Written by Jayasri P · Last updated 20 August 2026 · Statutory references current to the Income-tax Act 2025 and the Income-tax Rules 2026.
Transfer pricing applies if your company entered into an international transaction with an associated enterprise, at any value, or specified domestic transactions exceeding twenty crore rupees in aggregate. Applicability is decided by the transaction under sections 163 and 164 of the Income-tax Act 2025, never by turnover.
Transfer pricing applicability is usually regarded as a question of size by most finance teams, and that instinct is wrong in a way that eventually costs money. The Indian framework attaches instead to the character of the transaction and to the relationship behind it, rather than to the scale of the enterprise. For instance, a firm with fifteen crore rupees of revenue and one royalty payment made to its overseas parent sits inside the framework. A domestic group turning over five hundred crore rupees with no associated enterprise dealings sits outside it.
Do I need transfer pricing documentation for my company?
You will do so if either of the conditions is satisfied. Documentation under section 171 of the Income-tax Act 2025, read with Rule 84 of the Income-tax Rules 2026, is mandatory for every person the test reaches. The first condition applies to all those who conducted any international transaction with an associated enterprise in that year. The second condition applies to a person whose specified domestic transactions exceeded twenty crore rupees in aggregate.
| Limb | Statutory anchor | Monetary threshold |
|---|---|---|
| International transaction with an associated enterprise | Section 163 (erstwhile section 92B) | None. A single transaction triggers it |
| Specified domestic transaction | Section 164 (erstwhile section 92BA) | Aggregate must exceed ₹20 crore in the tax year |
Which two limbs make transfer pricing applicable?
There are two limbs and these are separate from one another. A company can fall under one limb, under both limbs or under neither. Because just one new counterparty is enough to change the answer, the applicability test has to be run twice each year rather than settled once at incorporation and then carried forward on the strength of last year’s conclusion.
What counts as an international transaction?
Any transaction between two or more associated enterprises where at least one of them is a non-resident. The Income-tax Act 2025 defines an international transaction at section 163, the successor to section 92B of the 1961 Act, and the definition is wide enough that finance personnel regularly miss items carrying no invoice at all, such as a guarantee given for a group company or a cost absorbed on its behalf.
- Purchase or sale of goods, raw materials or finished stock
- Provision or receipt of services, including management and technical support
- Royalty, licence fees and other payments for intangible property
- Intra-group loans, deferred receivables, advances and other financing
- Corporate guarantees issued for an associated enterprise
- Cost contribution or cost allocation arrangements, with or without a margin
- A business restructuring between associated enterprises
None of the items in that list carries a monetary floor. One management fee of two lakh rupees paid to a parent company brings the entire compliance framework into effect for that tax year, which is exactly what small subsidiaries think cannot apply to them, and they usually keep believing so until a notice arrives.
Who is an associated enterprise?
An enterprise that participates in the management, control or capital of another, directly or indirectly. The deeming tests under section 162 of the Income-tax Act 2025 have replaced section 92A, and there is a relationship between the two enterprises provided that any one of these tests is satisfied at any time during the tax year, meaning that a shareholding sold during the year does not invalidate an association that existed in it.
| Test under section 162 | Threshold |
|---|---|
| Shareholding carrying voting power, directly or indirectly | Not less than 26% |
| Interest held in a firm, association of persons or body of individuals | Not less than 10% |
| Loan advanced, against the book value of the borrower’s total assets | Not less than 51% |
| Guarantee given, against the other enterprise’s total borrowings | Not less than 10% |
Shareholding is the criterion everyone checks, while the other tests are the ones that catch companies unprepared. An enterprise with no ownership link at all may still be an associated enterprise, where it has guaranteed a tenth of your borrowings or advanced a loan against most of your assets. Control matters no less than capital.
When does a specified domestic transaction exceed ₹20 crore?
When the qualifying transactions add up to more than twenty crore rupees within the tax year. Section 164 defines the specified domestic transaction and confirms that the limb applies only once the aggregate of such transactions entered into by the assessee in a tax year exceeds twenty crore rupees, implying that the aggregate under consideration has to be computed anew for every year rather than one time.
Aggregation is what most teams get wrong. The threshold is tested neither transaction by transaction nor against turnover. A company with eleven crore rupees of one qualifying payment and ten crore rupees of another has crossed the line, even though neither item would have crossed it alone. Which domestic dealings qualify, and how the aggregate is built, is explained in specified domestic transaction compliance.
How should a finance head run the applicability decision in order?
Implement the two limbs one after another, stopping at the first positive outcome. The sequence matters because the international limb has no threshold to test, which makes it much quicker to clear. A company that falls inside it has already acquired the full documentation and reporting obligation, regardless of what the domestic limb shows later.
- List every counterparty for the tax year. Include entities with no invoicing relationship, such as a guarantor parent or a group entity that absorbed a cost allocation.
- Apply the section 162 tests to each counterparty. Any one test satisfied at any point in the year makes that entity an associated enterprise.
- Ask whether any associated enterprise is a non-resident. If yes, and any transaction occurred with it, the international limb applies at once and no value test follows.
- Aggregate the qualifying domestic transactions. If the total exceeds twenty crore rupees for the year, the domestic limb applies as well.
- Record the conclusion in writing, including a negative one. A documented negative conclusion, supported by the counterparty list it rests on, is what allows a later assessment to be answered from the file rather than from memory, and it separates a short response from a long reconstruction.
What does transfer pricing applicability require you to do?
Two separate obligations follow, and satisfying one does not satisfy the other. Applicability triggers contemporaneous documentation under section 171 read with Rule 84, and it separately triggers a report from an accountant under section 172, each with its own contents and its own consequence for default. A company that has prepared one of them has satisfied only half of what the year requires.
What triggers documentation under section 171 and Rule 84?
Applicability itself, without any further test. Section 171 states that any person who engaged in an international transaction or specified domestic transaction is required to keep and maintain the prescribed information and document, whereas Rule 84 of the Income-tax Rules 2026 gives the detailed description of the contents of that record, from the group profile and the functional analysis through to the comparables relied upon.
The word doing the work is contemporaneous. The documentation is expected to be available at the time of pricing the transaction rather than prepared after the year has ended. A benchmarking study reconstructed in the fortnight before a deadline can be much more difficult to defend in front of a Transfer Pricing Officer than one that has been prepared throughout the period of commercial decision-making.
What triggers the accountant’s report under section 172?
The same test, with no threshold of its own. Anyone to whom either limb applies must obtain a report from an accountant under section 172, furnished in Form 48. Form 48 is the erstwhile Form 3CEB, renumbered by the Income-tax Act 2025 and governed by Rule 85 of the Income-tax Rules 2026.
The report is due at least one month before the due date for furnishing the return of income under section 263(1). That is an earlier date than most compliance calendars assume, because the report precedes the return rather than accompanying it, and a team working backwards from the return deadline usually notices the gap too late. Who is eligible to sign it is covered in a separate note on the transition from Form 3CEB to Form 48.
Does transfer pricing applicability depend on turnover or profit?
No. Neither revenue, profit, nor the margin earned determines whether the framework applies, which is the most common misunderstanding in Indian practice. A loss-making subsidiary with one intra-group service charge carries the same documentation and reporting obligation as a profitable one. A transaction priced at cost with no mark-up remains fully reportable, because the obligation lies with the transaction rather than the outcome.
What does a wrong applicability conclusion cost?
Two penalties follow, and both attach to the default rather than to the tax involved. The erroneous conclusion that the framework does not apply leaves the documentation unprepared and the report unfiled, and each of those failures carries its own consequence under the Income-tax Act 2025.
| Default | Current provision | Consequence |
|---|---|---|
| Failure to keep and maintain the prescribed documentation | Section 442 | Penalty of 2% of the value of the transaction |
| Failure to furnish information or documents called for under section 171 | Section 457 | Penalty |
| Failure to furnish the accountant’s report | Section 428(4)(d) | Fee of ₹50,000 up to one month, ₹1,00,000 thereafter |
What is worth pausing on is the two per cent measure, because it is calculated on transaction value instead of on any adjustment. A firm priced correctly all along may still face a substantial penalty, purely for having concluded that the framework did not reach it. Each default and its current statutory home is described in transfer pricing penalties.
Who should review your applicability position?
Someone who tests the counterparty list rather than the invoice ledger. Steadfast Business Consulting (SBC) was recognised as a Notable Transfer Pricing Firm 2024 by ITR World Tax, and its team holds access to the Indian and global comparable databases the supporting analysis depends on, including Prowess, CapitalineTP, Amadeus, Orbis and RoyaltyRange, and that team is built substantially of Big 4 alumni. SBC provides transfer pricing services in India covering the applicability review, documentation, the accountant’s report and representation through assessment.
What is the first step if you are unsure?
Rebuild the counterparty list first. A review that begins from the general ledger will find the transactions that were invoiced and miss the guarantees, the cost allocations and the interest-free advances that were not, which is where most missed applicability actually hides. Ask the SBC transfer pricing team to review your position for the current tax year.
Frequently Asked Questions
Is transfer pricing applicable if my company has only one foreign transaction?
Yes. The international limb carries no monetary threshold. A single transaction with a non-resident associated enterprise, of any value and at any margin, brings documentation under section 171 and the accountant’s report under section 172 into effect for that tax year, regardless of whether the counterparty is a parent, a subsidiary or a fellow group entity.
Is transfer pricing audit applicability the same as documentation applicability?
Yes, in practice. Both the documentation requirement under section 171 and the obligation to obtain an accountant’s report under section 172 are triggered by the same applicability test, which means a company satisfying the criteria of either limb carries both obligations. There is no separate audit threshold in place.
Does the ₹20 crore threshold apply to international transactions?
No. The twenty crore rupee threshold in section 164 applies only to specified domestic transactions, and it is tested on the aggregate for the tax year. International transactions with an associated enterprise carry no monetary threshold at all.
Are loss-making or zero-margin transactions still covered?
Yes. Applicability attaches to the transaction and to the relationship, not to the profit earned. Transactions priced at cost, transactions producing a loss and transactions with no written agreement are all within the framework and all reportable.
Can a company be an associated enterprise without any shareholding?
Yes. Section 162 treats enterprises as associated on several tests unrelated to shares, including a loan of not less than 51% of the borrower’s total assets by book value and a guarantee covering not less than 10% of the other enterprise’s total borrowings, either of which is enough on its own.
Does transfer pricing apply to a purely domestic group?
Only if the specified domestic transaction limb is met. A group with no non-resident associated enterprise falls outside the international limb entirely, and enters the framework only once its qualifying domestic transactions for the tax year exceed twenty crore rupees, a threshold which many domestic groups never approach.