Transfer pricing rules apply to every intercompany transaction between your India entity and its foreign parent. Here is what is required, what gets audited, and how to stay compliant.
What it is
Transfer pricing in India
Transfer pricing is the set of rules governing how prices are set for transactions between related companies – for example, between your India subsidiary and its foreign parent. The Indian Income Tax Act (Section 92–92F) requires that all such transactions be priced at arm's length – i.e., at the same price two unrelated parties would agree on.
Regulated transactions include: management fees, royalties, software licence fees, IT services, technical services, loans, guarantees, and any sale or purchase of goods or intellectual property between related parties.
For foreign companies with India subsidiaries, transfer pricing is not optional. Every year, if your India entity has international transactions with related parties exceeding ₹1 crore, a formal transfer pricing study and Form 3CEB (a certificate from a Chartered Accountant) must be filed with the income tax return.
What transfer pricing compliance looks like in practice
01
Identify transactionsBefore year-end
Document every payment flowing between the India entity and related parties – management charges, royalties, IT services, cost recharges, loans.
02
Select methodologyAt setup
India recognises five OECD-accepted methods: CUP, RPM, CPM, TNMM, and PSM. For GCCs and service entities, TNMM is most common.
03
Benchmark analysisAnnually
A comparability analysis using CMIE ProwessIQ or TP Catalyst databases – comparing your entity's margins against industry benchmarks.
04
TP study documentationBefore filing ITR
A formal TP study documenting the entity profile, transaction analysis, methodology, benchmark, and arm's length conclusion. Maintained for 8 years.
05
Form 3CEB certificationBy 31 October
A report certified by a Chartered Accountant confirming the TP study and declaring that transactions are at arm's length.
06
ITR filing with disclosureBy 31 October
The income tax return for a company with international transactions is due by 31 October. Late filing attracts interest and penalties.
Transfer pricing done right — and wrong
UAE · Manufacturing Group · 12-Year-Old India Entity
Dubai group fixed 12 years of undocumented transfer pricing
The Challenge
The India branch office had been paying management fees to the UAE parent without any transfer pricing documentation for over a decade. When a TP audit was initiated, the company had no defensible position.
What We Delivered
We converted the branch to a private limited company, reconstructed a defensible TP policy, filed Form 3CEB for current and prior years, and appeared before the Transfer Pricing Officer.
Passed the TP scrutiny assessment with no adjustment made. Zero additional tax demand.
Transfer pricing mistakes Indian subsidiaries make
1
Setting up transfer pricing after transactions have already occurred
The most common and costly mistake. TP documentation must be in place before the first intercompany payment. Reconstructing it retroactively is possible but creates risk – auditors give less weight to documentation prepared after the fact.
2
Underpaying or overpaying on management fees without benchmarking
Management fees charged by the parent to the subsidiary must be benchmarked against what an unrelated party would pay for equivalent services. Rates that are too high (over-charging the India entity) reduce taxable income in India – exactly what TP auditors look for.
3
Treating GCC entities as cost centres without proper cost-plus documentation
GCCs providing services to the foreign parent at cost are still subject to TP rules. A cost-plus methodology with a mark-up (typically 8–15%) must be documented, benchmarked, and defended.
4
Missing the Form 3CEB deadline
Form 3CEB must be filed by 31 October. Missing this deadline attracts a penalty of ₹1 lakh under Section 271BA, regardless of whether the TP position is correct.
How India's transfer pricing audit system works
India has one of the most active transfer pricing audit regimes in Asia. Cases are selected for TP scrutiny based on risk parameters set by the Central Board of Direct Taxes (CBDT) – typically companies with large international transactions, significant adjustments in prior years, or sectors known for TP disputes (IT services, pharma, financial services).
A TP adjustment – where the tax officer determines that your intercompany pricing was not at arm's length – attracts tax on the adjustment plus interest (12% per annum) plus penalty (up to 300% of the tax on adjustment in some cases). Advance Pricing Agreements (APAs) are available for companies wanting certainty – we have experience in both unilateral and bilateral APAs.
Our track record: zero TP adjustments upheld across all client engagements where we prepared the documentation before the transactions occurred.
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Transfer pricing questions
Transfer pricing documentation is required when the aggregate value of international transactions with related parties exceeds ₹1 crore in a financial year. Form 3CEB is additionally required. Below this threshold, documentation is still best practice but not legally mandated.
Penalties range from 2% of the transaction value (for failure to maintain documentation) to 100–300% of the tax on any adjustment. Form 3CEB non-filing attracts ₹1 lakh flat penalty. In practice, the larger risk is the adjustment itself – which then attracts tax + interest + penalty.
A GCC providing services to its foreign parent is subject to TP rules on those services. The standard approach is a cost-plus methodology – the GCC charges the parent its total costs plus a mark-up (typically 8–15%). This mark-up and the methodology must be benchmarked and documented annually.
An APA is a formal agreement between a taxpayer and the CBDT fixing the transfer pricing methodology and pricing for a period of 5 years. It provides complete certainty – no TP audit risk during the APA period. Available as unilateral (India only) or bilateral (India + treaty partner country).
Yes. If the Indian subsidiary has received a loan from its foreign parent, the interest rate on that loan must be at arm's length. LIBOR-based or SBI MCLR-based benchmarks are typically used. RBI also imposes all-in cost ceilings on external commercial borrowings.
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