Transfer Pricing

Transfer pricing refers to the inter-company pricing arrangements between related business entities and commonly applies to intercompany transfers of services and tangible/intangible properties. In India, detailed transfer pricing provisions were introduced by the Finance Act, 2001 to facilitate the computation of fair, reasonable, and equitable profits and tax in India for businesses carried on by multinational companies. Essentially, transfer pricing is the process of determining the prices of cross-border transactions between related/associated parties. Section 92 of the ITA provides that the price of any transaction between Associated Enterprises (AE), either or both of whom are non-residents for tax purposes (international transaction), shall be computed with regard to the arm's length principle. Subsequently, the Finance Act, 2012 also brought 'Specified Domestic Transactions', (SDT) under the purview of transfer pricing, to mitigate tax arbitrages where transactions are carried out between two related Indian entities (and both of them enjoy tax holidays or preferential rates of taxes). Lately, the Finance Act, 2025 and Income Tax Act, 2025 has amended the structure of the section by incorporating Section 161 to 173 to replace the Erstwhile Section 92.

With effect from 1 April 2026, the Income-tax Act, 2025, has replaced the Income-tax Act, 1961 in its entirety, and the Income-tax Rules, 2026 have correspondingly replaced the Income-tax Rules, 1962. The transfer pricing code – earlier contained in Sections 92 to 92F (Chapter X) of the 1961 Act – has been re-enacted, largely without change of substance, as Sections 161 to 173 (also within Chapter X) of the Income-tax Act, 2025. Because transfer pricing provisions apply with reference to the tax year in which the transaction takes place, compliances for FY 2025-26 (AY 2026-27) continue to be governed by the erstwhile 1961 Act/1962 Rules numbering, while FY 2026-27 (AY 2027-28) onward will follow the new numbering used throughout this note.

Associated Enterprises: Two enterprises are considered to be associated¹ if there is - :

• Direct/indirect participation in the management, or control or capital of two enterprises by the same – one or more persons; or Direct/indirect shareholding with 26% or more of the voting power; or
• Advancing loans of 51% or more of the total assets; or
• Guarantee not less than 10% of the total borrowings; or
• Appointment of more than 50% of the Board of Directors
• Complete/absolute dependence of commercial rights of manufacture/processing
• Supply of at least 90% raw materials/consumables required for the manufacture or processing of goods
• Sale of manufactured goods, whereby the terms, conditions, and prices are influenced by the other party
• Control by the same person/relative/HUF/firm

Relationship of mutual interest as may be prescribed.

Transactions Covered

The regulations cover (i) all international transactions and (ii) certain specified domestic transactions (which may result in tax arbitrage) in case the value exceeds INR 200 million in a tax year.

International transactions would include routine transactions relating to

• Purchase, sale, transfer, lease or use of tangible property;
• Purchase, sale, transfer, lease or use of intangible property (including transfer of ownership or provision of use of rights);
• Capital financing, lending or borrowing of money (Long term or short term or guarantee, purchase/Sale of marketable securities, any advance or receivable or payment or debt arising during the course of business);
• Provision or availing of services;
• Transactions involving business restructuring;
• Mutual Agreement for allocation of costs / cost contribution arrangements;
• Any other transaction having bearing on profits, income, losses or assets

SDTs would include cases of inter-unit transfer of goods and services, which enjoy tax exemptions/deductions for carrying out eligible activities/businesses as well as transactions with new manufacturing companies having lower effective corporate tax rate. The threshold for the applicability of SDT remains to be INR 200 million.

Furthermore, in India there is also a concept of deemed international transactions which covers transactions with third parties (whether resident or not) under the ambit of transfer pricing if:

• There exists a prior agreement in relation to such a transaction between the third party and the associated enterprise, or;
• The terms of such transactions are determined in substance between the third party and the associated enterprise.

Reporting and Compliance

Obtaining an accountant’s certificate in the prescribed format is mandatory and would have to be filed on or before the prescribed due date⁴ 4 of the relevant assessment year, along with the tax return. There is no threshold exemption limit provided for compliance. Strict penal provisions have been established for non-compliance with the prescribed requirements.

Determination of 'Arm's Length Price' (ALP)

A crucial aspect of transfer pricing is the process of determining the Arm's Length Price (ALP). The Central Board of Direct Taxes (CBDT) has prescribed six methods for determining the ALP:

• Comparable Uncontrolled Price Method
• Resale Price Method
• Cost Plus Method
• Profit Split Method
• Transactional Net Margin Method
• Other Method (via Notification No. 18/2012 dated 23 May 2012)

The 'other method' has been prescribed to potentially cover transactions involving intangibles and business restructuring for which the above methods may not be the most appropriate. The regulations do not give preference to any specific method or method. The choice of the appropriate method is determined with respect to the nature and class of transaction, the classes of associated people, the functions performed by them, and other relevant factors.

Usage of multiple year data and range

To enhance the reliability of the comparability analysis, taxpayers need to examine multiple year data as opposed to single year data in order to evaluate factors that influence transfer pricing, such as long-term arrangements, business/product life cycles, etc.

The adoption of the arm’s length range and allowing the usage of multiple year data and a range of comparable results (35th to 65th percentile) has aligned the transfer pricing rules to global practices, to a certain extent.

However, if the dataset contains less than six comparability data points, taxpayers need to use the arithmetical means to ascertain the ALP, wherein a tolerance range of 1% for ‘wholesale trading’ and 3% for all other transactions is also allowed vis-a-vis the ALP. ‘Wholesale trading’ has also been defined to include:

• Where the purchase cost of finished goods is 80 or more of the total cost of such trades; and
• The average monthly closing inventory of such goods is 10% or less of sales from such trading activities

Extensive Transfer Pricing Documentation (Three-tiered documentation approach)

The transfer pricing documentation requirements have been substantially revised to align with Action Plan 13 of the OECD BEPS Project, in which a three-tiered documentation (viz. Country by Country Report (CbCR), Master File, and Local File requirements) was introduced.

• Local File: The requirement of maintaining prescribed documentation would be attracted only in cases wherever aggregate value of international transactions exceed INR 10 million for the year. Furthermore, there is no specific format prescribed for documentation, but an indicative list to be included has been prescribed. A taxpayer (falling within the thresholds above) is required to keep contemporaneous documentation (in the English language) for demonstrating the arm’s length nature of the international transactions and SDTs (collectively referred to as a related party transaction). The record-keeping (retention of documentation) should be for a period of 8 years from the end of the relevant year of assessment. For comparability analysis, the taxpayer can use publicly available databases (Indian and overseas as relevant for the analysis) to arrive at an ALP, and appropriate adjustments need to be made if necessary. The Indian databases widely used are maintained by private companies, while the corporate filings of companies are available on the public portal, namely, the Ministry of Company Affairs (MCA).
• Additionally, in line with the international consensus on this topic, it is now proposed that companies need to maintain and furnish extensive, group-level details to the Indian tax authorities by way of a Master File (MF) and CbCR, in addition to the current transfer pricing documentation (local file) requirements in India.

Master File - Rule 123 (erstwhile Rule 10DA): The information to be captured in the Master File can be broadly classified in four categories, i.e., (i) Description of the business, (ii) Particulars of intangibles, (iii) Particulars of financing activities, (iv) General information. Additionally, the groups consolidated financial statement is also expected to be included.

The applicability and timelines required for the Master File are as follows:

• CbC Report (CbCR) - Rule 124 (erstwhile Rule 10DB): The CbCR shall include economic information within the multinational group, such as the nature of main business activities, revenues, profit/loss, Income Taxes paid, stated capitals, accumulated earnings, number of employees, tangible assets, etc. for each country in which the group operates.
• The CbC reporting requirements shall apply to Indian multinational groups having a consolidated revenue above a threshold to be prescribed. It was indicated that the revenue threshold will be INR 64 billion (which is meant to be equivalent to the globally adopted EUR 750 million per year).

The applicability and timelines required for CbCR are as follows:

Secondary Adjustment

The concept of 'secondary adjustment' was introduced in 2017 to align transfer pricing provisions with international best practices. As a concept, secondary adjustment arises when the taxpayer agrees to a transfer price, which is different from what is recorded in the books of accounts. The taxpayer can agree to this different transfer price, either suo moto at the time of filing a tax return, or once the transfer pricing adjustment is done by the tax officer and not further litigated, or during the APA or Mutual Agreement Procedure (MAP) proceedings. The provisions require Indian taxpayers to repatriate the difference in transfer price as per tax and as per books of accounts (excess money) from the overseas AE within 90 days. In case the repatriation is not made within 90 days, it would be deemed as a loan given by the taxpayer to the AE, and the interest shall be computed till the time the repatriation is made by the AE. However, Finance Bill (No. 2) of 2019 provided certain clarifications regarding the effective implementation of these provisions, which are given below:

• These provisions shall not apply if the primary adjustment does not exceed INR 10 million or the same pertains to AY 2016-17 and earlier years. These two conditions are not cumulative.
• The taxpayer may choose not to make a secondary adjustment by a one-time tax payment of 18% on the amount to be repatriated, plus a 12% surcharge on such tax. However, the taxpayer will continue to pay the due interest till the date of such one-time tax, as per the existing provisions.
• The amount of primary adjustment may be repatriated from any of the AEs not resident in India, and not necessarily the transacting AEs.

Section 177 (erstwhile Section 94B) - Limitation of interest benefit (Deduction)

In conformance with OECD BEPS Action Plan 4, the Finance Act, 2017 introduced erstwhile Section 94B “Limiting Base Erosion Involving Interest Deductions and Other Financial Payments” now Section 177 of the Income Tax Act, 2025, where an Indian company or PE of a foreign entity as a borrower pays interest exceeding INR 10 million in respect of a debt issued/guaranteed (implicit or explicit) by a non-resident AE. The provisions intend to disallow interest expense in ‘excess’ of 30% of the earnings before interest, tax, depreciation, and amortization, subject to actual interest expense. However, the same shall be available to be carried forward for a period of 8 years and will be allowed as a deduction in subsequent years. The above restriction is not applicable to banking and insurance companies.

Penalty

In case of any lapses/adverse inferences drawn by the transfer pricing officers, penalties linked to the value of transactions are attracted. The penalties, circumstances under which they shall be attracted, and their quantum are mentioned below:

Late fees for failure in furnishing Form 48 (as per section 172) shall be – (i) a sum of INR 0.05 million for a delay up to one month for which such failure continues; and (ii) a sum of INR 0.1 million thereafter.

(as per the erstwhile Section 271, there was a penalty of INR 100000 for failure to furnish Form 3CEB)

Late fees for failure in furnishing Form 48 (as per section 172) shall be – (i) a sum of INR 0.05 million for a delay up to one month for which such failure continues; and (ii) a sum of INR 0.1 million thereafter.

(as per the erstwhile Section 271, there was a penalty of INR 100000 for failure to furnish Form 3CEB)

Safe Harbor

In existence since 2013, Safe Harbor Provisions have undergone a conscious revision to rationalize the acceptable profit ranges for a series of transactions such as IT/ITES/KPO, guarantee, etc. Also, a new category of international transactions for ‘receipt of low value-adding intra-group services were added. Safe Harbor Provisions have been stated to be in force only for the specific tax year/financial year and currently. Further, the Safe Harbor for intra-group loans have been aligned with the global practices of shifting the reliance from London Inter-Bank Offered Rate (LIBOR) as a base rate to currency-specific base reference rates, which is an attempt to provide administrative clarity and certainty to the taxpayers. As of FY 2025-26, the existing safe harbour rates shall apply.

The Finance Act, 2026 has since introduced a further, more significant round of reform:

• The IT/ITeS/KPO categories have been consolidated into a single ‘Information Technology Services’ category, carrying a fixed margin of 15.5%;
• The eligibility threshold has been raised sharply, from INR 300o million to INR 20,000 million;
• Safe Harbor eligibility, previously extended year-by-year, has been confirmed for two consecutive assessment years at a time – currently AY 2025-26 and AY 2026-27 – restoring the earlier multi-year practice and giving taxpayers greater planning certainty;

Advance Pricing Agreements (APA)⁵

It should be noted that Central Board of Direct taxes has entered into a record 219 APAs in FY 2025-26 with Indian taxpayers. This includes Unilateral APAs (UAPAs) and Bilateral APAs (BAPAs). With this, the total number of APAs since the inception of the APA programme has crossed the 1000th mark, aggregating to 1034 APAs, comprising 750 UAPAs and 284 BAPAs.

This year, CBDT again recorded the highest ever APA signings in any financial year since the launch of the APA programme, signing a total of 219 APAs. This year, CBDT also signed 84 BAPAs, crossing the record of 65 BAPAs signed last year in FY 2024-25.

The BAPAs were signed pursuant to entering into Mutual Agreements with 13 of India’s treaty partners namely the US, Finland, the UK, Singapore, Japan, South Korea, Australia, Denmark, Sweden, France, Indonesia, Ireland and New Zealand. Notably, this year also marks the achievement of signing India’s first-ever bilateral APAs with France, Ireland, Indonesia and Sweden.CBDT has consistently been signing a high number of APAs, having concluded 174 APAs in the previous financial year and 125 APAs in the year before that.

In March 2015, the Central Board of Direct Taxes (CBDT) introduced roll-back provisions according to which, an APA would also be applicable to international transactions undertaken in the previous 4 financial years are subject to certain conditions. On 19 December 2014, India signed its first Bilateral APA (BAPA) with Japan, which was to be valid for 5 years. In FY 24-25, India not only had a record number of agreements getting signed but also marks the year of India’s first signing of Multilateral APA (MAPA).

Provisions to convert Unilateral APAs (UAPAs) to BAPAs (subject to the satisfaction of certain conditions) are also available, and, since FY 2012-13, 618 Unilateral APAs have been converted under the same.

The New Block Transfer Pricing Assessment System

The government has made efforts to rationalize transfer pricing assessment provisions by introducing block assessments in transfer pricing, where arm’s length price determined by the TPO for any previous year shall apply to similar transactions for two (2) consecutive years immediately following the previous year. This amendment is proposed to be effective from 1 April 2026 for assessment years starting 2026-27.

The benefit of block assessments shall be available to the taxpayer by making an application to the TPO in Form No.46 (filed after the third tax year but before 30 June following that year). The TPO is bound to declare the validity of the form within one month from the end of the month in which such option is exercised by the taxpayer. These benefits of block assessments will not apply to cases under search and seizure (erstwhile Chapter XIV-B). Rules and guidelines for implementation shall be separately prescribed.

• 4. Currently being 31 October, whereas formerly, it was 30 November.
• 5. Signing of 62 Advance Pricing Agreements by CBDT in FY 2021-22, Press Releases, Income Tax Department, https://incometaxindia.gov.in/Lists/Latest%20News/Attachments/601/APA-Report-Final-2023.pdf .