Transfer Pricing FAQ

Transfer Pricing is the pricing of transactions between related companies in a group: goods, services, royalties, loans, guarantees and so on. Tax law requires these prices to be set as if the parties were independent, at an arm’s length price, so that profits are not shifted out of a country by pricing alone.

Any person in India that enters into an international transaction with an associated enterprise, and anyone with specified domestic transactions above ₹20 crore. In practice this covers Indian subsidiaries and branches of foreign groups, Indian groups with overseas subsidiaries, and some domestic groups with tax-incentivised units.

Broadly, an enterprise that participates in the management, control or capital of the other, directly or through intermediaries, or where the same persons do so for both. The law lists specific tests, including:

• holding 26% or more of the voting power of the other
• a loan of 51% or more of the book value of the other’s total assets
• guaranteeing 10% or more of the other’s total borrowings
• appointing more than half of the board or one or more executive directors
• complete dependence on the other’s intangibles, or 90% or more of raw materials supplied or goods bought on terms influenced by the other

Meeting any one test is enough.

A transaction between two or more associated enterprises, at least one of which is a non-resident, involving goods, services, intangibles, money (loans, deposits, guarantees), cost sharing, or a business restructuring. It must have a bearing on profits, income, losses or assets.

A transaction with an unrelated party is treated as one with the associated enterprise if there is a prior agreement between that party and the associated enterprise about the transaction, or if its terms are in substance settled between them. This applies whether or not the unrelated party is resident in India.

Certain transactions between related parties within India, covered when their aggregate value exceeds ₹20 crore in the year. Today these are mainly transactions involving units that claim profit-linked tax incentives and companies under the concessional tax regime for new manufacturing companies.

The price, or more often the margin, that independent parties would have agreed in comparable circumstances. Because exact prices are rarely observable, most Indian benchmarks compare the tested party’s operating margin with the margins of independent companies doing similar work.

No. The rules do not apply where they would reduce the income chargeable in India or increase a loss. If your margin is above the range, nothing is adjusted.

The Income-tax Act, 2025 and the Income-tax Rules, 2026 replaced the 1961 Act and the 1962 Rules. Transfer Pricing moved from sections 92 to 92F to sections 161 to 173, and the forms were renumbered. The terms “previous year” and “assessment year” were replaced by a single “tax year”.

The 1961 Act and the 1962 Rules, including Form 3CEB. The new Act applies from tax year 2026-27, which runs from 1 April 2026 to 31 March 2027.

Section 92 is now 161, 92A is 162, 92B is 163, 92BA is 164, 92C is 165, 92CA is 166, 92CB is 167, 92CC is 168, 92CE is 170, 92D is 171, 92E is 172 and 92F is 173. The methodology has the full table.

Form 48. It is still certified by a chartered accountant and is due by 31 October following the tax year. The master file is now Form 56, the country-by-country report Form 59, and the safe harbour option Form 49.

The six methods, the comparability factors, the use of three-year weighted data and the 35th to 65th percentile range were carried over in substance. The main changes were in procedure: forms, the safe harbour regime, advance pricing agreement rollback, and a new option to apply an arm’s length price to three years.

Comparable uncontrolled price (CUP), resale price, cost plus, profit split, the transactional net margin method (TNMM), and any other method that reflects the price in comparable uncontrolled conditions.

On the facts: the nature of the transaction, the functions performed, assets used and risks assumed by each party, the availability and reliability of data on comparables, and how reliably differences can be adjusted for. There is no fixed order of preference, but the choice must be explained.

Because transaction-level prices between independent parties are rarely available, whereas company-level financial statements are. TNMM compares net operating margins, which are less affected by small product or accounting differences than prices or gross margins.

The ratio used to measure the margin under TNMM, such as operating profit to total cost (OP/TC) or operating profit to sales (OP/Sales). The denominator should be the base on which the tested party is rewarded and should not itself be affected by the controlled transaction.

OP/TC (net cost plus) for service providers and contract manufacturers paid on their costs. OP/Sales for distributors and traders, whose purchases from the group are the controlled transaction and so cannot be a reliable base.

Gross profit divided by operating expenses other than cost of goods. It suits low-risk distributors and agents whose functions are reflected in their operating expenses and who do not add value to the goods. It is unreliable where inventory, manufacturing or significant intangibles are involved.

There is no single answer. Forex gains and losses on trade receivables and payables are often treated as operating, especially for exporters, because they arise from the business itself. What matters is consistency between the tested party and the comparables. TP Bharat gives each PLI with and without forex.

Costs that the tested party incurs on behalf of the group without adding value, such as third-party costs recharged at cost. They are often excluded from the cost base, or a value-added expenses PLI is used, so that no mark-up is expected on them.

Usually CUP, based on market interest rates, guarantee fees or royalty rates for comparable terms. The safe harbour rules prescribe rates for some loans and guarantees.

Similar products or services, similar functions, assets and risks, similar contractual terms and similar market conditions. Differences are acceptable if they do not materially affect the margin or can be adjusted for reliably.

Normally the less complex party, whose functions can be benchmarked reliably and whose data is available. For Indian captives, contract manufacturers and distributors, that is usually the Indian entity.

One with audited financial statements of Indian companies and a reliable industry classification. TP Bharat runs on its own database, which is organised for Transfer Pricing and records how each figure is classified.

Standalone. Comparability is assessed on the legal entity, and consolidated accounts mix the results of different businesses and countries.

There is no minimum. Six or more allows a range; with fewer, the arithmetic mean and the tolerance apply. A smaller set of good comparables is better than a larger set of weak ones, but very small sets are more exposed to challenge.

Generally yes, because scale affects margins. The band should be justified, often one-tenth to ten times the tested party’s turnover. Excluding very large companies is common for small and mid-sized tested parties.

A comparable should be uncontrolled. Companies with related-party transactions above a threshold, commonly 15% to 25% of revenue or cost, are usually excluded.

Not simply because they made a loss in one year. Companies with losses in most years of the window (for example two of three) are commonly excluded because persistent losses suggest abnormal conditions. A company with an ordinary loss in one year may still be comparable.

Generally not on its own. A high margin should prompt a closer look for a reason, such as different functions, significant intangibles or an extraordinary event, and the rejection should rest on that reason.

A merger, demerger or major restructuring in the window can distort the margin. Such companies are usually rejected for the affected years, with the event recorded as the reason.

Yes, if the company reports a segment that matches the tested party’s activity and the segment data is reliable, including a fair allocation of common costs. Segment data can make an otherwise mixed company usable.

Indian companies mostly follow April to March. Where a company’s accounts cover a different or shorter period, it is usually excluded unless the data can be reliably aligned.

No. Each year stands on its own and the search should be refreshed. Consistency helps, though, and large unexplained changes in the set from year to year invite questions.

Data for the year of the transaction. For the resale price method, cost plus and TNMM, the two preceding years can also be used, combined on a weighted average basis.

The preceding years can be used at the time of filing. If current-year data becomes available by the assessment, it is then taken into account.

Add up the numerator over the years and divide by the sum of the denominator. For OP/TC: total operating profit for the years with data divided by total operating cost for the same years. This is not the same as averaging the three yearly percentages.

Sort the margins in ascending order. Multiply the number of comparables by the percentile (for example 11 × 0.35 = 3.85). If the result is a whole number, take the average of the value at that position and the next one; otherwise use the value at the next higher position (position 4 here). The median is found the same way at 50%.

If it is below, the arm’s length price is the median of the dataset, and the difference is the adjustment. If it is above, there is no adjustment.

The arithmetic mean is the arm’s length price. The transaction price is accepted if the mean differs from it by no more than the tolerance notified for the year.

In recent notifications the tolerance is 1% for wholesale trading and 3% in other cases, measured on the transaction price. Wholesale trading means purchases of finished goods make up at least 80% of the total cost of the activity and average monthly closing inventory is no more than 10% of its sales. The tolerance does not apply where a range is used.

An adjustment for differences in receivables, payables and inventory between the tested party and each comparable. The difference in working capital intensity is multiplied by an interest rate and applied to the comparable’s margin. It is widely accepted where the data supports it.

The Indian rules use the 35th to 65th percentile by position, with the median outside the range. The OECD practice is usually the 25th to 75th percentile, often with interpolation. TP Bharat can show both for the same set.

Anyone whose international transactions exceed ₹1 crore in the year, and anyone with specified domestic transactions above ₹20 crore. Below ₹1 crore the detailed documentation is not required, but you should still be able to show that prices are at arm’s length.

Ownership structure and group profile, a description of the business and industry, the nature and terms of each transaction, the functional analysis, the method chosen and why, the comparability analysis and search, the computation of the arm’s length price, and any assumptions or adjustments.

It should be prepared at the time, and in any case be in place by the due date of the accountant’s report. It is produced when the Assessing Officer or the Transfer Pricing Officer asks for it.

The accountant’s report on international and specified domestic transactions (previously Form 3CEB). It is required whenever there is an international transaction, whatever the amount, and is due by 31 October following the tax year.

Constituent entities of groups with consolidated revenue above ₹500 crore whose international transactions exceed ₹50 crore, or ₹10 crore for intangibles. It is filed in Form 56 by 30 November.

Groups with consolidated revenue above ₹6,400 crore. The report is filed in Form 59 within twelve months of the end of the parent’s reporting year, either by the Indian parent or, in specified cases, by the Indian constituent.

Under the 1962 Rules, eight years from the end of the relevant assessment year. Keep the search, the accept and reject decisions and the data behind them for the same period.

• Failure to keep or furnish documentation: 2% of the value of each transaction.
• Late accountant’s report under the 2025 Act: a fee of ₹50,000 if up to one month late and ₹1 lakh after that.
• Master file not furnished: ₹5 lakh.
• Country-by-country report: daily penalties for delay and a further penalty for inaccurate reporting.

Under-reporting of income from an adjustment can also attract a penalty based on the tax.

The Assessing Officer refers cases on the basis of risk parameters set by the CBDT, typically larger transaction values or particular risk indicators. The TPO then determines the arm’s length price.

Examines the documentation, may reject comparables, filters or the method, may run a fresh search, and passes an order with the arm’s length price. The Assessing Officer then computes the income on that basis.

A panel of three senior Commissioners that hears objections to a draft assessment order containing a Transfer Pricing adjustment, for eligible taxpayers including foreign companies. Objections are filed within 30 days of receiving the draft order, and the panel’s directions bind the Assessing Officer.

After the final order, an appeal lies to the Income Tax Appellate Tribunal, which is the final fact-finding authority. Questions of law can go on to the High Court and the Supreme Court. Taxpayers who do not use the panel can appeal to the Commissioner (Appeals) first.

Where a primary adjustment above ₹1 crore is made or accepted, the excess money with the associated enterprise must be brought back to India within 90 days. If it is not, it is treated as an advance and interest is imputed on it. The taxpayer can instead choose to pay a one-time additional tax on the excess.

Yes. Interest exceeding ₹1 crore paid to non-resident associated enterprises (or on debt they guarantee) is deductible only up to 30% of EBITDA, with the excess carried forward for eight years. This is separate from the arm’s length test on the interest rate.

A treaty process in which the tax authorities of two countries resolve double taxation arising from an adjustment. It can run alongside domestic appeals, but is not available once a safe harbour has been accepted.

A margin or rate prescribed by the CBDT that the tax department accepts without benchmarking, for eligible taxpayers who opt in. From tax year 2026-27, software development, IT-enabled services, KPO and contract R&D in software are combined into one IT services category with a 15.5% mark-up on operating cost, for transactions up to ₹2,000 crore, and the option can cover five years. There are separate categories for auto components, intra-group loans, guarantees, data centres and others.

Compare the safe harbour margin with the range your own benchmark would give. Opting in removes the dispute risk but commits you to the prescribed margin, rules out the mutual agreement procedure, and does not remove the need to keep documentation and file Form 48.

An agreement with the CBDT, alone (unilateral) or together with another country’s authority (bilateral or multilateral), that fixes the method or price for up to five future years. It can be rolled back to the four previous years; under the 2026 Rules, rollback applies only if the return for that year was filed by the original due date.

From tax year 2026-27, where the TPO has determined the arm’s length price for a transaction, the taxpayer can opt to apply it to the next two years as well, if the transaction is materially the same. The option is made in Form 46 with an accountant’s certificate in Form 47.

With TNMM and OP/TC, against independent Indian IT or ITeS service providers. Typical filters include export earnings of 75% or more, employee cost of 25% or more, low R&D and selling spend, and exclusion of companies with significant products or intangibles. The safe harbour is an alternative for eligible captives.

Also TNMM with OP/TC, against companies providing R&D or engineering services on contract. Companies that own the results of their research, or earn significantly from products and licensing, are not comparable.

With TNMM and OP/Sales, or the resale price method with gross margins where reliable. Comparables should be independent traders of similar products, without manufacturing or significant brand ownership. The Berry ratio may suit limited-risk distributors.

Indian assessments have often argued that high advertising and marketing spend builds the foreign brand owner’s intangibles. The Delhi High Court has rejected the use of a bright-line test to decide this. Each case turns on the functions, the contracts and whether the distributor is already compensated through its margin.

Usually by CUP, comparing the rate with royalty rates in comparable licence agreements, supported by evidence of the benefit received. The payment can also be tested as part of the overall margin under TNMM where that is more reliable.

First by showing that services were actually received and benefited the Indian entity (the benefit test), and are not shareholder or duplicate activities. Then by testing the charge, usually cost plus a mark-up. Evidence such as emails, reports and time records is essential.

By CUP against market rates for a loan with similar currency, tenor, security and borrower credit standing. Safe harbour rates are available for some loans.

By a guarantee fee that reflects the benefit to the borrower, for example the interest saved. The safe harbour rules prescribe a commission for eligible guarantees to wholly-owned subsidiaries.

Yes. Anyone can run a search without an account. We ask for your details only if you want the Arm’s Length Analysis.

An Arm’s Length Analysis is ₹30,000. During the launch offer, until 20 October 2026, it is ₹15,000. GST is added at the applicable rate. See Pricing.

So that we can start your search as soon as you ask. It is adjusted against the fee, and the balance is paid when the analysis is ready. See the Refunds & Cancellation policy.

Names, business descriptions and the review are part of the paid analysis. You still see enough to judge the result: the funnel, the margins and the range.

TP Bharat maintains its own database. Company data is sourced from filings with the Ministry of Corporate Affairs and public databases about companies, and is organised for Transfer Pricing with industry, product and NIC classifications.

Standalone accounts, in ₹ crore, by Indian financial year (April to March).

No. It is calculated on every company that passed the filters. The review in the analysis removes some companies, and the range of the accepted set is the one to document.

The accepted comparables by name, with weighted and yearly margins, the range and the result; business descriptions; our accept and reject decisions with reasons; the screening record; an Excel workbook and a Word report. See the sample report.

An Arm’s Length Analysis covers the search and benchmarking. Our team can prepare the full documentation and help with the accountant’s report as a separate engagement.

Yes. Send us the comparable set and, if you have it, the workbook. We review each comparable, flag the ones a Transfer Pricing Officer is likely to question, add comparables from our database and update the margins to later years. Choose “Review or supplement an existing search” on the contact form.

Yes. Tell us the assessment year, for example AY 2024-25 (FY 2023-24), and what the Transfer Pricing Officer has proposed. Our data runs from FY 2019-20; we confirm the years available for your case before you pay.

Search settings are used to show you the result and are kept only if you send them with a request. The public site sets no cookies. See the privacy notice.