisation of tooling costs

3. Technology and IP

• Licensing of technology from the OEM to the vendor
• Royalty payments
• Technology transfer

4. Engineering Services

• Engineering and design services
• Testing and validation
• Quality control

5. Supply Chain Services

• Logistics and warehousing
• Inventory management
• Just-in-time (JIT) delivery

Determination of Arm's Length Price

Applicable Methods

Section 165(1) prescribes six methods. The most appropriate method depends on the nature of the transaction:

Key Transfer Pricing Challenges in Automotive Sector

1. Centralized IP Ownership

Automotive suppliers are characterized by a centralized IP ownership model, where intellectual property is typically owned by the parent company and licensed to subsidiaries. This creates significant transfer pricing challenges for royalty payments and IP licensing.

2. Global Manufacturing Presence

Local plants sell and invoice manufactured components directly to their customers' local production facilities. This makes cross-border intercompany transactions and the respective transfer pricing of automotive suppliers with respect to intangibles, manufacturing and services very challenging.

3. OEM Pricing Pressure

OEM pricing pressure, declining EV volumes, new tariffs, and supplier distress have compressed margins across the chain. Transfer pricing in challenging markets requires careful analysis of comparables and adjustments.

4. Interest Deduction Limitations

Interest deduction limitations on compressed EBITDA are a significant concern for automotive suppliers.

Documentation Requirements

Section 171 — Maintenance of Information and Documents

Rule 84(1) prescribes the information and documents to be maintained:

• Description of the ownership structure
• Profile of the multinational group
• Description of the business and industry
• Nature and terms of the international transaction
• Functional analysis
• Method selection and application

Section 172 — Report from an Accountant

Every person who has entered into an international transaction or specified domestic transaction shall obtain a report from an accountant and furnish it on or before the specified date.

Practical Compliance

1. Identify Related-Party Transactions

• Identify all transactions between the OEM and vendor
• Determine the nature and value of each transaction

2. Conduct Transfer Pricing Study

• Conduct a functional analysis
• Identify comparables
• Determine the arm's length price
• Document the analysis

3. Maintain Documentation

• Maintain contemporaneous documentation
• Ensure documentation is complete and accurate
• Retain documentation for nine years

4. File Report

• Obtain a report from an accountant
• File the report on or before the specified date

5. Monitor Compliance

• Regularly monitor compliance with transfer pricing rules
• Update documentation as necessary

Consequences of Non-Compliance

Transfer Pricing Adjustment

If the transfer price is determined not to be at arm's length:

• The income may be adjusted
• Interest and penalty may be levied

Penalties

• Section 442: Penalty of 2% of the value of each international transaction
• Section 457: Penalty of 2% for failure to furnish information

Expert Legal Guidance

Anuj Desai & Associates provides comprehensive legal advisory services on transfer pricing for automotive OEM-vendor related party arrangements. Our direct tax experts help automotive groups understand their obligations, prepare documentation, and navigate the regulatory framework. We assist in TP study preparation, report filing, and representation before income-tax authorities.

---

Disclaimer: This article provides general information and does not constitute legal advice. For specific guidance on transfer pricing or any other direct tax matter, please consult qualified legal professionals.

---

Need Expert Legal Guidance?

Navigating the complex transfer pricing framework for automotive OEM-vendor arrangements requires experienced legal counsel. At Anuj Desai & Associates, we provide comprehensive direct tax advisory services, including:

• TP Assessment: Evaluation of transfer pricing obligations
• Documentation: Assistance with TP study and documentation
• Benchmarking: Guidance on comparable selection and analysis
• Representation: Representation before Transfer Pricing Officers

Contact us for expert legal guidance on your automotive transfer pricing matters.

---