07Transfer pricing
Transfer pricing from the first rupee
There is no threshold to cross. If your subsidiary bills the parent, or the parent bills it, the framework is live.
Transfer pricing applies to your Indian entity from the first rupee it transacts with a related party abroad. There is no threshold to cross and no grace period. If your subsidiary bills the parent for engineering work, or the parent bills it for software, the framework is live.
For a foreign-owned subsidiary this is usually the largest single source of tax exposure, and the Income-tax Act, 2025 changes how it works from 1 April 2026.
- Applies from
- INR 1 of cross-border related-party transactions
- Introduced
- Chapter X of the Income-tax Act, 1961, in 2002
- Annual filing
- Form 48, formerly Form 3CEB, due 31 October
- Full documentation from
- INR 1 crore in aggregate international transactions
- Master File from
- INR 500 crore of consolidated group revenue
- Penalty exposure
- Up to 2% of transaction value, and up to 200% of underpaid tax
What is the arm's length principle?
Every transaction between related parties has to be priced as though the two sides were completely independent of each other. That is the arm's length principle, and it exists because transactions inside a group can otherwise be structured to move profit toward lower-tax jurisdictions.
India introduced transfer pricing under Chapter X of the Income-tax Act, 1961 in 2002 and has since become one of the most active enforcement jurisdictions in the world. Tax authorities everywhere are built to detect and challenge this, and India's are practised at it.
What is a transfer pricing agreement?
A commercial contract between your Indian subsidiary and its parent, written as though the two had negotiated as strangers. It sets out who does what, for whom, at what price, and on what terms.
It has three parts.
- The agreement itself, covering scope, obligations and terms.
- A pricing method that explains how the price was arrived at, chosen from the recognised methods below.
- A markup, the margin percentage, backed by industry data showing what independent companies earn for comparable work.
The same two entities can hold several agreements at once. Services, a loan and an IP licence between the same parent and subsidiary are three separate documents, because that is how tax authorities expect each transaction type to be evidenced.
Types of intercompany agreement
| Agreement | What it covers |
|---|---|
| Services, cost-plus | One entity provides services to another: engineering, R&D, IT, back-office, marketing. The most common shape for an Indian subsidiary billing a foreign parent. |
| Distribution | The Indian entity resells or promotes the parent's product locally. |
| IP licensing or royalty | One entity licenses software, trademarks or patents to another in exchange for royalties. |
| Contract R&D | One entity conducts research and development on behalf of another without owning the resulting IP. |
| Contract manufacturing | One entity manufactures for another with no IP ownership and limited market risk. |
| Intra-group financing | Any intercompany loan, advance or guarantee between related entities. |
| Cost sharing | Two entities jointly fund IP development and share ownership of the results. |
How the price is calculated
- Cost Plus. Take the cost of the work and add a margin. The most common approach for services and back-office arrangements.
- TNMM, the Transactional Net Margin Method. Compare your net margin to what independent companies earn on similar work. The most widely used method in India and globally.
- CUP, the Comparable Uncontrolled Price method. Match your price to what an unrelated third party charges for the same thing. The most precise method, and it only works when a genuine comparable exists.
What your advisor needs to draft it
- The nature and description of the intercompany transactions: services, goods, IP, financing.
- A functional analysis: what each entity does, what risks it bears, and what assets it owns or uses.
- Financial data for both entities, including revenue, costs and operating margins.
- The industry and sector of the business.
- The country pair, which determines the benchmarking database and the applicable markup norms.
- The proposed or existing markup percentage.
Which transactions are covered?
All international transactions between associated enterprises. In practice that means most of what a subsidiary does with its parent.
- Provision of services: IT, management, back-office, technical, support.
- Sale or purchase of goods or products.
- Licensing of intellectual property: software, trademarks, patents.
- Payment of royalties.
- Intercompany loans and guarantees.
- Management fees and cost allocations.
- Research and development services.
What falls outside the scope
- Transactions with unrelated third parties. Transfer pricing only applies between associated enterprises.
- Domestic transactions between two Indian entities, unless they qualify as Specified Domestic Transactions above INR 20 crore in aggregate related-party transactions.
- One-off transactions that do not affect taxable income and are not part of a regular intercompany arrangement.
What safe harbour actually does
Safe harbour under Section 92CB lets you adopt a prescribed margin that the tax authority will accept without challenging your pricing. Opting in leaves the transaction inside the transfer pricing regime: you still file Form 48, you still keep the documentation, and the thresholds above still apply. What you buy is certainty on the margin and freedom from a pricing audit on it.
Rates before April 2026 sat at or above 17 to 18% margin for software development and IT-enabled services, 24% for KPO services, and up to 5% on cost for low value-adding intra-group services. Outbound loans and corporate guarantees at or above the prescribed rate are also covered.
What has to be filed each year?
| Filing | When it applies | Deadline |
|---|---|---|
| Form 48, formerly Form 3CEB | Any cross-border intercompany transaction, triggered by as little as a single rupee. A CA-certified report disclosing all international related-party transactions and confirming arm's length pricing. | 31 October annually |
| Local File, Form 3CEAB | Once the aggregate value of international transactions exceeds INR 1 crore. | Filed alongside Form 48 |
| Master File, Form 3CEAA | Where consolidated group revenue exceeds INR 500 crore. | Annually |
| Advance Pricing Agreement | Optional. A formal agreement with the CBDT pre-agreeing the methodology for covered transactions for a fixed future period. Unilateral, bilateral or multilateral, and can be rolled back up to 4 preceding years. | By application |
What does the Income-tax Act, 2025 change?
The Income-tax Act, 2025 takes effect on 1 April 2026 and is the biggest overhaul of India's transfer pricing framework in twenty years. Five changes matter for a foreign-owned subsidiary.
| What changes | Before | After |
|---|---|---|
| Safe harbour threshold | INR 300 crore | INR 2,000 crore, bringing far more businesses under it |
| IT services margins | Separate categories: software development and ITES at 17 to 18%, KPO at 24% | One consolidated category at a uniform 15.5% cost-plus margin |
| Annual form | Form 3CEB, with documentation prepared later | Form 48, requiring the full analysis, methodology, benchmarking and arm's length determination at the point of filing, CA certified |
| Assessment period | Year by year | Three-year block. An arm's length price determined in year one applies to similar transactions for the next two |
| Associated enterprise test | "Any participation in management or control" | A closed list of specific conditions, reducing ambiguity about who counts as a related party |
The trade is more work at filing time for less of it repeated every year.
Common questions
How many agreements can be in place at one time?
As many as you need. Each type of transaction gets its own agreement. A business with services, a loan and an IP licence between the same two entities would have three separate agreements, because that is how tax authorities expect transactions to be documented, individually and clearly.
What is the tenure of a transfer pricing agreement?
It can have a fixed term or auto-renew indefinitely. Either way, review the pricing terms at least every three years, or every year if the business is growing quickly.
What is a benchmark study and when do you need one?
A benchmarking study is the evidence behind your markup. It identifies comparable transactions between unrelated companies, analyses their pricing, and establishes what an arm's length price looks like for your specific type of transaction. It is what turns a transfer pricing agreement from a document into a defensible position.
In India it is required once your aggregate international transactions exceed INR 1 crore. If a tax authority challenges your pricing, the benchmark study is your first line of defence and it can significantly reduce penalties.
Do the agreements have to be filed with anyone?
No. The agreement does not get filed as a standalone document. It has to be available when asked. Tax authorities request it during audits and transfer pricing reviews, and not having it ready is where the real exposure begins.
Why does this matter for a small subsidiary?
Because the threshold is a single rupee. Any Indian entity transacting with a related party abroad has to comply, and every related-party transaction requires a CA-certified report in Form 48 from April 2026. Above INR 1 crore in aggregate, full documentation is mandatory.
The real risk is a transfer pricing adjustment: additional tax, interest, penalties up to 2% of transaction value for missing documentation, and up to 200% of underpaid tax where the pricing does not hold. In the worst case both countries tax the same profit.
Fixing the structure retroactively costs far more than getting it right at the start. If your subsidiary will bill the parent from month one, have the agreement and the benchmarking in place before the first invoice. Commenda's transfer pricing service covers documentation, benchmarking and the annual filings.
