Written by the Delhi Legal Company India Entry & FDI Advisory team · Last updated August 2026 · Reviewed quarterly against CBDT notifications and Income Tax Department guidance
Introduction
The management fee your parent charges the Indian subsidiary is not a pricing decision. It is a filing.
Every rupee that moves between an Indian company and its foreign group — a service fee, a royalty, a software recharge, an intercompany loan, a corporate guarantee, the purchase of goods — is an international transaction with an associated enterprise. Each one must be priced as two unrelated parties would have priced it, documented before the return is filed, and certified by a chartered accountant on a prescribed form.
Most foreign-owned Indian companies discover this in their first October, when the auditor asks for a transfer pricing study and there is nothing to give them. It is one of the recurring gaps we see across international taxation engagements.
Two things make 2026 a bad year to be caught out. First, the entire framework has been recodified — Chapter X of the Income-tax Act, 1961 now sits at Sections 161 to 173 of the Income-tax Act, 2025, and the familiar Form 3CEB is being replaced. Second, the safe harbour programme has been overhauled more substantially than at any point since it was introduced, which changes the calculation for a large number of captive service subsidiaries.
This guide covers who is caught, what has to be documented at each threshold, what the new forms are called, how safe harbour now works, what the penalties are, and what a defensible file actually looks like. It is written for the finance lead of a foreign-owned Indian company, not for a transfer pricing specialist.
About this guide
Delhi Legal Company works exclusively with foreign companies establishing and operating in India. Transfer pricing sits at the point where three of our workstreams meet — corporate tax, cross-border withholding and FEMA — and it is the one that most often arrives unplanned.
Where a rule is settled we state it and cite the source. Where the position is in transition — and in 2026 much of it is — we set out both the old and the new position and say plainly which is which, rather than presenting one confidently and leaving you to discover the other.
That distinction matters here more than usual. Published guidance on India’s 2026 safe harbour thresholds currently disagrees with itself, because some sources describe the position notified in 2025 and others describe what the 2026 Rules introduced. Section 10 sets out both.
Primary sources: the Income Tax Department for the legislation, rules, forms and CBDT notifications, and the Reserve Bank of India where FEMA interacts with intra-group pricing.
1. What changed for Tax Year 2026-27
If you are working from a checklist prepared before 2026, several of the references on it have moved.
| Concept | Income-tax Act, 1961 | Income-tax Act, 2025 (from 1 April 2026) |
|---|---|---|
| Transfer pricing provisions | Chapter X, Sections 92 to 92F | Sections 161 to 173 |
| Accountant’s report | Form 3CEB | Form 48 |
| Safe harbour | Section 92CB | Section 167, with Rules 86 to 96 |
| Documentation obligation | Section 92D, Rule 10D | Section 171 |
| Accountant’s report obligation | Section 92E | Section 172 |
| Notified jurisdictions | Section 94A | Section 176 |
| Period terminology | Financial Year / Assessment Year | Tax Year — TY 2026-27 runs 1 April 2026 to 31 March 2027 |
The substance has not changed. The references have.
The arm’s length principle, the methods, the thresholds and the penalty architecture all carry forward. What changed is which section your tax note cites, which form your accountant files, and what the period is called.
Two practical consequences. Board papers, engagement letters and intercompany agreements drafted before 2026 will cite superseded sections — they remain valid for the years they relate to, but should be refreshed for anything forward-looking. And any advisor still describing the accountant’s report only as “Form 3CEB” for Tax Year 2026-27 is working from stale material.
Throughout this guide we refer to the report as Form 3CEB where discussing the historical position and Form 48 where discussing Tax Year 2026-27 onwards. Confirm the current form on the Income Tax Department portal before filing.
2. Does transfer pricing apply to your company?
Almost certainly, if you are a foreign-owned Indian subsidiary. The threshold question is not whether you are “big enough.” It is whether you transacted with an associated enterprise across a border.
2.1 Associated enterprise
The definition is wider than a simple parent-subsidiary relationship. It captures direct or indirect participation in management, control or capital, and includes situations such as:
- One enterprise holding a specified proportion of voting power in the other, directly or indirectly
- A common person or enterprise holding such a proportion in both
- Substantial loan financing from one enterprise to another
- Guarantees given for a substantial proportion of borrowings
- Appointment of a majority of the board or of executive directors by the other enterprise
- Dependence on the other enterprise for know-how, patents, licences or similar rights
- Substantial purchase of raw materials from, or sale of manufactured goods to, the other enterprise at prices and conditions it influences
The last three catch arrangements that do not look like ownership at all. A supplier that appoints your board, or on whose licensed technology your entire manufacturing depends, can be an associated enterprise even without a shareholding.
2.2 International transaction
Also wider than most finance teams assume. It covers the purchase, sale, lease or transfer of tangible or intangible property, provision of services, lending or borrowing, and any transaction having a bearing on profits, income, losses or assets.
It expressly extends to:
- Intangibles including marketing, technological, customer-related and human capital intangibles
- Capital financing including borrowing, lending, guarantees, deferred payment and receivables
- Provision of services including market research, administration, technical service, repairs, design, know-how and management
- Business restructuring or reorganisation, whether or not it has a bearing on profits at the time
That last point deserves attention. A restructuring that appears cost-neutral in the year it happens is still an international transaction requiring documentation. Groups that move functions or risks between the Indian entity and an overseas affiliate frequently miss this.
2.3 The transactions foreign-owned subsidiaries actually have
| Transaction | How often missed | Why it matters |
|---|---|---|
| Management or support service fee from parent | Rarely missed | Benefit test and cost allocation key are the usual challenge points |
| Royalty for brand or technology | Rarely missed | Rate must be benchmarked; FEMA conditions apply in parallel |
| Purchase or sale of goods with group entities | Rarely missed | Usually the largest value; method selection matters |
| Software or IT cost recharge | Often missed | Treated as an ordinary vendor cost in the books; still an international transaction |
| Intercompany loan or advance | Often missed | Interest rate must be arm’s length; ECB compliance runs alongside |
| Corporate guarantee given by parent | Very often missed | A guarantee fee may be expected; documenting the absence of one is itself a position |
| Outstanding receivables beyond credit terms | Very often missed | Extended credit to an associated enterprise can be treated as a financing transaction |
| Reimbursement of third-party costs | Often mischaracterised | A genuine pass-through and a marked-up recharge are different transactions |
| Secondment of parent employees | Often missed | Fact-sensitive; interacts with permanent establishment exposure |
| Business restructuring | Very often missed | Reportable whether or not it affects profits at the time |
The rows marked “very often missed” are where transfer pricing adjustments most commonly originate in assessments of foreign-owned subsidiaries. None of them generates an invoice that looks like an intercompany transaction, which is precisely why they are overlooked.
2.4 Specified domestic transactions
Transfer pricing is not only cross-border. Specified domestic transactions require the same documentation once their aggregate value exceeds ₹20 crore in the previous year.
The threshold was raised from ₹5 crore by the Finance Act, 2015, and the Finance Act, 2017 removed related-party payments under Section 40A(2)(b) from scope. What remains is mainly transactions involving profit-linked deduction units. In practice this is relevant to SEZ units, infrastructure companies and STPI entities claiming tax holidays. Where those units also import or export goods, the Import Export Code position and customs valuation should be reviewed alongside.
Some published pages still quote the specified domestic transaction limit as ₹5 crore. The current figure is ₹20 crore. If your advisor’s checklist says ₹5 crore, it predates 2015.
3. The three-tier documentation framework
India applies the OECD’s BEPS Action 13 architecture. Three tiers, three different triggers, three different filings.
| Tier | What it is | Who files |
|---|---|---|
| Local file | The transfer pricing study: entity, transactions, functional analysis, method selection, benchmarking, conclusion | The Indian entity, maintained rather than filed — produced on demand |
| Master file | Group-level information: organisational structure, business description, intangibles, intercompany financing, financial and tax position | The Indian constituent entity, filed with the tax authority |
| Country-by-Country Report | Group-level allocation of income, taxes and business activity by jurisdiction | Usually the ultimate parent in its home country; the Indian entity may need only a notification |
Sitting across all three is the accountant’s report — Form 3CEB, now Form 48 — which certifies the transactions and the method applied. Almost every entity with related-party billing has to file it.
3.1 The gap that matters most
Filing the accountant’s report but missing the intercompany documentation behind it is the most common gap.
The report is a certification. It is not the analysis. A company that files on time every year but has never prepared a study has a certified statement with nothing supporting it, which is precisely what an assessment tests. The study is the defence document; the form is the receipt. Our income tax filing team prepares both together rather than treating the report as a year-end certification exercise.
4. Documentation thresholds
| Requirement | Threshold | Form |
|---|---|---|
| Accountant’s report | Any international transaction, no minimum value | Form 3CEB, now Form 48 |
| Detailed local file documentation | Aggregate international transactions above the prescribed limit | Maintained, not filed |
| Specified domestic transaction documentation | Aggregate value above ₹20 crore | Maintained, not filed |
| Master file, Part A | Required from every Indian constituent entity where the group’s consolidated revenue exceeds ₹500 crore, regardless of the monetary limbs | Form 3CEAA |
| Master file, Part B | Triggered where international transactions exceed the ₹50 crore limb | Form 3CEAA |
| Master file intimation | Where multiple Indian constituent entities exist, designating the filer | Form 3CEAB, at least 30 days before the master file date |
| CbCR notification | Indian constituent entity of a group above the CbCR threshold | Form 3CEAC |
| CbCR filing | Group consolidated revenue above ₹6,400 crore | Form 3CEAD, within 12 months of the group’s reporting year end |
4.1 The two thresholds people get wrong
The accountant’s report has no minimum. A single international transaction of any value triggers it. Companies that assume a de minimis exists are the ones that discover in year three that they should have been filing since year one.
Master file Part A applies on group revenue alone. Where the group’s consolidated revenue exceeds ₹500 crore, Part A is required from every Indian constituent entity regardless of the monetary limbs. A small Indian subsidiary of a large group therefore has a master file obligation even if its own transactions are modest. This is routinely missed by exactly the companies it applies to.
4.2 CbCR: check the number you are using
The CbCR limit is shown in some places as ₹5,500 crore; it was revised to ₹6,400 crore, aligned to the OECD’s EUR 750 million standard.
For most foreign-owned Indian subsidiaries, the ultimate parent files the CbCR in its home jurisdiction and the Indian entity’s obligation is limited to the notification. The Indian entity may only need the Form 3CEAC notification. That notification is still a filing with a deadline, and missing it is still a default.
4.3 How long you must keep the file
The documentation must be kept for eight years from the end of the assessment year, so a FY 2025-26 file is held until the end of AY 2034-35.
Eight years is longer than most groups’ document retention policies, longer than most finance directors stay in post, and considerably longer than the average outsourced accountant relationship. Store the file somewhere institutional, not on the laptop of whoever prepared it.
5. The compliance calendar
| Filing | Due date |
|---|---|
| Accountant’s report (Form 3CEB / Form 48) | 31 October |
| Income tax return for a taxpayer with international transactions | 30 November |
| Master file (Form 3CEAA) | 30 November |
| Master file intimation (Form 3CEAB) | At least 30 days before the master file date |
| CbCR (Form 3CEAD) | 12 months from the end of the parent entity’s accounting year |
5.1 Why the one-month gap exists
Form 3CEB is due one month before the 30 November return date that applies to transfer pricing cases. The gap is deliberate: the accountant’s report must be on record before the return is filed.
This is worth internalising because it inverts the usual sequence. You cannot treat the transfer pricing report as something that follows the return. It precedes it, which means the benchmarking work behind it has to be complete by September at the latest.
5.2 A realistic working backwards schedule
| When | What |
|---|---|
| April–May | Scoping call: list every transaction with every group entity for the year just ended, including the ones that do not look like transactions |
| June | Functional analysis; agree method per transaction; identify data gaps |
| July–August | Benchmarking searches; comparables selection; draft study |
| September | Study finalised; intercompany agreements reconciled against actual conduct |
| October | Accountant’s report filed by 31 October |
| November | Return filed by 30 November; master file by 30 November |
Where the finance function is lean, many groups run this cycle through virtual CFO services rather than building the capability internally. Groups that start in October are choosing between a rushed study and a late filing. Neither is a good outcome, and the rushed study is the one that fails in assessment three years later.
6. Methods
Indian law prescribes six methods. The most appropriate method must be selected having regard to the nature of the transaction, the availability of reliable data and the degree of comparability.
| Method | How it works | Typical use |
|---|---|---|
| Comparable Uncontrolled Price (CUP) | Compares the price charged in the controlled transaction with the price in a comparable uncontrolled transaction | Commodities, interest on loans, royalties where external comparables exist |
| Resale Price Method | Works back from the resale price to an uncontrolled party, less an appropriate gross margin | Distributors that add limited value |
| Cost Plus Method | Adds an appropriate gross mark-up to the direct and indirect costs of production | Contract manufacturing, some service arrangements |
| Profit Split Method | Splits combined profit between parties by reference to their contributions | Highly integrated operations; both parties own unique intangibles |
| Transactional Net Margin Method (TNMM) | Compares the net profit margin relative to an appropriate base | The most commonly applied method for captive service subsidiaries |
| Other method | Any method that takes into account the price that would have been charged between unrelated parties | Where none of the above fits; used for guarantees and some intangibles |
6.1 Why TNMM dominates — and where it fails
Most Indian subsidiaries of foreign groups are captive service providers, contract manufacturers or limited-risk distributors. For those, TNMM applied to operating margin on operating costs is usually the practical choice, because reliable transaction-level pricing comparables rarely exist.
Where TNMM comes under pressure is when the Indian entity is not, in fact, limited-risk. If the Indian company develops intangibles, bears market risk, or makes significant decisions, characterising it as a routine service provider earning a cost-plus margin invites challenge — because the functional analysis does not support the characterisation.
The functional analysis is therefore not a formality at the front of the study. It is the thing the whole position rests on.
7. Functional analysis: the section everything rests on
The functional analysis sits at the front of every transfer pricing study and is usually the section that receives least attention when the study is being commissioned. It is also the section that decides the outcome.
It answers three questions about each party to the transaction.
7.1 Functions
What does each entity actually do? Not what the agreement says it does — what the people do, day to day.
For a typical foreign-owned Indian subsidiary this means examining who performs research and development, who designs the product, who manufactures, who holds inventory, who finds customers, who negotiates prices, who provides after-sales support, who collects receivables, and who makes the decision when something goes wrong.
The pattern that produces trouble is a company characterised in the agreement as a routine service provider, staffed with people who are in fact building product, winning customers and setting prices. The agreement describes one entity; the payroll describes another.
7.2 Assets
What does each entity own and use? Tangible assets are straightforward. Intangibles are where the analysis becomes contentious.
The questions that matter: who owns the technology, who developed it, who funded the development, who bears the cost of maintaining it, who owns the brand, and who has built the customer relationships. Where the Indian entity has contributed to developing or enhancing an intangible — even one legally owned overseas — that contribution has a value that should be reflected in its return.
This is the single most common area of dispute for Indian subsidiaries in technology and pharmaceuticals, because significant development work often happens in India while legal ownership sits offshore.
7.3 Risks
Which entity bears which risk, and — crucially — which entity has the financial capacity and the decision-making authority to bear it?
| Risk | The question actually asked |
|---|---|
| Market risk | Who suffers if volumes fall? Is the Indian entity guaranteed a margin regardless? |
| Credit risk | Who bears the loss if a customer does not pay? |
| Inventory risk | Who owns unsold stock and who writes it down? |
| Foreign exchange risk | Who carries the currency movement between billing and settlement? |
| Product liability | Who is exposed if the product fails? |
| Capacity utilisation | Who absorbs the cost of idle capacity? |
| R&D risk | Who loses the investment if the development does not succeed? |
A contractual allocation of risk to the parent carries weight only if the parent actually controls that risk and has the capacity to bear it. Allocating market risk to a parent that plays no part in Indian market decisions is a position that does not survive examination.
7.4 Why the characterisation matters commercially
The functional analysis determines the entity’s characterisation, and the characterisation determines the expected return.
| Characterisation | Typical return | Requires |
|---|---|---|
| Contract service provider | Cost plus a routine mark-up | No meaningful risk; no intangible ownership; parent directs the work |
| Limited-risk distributor | A modest, stable operating margin | No inventory or market risk; no customer intangibles |
| Full-risk distributor | Variable margin reflecting actual performance | Bears inventory, credit and market risk |
| Contract manufacturer | Cost plus on manufacturing costs | Parent supplies design, bears capacity and market risk |
| Entrepreneur or full-fledged manufacturer | Residual profit after routine returns to others | Owns or co-owns intangibles; bears the significant risks |
A group that wants its Indian entity taxed on a routine margin has to be prepared for that entity to look routine — in its contracts, its decision rights and its actual conduct. Groups frequently want the tax outcome of a captive and the commercial autonomy of a full operating company. That combination does not hold up.
8. Benchmarking: how comparables are chosen and challenged
Once the method is selected, the arm’s length result is established by reference to comparable uncontrolled companies or transactions. Comparables selection is where a study is either defensible or merely present.
8.1 The search process
- Database selection. Indian benchmarking typically uses recognised commercial databases of Indian company financials, with regional or global databases used where the tested party or transaction requires it.
- Initial screen. Industry classification codes are applied to produce a starting set.
- Quantitative filters. Turnover range, related-party transaction proportion, persistent losses, data availability, and years of financial information.
- Qualitative review. Each remaining company’s annual report and business description is read to confirm functional comparability.
- Final set and computation. The margin is computed for each accepted comparable and the range or arithmetic mean applied.
8.2 Where the Transfer Pricing Officer pushes
| Challenge | What to have ready |
|---|---|
| Rejection of a comparable the officer considers valid | A documented, consistently applied reason for each rejection — not a conclusion |
| Inclusion of a company with different functions | The qualitative review notes showing the business was actually examined |
| Turnover filter set to exclude inconvenient results | A filter rationale fixed before the results were seen |
| Persistent loss-making companies excluded | Consistent treatment; a filter that excludes losses but retains outliers on the upside is visible |
| Related-party transaction threshold | The threshold applied and why |
| Working capital or risk adjustments claimed | The computation, not just the assertion |
| Use of multiple year data | The basis on which multiple years were used |
The recurring theme is that filters must be set for a reason and applied consistently in both directions. A search that quietly removes every high-margin comparable and retains every low-margin one is the search most likely to be redone by the officer, using their own filters.
8.3 The economic adjustments question
Where the tested party and the comparables differ in working capital intensity, capacity utilisation or risk profile, adjustments can be made to improve comparability. These are frequently claimed and frequently rejected, because the claim is made without a computation behind it.
If you intend to rely on an adjustment, build the workings into the study when it is prepared. Producing them for the first time in response to a notice looks exactly like what it is.
9. Arm’s length range and tolerance band
An arm’s length price is rarely a single number.
Where six or more comparables are available, the arm’s length range is constructed using the 35th to 65th percentile of the dataset. If the transaction price falls within that range, no adjustment is made.
Where the range does not apply, the arithmetic mean is used with a tolerance band of 3%, or 1% for wholesale trading. If the variation between the transaction price and the arithmetic mean is within the band, the transaction price is accepted.
Two practical points. The dataset drives which mechanism applies, so comparables selection is not a mechanical step. And the tighter 1% band for wholesale trading means distribution businesses have materially less headroom than service businesses.
10. Multi-year arm’s length determination
From AY 2026-27, a multi-year arm’s length price applies — a three-year block for similar transactions.
This is a genuine simplification and one of the more welcome recent changes. Where a transaction is substantially similar year on year, the arm’s length determination can apply across a block rather than being re-established annually.
What it does not do is remove the documentation obligation. It reduces repetitive benchmarking for stable arrangements; it does not convert a three-year block into a three-year holiday. Confirm the mechanics and the conditions for a valid block with your advisor before relying on it, and note that a change in the transaction, the functional profile or the parties will break the block.
11. Penalties
| Default | Exposure |
|---|---|
| Failure to maintain documentation | 2% of the value of the transaction |
| Failure to furnish the accountant’s report | Prescribed penalty; the new regime introduces graded penalties for delays, particularly for accountant’s reports |
| Misreporting of income following adjustment | 50% to 200% of the tax on the adjustment |
| Failure to report an international transaction | 2% of the value of the unreported transaction |
| Late CbCR filing | Graded daily penalties from ₹5,000 to ₹50,000 per day, depending on the extent of the delay |
| Failure to furnish master file | Prescribed penalty per default |
11.1 The number that surprises people
The 2% documentation penalty is charged on the value of the transaction, not on the tax involved. A company with ₹50 crore of intercompany transactions and no study faces ₹1 crore of penalty exposure before any adjustment is even made to its income.
That is the calculation that usually settles the internal debate about whether a transfer pricing study is worth commissioning.
11.2 The secondary adjustment
Where a primary transfer pricing adjustment is made and the corresponding funds are not repatriated to India within the prescribed period, the excess money is treated as an advance to the associated enterprise and notional interest is imputed on it.
This turns a one-off adjustment into a recurring annual charge until the cash is actually brought back. Groups that accept an adjustment and move on, without repatriating, find the same issue reappearing in every subsequent year.
12. Safe harbour
Safe harbour rules prescribe margins that the tax authority will accept without detailed scrutiny. If your company provides IT services, operates data centres, manufactures auto components or advances intra-group loans to associated enterprises, safe harbour can substantially simplify compliance: instead of annual benchmarking and defending arm’s length pricing during audits, you adopt predefined margins.
This is the area of Indian transfer pricing that has changed most, and where published guidance currently conflicts. Both positions are set out below.
12.1 The position notified in 2025
CBDT Notification No. 21/2025 dated 25 March 2025 extended the safe harbour rules through AY 2025-26 and AY 2026-27, raised the eligibility threshold from ₹200 crore to ₹300 crore for IT, ITES and KPO services, and expanded core auto components to include lithium-ion batteries. Under that notification the safe harbour margin for IT and ITES services remains 17% to 18% on operating costs.
12.2 The position under the 2026 Rules
With the Income-tax Act, 2025 and the Income Tax Rules, 2026, the safe harbour framework has been restructured under Section 167 and Rules 86 to 96, introducing the most significant reform since the programme’s inception: a unified margin and a substantially higher eligibility threshold.
The eligibility threshold for IT services has been increased from ₹300 crore to ₹2,000 crore, and the revenue threshold is now tested only in the first year of a five-year block. The proposed unified margin of 15.5% represents a substantial reduction from the previous IT and ITES margins.
12.3 Reading the conflict honestly
Sources published in the first half of 2026 describe these differently — some as proposals under draft rules, others as the operative position. The reconciliation appears to be sequential: ₹300 crore and 17% to 18% was the position notified for AY 2025-26 and AY 2026-27; ₹2,000 crore and a unified 15.5% is the position introduced for Tax Year 2026-27 onwards under the 2026 Rules.
Because a safe harbour election binds you for a block of years, this is not a detail to resolve from a secondary source. Confirm the currently notified margin, threshold and block period with your advisor against the Income Tax Department’s published rules before electing.
12.4 The three limitations that catch electors
Safe harbour does not remove the documentation obligation. The rules explicitly state that the documentation and accountant’s report provisions apply even where safe harbour is exercised. You still need local file documentation, the accountant’s report, and master file or CbCR where applicable. Safe harbour protects the declared margin, not the absence of documentation.
The most common mistake is assuming safe harbour eliminates all transfer pricing documentation. It does not. It removes the argument about the margin, not the file.
Certain associated enterprises are excluded. Safe harbour is not available for transactions with associated enterprises in notified countries or territories, or in no-tax or low-tax jurisdictions. A group routing services through a low-tax hub cannot elect.
You give up mutual agreement procedure. Once safe harbour is accepted, the assessee is barred from invoking MAP. If the transaction is likely to be challenged in the other jurisdiction, giving up the treaty dispute mechanism is a significant price for domestic certainty.
12.5 The trade-off in one sentence
Safe harbour margins are typically higher than market margins, so the taxpayer may pay slightly more tax in exchange for certainty.
Whether that is worth it depends on three things: how far your actual margin sits below the safe harbour margin, how much a defended study and a possible dispute would cost, and whether you need MAP protection. For a small captive service subsidiary with a stable cost base, the arithmetic often favours safe harbour. For a larger entity with a genuine market-based margin well under the prescribed rate, it usually does not.
13. Advance Pricing Agreements
An APA is an agreement between the taxpayer and the tax authority fixing the arm’s length price or methodology in advance.
Unilateral and bilateral agreements are available, covering five prospective years with rollback to earlier years, giving up to nine years of certainty.
| Safe harbour | APA | |
|---|---|---|
| How the margin is set | Prescribed by rule | Negotiated on your facts |
| Time to obtain | Election, effective quickly | Extended negotiation |
| Cost | Low | Substantial |
| Coverage | Specified transaction categories only | Any covered transaction |
| MAP available | No | Yes, under a bilateral APA |
| Suits | Standard captive arrangements within the thresholds | High-value or complex arrangements where the margin genuinely matters |
An APA is worth considering where the annual transaction value is large enough that a few percentage points of margin is a material number, where the arrangement is stable enough to justify a multi-year agreement, and where a bilateral agreement would also resolve the position in the parent’s jurisdiction.
14. Assessment and dispute
Understanding the route matters, because the decisions that determine the outcome are taken early.
14.1 How a case develops
- The return and accountant’s report are filed. Cases are referred to the Transfer Pricing Officer based on selection criteria.
- The TPO issues notices and requisitions — the study, agreements, invoices, cost allocation workings, and evidence of services actually received.
- The TPO passes an order determining the arm’s length price, which may propose an adjustment.
- The Assessing Officer issues a draft assessment order incorporating the adjustment.
- The taxpayer may object to the Dispute Resolution Panel or accept and appeal later.
- Appeals lie to the Commissioner (Appeals) or the Income Tax Appellate Tribunal, then the High Court and Supreme Court on questions of law.
- Mutual agreement procedure is available under the applicable treaty as a parallel route.
A new block assessment scheme applies from Tax Year 2026-27. Confirm how it affects the assessment cycle for your transactions with your advisor.
14.2 What the TPO actually asks for
In our experience the requisitions cluster around the same points, and a study that anticipates them fares considerably better:
- Evidence of benefit. For management and support service fees, what did the Indian entity actually receive? Emails, deliverables, meeting records, reports. The absence of evidence is the single most common reason a service fee adjustment is proposed.
- The cost allocation key. Why headcount rather than revenue? Why this proportion? A key that cannot be explained looks like an allocation designed to produce a number.
- Duplication and shareholder activity. Services that duplicate what the Indian entity already does, or that are performed for the parent’s own benefit as shareholder, are not chargeable.
- Comparables selection. Why these companies, why these filters, why were these rejected?
- Consistency with conduct. Does the agreement describe what actually happens? A contract saying the parent bears market risk, alongside an Indian entity that plainly bears it, is a problem.
- Board records. Where a pricing change or restructuring was approved, the board resolutions and minutes should show the decision and its rationale.
14.3 Documentation contemporaneity
The study must be in place by the specified date, not reconstructed when the notice arrives. A study dated three years after the transactions it describes carries far less weight, and its late preparation is itself visible.
15. Building a file that survives
A defensible transfer pricing position rests on three things being consistent with each other.
15.1 The agreement
Every intercompany arrangement should have a written agreement executed before the transactions begin, describing the services or goods, the pricing basis, the allocation method, payment terms and the allocation of risk.
Contract drafting here is not a formality; see drafting and vetting of agreements. Where the parent licenses brand or technology, that is a separate agreement with its own rate — see brand licensing agreements and technology licensing agreements. Where a royalty is payable, royalty agreements need to satisfy both transfer pricing and FEMA requirements.
15.2 The conduct
What actually happens must match what the agreement says. Where they diverge, the tax authority follows the conduct.
This is where most weak positions are actually lost. The agreement describes a limited-risk service provider; the Indian entity in practice negotiates with customers, sets prices and carries inventory. No amount of benchmarking rescues that.
15.3 The evidence
Keep it contemporaneously, not at year end. For service fees: deliverables, correspondence, time records where available. For cost allocations: the workings, and a note explaining why that key was chosen. For loans and guarantees: the terms and the rate rationale.
None of this is difficult if it is collected as the year goes on. All of it is difficult in September.
16. Where transfer pricing meets your other obligations
Transfer pricing does not sit alone. The same transaction usually engages two or three other regimes at the same time.
| Transaction | Transfer pricing | Also engages |
|---|---|---|
| Management fee to parent | Benefit test, allocation key, margin | Withholding on the payment; reverse charge GST; treaty characterisation |
| Royalty to parent | Rate benchmarking | Withholding; FEMA conditions on royalty outflow |
| Intercompany loan | Interest rate | ECB framework and RBI reporting; withholding on interest |
| Purchase of goods from group | Method and margin | Customs valuation for related-party imports |
| Corporate guarantee from parent | Guarantee fee | FEMA position on the guarantee itself |
| Secondment of employees | Characterisation of the recharge | Permanent establishment exposure; payroll and social security |
The withholding side is covered in our guide to TDS on payments to your foreign parent. Treating these as separate exercises, handled by different advisors, is how a group ends up with a transfer pricing position and a withholding position that contradict each other — both documented, in writing, on the same transaction.
17. Twelve mistakes that produce adjustments
- Assuming a minimum threshold exists for the accountant’s report. Any international transaction triggers it, at any value.
- Filing the report without a study behind it. The most common gap.
- Missing master file Part A because the Indian entity’s own transactions are small, when the group’s consolidated revenue exceeds ₹500 crore.
- Omitting corporate guarantees and outstanding receivables from the transaction list because no invoice was raised.
- Ignoring business restructuring, which is reportable whether or not it affects profits at the time.
- No evidence of benefit for management and support service fees.
- A cost allocation key nobody can explain.
- Characterising the entity as limited-risk when its conduct shows otherwise.
- Electing safe harbour and stopping documentation, when documentation remains mandatory.
- Electing safe harbour without considering the MAP bar, where the other jurisdiction is likely to challenge.
- Accepting an adjustment without repatriating, triggering the secondary adjustment year after year.
- Using a checklist with the ₹5 crore domestic threshold, superseded in 2015.
18. Annual checklist
- Complete list of every group entity transacted with during the year, including entities that only provided a guarantee or held a receivable
- Every transaction type identified, including recharges, guarantees, extended credit and restructurings
- Associated enterprise test applied to any party where the relationship is not a simple shareholding
- Aggregate international transaction value calculated against the documentation threshold
- Specified domestic transactions tested against the ₹20 crore threshold
- Group consolidated revenue confirmed against the ₹500 crore master file limb and the ₹6,400 crore CbCR limb
- Form 3CEAB intimation filed at least 30 days before the master file date, where multiple Indian entities exist
- Form 3CEAC notification filed where the group is within CbCR scope
- Intercompany agreements in place, dated before the transactions, and reconciled against actual conduct
- Benefit evidence collected contemporaneously for all service fees
- Cost allocation keys documented with the rationale for each
- Functional analysis refreshed if functions, assets or risks changed during the year
- Method selected and justified per transaction
- Benchmarking completed with comparables selection documented
- Safe harbour eligibility assessed against the current notified threshold and margin, and the MAP consequence considered
- Accountant’s report filed by 31 October; return by 30 November; master file by 30 November
- File stored institutionally for the eight-year retention period, alongside the statutory registers and other permanent records
Transfer pricing arriving unplanned?
Most foreign-owned Indian companies meet transfer pricing in their first October, with two months to produce a document that should have taken six. Send us your intercompany transaction list and we will tell you what is in scope, what has to be filed and when, and whether safe harbour is worth electing on your numbers.
19. Frequently asked questions
Q1. Does transfer pricing apply to a small Indian subsidiary of a foreign company?
Yes. There is no minimum value threshold for the accountant’s report — any international transaction with an associated enterprise triggers it. Detailed documentation applies above a prescribed aggregate value, and master file obligations can apply based on the group’s global revenue even where the Indian entity’s own transactions are small. Size does not exempt you.
Q2. What is Form 3CEB and has it been replaced?
Form 3CEB is the accountant’s report certifying international and specified domestic transactions and the method applied. It is being replaced by Form 48 from Tax Year 2026-27 under the Income-tax Act, 2025 framework. The substance and the 31 October due date carry forward; the form number changes. Confirm the current form on the Income Tax Department portal before filing.
Q3. When is the transfer pricing report due?
The accountant’s report is due by 31 October, and the income tax return for a taxpayer with international transactions is due by 30 November. The one-month gap is deliberate: the accountant’s report must be on record before the return is filed. Working backwards, the benchmarking study needs to be complete by September.
Q4. What is the transfer pricing documentation threshold in India?
The accountant’s report has no minimum value. Detailed local file documentation applies once aggregate international transactions exceed the prescribed limit. Specified domestic transactions require the same documentation above ₹20 crore. Master file Part A applies where group consolidated revenue exceeds ₹500 crore, and Part B where international transactions exceed the ₹50 crore limb.
Q5. Which sections govern transfer pricing under the Income-tax Act, 2025?
The provisions previously in Chapter X of the Income-tax Act, 1961 have been recodified at Sections 161 to 173 of the Income-tax Act, 2025. Documentation sits at Section 171, the accountant’s report at Section 172, safe harbour at Section 167 with Rules 86 to 96, and notified jurisdictions at Section 176. Older material citing Sections 92 to 92F refers to the previous framework.
Q6. What is the penalty for not maintaining transfer pricing documentation?
Two per cent of the value of the transaction. Note that this is charged on transaction value, not on tax, so a company with ₹50 crore of intercompany transactions and no study faces ₹1 crore of penalty exposure before any adjustment to income. Misreporting following an adjustment attracts 50% to 200% of the tax on that adjustment.
Q7. Does electing safe harbour mean we stop preparing documentation?
No. The rules explicitly provide that documentation and accountant’s report obligations continue even where safe harbour is exercised. You still need local file documentation, the accountant’s report, and master file or CbCR where applicable. Safe harbour protects the declared margin from scrutiny; it does not remove the file. This is the most common misconception about the regime.
Q8. What are the current safe harbour margins and thresholds?
The position is in transition. CBDT Notification 21/2025 set a ₹300 crore eligibility threshold with margins of 17% to 18% for IT and ITES services for AY 2025-26 and 2026-27. The 2026 Rules introduce a substantially higher threshold of ₹2,000 crore for IT services and a unified margin of 15.5%, with the revenue threshold tested only in the first year of a five-year block. Confirm the currently notified position before electing.
Q9. What do we give up by electing safe harbour?
Two things. Mutual agreement procedure is barred once safe harbour is accepted, so you lose the treaty route to resolve a dispute with the other jurisdiction. And safe harbour margins are typically above market margins, so you may pay more Indian tax in exchange for certainty. Safe harbour is also unavailable for transactions with associated enterprises in notified or no-tax and low-tax jurisdictions.
Q10. Do we need to file a Country-by-Country Report?
Only if the group’s consolidated revenue exceeds ₹6,400 crore, aligned to the OECD’s EUR 750 million standard. For most foreign-owned Indian subsidiaries, the ultimate parent files the CbCR in its home country and the Indian entity’s obligation is limited to the Form 3CEAC notification. Some published sources still quote ₹5,500 crore; the current figure is ₹6,400 crore.
Q11. Is a corporate guarantee from the parent a transfer pricing transaction?
Yes. Capital financing, including guarantees, falls within the definition of an international transaction, and a guarantee fee may be expected. This is one of the most frequently omitted items because no invoice is raised and nothing appears in the ledger. If no fee is charged, that position needs documenting rather than ignoring.
Q12. Are outstanding receivables from a group company a transfer pricing issue?
They can be. Where receivables from an associated enterprise remain outstanding well beyond normal credit terms, the extended credit can be treated as a financing transaction on which interest should have been charged. Foreign-owned subsidiaries that let intercompany balances drift are creating a transfer pricing exposure without any transaction taking place.
Q13. How long must transfer pricing documentation be retained?
Eight years from the end of the assessment year. A FY 2025-26 file must therefore be held until the end of AY 2034-35. That is longer than most groups’ retention policies and longer than most finance teams stay in post, so the file should be stored institutionally rather than on an individual’s device.
Q14. What is a secondary adjustment?
Where a primary transfer pricing adjustment is made and the corresponding funds are not repatriated to India within the prescribed period, the excess is treated as an advance to the associated enterprise and notional interest is imputed. This converts a one-off adjustment into a recurring annual charge until the cash is actually brought back to India.
Q15. What is the difference between safe harbour and an APA?
Safe harbour applies prescribed margins by rule, is quick and inexpensive, but covers only specified transaction categories and bars MAP. An advance pricing agreement is negotiated on your facts, covers five prospective years with rollback for up to nine years of certainty in total, can be bilateral, and preserves treaty protection. APAs cost considerably more and take considerably longer.
Q16. What does a Transfer Pricing Officer usually challenge?
Most commonly, evidence that services were actually received for a management fee, the rationale behind a cost allocation key, whether services duplicate what the Indian entity already does or amount to shareholder activity, comparables selection, and whether the agreement matches actual conduct. A study that anticipates these questions fares considerably better than one that does not.
Q17. Does a branch office of a foreign company need transfer pricing documentation?
Yes. Transactions between a foreign company’s head office and its Indian branch or permanent establishment are treated as international transactions, so the foreign company undergoes a transfer pricing audit and files the accountant’s report alongside its return. The idea that a branch is a lighter compliance option than a subsidiary does not survive this requirement.
Q18. What is the multi-year arm’s length determination?
From AY 2026-27, a three-year block applies for similar transactions, so the arm’s length determination can hold across the block rather than being re-established annually. It reduces repetitive benchmarking for stable arrangements. It does not remove the documentation obligation, and a change in the transaction, the functional profile or the parties will break the block.