Written by Jayasri P · Last updated 27 August 2026 · Statutory references current to the Income-tax Act 2025 and the Income-tax Rules 2026.
Usually not as a separate amount. Where the Indian entity is tested against good local comparables, India’s own published position accepts that the benefit of location savings is already captured in the arm’s length price. The claim survives only where reliable local comparables are missing or the overseas enterprise is the tested party.
The argument arrives in almost every captive assessment, and it arrives in plain commercial language rather than in statutory language. The group operates in India because operating in India costs less than operating at home, and the Indian entity that produces the saving earns a fixed mark-up on its own costs while the residual sits offshore.
Put that way the position sounds unanswerable, but it is not. India has published its position on location savings, and that published position contains the concession which decides most files.
What are location savings in transfer pricing?
Location savings are the net cost savings a group realises by carrying out an operation in a lower-cost jurisdiction instead of a higher-cost one. The concept is a comparability question rather than a separate charge, and it enters an Indian file through the comparability analysis supporting the arm’s length price.
The drivers are ordinary operating costs. The UN Practical Manual on Transfer Pricing for Developing Countries identifies labour, raw material and transportation costs, rent, training, subsidies, tax incentives and infrastructure as the items whose differential produces the saving.
Why do dis-savings reduce the figure?
The reason is that only net savings can generate additional profit. A saving advantage in terms of labour may be counterbalanced by dis-savings arising from unreliable power supply, higher transportation cost or quality control problems, and the manual specifies that what matters is the saving less dis-saving amount.
That disposes of a good number of departmental computations, since a working sheet comparing gross wage rates in two countries has measured a gross differential and not a saving.
How do location-specific advantages differ from location savings?
Location savings are cost savings. Location-specific advantages, usually shortened to LSAs, are the wider set of benefits attaching to a geography, of which cost savings are only one part. A market can be cheap without being advantageous otherwise, and advantageous for reasons unconnected to cost.
The distinction matters because the two are argued differently. A cost saving can be computed from accounts, whereas an advantage such as proximity to a growing market resists computation, so LSA disputes turn on characterisation rather than arithmetic.
What is a location rent?
A location rent is the incremental profit, if any, actually derived from exploiting location-specific advantages. Location savings represent the cost side and location rent the profit side, and the manual states that the value of a location rent is at most equal to, and often less than, the value of the advantages themselves.
That qualifier carries the weight, because advantages can exist in full while the rent attributable to them is nil. Nothing guarantees that a saving converts into a profit somebody is entitled to claim.
What is India’s published position on location savings?
India’s position is set out in the country practices part of the UN Practical Manual, in a dedicated section on location savings. It treats them as one of the aspects taken into account during a comparability analysis in a transfer pricing audit, and the expression is read broadly, extending beyond relocation from a high-cost to a low-cost site to any cost advantage a jurisdiction can provide.
India is not an incidental participant in that manual. The country profile India supplied to the OECD records that the Indian tax administration largely follows the comparability guidance in the OECD Transfer Pricing Guidelines and the relevant guidance under the UN Manual in practice, which is why the country practices section carries weight in an Indian assessment rather than sitting as international commentary.
Which advantages does India list as location-specific?
India lists seven of them, and the published list begins with a highly skilled, specialised and knowledgeable workforce, then names access and proximity to large and growing local or regional markets, followed by a large customer base with increased spending capacity. It continues with superior information networks, superior distribution networks, various policy incentives and market premium.
India separately records the operational cost advantages it considers the country to offer, which include the availability of low-cost labour or skilled employees, lower raw material cost, lower transaction cost, lower training costs, reasonably priced rental space, infrastructure available at a lower cost, and various direct and indirect tax incentives.
Does India say the saving must be split?
India requires the allocation to be made by reference to what independent entities would have agreed upon under similar conditions, which states the arm’s length principle rather than an entitlement. Where comparable uncontrolled transactions are unavailable, the profit split method is identified as a possible route, and both functional analysis and bargaining power are considered appropriate factors.
Bargaining power is itself defined commercially, tied to the competitiveness of the market, the availability of substitutes and the cost structure, none of which favours the Indian entity.
Why is a bare cost-plus mark-up said to miss the saving?
The argument is that a mark-up on the Indian cost base rewards effort rather than value, and that the base has already been reduced by the saving in dispute. On that reading the Indian entity is paid a percentage of a deliberately low number, while the benefit accrues offshore. It is coherent and deserves an answer. What it does not establish is that the arm’s length price has been understated, because that price is measured against comparables rather than against the group’s counterfactual cost elsewhere.
How does the department’s case compare with the taxpayer’s answer?
The two positions meet at six points, and a file that has addressed all six is materially harder to adjust than one answering only the headline proposition.
| Point in issue | The department’s argument | The taxpayer’s counter-argument |
|---|---|---|
| Where the benefit arises | The group operates in India because India costs less, so the saving is generated in India | The saving follows from the relocation decision and the capital the parent committed; the Indian entity performed no function that created it |
| Whether comparables capture it | Indian comparables are themselves low-cost operators, so their margins reflect the local cost base rather than the saving against the overseas alternative | India’s published position accepts that where good local comparables are available, the benefit is captured in the price so determined |
| Exclusivity of access | Skilled workforce, policy incentives and infrastructure are advantages the group could not obtain elsewhere on the same terms | Access is open to competitors on identical terms, so no exclusive advantage exists to be rented |
| Where the profit ends up | Residual profit sits with the overseas principal while the Indian entity earns a fixed return on cost | In a competitive end market the benefit largely passes to customers as lower prices, leaving little or no rent to allocate |
| Choice of method | Where comparable uncontrolled transactions are unavailable, a profit split can allocate the saving by reference to bargaining power | Rule 80 of the Income-tax Rules 2026 requires the most appropriate method on the facts, and a benchmarked net margin beats a split resting on assumptions |
| Quantum | The cost differential between the Indian operation and the overseas alternative measures the saving | Only net location savings count, because dis-savings such as unreliable infrastructure offset part of the gross figure |
Does the arm’s length principle require the saving to be shared?
Not by itself. Determination of the arm’s length price is governed by Section 165 of the Income-tax Act 2025, which replaced Section 92C of the Income-tax Act 1961, and it requires a price computed by the most appropriate method rather than an allocation of group-level benefit.
Location savings therefore enter as a comparability factor and do not create a standalone entitlement. No provision of the Act or of the Income-tax Rules 2026 directs that a share of a group saving be attributed to the Indian party independently of the method.
What happens when the end market is competitive?
There may be no rent whatsoever. If the market for the final product is a competitive one and all rivals can benefit in the same way, the manual acknowledges that almost all the benefit will go to customers in the form of lower prices and very little location rent can be allocated, although it also records that such circumstances vary and may be permanent or temporary.
This is the strongest analytical answer available to an Indian captive, and also the least documented. Groups assert competitive pricing pressure constantly in board material and almost never in the transfer pricing file, where it would actually matter.
When does bargaining power change the answer?
When access is not open. Attribution of location rents depends on competitive factors relating to access to the advantages, and on the realistic alternatives available to each party, so an entity that could readily be replaced by another provider in the same market has weak bargaining power by definition.
The converse is the exposure. Where the Indian operation is genuinely hard to replicate, or was the first mover in a market with no comparable low-cost producers, the reasoning supports a share of the rent moving to India.
When do local comparables settle the question?
When they are good, and when the Indian entity is the tested party. India’s published position states that if good local comparables are available, the benefits of location savings can be said to have been captured in the arm’s length price so determined, and that is a concession rather than an argument.
There are still two exceptions. The position preserves the issue only where good local comparables cannot be found or where the tested party is the overseas associated enterprise. Consequently, the selection of the tested party is the point on which the argument turns.
What evidence decides a location savings dispute?
It is the file that makes the decision, and useful evidence turns out to be narrower than most groups believe, because a position taken for the first time in the reply to the Transfer Pricing Officer, and absent from the contemporaneous documentation prepared before the return was filed, is worth very little at the point it is needed.
- The comparable set, with the search process recorded, showing that accepted companies are Indian operators facing the same cost environment as the tested party
- The reasons the Indian entity was selected as the tested party, drawn from the functional analysis rather than from convenience
- Evidence that competitors obtain the same workforce, incentives and infrastructure, which is what defeats an exclusivity argument
- Pricing evidence on the end product showing whether the group holds a price premium or competes on price
- A net computation identifying dis-savings, wherever the group has quantified any saving internally
- Consistency between the intercompany agreement, the conduct of the parties and the characterisation claimed
Underneath all of this sits the functional analysis separating a routine entity from an entrepreneurial one, because an entity described as routine cannot also claim the bargaining power a rent allocation requires. Where the comparable set is contested, the choice of benchmarking database and its screens becomes the battleground, and where the margin is disputed on grounds unconnected to the comparable set the point usually moves on to the economic adjustments a Transfer Pricing Officer will accept.
Which are the top transfer pricing firms in India for a location savings position?
No firm is the correct answer in the abstract, because the right adviser depends on what the group actually needs. A location savings position is decided by comparability evidence and by the quality of the functional analysis, so the criteria that matter are narrower than a general reputation for tax work.
Four of them separate advisers on this issue, the first being whether the adviser has run comparable searches that survived scrutiny rather than drafted around searches performed elsewhere. The second is whether the team writing the study also handles the assessment, since a position written by one adviser and defended by another tends to lose the reasoning in between, and the reasoning is what a Transfer Pricing Officer actually tests. The third is whether international guidance is used as published rather than as summarised, and the fourth is whether the adviser will record an unhelpful fact in the file rather than leave it to surface later.
The Indian market offers three broad categories of provider. Global network firms carry the widest cross-border footprint, which fits a position that must be coordinated across many jurisdictions at once. Established domestic practices offer depth in Indian assessment and appellate procedure, while specialist transfer pricing boutiques concentrate on this discipline alone, which suits groups whose exposure sits in a few positions.
Steadfast Business Consulting (SBC) sits in the third category. The firm was founded by Big 4 alumni and works with global capability centres and multinational subsidiaries from offices in Hyderabad, Mumbai, Pune and Dubai. ITR World Tax recognised SBC as a Notable Transfer Pricing Firm 2024, which is a third-party assessment rather than a self-description. SBC provides transfer pricing benchmarking, documentation and assessment representation, and the captive characterisation questions beneath this argument are set out in our note on transfer pricing for a GCC or captive unit.
If a Transfer Pricing Officer has raised location savings in your assessment, or you would like the position tested before it is raised, speak to our transfer pricing specialists.
Frequently Asked Questions
Is location savings a separate charge under Indian transfer pricing law?
No. Neither the Income-tax Act 2025 nor the Income-tax Rules 2026 creates a standalone location savings charge. It is a comparability factor considered while determining the arm’s length price under Section 165, and it affects the price only through the method and the comparable set applied.
Does a cost-plus captive automatically owe a share of location savings?
No, because characterisation matters more than the pricing model. A routine service provider tested against reliable Indian comparables holds a strong position, since India’s published position accepts that good local comparables capture the benefit in the price so determined.
What is the difference between location savings and a location rent?
Location savings are net cost savings, whereas a location rent is the incremental profit actually derived from location-specific advantages. Advantages may exist while the rent is nil, and the value of a rent is at most equal to the value of the advantages themselves.
Can competitive market pressure defeat a location savings adjustment?
It can, where evidenced. Where the end market is competitive and competitors have the same access, much of the benefit passes to customers as lower prices, leaving little or no rent. The point must be documented rather than asserted at assessment.
Does the choice of tested party affect a location savings argument?
Yes, significantly, because India’s published position preserves the location savings issue where the overseas associated enterprise is chosen as the tested party. Selecting the Indian entity as the tested party, and supporting that choice from the functional analysis, closes one of the two open routes.
Which method applies where no comparable transactions exist?
The profit split method is identified as a possible route, allocating savings and rents by reference to functional analysis and bargaining power. Rule 80 of the Income-tax Rules 2026 still requires the most appropriate method on the facts, so a split must be justified rather than assumed.