The moment your Indian company transacts with its foreign parent or any group entity, transfer pricing applies – every such transaction must happen at arm’s length, be documented, and be reported annually in Form 3CEB regardless of value. India runs one of the world’s most active TP enforcement machines, and from April 2026 the whole chapter wears new section numbers under the Income-tax Act 2025 – with one genuinely new feature: multi-year arm’s-length determinations. Here are the basics every foreign subsidiary’s controller needs.
Who is caught – associated enterprises
- 26%+ voting power (direct or indirect), loans of 51%+ of assets, guarantees of 10%+ of borrowings, board control, dependence on IP or supply – the definition (s.92A, now s.162) is wide;
- A wholly-owned subsidiary is always an AE of its parent and of sister subsidiaries;
- Caught transactions: services billed to the parent, royalties, cost recharges (ESOPs, management fees), intercompany loans and guarantees, asset transfers – even free-of-cost support flows.
The machinery in one table
| Item | Rule | Old → new section |
|---|---|---|
| Arm’s-length standard | 5 prescribed methods + “other method”; TNMM dominates for captives (operating profit / operating cost as the indicator) | 92C → 165 |
| Documentation | Full TP study mandatory above ₹1 crore of international transactions (Rule 10D); keep ~8 years | 92D → 171 |
| Accountant’s report | Form 3CEB for EVERY AE transaction, any value – due 31 October; ITR follows 30 November | 92E → 172 |
| Master File | Group revenue > ₹500 crore AND Indian transactions > ₹50 crore (₹10 crore if intangibles) | Rule 10DA |
| CbCR | Group consolidated revenue > ₹6,400 crore | Rule 10DB |
| Penalties | 2% of transaction value for documentation failures; ₹1 lakh for missing 3CEB; graduated daily fines for CbCR | 271AA → 442; 271G → 457 |
| Secondary adjustment | A TP adjustment not repatriated within time is treated as a deemed advance carrying notional interest | 92CE → 170 |
How the disputes actually happen
- 3CEB filed → risk-based referral to the TPO (typically 2–4 years later) → TPO order → draft assessment → DRP (9-month track) or CIT(A) → ITAT;
- The classic captive adjustments: markup below the TPO’s comparables set; markup demanded on pass-through/reimbursement costs; ESOP recharges disputed; and receivables from the parent outstanding beyond the credit period recharacterised as loans with notional interest added;
- Defence is built in advance, not in assessment: contemporaneous benchmarking, a clean intercompany agreement, and consistent invoicing – see the cost-plus guide.
The three certainty routes
| Route | What it fixes | Best for |
|---|---|---|
| Safe harbour | 15.5% margin on operating cost auto-accepted – IT/ITeS/KPO/contract R&D up to ₹2,000 crore, 5-year election | Routine captives that can live with 15.5% |
| APA | Negotiated margin, up to 9 years including rollback; 2-year fast track for IT unilaterals | Bigger, non-standard, or below-15.5% ambitions; bilateral certainty |
| Litigate the benchmarks | Nothing in advance | Only where the margin gap justifies years of dispute |
First 3CEB season – or a TPO notice?
We run benchmarking, documentation and 3CEB – and steer captives into safe harbour or APA where the maths says so.
Talk to My Cloud AccountantFrequently asked questions
Is Form 3CEB mandatory for small intercompany transactions?
Yes – 3CEB reports every international transaction with an associated enterprise regardless of value, due 31 October. The full documentation study becomes mandatory once transactions cross ₹1 crore.
Which TP method applies to a cost-plus captive?
Almost always TNMM – testing the operating margin on operating costs against comparable Indian service companies. The safe harbour short-circuits the comparables debate at 15.5% for eligible IT/ITeS captives.
What are the penalties for transfer pricing non-compliance?
2% of transaction value for failing to maintain or furnish documentation (ss. 271AA/271G, now 442/457), ₹1 lakh for not filing 3CEB, plus the adjustment itself with interest – and secondary-adjustment notional interest if the adjusted amount is not repatriated.
What changed for TP under the Income-tax Act 2025?
Renumbering (92–92F became 161–173) and one substantive addition: multi-year arm’s-length determinations – a TPO’s determination can apply to similar transactions for the following two years.
Based on sections 92–92F of the Income-tax Act 1961 (sections 161–173, ITA 2025), Rules 10A–10E and current assessment practice. Last reviewed: July 2026.