Telecom operators increasingly engage in tower infrastructure sharing arrangements to optimise costs and improve operational efficiency. These arrangements — which may involve passive infrastructure sharing, tower leasing, or co-location — often occur between related parties and are subject to transfer pricing rules under the Direct Tax Code (DTC) 2025. Understanding the transfer pricing implications is essential for telecom groups to ensure compliance and avoid penalties. This guide analyses the transfer pricing framework for tower infrastructure sharing 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
Telecom group entities 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 telecom group entities are in different jurisdictions, the tower sharing arrangements may constitute international transactions.
Common Telecom Tower Sharing Arrangements
1. Passive Infrastructure Sharing
- Sharing of tower structures
- Sharing of shelter or equipment rooms
- Sharing of power supply and backup systems
- Sharing of security and access systems
2. Active Infrastructure Sharing
- Sharing of radio access network (RAN) equipment
- Sharing of baseband units
- Sharing of transmission equipment
3. Tower Leasing
- Lease of tower space to group companies
- Lease of tower space to third parties
4. Co-location Arrangements
- Co-location of equipment on existing towers
- Space and power provisioning
- Access and maintenance services
5. Managed Services
- Tower management services
- Operations and maintenance services
- Site acquisition and management
Determination of Arm's Length Price
Applicable Methods
Section 165(1) prescribes six methods. The most appropriate method depends on the nature of the arrangement:
| Transaction Type | Common Methods |
|---|---|
| Tower Leasing/Rental | CUP, TNMM |
| Passive Infrastructure Sharing | CUP, TNMM |
| Active Infrastructure Sharing | TNMM, Profit Split |
| Managed Services | TNMM, Cost Plus |
Tower Sharing — Key Pricing Considerations
1. Base Price and Site Fee
The base price and site fee for the new tenant shall be based on the prices of acquired towers located at the same site and the co-location discount shall apply. The pricing for tower products includes:
- Three-hour backup battery assurance service for the master facilities
- 10-hour backup for the transmission facilities
2. Co-Location Discounts
For existing sharing parties, the prices shall typically be a percentage of the base price and site fee. Industry practice often sees discounts ranging from 25% to 30% of the base price.
3. Cost Sharing
For shared station sites, the electricity charges shall be shared by the telecom companies according to the percentage of nominal power or actual electricity consumption of their respective equipment. Expenses for oil machine power generation services shall be shared equally by the telecom companies.
Comparability Analysis
- Identify comparable tower sharing arrangements
- Consider factors such as:
- Type of infrastructure shared
- Location and site characteristics
- Tenancy arrangements
- Service levels and backup provisions
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.
Special Considerations for Telecom Tower Sharing
1. Regulatory Framework
- TRAI regulations on infrastructure sharing
- Spectrum sharing guidelines
- License conditions
- These may affect the transfer pricing analysis
2. Classification of Arrangements
For tax purposes, tower sharing arrangements need to be considered operating leases because the lessors are not financing companies approved by the Ministry of Finance.
3. Transfer of Passive Infrastructure Assets
Transfer of passive infrastructure assets under a court-approved scheme of demerger without consideration may qualify as a 'gift' under Section 47(iii). This has implications for depreciation claims.
Practical Compliance
1. Identify Tower Sharing Arrangements
- Identify all tower sharing arrangements with related parties
- Determine the nature and value of each arrangement
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 telecom tower infrastructure sharing arrangements. Our direct tax experts help telecom 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 telecom tower infrastructure sharing 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 telecom transfer pricing matters.