Transfer Pricing Rules in India : A Complete Compliance Guide for Foreign Subsidiaries

If you're running a foreign company's Indian subsidiary, there's one question that should keep you awake at night: are your inter-company transactions really at arm's length? A single misstep can trigger massive tax penalties, years of litigation, and serious damage to your bottom line. In India, where transfer pricing is one of the most heavily scrutinized areas of taxation, compliance isn't optional — it's a strategic necessity.

India has one of the world's most complex and aggressively enforced transfer pricing regimes. For multinational enterprises (MNEs), navigating these rules is not just about ticking a compliance box; it’s about protecting profits, maintaining reputational integrity, and avoiding painful disputes with Indian tax authorities.

This guide is designed for CFOs, tax directors, and business owners of foreign subsidiaries operating in India. We’ll break down what you need to know, from the foundational principles to practical compliance strategies, so you can focus on growth while staying on the right side of the law.

Indian Transfer Pricing Regulations (TP Regulations)

What Are the Indian Transfer Pricing Regulations?

India introduced its transfer pricing regulations in 2001, aligning them broadly with the OECD Guidelines but adding several India-specific nuances. The goal is clear: ensure that profits earned from economic activity in India are taxed in India.

Under these regulations, every cross-border transaction between "associated enterprises" must be conducted as if the entities were unrelated — that is, at arm’s length prices.

The Arm’s Length Standard (ALS)

At the heart of transfer pricing is the Arm’s Length Standard (ALS). The ALS requires that the price charged in a controlled transaction between two related parties should be the same as if the transaction had taken place between two independent parties under similar circumstances.

This standard is critical because it prevents profit shifting, where multinational companies could otherwise route profits to low-tax jurisdictions, eroding the Indian tax base. By enforcing ALS, India ensures that its fair share of tax revenue stays within the country.

Who is Covered?

The transfer pricing provisions apply to any international transaction between two or more associated enterprises (AEs). The Income-tax Act, 1961, defines an AE broadly — it includes any situation where one enterprise participates directly or indirectly in the management, control, or capital of another enterprise.

For foreign companies, this means that any transaction between your parent entity and your Indian subsidiary — whether it’s the sale of goods, provision of services, royalty payments, or cost-sharing arrangements — is covered.

Key Compliance Requirements for Foreign Subsidiaries

1. Transfer Pricing Documentation (Rule 10D)

Every company engaging in international transactions exceeding ₹1 crore must maintain prescribed documentation, including:

• Profile of the group and industry
• Nature and terms of transactions
• Functional, asset, and risk (FAR) analysis
• Selection of the most appropriate method (CUP, TNMM, etc.)
• Comparable company analysis

2. Form 3CEB Filing

Filing of Form 3CEB is mandatory and must be certified by a Chartered Accountant. This form is submitted with the income tax return and discloses the nature and value of all international and specified domestic transactions.

3. Master File and Country-by-Country Reporting (CbCR)

Applicable to multinational groups with global consolidated revenue above specified limits. Indian entities must file:

• Form 3CEAA (Master File) – Details of the global group’s structure and transfer pricing policies.
• Form 3CEAC/3CEAD (CbCR notifications and report) – Country-by-country reporting for large MNEs.

The Compliance Framework: Navigating Indian TP Regulations

Mandatory Documentation

India follows a three-tiered documentation approach:

• Master File: A global overview of the MNE’s business operations, value drivers, and TP policies.
• Local File: A detailed, entity-specific report focusing on the Indian subsidiary’s functional profile, transactions, and benchmarking.
• Country-by-Country (CbC) Report: Applicable to large MNE groups with consolidated revenue exceeding INR 5,500 crore.

Maintaining this documentation is not just good practice — it’s legally required and forms your first line of defense in case of scrutiny.

Preparing and Maintaining Contemporaneous Documentation

The keyword here is "contemporaneous" — meaning your documentation must be ready by the due date of your tax return. A robust Local File should include:

• Nature of business and industry analysis.
• Functional analysis identifying who does what, who assumes what risks, and who owns which assets.
• Economic analysis — choosing the right transfer pricing method, selecting comparables, and justifying why the pricing is arm’s length.

Failing to have contemporaneous documentation can be costly, as authorities may make adjustments that significantly impact taxable income.

The Annual Obligation: Filing Form 3CEB

Every taxpayer with international transactions must file Form 3CEB, an audit report signed by a Chartered Accountant, certifying that pricing is at arm’s length. This form must be filed electronically along with the income tax return, and it is a key piece of evidence in case of disputes.

Selecting the Right Transfer Pricing Method

Indian TP regulations prescribe five methods for determining arm’s length prices:

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Selecting the right method depends on the nature of your transaction, availability of data, and industry practices. For instance, Infosys BPO reportedly uses TNMM for its captive service center operations because of readily available industry comparables.

The Indian Legal Landscape

High-Stakes Penalties for Non-Compliance

India’s tax authorities mean business when it comes to transfer pricing. Penalties can be severe:

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For MNEs dealing with high-value transactions, even a 2% penalty can run into millions of rupees.

Consider SAP Labs India Pvt. Ltd., which faced scrutiny over low operating margins. The tribunal upheld the use of TNMM but required adjustments due to flawed selection of comparables, leading to significant tax implications.

In another case, an Indian subsidiary paying royalties to its parent company had deductions disallowed because it failed to demonstrate actual benefit derived. This shows the importance of strong benefit analysis and contemporaneous documentation.

Best Practices and Common Pitfalls to Avoid

Proactive Best Practices for Foreign Subsidiaries

• Start early: Treat transfer pricing as a year-round process, not a year-end scramble.
• Conduct a functional analysis: Understand who performs what functions and bears what risks.
• Put agreements in place: Formalize inter-company arrangements before transactions occur.
• Use fresh comparable data: Benchmarking should be updated annually.
• Consider an APA: An Advance Pricing Agreement can provide multi-year certainty and reduce litigation risk.

Top 5 Common Pitfalls (The "What Not to Do")

• Treating TP documentation as a mere compliance formality.
• Using outdated or unreliable comparable data.
• Allowing inconsistencies between actual conduct and legal agreements.
• Failing to justify the choice of transfer pricing method.
• Missing statutory deadlines for documentation and filing.

FAQs

Q1: What are transfer pricing rules in India?
India’s transfer pricing rules require related-party cross-border transactions to be priced at arm’s length under the Income-tax Act, 1961.

Q2: What is the threshold limit for transfer pricing in India?
Regulations apply if the aggregate value of international transactions exceeds INR 1 crore for royalties or INR 20 crores for other transactions in a financial year.

Q3: What are the penalties for transfer pricing non-compliance in India?
Penalties range from 2% of transaction value for documentation failures to 100–300% of tax avoided for transfer pricing adjustments.

Q4: Is an audit mandatory for transfer pricing in India?
Yes, companies must obtain a transfer pricing audit and file Form 3CEB along with their tax return.

Q5: What is the most common transfer pricing method used in India?
The TNMM method is most commonly applied for routine ITES, software development, and manufacturing transactions.

Conclusion

India’s transfer pricing regulations are strict, complex, and actively enforced. Compliance is not just about avoiding penalties — it’s about enabling business continuity and safeguarding profitability.

Key takeaways:

• Stay proactive with planning and documentation.
• Keep transactions and agreements consistent and defensible.
• Be prepared for scrutiny with data-driven benchmarking and benefit analysis.

Don’t let transfer pricing uncertainties disrupt your Indian operations. Our team of seasoned transfer pricing specialists can help you perform a compliance health check, prepare robust documentation, and design a defensible TP strategy that stands up to scrutiny and help you setup company in India.

📅 Schedule a  consultation today and take the first step toward transfer pricing peace of mind.