Transfer pricing in India – what it means for foreign companies
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 Rs.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
Document every payment flowing between the India entity and related parties – management charges, royalties, IT services, cost recharges, loans. Many foreign companies underestimate the breadth of what qualifies.
India recognises five OECD-accepted methods: CUP, RPM, CPM, TNMM, and PSM. For GCCs and service entities, TNMM (Transactional Net Margin Method) is most common. We select and document the method before any transactions occur.
A comparability analysis using CMIE ProwessIQ or TP Catalyst databases – comparing your entity's margins against industry benchmarks. This is the core of the TP study and requires specialist expertise.
A formal TP study documenting the entity profile, transaction analysis, methodology, benchmark, and arm's length conclusion. Required by law and must be maintained for 8 years.
A report certified by a Chartered Accountant confirming the TP study and declaring that transactions are at arm's length. Filed along with the income tax return.
The income tax return for a company with international transactions is due by 31 October (not 31 July). Late filing attracts interest and penalties.
Transfer pricing done right – and wrong
Dubai group fixed 12 years of undocumented transfer pricing
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.
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
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.
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.
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.
Form 3CEB must be filed by 31 October. Missing this deadline attracts a penalty of Rs.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.
What transfer pricing compliance costs in India
Transfer pricing questions
Ready to get started? Book a free 30-minute consultation.
Senior CA reviews your situation and gives you a clear structure recommendation. No commitment. Written summary after the call.