Transfer Pricing

Transfer pricing refers to the pricing of transactions between associated enterprises, typically companies within the same multinational group. Because tax rates differ between countries, a group could shift profit to a lower-tax country by adjusting the prices it charges between its own entities. India's transfer pricing rules, now set out in Sections 92 to 92F [ITA 2025: ss. 161-173], require that such transactions are priced at arm's length, meaning the price that independent parties would have agreed in comparable conditions. This protects the share of profit that is taxed in India.

The rules apply where two enterprises are associated enterprises and they enter into an international transaction or a specified domestic transaction. Under Section 92A [ITA 2025: s. 162], enterprises are associated where one holds at least 26% of the voting power in the other, where a common party holds at least 26% in both, or where they are linked through defined management, control, financing or supply relationships. An international transaction is a cross-border dealing between associated enterprises, such as the sale of goods, provision of services, use of intangibles, or intra-group financing.

There is no minimum value below which the arm's length principle stops applying; every international transaction between associated enterprises must meet it. Detailed transfer pricing documentation, the Local File, becomes mandatory where the aggregate value of international transactions exceeds Rs 1 crore in the year. For specified domestic transactions, the rules apply only where the aggregate exceeds Rs 20 crore in the year. The accountant's report is required regardless of transaction value, with no exemption based on size.

Indian rules recognise six methods under Section 92C [ITA 2025: s. 165]: the Comparable Uncontrolled Price method, the Resale Price method, the Cost Plus method, the Profit Split method, the Transactional Net Margin method, and the Other method for situations the first five do not fit. There is no fixed hierarchy; the most appropriate method is selected from the nature of the transaction, the functions performed, and the data available. We carry out a functional analysis and a comparables search to support the method chosen.

A company that crosses the documentation threshold must keep a contemporaneous record covering the group structure, the associated enterprises involved, each entity's functions, assets and risks, the transactions and their values, the method selected, and the comparables and arm's length range supporting the pricing. This is the Local File within the three-tier framework. Under Rule 10D [ITR 2026: r. 84], the documentation must exist by the specified date—one month before the return due date—and the 2026 Rules require retention for nine years from the end of the relevant tax year. Preparing it contemporaneously, rather than reconstructing it later, is what makes a position defensible in an audit.

These are the upper two tiers of the documentation framework, aimed at larger multinational groups. Under Section 92D [ITA 2025: s. 171] and Rule 10DA [ITR 2026: r. 123], the Master File is furnished in Form 3CEAA [ITR 2026: Form 56], with the designated-entity intimation in Form 3CEAB [ITR 2026: Form 57]. It applies where consolidated group revenue exceeds Rs 500 crore and international transactions exceed Rs 50 crore, or intangible-related transactions exceed Rs 10 crore. Under Rule 10DB [ITR 2026: r. 124], the Country-by-Country Report is filed in Form 3CEAD [ITR 2026: Form 59], with related intimations in Form 3CEAC [ITR 2026: Form 58]/Form 3CEAE [ITR 2026: Form 60], for groups whose consolidated revenue is Rs 6,400 crore or more.

Every person who enters into an international transaction or a specified domestic transaction must obtain a report from a Chartered Accountant on those transactions and their arm's length treatment. For tax year 2026-27 onward, the prescribed report is Income-tax Rules 2026 Form 48 under Section 92E [ITA 2025: s. 172] and Rule 10E [ITR 2026: r. 85]. Income-tax Rules 2026 Form 48 is more structured than the earlier Form 3CEB [ITR 2026: Form 48], organised into six parts. The due date continues to be 31 October, one month before the income-tax return due date. For the year ended 31 March 2026, Form 3CEB [ITR 2026: Form 48] still applies and is filed by 31 October 2026.

An Advance Pricing Agreement (APA) is an agreement between the taxpayer and the Central Board of Direct Taxes that fixes the transfer pricing method, or the arm's length price, for specified transactions in advance. It can cover up to five future years and can be rolled back to four earlier years, giving as much as nine years of certainty, and it may be unilateral, bilateral or multilateral. The application is made in Form 3CED [ITR 2026: Form 51]/Form 3CEDA [ITR 2026: Form 51], with the annual compliance report in Form 3CEF [ITR 2026: Form 52], under Section 92CC [ITA 2025: s. 168] and Section 92CD [ITA 2025: s. 169]. An APA suits groups that want to remove uncertainty on recurring, material transactions.

Safe harbour rules let an eligible taxpayer adopt a margin or price that the tax authority will accept without dispute, for defined categories such as software development services, IT-enabled services, contract research, and intra-group loans. Choosing a safe harbour reduces audit exposure and documentation effort, in exchange for accepting the prescribed margin, which is often conservative. The option is exercised in Forms 3CEFA-3CEFC [ITR 2026: Form 49], under Section 92CB [ITA 2025: s. 167]. Whether it helps a company depends on how the prescribed margin compares with its own results, which we assess before recommending it.

Where a return is selected on transfer pricing risk, the Assessing Officer refers the matter to a Transfer Pricing Officer, who examines the documentation and may propose an adjustment to the arm's length price. If an adjustment is proposed, an eligible taxpayer can object before the Dispute Resolution Panel, whose directions bind the officer, or follow the normal appeal route. Where an adjustment causes double taxation with a treaty partner, the Mutual Agreement Procedure, applied for in Form 34F [ITR 2026: Form 55], lets the two tax authorities resolve it between themselves. A recent change also allows an arm's length price determined for one year to apply to similar transactions for the following two years, reducing repeated disputes. We prepare submissions, attend hearings, and represent the company through these stages.

A primary adjustment increases a company's taxable income to the arm's length price. A secondary adjustment, under Section 92CE [ITA 2025: s. 170], then addresses the cash position: the excess money that effectively stayed with the associated enterprise must be brought back to India within the prescribed time. If it is not repatriated, that amount is treated as a deemed advance to the associated enterprise and notional interest is added to income. This is why a transfer pricing adjustment affects treasury and intercompany balances, not only the tax computation.

The consequences are significant and separate from the tax itself. Failure to furnish the accountant's report attracts a penalty of Rs 1 lakh. Failure to maintain or furnish the prescribed documentation attracts a penalty of 2% of the value of the transaction. Failure to furnish the Master File attracts Rs 5 lakh, and late Country-by-Country reporting attracts graded daily penalties. Where an arm's length adjustment is treated as under-reported or misreported income, further penalties apply on the tax involved. These provisions sit within the penalty framework of the Income Tax Act 2025.

The substance of the rules is largely unchanged; the references and forms moved. From 1 April 2026, transfer pricing sits in Sections 92 to 92F [ITA 2025: ss. 161-173], and reporting is framed around the Tax Year. The applicable filing forms are Form 3CEB [ITR 2026: Form 48] for the transfer-pricing report, Forms 3CEAA to 3CEAE [ITR 2026: Forms 56-60] for the Master File/Country-by-Country set, Forms 3CEFA-3CEFC [ITR 2026: Form 49] for safe harbour, and Form 3CED [ITR 2026: Form 51]/Form 3CEDA [ITR 2026: Form 51] for the APA application. Compliance for the year ended 31 March 2026 still uses the earlier sections and forms. We align documentation and filings to the correct set based on the year involved. Form 3CEF [ITR 2026: Form 52] is the annual APA compliance report.