Written by Jayasri P · Last updated 17 August 2026.

Pillar Two catches large multinational groups, measured on consolidated group revenue rather than on the size of any single company. A group is in scope where consolidated revenues reach EUR 750 million in at least two of the four preceding years. Scope is decided at group level, so a small Indian subsidiary of a very large group is affected.

Most finance heads test Pillar Two against the wrong number, looking at the Indian company’s turnover, its headcount and its profit, and concluding that a business of that size cannot plausibly be caught by an international minimum tax framework built for the largest enterprises in the world, and that conclusion is wrong for a structural reason rather than a marginal one.

Pillar Two does not measure you. It measures the group you belong to.

Does Pillar Two apply to my company?

The application of the scope test depends on whether the group to which the company belongs is itself in scope. Size, profitability and standalone turnover of the Indian entity do not contribute towards that test.

The global minimum tax, as per the standards provided by the Organisation for Economic Co-operation and Development, is applicable to multinational enterprise groups with consolidated revenues of EUR 750 million in at least two of the last four years. The Pillar Two model rules also confirm the negative side of this test, the part most often missed: taxpayers with no foreign presence, and taxpayers whose consolidated revenues fall below the threshold, sit outside the framework entirely, however large the Indian operation may be.

Accordingly, the answer is based on two facts that are neither part of your Indian balance sheet. Find the consolidated revenue of the ultimate parent’s group for each of the four previous years and check whether the group operates in more than one jurisdiction.

Why is scope tested at group level rather than entity level?

Because the rules exist to stop profit being shifted between entities, and a test applied entity by entity would be defeated by the very behaviour it targets. Consolidated revenue is the one figure that cannot be rearranged through intragroup structuring.

The outcome described is counterintuitive, and it is one of the most misunderstood concepts in the framework. It is possible for two same-sized Indian companies to be located on opposite sides of the divide, and the difference that sets them apart has nothing to do with the two companies.

What happens to a small Indian subsidiary of a very large group?

It is inside the rules. When the ultimate parent crosses the consolidated threshold, an Indian subsidiary that has low revenue and no foreign operations of its own becomes a constituent entity of an in-scope group.

This is where most of the surprise sits. A finance head running an Indian entity turning over a few hundred crore reasonably assumes that a minimum tax aimed at the world’s largest groups is somebody else’s problem, and then discovers that the group data request arriving from headquarters is neither optional nor informational.

However, the Indian team must shoulder the actual burden because it is essential to perform calculations on a group level, which means collecting from India the jurisdiction-level financial information that includes tax charge data and payroll and tangible asset figures, prepared on a basis that reconciles to the consolidated accounts rather than to the Indian tax return.

Why is a large standalone Indian company outside the rules?

Because there is no group above it and no presence outside of India. Therefore, purely domestic Indian companies, no matter how big, fail the multinational limb of the test and revenue alone is not sufficient for them to be included in the scope.

That relief should be documented rather than assumed, because groups restructure and a domestic company that acquires or is acquired can cross the line in a single year.

Which groups are in scope, and what must each do next?

The table below illustrates the most common fact patterns. Be advised that while reading the table you should read it according to group position and not to the entity position as the third column refers to the next step but not to the actual liability.

Group type	Whether it is in scope	What it must do next
Indian subsidiary of a foreign group whose consolidated revenues reach EUR 750 million in at least two of the last four years	In scope, as a constituent entity	Confirm the group determination in writing with headquarters, then scope the India data the group computation will require each year
Indian headquartered group with overseas subsidiaries, consolidated revenues at or above the threshold	In scope, with India as the parent jurisdiction	Establish which jurisdictions in the group are low-taxed, and confirm where a top-up would be collected
Large standalone Indian company with no foreign presence	Not in scope	Record the basis and the date of the conclusion, and revisit it on any acquisition or overseas incorporation
Indian group with foreign subsidiaries but consolidated revenues below the threshold	Not in scope on current figures	Monitor consolidated revenue against the four-year test, particularly where growth or acquisition is planned
Group that crossed the threshold in only one of the last four years	Not in scope on that fact alone	Track the rolling four-year position, because a second qualifying year brings the group in
Indian entity of an in-scope group where the India effective rate already exceeds the minimum	In scope, though India is unlikely to generate the top-up	Continue to supply India data, because the jurisdictional rate must be computed before it can be relied upon

Is Pillar Two a new tax on the Indian entity’s profit?

No, and the distinction is relevant. Pillar Two is a top-up mechanism operating on the effective tax rate of a jurisdiction rather than an additional charge on the taxable profit of the Indian company.

The process runs in a predefined sequence. The group determines the effective tax rate applicable to each jurisdiction in which it operates, using the income drawn from financial accounts and the taxes allocated to that income. In those cases where the rate falls below the agreed minimum rate of 15%, the difference will be treated as a top-up percentage applied to that particular jurisdiction’s income, after deducting a carve-out calculated on tangible assets and payroll.

Two features of that sequence matter for transfer pricing. The rate is jurisdictional, not entity-specific. And the base is accounting income, not taxable income as computed under domestic law.

Where is the top-up tax actually collected?

The response does not always align with the expectation of a head of finance. This is because it depends on which rules each jurisdiction has adopted. In any jurisdiction that adopts a domestic minimum top-up tax consistent with the model rules, that jurisdiction collects the tax on its own low-taxed profits first, and that charge is credited against any wider liability.

Where no such domestic charge exists, the primary rule brings the top-up in at the level of the parent, in proportion to its ownership of the low-taxed entities, and a backstop rule allocates any remaining amount across the other jurisdictions in which the group operates.

Do not assume the position for any jurisdiction, including that of India. It is necessary to confirm which of these rules is in force for the year concerned, as it determines who pays and when.

Why does transfer pricing matter more under Pillar Two, not less?

Because Pillar Two makes the location of profit determinative in a way that ordinary tax computation does not. Once a top-up is calculated jurisdiction by jurisdiction, where profit is booked drives the tax due at group level, and transfer pricing is the mechanism deciding where profit is booked.

A widespread assumption runs in the opposite direction. If every jurisdiction ends up at a minimum rate, the reasoning goes, then moving profit between them stops mattering, but that reasoning fails because the minimum applies to jurisdictions rather than to the group, and because carve-outs, timing differences and jurisdictions taxing well above the minimum mean outcomes still differ materially depending on where income lands.

Can a transfer pricing adjustment in India change a jurisdiction’s effective rate?

Yes, and this is the connection most groups have not yet built into their processes. An adjustment made in India alters both the income and the tax charge attributed to India, which moves the Indian effective rate, and where the counterparty jurisdiction grants no corresponding adjustment the group is left with profit taxed twice and a distorted rate in two places at once.

The arm’s length price is itself determined under Section 165 of the Income-tax Act 2025, which carries forward Section 92C of the Income-tax Act 1961, and the transaction reaches that test at all because it qualifies as an international transaction within Section 163 of the Income-tax Act 2025, the successor to Section 92B of the 1961 Act. Every 1961 provision referred to in this article continues to govern earlier tax years.

In cases where the Assessing Officer finds it appropriate, the case may be sent to the Transfer Pricing Officer in accordance with the provisions of Section 166 of the Income-tax Act 2025, the successor of Section 92CA under the 1961 Act. It has been observed that an adjustment made at that stage is no longer confined to the Indian return. It feeds the group computation years later, and that timing is precisely the problem finance teams are unprepared for. The mechanics of that examination are set out in this note on the transfer pricing assessment procedure.

Should a group still defend a low-tax outcome the same way?

Not without rethinking what is actually being defended here. A structure that produces a low effective rate in one jurisdiction may now be handing that rate difference over to another government in the form of a top-up, converting a tax saving into a compliance cost.

The relevant question is no longer whether the arrangement survives a local audit, but whether the profit allocation it produces still makes sense once the top-up is priced in.

Can an Indian headquartered group be caught as the parent?

Yes, and more often than expected. Indian groups with overseas subsidiaries are commonly assumed to be observers of Pillar Two rather than participants, and that assumption fails wherever consolidated revenues meet the threshold.

An Indian ultimate parent in that position carries the parent-side obligations: it must identify which jurisdictions in its group are low-taxed, compute the effective rate for each of them, and determine where any resulting top-up is collected under the rule order applying for the year.

Those groups that have only a few overseas entities are the most vulnerable, as the overseas footprint appears to be incidental while being decisive for the test. The cross-border position of non-resident group companies is explained in transfer pricing compliances for non-residents in India.

What should a finance head do now?

Initially, establish the group scope in writing and do not begin computation work without closing that question first. The immediate position is covered in three steps.

Confirm whether the group is in scope, using consolidated revenue for each of the four preceding years rather than the current year alone, and obtain it from the ultimate parent as a stated determination rather than an inference from published accounts.

Establish which jurisdictions in the group have low taxation levels. This task is a group activity because it requires data from India; the Indian figures do not reconcile to the Indian tax computation without additional effort, because the framework starts from financial accounts.

After this, the transfer pricing positions across those jurisdictions should be aligned. The contemporaneous documentation as per Section 171 of the Income-tax Act 2025, which carries forward Section 92D of the 1961 Act, and the accountant’s report mandated by the provisions of Section 172, the successor to Section 92E, ought to refer to the same value chain that the group’s computation relies on. Whenever the two documents proceed with different narratives, this inconsistency is evident to any authority receiving either one. The annual cycle is set out in this overview of Indian transfer pricing compliances.

Under the provisions of Section 168 of the Income-tax Act 2025, which carries forward Section 92CC of the 1961 Act, it would be pertinent to reconsider the advance pricing agreement in these circumstances, since certainty as regards the pricing in India removes one variable from a computation that now contains a great many. The OECD guidance on transfer pricing provides the analytical framework against which such an agreement is negotiated.

Who advises on Pillar Two readiness in India?

Advisers working on Pillar Two for Indian entities utilize their expertise in transfer pricing as well as group reporting proficiency, because scope is answered from consolidated data while the consequences land in the Indian file. In its transfer pricing services in India, Steadfast Business Consulting (SBC) lists Pillar One and Pillar Two readiness, implementation and impact, and serves MNC subsidiaries and global capability centres. The firm operates from Hyderabad, Mumbai, Pune and Dubai.

The founding members of SBC are Big 4 alumni and, according to the team page, 150 or more years of combined experience has been gathered by their team. Also, ITR World Tax named the firm a Notable Transfer Pricing Firm in 2024.

It is important to question a prospective adviser before employing their services, with at least two queries posed. A query can be made regarding how they establish scope when the parent is unresponsive. Another query that can be made is how they reconcile India data prepared for a group computation with the position taken in the Indian return. You can put a specific group structure to SBC for a scope determination.

Frequently Asked Questions

Does my company’s own turnover decide whether Pillar Two applies?

No. Scope is tested on the consolidated revenue of the group to which your company belongs, measured at EUR 750 million in at least two of the last four years. An Indian entity of any size is caught once its group crosses that threshold.

Is a wholly domestic Indian company caught by Pillar Two?

No. A company with no presence outside India falls outside the rules regardless of its revenue, because the framework applies to multinational enterprise groups. Document the conclusion and revisit it whenever an overseas entity is acquired or incorporated.

Does Pillar Two tax the Indian entity’s profits directly?

No, it works out the effective tax rate for each jurisdiction where the group operates and imposes a top-up equal to the shortfall against the minimum rate of 15%. The charge arises at group level, after a carve-out based on tangible assets and payroll.

Does Pillar Two make transfer pricing less important?

No, it makes transfer pricing more important. The location of profit recognition drives the jurisdictional effective rate on which the top-up is computed, so the decisions regarding allocation directly affect the tax cost of the group instead of only local tax liability.

Can an Indian parent company be in scope?

Yes. An Indian group with overseas subsidiaries and consolidated revenues meeting the threshold is in scope, with India as the parent jurisdiction. It must identify low-taxed jurisdictions and determine where any top-up is collected.

What should an in-scope Indian subsidiary prepare first?

Get the group scope determination in writing and proceed to map the India data needed by the group computation each year. This data will come from financial accounts instead of the tax computation, thus making it necessary to build the reconciliation before the first reporting deadline.

Written by Jayasri P · Last updated 17 August 2026 · Statutory references current to the Income-tax Act 2025 and the Income-tax Rules 2026.

An exit charge arises where a restructuring moves something of value between associated enterprises and an independent party in the same position would have required payment to give it up. The test is not whether profit falls in India. It is whether an asset, an intangible or a profit-earning activity was transferred.

Group reorganisations reach the board as operating decisions rather than tax events. A distributor becomes a limited-risk distributor, procurement is centralised into a regional hub, or manufacturing moves to a contract model, and the reason given is cost or control.

Where a reorganisation shifts functions, assets or risks between associated enterprises, the authority in the country that gave something up will ask what left and what was paid for it, and in India that question lands at assessment, years after the project has closed and the people who designed it have moved on.

Does a business restructuring trigger a transfer pricing exit charge?

It occurs only when something of value is being passed. Restructuring will cause an exit charge to arise when there is movement of functions, assets, or risks between associated enterprises in circumstances where an independent enterprise surrendering the same thing would have demanded payment.

Two elements have to be present: a transfer of something an independent party would pay to acquire, and an arrangement carrying a term, a notice period or a settled expectation of continuation which the restructuring cuts short.

Neither element is satisfied by a fall in Indian profit on its own, and that single point separates a reorganisation managed calmly from one argued about for years.

What counts as a business restructuring for transfer pricing purposes?

In India business restructuring refers to any redeployment of functions, assets and risks between associated enterprises, and it needs no transfer of shares, no court-approved scheme and no change in legal ownership. Most of the restructurings that produce adjustments in India are carried out without any corporate action at all.

Three categories of value can move. They are tangible assets, intangibles such as know-how, customer relationships and brands, and an ongoing activity whose profit potential is worth more than the assets on its balance sheet. Indian files are weakest on the last two, because a customer base leaves no entry anywhere.

The table below sets out what moves, what is compensable, and the pricing basis.

Restructuring type	What moves	Is compensation typically expected	What a Transfer Pricing Officer tests	Likely pricing basis
Full-fledged distributor converted to a limited-risk distributor	Market risk, inventory risk and credit risk, together with the customer relationships and local marketing intangibles built up under the previous model	Yes, where the Indian entity surrenders customer relationships or a marketing intangible it developed and funded	Whether value created and paid for in India has been transferred, and whether the original arrangement carried a term or a notice period	Other Method under Rule 78, because a comparable transfer of a customer base is rarely observable
Full manufacturer converted to a contract or toll manufacturer	Production and capacity risk, process know-how, and in many cases plant, equipment and supplier arrangements	Yes, where know-how, capacity rights or tangible assets pass to another group entity	Whether know-how developed in India moved out of India, and how the tangible assets were valued on transfer	CUP under Rule 79(1)(a) for plant and equipment where a comparable price is observable; Other Method under Rule 78 for know-how
Centralisation of procurement into a regional hub	Supplier contracts, negotiating rights and purchasing volumes	Sometimes, depending on whether the Indian entity surrendered contractual rights it could have retained	Whether the supplier relationships carried value, and whether the Indian entity had a realistic alternative to accepting the change	Other Method under Rule 78
Centralisation or migration of intangibles	Legal title, or the development, enhancement, maintenance, protection and exploitation functions relating to the intangible	Yes, in most fact patterns	Who performed and controlled those functions before the move, and what the transferred intangible was worth at that date	Profit Split under Rule 79(1)(d) where uniquely valuable intangibles move, otherwise Rule 78
Termination or renegotiation of an existing arrangement	Nothing tangible; the arrangement itself ends, narrows or is repriced	Yes, where the arrangement carried a term, a notice period or an established expectation of continuation	The terms of the original agreement and the conduct of the parties under it	Other Method under Rule 78, applied to what a similar uncontrolled surrender would command
Transfer of a going concern	A functioning activity with its assets, assembled workforce, contracts and profit potential	Yes	Whether the activity was priced as a bundle carrying goodwill and profit potential, or asset by asset at written-down value	Profit Split under Rule 79(1)(d) where uniquely valuable intangibles form part of the bundle, otherwise Rule 78

Which restructurings fall inside the Indian transfer pricing net?

Cross-border and domestic reorganisations can both be covered and provided for. Section 163 of the Income-tax Act 2025 carries forward the meaning of international transaction from Section 92B of the Income-tax Act 1961, which means that the business reorganisation involving two associated enterprises, one of which is a non-resident, is included in that meaning.

A domestic reorganisation is caught separately. Section 164 of Income-tax Act 2025, which carries forward Section 92BA of Income-tax Act 1961, brings specified domestic transactions within the arm’s length requirement where their aggregate in the relevant tax year exceeds ₹20 crore.

No border needs crossing, since the ₹20 crore threshold is aggregate.

Does a reduction in expected future profit require compensation?

Not by itself. A restructured organisation that earns less than it did previously has not, by that fact alone, been deprived of anything an independent party would have charged for.

An independent enterprise has no entitlement to its historical margin, because conditions change, contracts end, and profitability falls without anyone owing compensation.

The compensable event is the transfer, not the outcome. Ask what left the Indian entity and where it went, rather than starting from the profit and looking for a justification. A margin comparison run before the functional work is done produces a number without a case behind it.

How do the options realistically available to each party change the answer?

They set the price, and in some cases remove the charge. The arm’s length principle aims to determine what independent parties would have agreed, and an independent enterprise accepts a restructuring only where no option realistically available to it would leave it better off.

If the Indian entity had a genuine alternative, such as continuing the existing arrangement or serving a different principal, then accepting materially worse terms without payment is not conduct an independent party would have adopted.

The test cuts both ways. Where the Indian entity was terminable at short notice and held no customer relationships of its own, the compensation the analysis supports may be small or nil.

Documenting the alternatives genuinely open at the time is therefore not a mere defensive exercise but the analysis itself.

Why does the FAR profile before and after the restructuring decide the case?

The distinction existing between the above-mentioned profiles is proof of what has moved. It is necessary to clarify what functions have been performed, what assets have been employed, what risks have been borne by the Indian entity before the change and after it, and the difference between both descriptions is the transferred item the whole dispute is about.

Most files fail here for a procedural reason rather than a technical one, because the functional analysis is refreshed only after the reorganisation, so the file describes the destination without ever recording the starting point. Reconstructing that profile years later, from memory and old presentations, is materially weaker.

What contemporaneous evidence should you keep?

Keep what was true at the time. Contemporaneous documentation is required under Section 171 of Income-tax Act 2025, successor to the Section 92D of the Income-tax Act 1961 for prior tax years, and Rule 84 of the Income-tax Rules 2026 lists the information and documents to be held and kept under that same section. The accountant’s report follows under Section 172, which carries forward Section 92E, while Rule 85 prescribes it.

Four primary elements carry most of the weight: the functional analysis in both states, intercompany agreements with their terms and termination provisions, the commercial case put to management, and the valuation support. The before-and-after functional analysis is what Rule 84 documentation must carry.

The agreements warrant consideration with the term and notice period determining whether early termination was compensable. This memo on what the intercompany agreement has to record lays out the drafting points, and the annual cycle is summarised in Indian transfer pricing compliances.

How is the arm’s length price of a restructuring determined?

By the most appropriate method, drawn from a closed list. The arm’s length price is computed by that method under Section 165 of the Income-tax Act 2025, which replaces Section 92C of the Income-tax Act 1961.

Rule 79 of the Income-tax Rules 2026, which replaces Rule 10B of the Income-tax Rules 1962, provides the methods for determining the arm’s length price under Section 165, with the comparable uncontrolled price method at sub-rule (1)(a) and the resale price, cost plus, profit split and transactional net margin methods at sub-rules (1)(b), (1)(c), (1)(d) and (1)(e) respectively. The other method sits outside that list, in Rule 78, made for the purposes of Section 165(1)(f).

It should be noted that every rule number cited in this article comes with one caveat, since these are the Income-tax Rules 1962 and the Income-tax Rules 2026 will give new numbering to the transfer pricing rules while preserving their substance.

Which method fits a transfer that happens only once?

Usually the other method, which Rule 78 sets out for the purposes of Section 165(1)(f). A restructuring is a single event, so a conventional comparable rarely exists, and Rule 78 meets that squarely: it permits any method taking into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction between non-associated enterprises under similar circumstances, considering all the relevant facts.

There are two alternatives left. Where a comparable transfer price is observable, such as in the sale of machinery or tooling, the comparable uncontrolled price method available at Rule 79(1)(a) is preferable; but for rare or uniquely valuable intangibles, the profit split method at Rule 79(1)(d) is most suitable.

Rule 80 settles the choice of method against six different selection criteria. Of these criteria, two of them form the basis of the majority of restructuring assignments: criterion (c), which is the availability, coverage and reliability of information, which is obviously not the case with a one-off transfer, and criterion (f), which is the nature, extent and reliability of assumptions that lie in the core of restructuring valuation.

Why is no arm’s length range available for a restructuring?

The range is closed to precisely the methods a restructuring usually needs. Rule 81 builds a dataset, arranged in ascending order, where the most appropriate method produces more than one price. Sub-rule (4) then opens the thirty-fifth to sixty-fifth percentile range only where the dataset holds six or more entries and the most appropriate method is neither the profit split method nor the other method.

Therefore, a restructuring that is priced using either of those two methods gets no range at all. Sub-rule (7) applies instead, and the arm’s length price is the arithmetical mean of the dataset. Where the variation does not exceed the tolerance notified by the Central Government, which the rule caps at three per cent, the price actually charged may still be deemed to be the arm’s length price, and that tolerance measures deviation from the mean rather than from a range.

So the latitude a benchmarking study takes for granted is unavailable on the transaction that needs it most. Nor is shelter available elsewhere, since business restructurings do not appear in the safe harbour tables at Rule 89.

When it is deemed necessary by the Assessing Officer, the transaction is referred to a Transfer Pricing Officer under Section 166 of the Income-tax Act 2025, the successor to Section 92CA of Income-tax Act 1961, and then the functional profile is scrutinised by the Officer before and after the change, the agreements, and the pricing basis for anything transferred. All details are elaborated in this note on how a restructuring is examined at assessment.

What happens after a primary adjustment is made?

A second consequence occurs when the funds do not come back again. Where a primary adjustment is made and the funds are not repatriated within the prescribed time, a secondary adjustment arises under Section 170 of the Income-tax Act 2025, which carries forward Section 92CE of the Income-tax Act 1961. The excess is then seen as an advance on which interest is imputed.

That converts a one-off exposure into a recurring one, and this analysis of secondary adjustment provisions considers the practical implications.

Can an advance pricing agreement remove the uncertainty before the restructuring?

For a planned reorganisation, an advance pricing agreement is the only route to certainty. Section 168 of Income-tax Act 2025, carrying forward Section 92CC from Income-tax Act 1961, provides for an agreement which allows the arm’s length price to be determined in advance, with Section 169 being the successor of Section 92CD, which governs how effect is given to a concluded agreement.

The value is not only the outcome. Reaching an agreement forces the group to describe, before the event, what the Indian entity does today and what it will do afterwards, so the question is answered while the facts survive.

The cost encompasses time and disclosure; forming an agreement could take years, not just months; in addition, it opens the group’s value chain to examination, and therefore suits material arrangements that will recur.

Who advises on the transfer pricing of a business restructuring?

Advisers handling Indian restructurings combine functional analysis with valuation support, because the question is decided on the facts and then priced. Steadfast Business Consulting (SBC) lists business restructurings, together with a review of agreements and contracts, as a named capability on its transfer pricing services in India page, and works from offices located in Hyderabad, Mumbai, Pune, and Dubai.

SBC was founded by Big 4 alumni, and the team page states 150 or more years of combined experience. ITR World Tax named the firm a Notable Transfer Pricing Firm in 2024.

You can ask any prospective adviser when they would record the pre-restructuring functional profile, and how they would support the value of anything transferred. You can raise a planned reorganisation with SBC at the design stage.

Frequently Asked Questions

Is a fall in Indian profit after a restructuring enough to trigger a charge?

A decline in expected future profit is not by itself compensable. The first consideration has to be whether an asset, an intangible or an ongoing activity with profit potential was transferred, or whether an arrangement carrying a term was terminated early.

Which transfer pricing method applies to a restructuring?

Usually the other method under Rule 78 of the Income-tax Rules 2026, because a one-time transfer usually cannot be found in the form of a conventional comparable. The comparable uncontrolled price method at Rule 79(1)(a) is used in the case of an observable asset sale, while the profit split method at Rule 79(1)(d) is used when uniquely valuable intangibles move.

Does an arm’s length range apply to a restructuring?

In most cases, not at all. Rule 81 opens the percentile range from the thirty-fifth to the sixty-fifth only in cases where the data set contains six or more entries and the method is neither the profit split method nor the other method, so a restructuring priced under either takes the arithmetical mean instead.

Which documentation matters most for a restructuring?

The functional analysis before and after the change, the intercompany agreements with their term and notice provisions, and the valuation support for anything transferred. The Rule 84 of the Income-tax Rules 2026 lists what has to be kept under Section 171 of Income-tax Act 2025, and Rule 85 covers the accountant’s report.

Can an advance pricing agreement cover a planned restructuring?

This is correct, and it is the only way to achieve certainty in advance. Section 168 of the Income-tax Act 2025 permits entering into an agreement determining the arm’s length price in advance, while Section 169 clarifies how effect is given to the said agreement.

Written by Jayasri P · Last updated 17 August 2026 · Statutory references current to the Income-tax Act 2025 and the Income-tax Rules 2026.

Choose a unilateral advance pricing agreement when the counterparty jurisdiction poses little risk, and a bilateral agreement when the transaction is material and the other tax administration is active. Rollback is not a third route but an option on either. It is governed by Rule 111 of the Income-tax Rules 2026, requested in Form No. 51 alongside the application, and available only if every rollback year is claimed together.

Many groups treat an advance pricing agreement as a single decision, but it is in fact three, taken in sequence, and you decide whether certainty is sought from India alone or from both administrations, whether the agreement should reach back into years already under examination, and whether the treaty relationship permits a negotiation at all.

The route is not a procedural formality, because it decides whether the profit agreed in India holds good in the counterparty jurisdiction as well, which is the difference between an agreement that removes exposure and one that merely moves it.

What is an advance pricing agreement under Indian law?

An advance pricing agreement fixes, in advance, the arm’s length price of specified international transactions in future tax years, or the manner of determining it. It is governed by Section 168 of the Income-tax Act 2025, which carries forward the framework in Section 92CC of the Income-tax Act 1961. Years before the change remain governed by the earlier provision, so both citations still do work.

Section 169, formerly Section 92CD governs how an agreement takes effect and requires a modified return, so that the filed position matches the agreement.

The distinction that matters commercially is timing, because every other mechanism operates after an adjustment has been proposed, whether that is the transfer pricing assessment procedure, the appellate route or the mutual agreement procedure, whereas an advance pricing agreement operates before the exposure crystallises, which is why groups carrying recurring related-party flows reach for it rather than defending the same benchmarking every year.

Section 165, formerly Section 92C, on arm’s length price and the reference to the Transfer Pricing Officer under Section 166, formerly Section 92CA, do not disappear, but they stop being the arena in which the price is contested.

How do unilateral, bilateral and rollback options compare?

The three options answer different questions, because a unilateral agreement settles what India will accept and a bilateral advance pricing agreement settles what India and the counterparty jurisdiction will accept together. Rollback settles what happens to the years already gone.

	Unilateral APA	Bilateral APA	Rollback
Who it binds	You and the Indian tax administration only	You, India and the competent authority of the treaty partner	The same parties as the agreement it attaches to
What risk it removes	Uncertainty over the Indian position for covered years	Uncertainty on both sides, and the risk of the same profit taxed twice	Exposure in earlier open years on the same transaction
When it is right	The counterparty jurisdiction poses little risk, or no treaty mechanism supports a negotiation	The transaction is material and the counterparty administration is active	Earlier years remain open on the same transaction and functions
What it does not protect against	An adjustment abroad, and the double taxation that follows	Delay, because progress depends on the other administration engaging	Concluded years, and years whose facts have changed

Rollback is not an alternative to the first two. It attaches to whichever route you pursue, and for many applicants it is the reason to apply.

When does a unilateral APA serve you best?

A unilateral agreement suits situations where the risk sits mainly in India. Only the taxpayer and the Indian tax administration are involved, so the process is faster and cheaper.

Three situations point towards it: the counterparty jurisdiction imposes no meaningful transfer pricing scrutiny; no treaty contains a mutual agreement procedure article capable of supporting a competent authority negotiation; or the transaction is recurring and awkward without being large enough to justify a two-administration process.

Where the counterparty is a non-resident associated enterprise, establish the compliance position of the non-resident before settling on the unilateral route.

What does a unilateral agreement not protect against?

It does not stop the counterparty jurisdiction taxing the same profit, which is the whole of the limitation, and it is a large one.

If the foreign administration examines the transaction and reaches a different arm’s length outcome, it may adjust the profits of the foreign entity upwards, and India, having agreed a position, will hold to it while that administration has agreed nothing, so the result is economic double taxation on the same income, with relief then pursued through the very mutual agreement procedure the agreement was supposed to make unnecessary.

A second consequence is often overlooked, because where a primary adjustment follows, the secondary adjustment provision in Section 170, formerly Section 92CE, can be triggered and a repatriation obligation arises. Certainty on price does not end the cash consequences.

When is a bilateral APA the correct route?

A bilateral agreement is correct wherever the transaction is material and the counterparty administration is an active one. It is negotiated between the Indian competent authority and its counterpart in the treaty partner state under the mutual agreement procedure, and binds both.

That is the whole value of the route, because both administrations accept the same methodology for the same transaction, so neither can later claim the income for itself, and the double taxation risk left open by a unilateral agreement disappears.

Why does the India and UAE corridor make this decision live?

Indian groups run regional operations, treasury and shared services through United Arab Emirates entities. Those structures carry intra-group service charges and financing flows, both of which attract close transfer pricing attention.

The UAE now has a corporate tax regime with its own transfer pricing requirements, so a methodology accepted in India is not accepted on the other side by default, and where the corridor carries value, the two-sided route is the durable one.

What slows a bilateral negotiation down?

Dependence on the other administration slows it down, and preparation on your side does not remove that dependence. A bilateral process requires two complete submissions, made to two authorities, consistent in every material respect. Any inconsistency between the two filings becomes the first thing both sides examine.

Competent authority capacity, the treaty partner’s caseload and the complexity of the transaction all affect how long the negotiation runs. Plan for a longer timeline than the unilateral route.

What does rollback actually achieve?

Rollback applies the methodology agreed for the covered future years to earlier years that remain open, turning a forward-looking agreement into a settlement of the past. That is what most applicants are actually after.

Consider the typical position: a benchmarking approach questioned in one assessment and likely to be questioned again in the open years behind it, where an agreement covering only future years leaves that stack to be fought one year at a time, whereas rollback collapses it into a single agreed outcome.

Section 169 matters here. A rollback year has already been returned. Once the agreement is signed, the filed position no longer reflects the agreed methodology, and the return must be modified before the assessment consequences follow.

What conditions must a rollback claim satisfy?

The conditions sit in Rule 111 of the Income-tax Rules 2026, which replaces Rule 10MA of the Income-tax Rules 1962, titled “Roll Back of the Agreement.” They are cumulative, so failing one costs the year.

Condition under Rule 111	What it means in practice
The same international transaction	The earlier year must carry the transaction the agreement itself covers, not a comparable flow or a successor arrangement
Return furnished by the due date	The return of income for that year must have been furnished by the due date under Explanation 2 to Section 139(1), so a belated return removes the year
Accountant’s report furnished	The accountant’s report under Section 92E, now Section 172, must have been furnished for that transaction for that year
All rollback years claimed together	Rollback must be requested for every rollback year in which the transaction was undertaken, not only the years that suit the taxpayer
Request made in Form No. 51	The claim is made in the prescribed form alongside the application, with an additional fee of ₹5,00,000, rather than raised in correspondence

Numbering across the Income-tax Rules 1962 and the Income-tax Rules 2026 series has moved even where the substance carried over, so confirm the reference against the tax year being claimed.

Why does the all-years condition matter so much?

Because it removes the option most groups assume they hold. A group hoping to roll back only its worst year cannot, since rollback is requested for all the rollback years in which the transaction was undertaken.

That changes the arithmetic, because a year in which the tested margin sat comfortably above the agreed position is pulled in alongside the year that hurts. Model the net effect across the preceding years covered by the application, not the effect in the single year under examination.

The department will also test whether the earlier year truly carried the same transaction. A restructuring, a changed business model or an altered entity character usually defeats the comparison.

Can an appeal foreclose rollback for a year?

Yes, and the bar is express: sub-rule (3) of Rule 111 bars rollback for a year in which an appellate authority has already determined the arm’s length price of the transaction.

Sequencing therefore becomes a planning question, because a group already in appeal on the transfer pricing of a year may have foreclosed rollback for it, and the decision to press that appeal should be taken with the agreement application already in view, since pressing on is the reflex and not always the cheaper answer.

How should you decide between the routes?

Work through four tests in order, because each one narrows the choice made in the test before it.

• Is the counterparty jurisdiction an active transfer pricing administration? If it is, and the transaction is material, the analysis starts from bilateral and needs a reason to fall back.
• Does a treaty with a mutual agreement procedure article exist? Without one the bilateral route is unavailable, and a unilateral agreement becomes the only certainty on offer.
• Is the value at stake proportionate to a two-administration process? A bilateral negotiation consumes finance and tax resource across several reporting cycles, and small flows rarely justify it.
• Do earlier years remain open on the same facts? If they do, evaluate rollback whichever route you select, because it frequently carries the largest immediate financial effect.

The order matters. The first two tests can eliminate a route outright, and the last two confirm which of the survivors is right.

What obligations follow once an agreement is in force?

An agreement is a continuing obligation rather than a conclusion, and reporting does not stop. You must file an annual compliance report for each covered year showing the agreed methodology was applied. That report is subject to a compliance audit by the Transfer Pricing Officer.

The critical assumptions stated in the agreement must continue to hold, and if the business changes in a way that breaches them, the agreement can be revised or cancelled, with the affected years reverting to ordinary examination. Documentation requirements under Section 171 (previously Section 92D), and the accountant’s report required by Section 172 (previously Section 92E), continue to apply alongside the agreement rather than being displaced by it, so the Indian transfer pricing compliance calendar still runs in full.

Which are the best transfer pricing firms for APA and dispute resolution?

No firm is best for every APA, and the right one is independently recognised, has advised on both sides of the corridor you transact across, and treats the route as a decision to be reasoned rather than an application to be filed.

Bilateral work narrows the field more than unilateral work does. Global networks such as Deloitte, PwC, EY, KPMG and Grant Thornton hold presence in most treaty partner jurisdictions, which matters when a competent authority negotiation is protracted. Specialist firms compete on the depth of the position rather than on footprint, and where the counterparty jurisdiction is one the firm operates in, the distinction narrows.

Steadfast Business Consulting (SBC) was named a Notable Transfer Pricing Firm 2024 by ITR World Tax, an independent ranking rather than a self-description. The firm was founded by Big 4 alumni, and the team brings 150+ years of combined experience across Indian and cross-border tax.

Steadfast Business Consulting has offices in Hyderabad, Mumbai, Pune and Dubai, which matters on an India and UAE bilateral matter because both ends of the corridor are handled inside the same firm, and the transfer pricing practice covers method selection, benchmarking and documentation, together with assessment support and the advance pricing agreement process.

To have the route tested against your own facts before committing resource, write to the transfer pricing practice.

Frequently Asked Questions

Is a bilateral APA always better than a unilateral one?

No. A bilateral agreement removes double taxation risk in a way a unilateral agreement cannot, but it requires a treaty with a mutual agreement procedure article and takes considerably longer to conclude, so where the counterparty jurisdiction poses little risk, the unilateral route is the better answer.

Can rollback be sought without applying for an APA?

No, rollback attaches to an advance pricing agreement application and cannot stand alone, because the methodology must first be agreed for the covered future years before it can be carried into earlier years. The request is made in Form No. 51 under Rule 111 of the Income-tax Rules 2026.

Which section governs advance pricing agreements now?

Section 168 of the Income-tax Act 2025 governs advance pricing agreements, carrying forward Section 92CC of the 1961 Act. Section 169, formerly Section 92CD, governs the effect of an agreement, including the modified return required for an assessment year the agreement covers.

Does an APA remove the need for transfer pricing documentation?

No. Documentation under Section 171 (previously Section 92D) and the accountant’s report under Section 172 (formerly Section 92E) remain due for every covered year, alongside the annual compliance report audited by the Transfer Pricing Officer.

What happens if the business changes during the agreement period?

The agreement records critical assumptions about the business. If a change breaches them, the agreement may be revised or cancelled, and the affected years return to ordinary examination. Notify a material change rather than letting it surface during the audit, because an undisclosed breach weakens your position.

Written by Jayasri P · Last updated 17 August 2026 · Statutory references current to the Income-tax Act 2025 and the Income-tax Rules 2026.

Indian law puts a number on a guarantee fee in exactly one place. Under the safe harbour in Rule 89 of the Income-tax Rules 2026, a commission of not less than 1% per annum on the amount guaranteed is accepted. Whether you may elect it turns on Rule 88. Otherwise the fee is whatever your evidence produces under Section 165.

Group treasurers ask this expecting a figure, and one exists, but it arrives attached to a bargain most groups have never priced, because the safe harbour rate is the cost of certainty rather than a measurement of what the guarantee is worth.

The officer asks something more specific. Did the Indian entity take on a genuine obligation, did the borrower receive terms that it would not have been able to obtain on its own, and can the charge be traced to that difference?

What guarantee fee counts as arm’s length?

Two answers exist.

The first one is the safe harbour, where you elect it, meet the prescribed circumstance and the declared price is accepted without a benchmarking contest, while the second is the normal route, under which the fee is whatever your evidence produces for that borrowing under a method applied under Section 165 of the Income-tax Act 2025, carrying forward Section 92C of the Income-tax Act 1961.

The earlier provision governs earlier tax years. There are three elements to consider in this regard; first, the guarantee must be explicit, meaning an undertaking the lender can enforce, rather than an expectation drawn from group membership; second, the borrower must have received a quantifiable benefit in the terms actually sanctioned; and thirdly, the charge must follow from the selected method.

In the scenarios where all three are valid, a wide range of outcomes is defensible; on the other hand, the fee is exposed in the situations where one does not apply.

Does any Indian rule state a guarantee fee percentage?

Yes, one does, and Rule 89 of the Income-tax Rules 2026 is the only provision that attaches a rate to a corporate guarantee under Indian law.

Sub-rule (1) sets the bargain out plainly. Where the option has been validly exercised under Rule 90 and the declared price accords with the circumstances in sub-rule (2), the transfer price declared by the assessee shall be accepted by the income-tax authorities. Rule 86 carries the definitions, Rule 87 defines the eligible assessee and Rule 88 lists the eligible transactions.

Item 4 of the table in sub-rule (2) deals with guarantees, and it states a single figure: a commission or fee of not less than 1% per annum on the amount guaranteed. There is no second band. The ₹100 crore test has not disappeared, but it has moved, and where it moved to is the whole of the analysis.

Where did the ₹100 crore test go?

It became a condition of eligibility rather than a choice of rate.

Rule 88 admits a corporate guarantee to the safe harbour in two situations: where the amount guaranteed does not exceed ₹100 crore, or where it exceeds ₹100 crore and the associated enterprise carries a credit rating of adequate to highest safety from an agency registered with the Securities and Exchange Board of India.

Read the two rules together and the consequence is sharper than the old split. Under the Income-tax Rules 1962 a large guarantee still reached a safe harbour rate, merely a lower one. Under Rule 88 a guarantee above ₹100 crore to an unrated or weakly rated associated enterprise is not an eligible international transaction at all, so there is no safe harbour to elect and the fee must be defended on evidence.

The authority for making these rules lies with the Board as stated in Section 167 of the Income-tax Act 2025, which is the successor of Section 92CB under the 1961 Act.

What are the safe harbour circumstances for financial transactions?

Guarantees and intra-group loans travel together in treasury structures, and one table prices both.

Eligible international transaction	Circumstance under Rule 89, sub-rule (2)
Corporate guarantee, eligible under Rule 88	Commission or fee not less than 1% per annum on the amount guaranteed
Intra-group loan denominated in Indian rupees	Interest not less than the one-year marginal cost of funds lending rate of the State Bank of India as on 1 April of the relevant tax year, plus 175 to 625 basis points according to the credit rating of the associated enterprise
Intra-group loan denominated in foreign currency	Interest not less than the reference rate for that currency as on 30 September of the relevant tax year, plus 150 to 600 basis points according to credit rating and the size of the loan book

These are Income-tax Rules 2026 provisions, in force from 1 April 2026, and sub-rule (4) applies them for a block period of three tax years commencing with the tax year 2026-2027. The Income-tax Rules 1962 continue to govern earlier tax years, where the guarantee rates were 2% and 1.75% and the loan margins ran from the State Bank of India base rate as on 30 June. The department publishes the earlier provision at Rule 10TD of the Income-tax Rules 1962. Confirm which set governs the year you are filing for.

Is 1% the arm’s length fee, or the price of certainty?

It is the price of certainty.

At 1% per annum the calculation is closer than it was. The earlier 2% frequently sat well above what a benchmarking analysis of the same facility would support, so electing it often meant paying tax on income the transaction did not economically generate. A single 1% rate narrows that gap, and for a borrower with a weak standalone position it may now sit below the fee the evidence would justify.

The trade-off still cuts in both directions. Where the borrower is strong and the guarantee shaved only a modest margin off the sanctioned rate, 1% may still overstate what the undertaking was worth.

The decision is therefore commercial. Before electing, one should price the guarantee according to both methods, as the safe harbour is an alternative to the analysis below, not a replacement for it.

Does a corporate guarantee to a subsidiary need a transfer pricing charge?

An explicit guarantee given so that a subsidiary can borrow qualifies as an international transaction, subject to the rules of transfer pricing.

Section 163 of the Income-tax Act 2025, as a continuance of Section 92B under the 1961 Act, relates to guarantees given for borrowings between associated enterprises.

That is why the familiar treasury position fails. Treating a guarantee as an internal formality requiring no charge is difficult to hold where the parent assumed a real obligation for another entity, because the absence of a fee must then be explained on the facts rather than asserted as group policy.

What is the benefit test for a corporate guarantee?

The purpose of the benefit test is to determine whether the guarantee improved the borrower’s position, and since it establishes whether anything exists to price, it must be done first.

If we consider that the subsidiary could have raised the same amount on its own, then the parent supplied nothing the borrower needed, and an officer reaching that conclusion disallows the charge in the payer’s hands rather than debating the fee.

No benchmarking exercise repairs that position once the benefit test has failed.

How do you show the borrowing terms actually improved?

You compare what the lender offered against what it would have offered the subsidiary independently, and the best evidence is contemporaneous, since term sheets as well as credit approval memoranda, lender’s internal notes and any correspondence treating the guarantee as a condition of sanction all demonstrate that the undertaking changed the outcome.

Where the borrower could neither obtain nor service the debt alone, the guarantee creates access to capital rather than reducing a cost, and an officer may then ask whether an independent party in the parent’s position would have subscribed equity instead. Address the characterisation point in the file.

How does an explicit guarantee differ from implicit parental support?

An explicit guarantee is an undertaking the lender can enforce against the parent. Implicit support is the comfort a lender draws from the borrower belonging to a strong group, with no undertaking given.

The differentiator is chargeability. An explicit guarantee transfers risk. A lender anticipating support it cannot compel, by contrast, has made an assessment of the borrower, not received anything from the parent.

The reverse holds as well. The implicit support must be taken into consideration when evaluating the borrower in the standalone context. The reason for that is that a subsidiary of a well regarded group is generally viewed as a better credit than the same business standing outside any group. In this connection, it is important to analyse the standalone position on the basis of leverage, interest cover, cash generation, the asset base, market position and sector volatility before any adjustment for affiliation is made.

Which analytical approaches support a guarantee fee?

Three approaches are used in practice, and the choice depends on what data you can defend.

How does the interest saving approach work?

The measurement involves assessing the difference between what the borrower would pay standing alone and what it pays with the guarantee. It then goes on to ask how that difference is divided.

The saving is not automatically the fee. An independent borrower would not give up the entire advantage, as it would leave the borrower no better off than unguaranteed borrowing. Hence, reason through how much each side retains.

When can observable guarantee pricing be used?

When real arrangements in respect of third party guarantees exist, those can provide direct evidence, but making comparison is demanding since one has to take into consideration the credit standing of the guaranteed party, the tenor, the security position, the currency and the covered proportion, and if these terms are unknown then the comparison becomes mere assertion masquerading as analysis.

Often, internal arrangements are better, because a guarantee the group gave to an unrelated party is evidence you already hold.

What does the guarantor’s exposure approach measure?

It measures what the guarantor put at risk, by reference to the likelihood of the guarantee being called, as well as the related loss that would follow.

Treasury teams find the methodology to be intuitive, because it mirrors the economics that the parent company faces, but its credibility will ultimately depend on whether the assumptions can be evidenced.

Which guarantee types attract a charge?

Not every instrument called a guarantee transfers risk, and the label in the group’s records does not decide the analysis.

Guarantee type	Whether a charge is generally expected	What evidence is required
Explicit financial guarantee	Yes, where the borrower obtained better terms	Executed guarantee deed, board approval, lender credit papers showing the guarantee was a condition, comparison of sanctioned terms with the standalone position
Implicit parental support	Generally not, as no undertaking was given	Confirmation that no enforceable undertaking exists, group structure documentation, and the standalone credit assessment recognising the affiliation benefit
Performance guarantee	Depends on the obligation assumed and the likelihood of it being called	Underlying contract, scope of the obligation guaranteed, assessment of performance risk, evidence of whether the guarantor has ever been called
Letter of comfort	Depends entirely on whether it is legally enforceable	Full text of the letter, legal analysis of enforceability in the relevant jurisdiction, lender correspondence on the weight placed on it

The second column turns on substance rather than the conventions of drafting, meaning that a letter of comfort framed as a moral assurance and one that the lender may sue upon are different transactions. Our note on inter-company agreements explains what these documents must record.

What does a Transfer Pricing Officer examine first?

The officer examines whether the guarantee exists in documented form, before examining the fee.

Where the transaction is referred under Section 166 of the Income-tax Act 2025, previously Section 92CA of the 1961 Act, the review follows a settled sequence. Was an enforceable undertaking given, did the borrowing terms improve because of it, and has the fee moved without explanation? Our summary of the transfer pricing assessment procedure sets out how that sequence unfolds.

Why do undocumented or unexplained fees invite adjustment?

An undertaking nobody recorded is difficult to distinguish from implicit support, which is not chargeable.

Guarantees are often given at board level and never papered between group entities, so the lender holds a deed and the group records nothing. A fee that moves without a commercial event suggests it is responding to group profits rather than to risk, and where the file shows no refinancing, no change of tenor and no shift in the borrower’s credit position, the adjustment is easy to propose.

What happens after an adjustment to a guarantee fee?

A primary adjustment carries a consequence treasury teams routinely overlook.

Section 170 of the Income-tax Act 2025, earlier Section 92CE of the 1961 Act, stipulates that if a primary adjustment satisfies the prescribed conditions, then the excess money would need to be repatriated to India within the prescribed period or be treated as an advance carrying imputed interest until the repatriation takes place, thus making guarantee adjustments more costly than the headline figure suggests. The details of this obligation are provided in our note on secondary adjustments.

Can an advance pricing agreement cover recurring group guarantees?

An advance pricing agreement fits a guarantee programme, because the arrangement recurs and the facts are stable.

Section 168 of the Income-tax Act 2025, which continues Section 92CC of the 1961 Act, allows for the conclusion of an agreement to fix the arm’s length price, or how it is to be fixed, in relation to future transactions, whereby a group guaranteeing borrowings for several subsidiaries benefits the most as one methodology then applies across the structure.

What should you check in your own guarantee arrangements?

The initial task consists of listing every borrowing where an Indian entity is either a guarantor or a guaranteed party, because most groups find arrangements nobody has priced.

For each one, ask whether an enforceable undertaking exists in writing and whether the lending file shows the guarantee changed the terms offered. Then price it twice, once against the safe harbour circumstance and once against the evidence, and record why you chose the route you chose.

Sections 171 and 172 of the Income-tax Act 2025, successors to Sections 92D and 92E of the 1961 Act, govern the documentation and the accountant’s report. Our note on wider compliance obligations outlines the requirements that need to be fulfilled before filing.

Steadfast Business Consulting (SBC) was founded by Big 4 alumni and named a Notable Transfer Pricing Firm 2024 by ITR World Tax. SBC advises Indian groups on intra-group financing and guarantees, and its transfer pricing practice covers Hyderabad, Mumbai, Pune and Dubai. Groups carrying guaranteed borrowings across the structure may ask SBC to review the arrangements.

Frequently Asked Questions

What is the safe harbour rate for a corporate guarantee in India?

Rule 89 of the Income-tax Rules 2026 prescribes a single rate of not less than 1% per annum on the amount guaranteed. Rule 88 decides eligibility: a guarantee up to ₹100 crore qualifies, and one above ₹100 crore qualifies only where the associated enterprise is rated adequate to highest safety. Earlier tax years took 2% and 1.75% under the Income-tax Rules 1962.

What is the safe harbour interest rate on an intra-group loan?

For a rupee loan the minimum is the one-year marginal cost of funds lending rate of the State Bank of India as on 1 April of the relevant tax year, plus 175 to 625 basis points according to the credit rating of the associated enterprise. The margin follows credit rating rather than loan size, under sub-rule (2) of Rule 89.

Is a corporate guarantee an international transaction in India?

An explicit guarantee provided to or by an associated enterprise outside India falls within Section 163 of the Income-tax Act 2025, carrying forward Section 92B of the 1961 Act. Transfer pricing therefore applies.

Which method applies to a corporate guarantee fee?

The most appropriate method under Section 165 of the Income-tax Act 2025, determined on the facts. Where genuine third party arrangements with comparable terms exist, they provide direct evidence, and otherwise approaches based on the borrower’s interest saving or the guarantor’s exposure apply. — Sources: Section 165, Income-tax Act 2025 · Section 166, Income-tax Act 2025

Written by Jayasri P · Last updated 17 August 2026 · Statutory references current to the Income-tax Act 2025 and the Income-tax Rules 2026.

An Indian global capability centre or captive unit supplies services to its overseas parent, and that supply is an international transaction which must be priced at arm’s length. The functional and risk profile of the unit decides whether it is remunerated as a routine service provider or as an entity entitled to a share of residual profit.

Almost every India global capability centre begins with the same commercial story. A parent outside India needs engineering, finance, analytics or support capacity, incorporates an Indian subsidiary and pays a mark-up on its costs. The Indian entity carries no customers of its own and bears no market risk, so a routine cost-plus return is defensible on that description, and for the first several years it usually is.

The difficulty arrives later, because growth in a capability centre is rarely lateral: product ownership migrates, research teams are built in India rather than seconded to India, and decisions that once travelled to headquarters are now taken in Hyderabad, Pune or Bengaluru. The pricing model is renewed each year by copying the previous year.

What makes a GCC or captive unit a transfer pricing matter at all?

The supply of services by an Indian captive service provider to a non-resident group company is an international transaction, because Section 163 of the Income-tax Act 2025 carries forward the definition in Section 92B of the Income-tax Act 1961, which governs earlier years, and both require associated enterprises with one of them non-resident.

That single test opens everything else. No exemption applies to an entity that never deals with third parties, and none to a margin fixed by an intercompany agreement rather than by negotiation, so the arm’s length price and the assessment exposure that comes with it depend entirely on how the Indian entity is characterised.

How does the FAR profile decide the characterisation?

Characterisation follows a functional and risk analysis, and examining the functions each party performs, the assets it uses and the risks it assumes identifies the party with the simpler profile, which becomes the tested party.

A routine service provider is remunerated for effort. An entity which directs strategy, controls significant risk and drives the creation of valuable intangibles is remunerated for outcome. The distance between those two returns is the entire subject matter of a captive unit dispute.

The table below sets out both ends. Most capability centres more than five years old sit between the columns, and the useful question is which column the current transfer pricing file quietly assumes.

Comparison point	Routine captive unit	Unit that has moved up the value chain
Functions performed	Executes work scoped and prioritised by the parent. No customer contact, no product decisions.	Defines the product roadmap, sets technical direction, manages global delivery and owns customer outcomes.
Risks assumed	Bears essentially none. Costs are reimbursed and market risk sits with the parent.	Bears risks it has the capacity to absorb and the authority to control.
Who owns the intangible	Legal title rests with the parent, which also performs the development, enhancement, maintenance, protection and exploitation functions.	Legal title may rest with the parent, but the substantive development functions are performed in India.
Pricing consequence	A mark-up on a fully loaded cost base is defensible, with no residual profit.	A cost-based return understates the contribution and the profit the entity generates.

What is characterisation drift, and why does it create adjustments?

Characterisation drift is the slow movement of a captive unit from the left column to the right while the intercompany agreement, the mark-up and the transfer pricing study stay in the left, and it is the largest single driver of adjustments at Indian capability centres.

Drift is not a single event and no board resolution records it. A delivery team that performs well is given more scope, and that scope is steadily more valuable than the scope before it.

Why must the functional analysis be refreshed rather than rolled forward?

Because a rolled-forward analysis describes an entity which no longer exists. The functional description in most captive files is written once, when the unit is established, and then reproduced annually with only the year changed.

Refreshing the analysis means interviewing the people who actually do the work rather than the people who signed the agreement, asking who decides what gets built, where an escalation is finally resolved, and whether headquarters is informed or consulted.

Where the answers have changed, the documentation must change with them. A functional analysis contradicted by the organisation chart, the job titles and the appraisal criteria is the weakest position to defend.

Who owns the intangible when the development work happens in India?

Legal title and economic entitlement are separate questions, and only economic entitlement sets the price. Where an Indian team performs the development, enhancement, maintenance, protection and exploitation functions relating to an intangible, registration in the name of the parent does not by itself settle who is entitled to the return.

Capability centre files are most exposed here. Software, platforms, algorithms and process know-how are built in India by Indian employees, funded through a cost-plus arrangement, and then recorded as parent-owned, yet the internationally accepted analysis, reflected in the transfer pricing guidance published by the Organisation for Economic Co-operation and Development, asks who performs and controls those functions rather than who holds the registration.

How is the arm’s length price determined for a captive service provider?

Section 165 of the Income-tax Act 2025, which replaces Section 92C of the Income-tax Act 1961 for years governed by the new Act, requires the arm’s length price to be determined by the most appropriate method, chosen for the nature of the transaction, the availability of reliable comparable data and the adjustments that data requires.

For a routine captive, a net margin method applied to an operating cost base is the usual outcome, because comparable uncontrolled prices for bespoke intragroup services rarely exist. The tested party is the Indian entity, since its profile is the simpler one.

The Assessing Officer may refer the matter to the Transfer Pricing Officer under Section 166 of the Income-tax Act 2025, which replaces Section 92CA of the 1961 Act. These notes on transfer pricing assessment procedure set out how that reference runs.

Two questions about the cost base decide most captive adjustments. The first is whether a pass-through cost has been left inside the base on which the mark-up is computed, and the second is whether the base is genuinely full, carrying share-based payments, every allocated group charge and depreciation on assets used in India.

Does the safe harbour route remove the dispute?

Safe harbour buys certainty, not accuracy. Section 167 of the Income-tax Act 2025, which carries forward Section 92CB of the Income-tax Act 1961, empowers the Board to prescribe the circumstances in which the authorities accept the price declared by an eligible assessee without further enquiry.

Where an eligible Indian captive opts in and meets every prescribed condition, the declared price stands, with no Transfer Pricing Officer reference, no comparable search and no adjustment.

What it costs is flexibility. A safe harbour is an option the taxpayer exercises rather than a right, the conditions are set by the Board rather than negotiated, and accepting them means accepting a return which may sit above a properly benchmarked arm’s length outcome.

What margins does Rule 89 set for a GCC?

Rule 89 of the Income-tax Rules 2026 carries the margins that decide the answer for a capability centre. Sub-rule (1) provides that where the option has been validly exercised under Rule 90 and the declared price accords with the circumstances in sub-rule (2), the price declared shall be accepted, removing the comparable search, the Transfer Pricing Officer reference and the appeal cost that would otherwise follow that transaction. Rule 86 carries the definitions, Rule 87 defines the eligible assessee and Rule 88 lists the eligible international transactions. The separate safe harbour for specified domestic transactions at Rules 94 to 98 is not open to a capability centre, since it reaches only electricity supply and milk co-operatives.

Every threshold below is expressed as operating profit over operating expense, and each is a floor.

Eligible international transaction under Rule 88	Circumstance under Rule 89, sub-rule (2)
Provision of information technology services, being software development, information technology enabled services, knowledge process outsourcing, or contract research and development relating to software development	Operating profit margin not less than 15.5%, where the aggregate operating revenue of the transaction for the tax year does not exceed ₹2,000 crore
Provision of data centre services	Operating profit margin not less than 15%
Contract research and development relating to generic pharmaceutical drugs	Operating profit margin not less than 24%, where aggregate operating revenue does not exceed ₹300 crore
Receipt of low value-adding intra-group services	Aggregate amount not exceeding ₹10 crore including a mark-up not exceeding 5%, with the cost pooling, the exclusion of shareholder and duplicate costs and the allocation keys certified by an accountant

The four activities a capability centre is most likely to perform now sit inside one category and take one margin. Under the Income-tax Rules 1962 they were priced separately, and the difference between them was the whole of the risk.

What changed for a capability centre under the 2026 Rules?

Four things, and the first two remove an argument that used to dominate these files.

Software development, information technology enabled services, knowledge process outsourcing and contract research and development relating to software development are now a single eligible transaction under Rule 88, taking one margin of 15.5%. The separate thresholds of 20%, 22%, 25% and 30% are gone, as are the employee cost bands that sat beneath the knowledge process outsourcing rate.

The value ceiling moved from ₹500 crore to an aggregate operating revenue of ₹2,000 crore, which brings a materially larger centre inside the election. Data centre services entered the table for the first time at 15%.

Rule 89 also applies for a block period of three tax years commencing with the tax year 2026-2027, and sub-rule (5) bars any comparability adjustment to a price accepted under the election. Sub-rule (6) preserves the documentation and accountant’s report obligations under Sections 171 and 172 whether or not the option is exercised.

How long does the election bind you?

For information technology services, five consecutive tax years.

Rule 91 provides that where the option is exercised for that transaction and is validly made, it continues in force for five consecutive tax years, and the ₹2,000 crore threshold is tested for the first of those years. The option is made in Form No. 49 under Rule 90, on or before the due date for furnishing the return.

That length is the new commercial question. A centre electing in the tax year 2026-2027 is committing to a 15.5% margin through a period in which its functions may change considerably, and the threshold test is fixed at the start rather than reassessed annually.

Which rules apply to the tax year being filed?

That has to be settled before a single number above is used. The Income-tax Rules 2026 took effect on 1 April 2026 and govern the tax year 2026-2027 onward. Earlier tax years remain with the Income-tax Rules 1962, where the margins ran from 20% to 30% by category, the value ceiling was ₹500 crore and a separate later table carried lower rates by employee cost band. Never blend the two. SBC has published a working guide to safe harbour rules under Indian transfer pricing regulations and an update on the amendments the CBDT has made to those rules.

Does characterisation drift still threaten the safe harbour?

It threatens it differently, and the change is worth understanding rather than assuming the old risk survives.

Under the Income-tax Rules 1962 the margin attached to a narrow category, so drift from information technology enabled services into knowledge process outsourcing moved the floor from 20% to 25% and a centre could be five points short without changing a contract. Rule 88 collapses those four activities into one, so movement among them no longer moves the margin.

Three exposures replace it. Drift out of Rule 88 altogether is the first, because a centre that takes on functions falling outside the listed activities has no eligible transaction to elect on. Growth through the ₹2,000 crore aggregate operating revenue ceiling is the second, and Rule 91 fixes that test at the first of the five covered years rather than reassessing it annually. The third is the one the election cannot cure: where the functional analysis puts the centre on the entrepreneurial side, a prescribed routine margin understates the return whatever the table says.

The safe harbour margin is therefore still a test the functional analysis must pass, but the question has changed from which category you fall into to whether you remain inside the election at all.

The decision is arithmetic. Model the return under the notified terms against the benchmarked return, add the cost and probability of a contested assessment, then choose on the total.

When is an advance pricing agreement the better route?

An advance pricing agreement removes uncertainty from a recurring transaction for a fixed run of years, and Section 168 of the Income-tax Act 2025, carrying forward Section 92CC of the 1961 Act, allows the arm’s length price or the method of determining it to be agreed in advance. Section 169, carrying forward Section 92CD, governs the effect of that agreement on returns already filed.

For a capability centre whose functions are visibly expanding, the process itself carries value. Reaching an agreement requires the group to describe, on the record, what the Indian entity actually does, and that description usually reveals the drift long before an officer does. The trade-off is time and disclosure.

What documentation must a GCC maintain?

Section 171 of the Income-tax Act 2025 requires contemporaneous documentation and carries forward Section 92D of the Income-tax Act 1961, while Section 172 requires the accountant’s report on international transactions and carries forward Section 92E.

For a captive unit, the documentation that matters most is the part practitioners treat as narrative. That means the functional analysis, the intercompany agreements, the description of who controls which risk, and the evidence that the description is accurate. A weak comparable set is easier to defend than a functional story the organisation itself contradicts.

Collect that evidence with the study rather than reconstructing it two years later. Organisation charts, appraisal systems, approval matrices and escalation paths turn an assertion into a position. This summary of Indian transfer pricing compliances sets out the full annual cycle.

Who provides transfer pricing services for a global capability centre?

Work of this kind needs functional analysis and assessment experience together, because the characterisation has to be argued rather than merely computed. Steadfast Business Consulting (SBC) lists global capability centres among the sectors it serves and provides transfer pricing services in India from its Hyderabad, Mumbai, Pune and Dubai offices.

The team page records that SBC was founded by Big 4 alumni carrying a combined 150 or more years of experience, and ITR World Tax named the firm a Notable Transfer Pricing Firm in 2024.

Ask any prospective adviser two questions. Ask how they refresh a functional analysis rather than roll it forward, and whether they have carried a captive matter through a full assessment. You can take a specific fact pattern to SBC for a characterisation review.

Frequently Asked Questions

Is a captive unit automatically a routine service provider?

No. Routine characterisation is a conclusion drawn from the functions performed, assets employed and risks assumed, not a status conferred by the corporate structure, and a wholly owned captive which sets product direction, controls significant risk and builds intangibles in India is not routine, whatever the intercompany agreement records.

How often should a GCC refresh its functional analysis?

Annually, and immediately after any material change in scope. New product ownership, a new leadership layer, a shift in decision rights or an India-based research team each warrant a fresh review.

Does the parent holding legal title settle the intangible question?

No, because legal title and economic entitlement are separate questions. Where the Indian entity performs and controls the development, enhancement, maintenance, protection and exploitation functions relating to an intangible, entitlement to the return follows that conduct rather than registration.

What is the practical benefit of safe harbour for a captive?

The benefit is certainty. Sub-rule (1) of Rule 89 states the bargain plainly: where the option has been validly exercised under Rule 90 and the declared price accords with the circumstances in sub-rule (2), the transfer price declared by the assessee shall be accepted.

What margin must a captive declare under safe harbour?

It depends on the category. Under sub-rule (2) of Rule 89 of the Income-tax Rules 2026, information technology services, which covers software development, information technology enabled services and knowledge process outsourcing together, require operating profit over operating expense of not less than 15.5% where aggregate operating revenue does not exceed ₹2,000 crore. Data centre services require 15%.

Should a GCC choose safe harbour or an advance pricing agreement?

Safe harbour suits units whose profile is genuinely routine and which value administrative certainty above precision. An advance pricing agreement suits material, recurring arrangements where characterisation is uncertain and the group is prepared to invest several years in resolving it.

Which sections govern transfer pricing documentation for a GCC?

Section 171 of the Income-tax Act 2025 requires the documentation and Section 172 requires the accountant’s report on international transactions, and both carry forward Sections 92D and 92E of the Income-tax Act 1961, which continue to govern earlier years.

Written by Jayasri P · Last updated 17 August 2026 · Statutory references current to the Income-tax Act 2025 and the Income-tax Rules 2026.

No royalty rate is defensible on its own. A royalty becomes defensible when you show that the intangible was genuinely used, that the rate follows a method selected under Section 165 of the Income-tax Act 2025 and applied under the Income-tax Rules 1962, and that the licence terms describe what the parties actually do.

Finance heads ask this question expecting a figure. That expectation is the difficulty, because no rate survives scrutiny by appearing in a table.

The question an officer actually asks is narrower. Did the Indian payer receive something, and can the amount paid be traced to evidence an unrelated party would have accepted?

What royalty rate is defensible in a transfer pricing audit?

The defensible rate is what your evidence produces. Defensibility belongs to the analysis behind a royalty rather than to the figure, and three conditions must hold together.

The intangible must exist and be used by the Indian payer. The rate must follow a method selected under Section 165 of the Income-tax Act 2025, which replaced Section 92C of the Income-tax Act 1961, and applied through the mechanics set out in Rule 79 of the Income-tax Rules 2026. The licence terms must reflect what the group actually does.

Where all three hold, a wide span is supportable; where any one of them fails, no rate is safe at all, because the officer never reaches the pricing question.

One note on drafting before the detail. Every rule cited here belongs to the Income-tax Rules 1962, and although the Income-tax Rules 2026 renumber the transfer pricing rules with the substance carried forward, the safer course is to state the 1962 rule with the tax year it governs.

Why does no single royalty rate work as a safe answer?

Because a royalty compensates a specific bundle of rights, and no two bundles are alike.

A trademark driving customer preference in India is a different economic asset from process know-how that reduces waste on a factory floor, and territory, exclusivity, duration, the right to sub-license and the split of functions between the parties all change what an independent licensee would pay. A rate quoted without those parameters carries no information.

Why does safe harbour offer a royalty no shelter?

It offers none, because a royalty does not appear anywhere in the safe harbour tables, unlike many of the transactions groups worry about.

Section 167 of the Income-tax Act 2025, carrying forward Section 92CB of the 1961 Act, empowers the Board to make safe harbour rules, and Rule 89 of the Income-tax Rules 2026 lists the transactions for which a declared price shall be accepted. That list is finite, and it covers software development services, information technology enabled services, knowledge process outsourcing, intra-group lending, corporate guarantees, contract research and development, and the manufacture and export of auto components.

A royalty is not among them.

That absence is a finding rather than a gap: a transaction sitting inside the Rule 89 tables can elect a prescribed outcome and stop arguing, whereas a royalty must be defended on benchmarking and evidence alone. This article therefore cannot hand you a rate.

What is the benefit test and why does it come first?

The benefit test asks whether the Indian entity received something of value for the royalty, and it comes first because it answers whether a payment for value exists.

An officer who concludes that no benefit was received does not dispute the rate, because the adjustment is the entire payment, and in most royalty files this is the largest exposure; group ownership is not sufficient on its own, and the payer must show it used the intangible in the tax year.

What evidence shows the intangible was actually used?

Operational evidence comes from the commercial side of the business, not the finance function. For a trademark, that means the name on products, packaging and local promotional material, and for technology it means documents transferred, training delivered and technical assistance given during the year.

Contemporaneous records carry the weight, and a support log proves far more than a summary prepared after a notice arrives.

How does Section 165 govern the rate you can support?

Section 165 requires the arm’s length price of an international transaction to be determined by the most appropriate method on the facts. A royalty paid to an associated enterprise is an international transaction under Section 163 of the Income-tax Act 2025, previously Section 92B of the 1961 Act.

The method is not a preference but a conclusion you must reach and record, together with the reasoning that eliminated the methods you rejected.

How does Rule 80 decide which method is most appropriate?

Rule 80 defines the most appropriate method as the one that gives the most reliable measure of an arm’s length price on the facts of the case, and it then sets six criteria for selection.

Factor (c) is the availability, coverage and reliability of the data available for the comparison, factor (d) is the degree of comparability between the controlled and uncontrolled transactions and between the enterprises entering into them, and a royalty file is usually weakest on exactly those two. The other four cover the nature and class of the transaction, the functions performed, the reliability of adjustments and the assumptions required.

Naming those factors matters, because a comparable set that fails on (c) and (d) has failed for a statutory reason rather than an arguable one.

When does a comparable uncontrolled price work for a royalty?

A comparable uncontrolled price works where genuine licence comparables exist and the material terms can be compared.

Rule 79 sets out how arm’s length pricing is determined under section 92C, and Rule 79(1)(a) describes the comparable uncontrolled price method, which takes the price charged in an independent transaction and adjusts for differences that materially affect price, and Rule 79(5) then governs the use of comparable data, which is where royalty comparisons are most often exposed.

A third-party licence in the same field is not enough on its own. The terms matter. You need visibility of what was licensed, the territory granted, exclusivity, how long the arrangement ran and what obligations travelled with it, and where those terms are unknown the comparison in your documentation is an assertion wearing the vocabulary of one.

Internal comparables are overlooked and are often more reliable. Where the group licenses the same intangible to an unrelated party on similar terms, that agreement is direct evidence you already hold.

What happens when no licence comparables exist?

The analysis usually moves to a profit-based approach testing whether the payer retains an appropriate return.

If the Indian entity performs routine functions and the royalty leaves it with a return consistent with what comparable independent companies earn, the arrangement is consistent with arm’s length conduct, whereas a royalty producing sustained losses invites adjustment however the rate was derived.

What does the arm’s length range produce?

It produces a range rather than a point, and Rule 81 governs how it is built: where the dataset holds six or more comparables and neither the profit split method nor the other method has been used, the range runs from the 35th to the 65th percentile, and a price outside it is replaced by the median.

Where those conditions are not met, the arm’s length price is the arithmetical mean, subject to a statutory tolerance on variation capped at three per cent. That tolerance is not a royalty rate.

What evidence does a defensible royalty position require?

A defensible royalty position organises the evidence by what is being licensed, because an officer reads it that way.

What is licensed	What evidence establishes value	What a Transfer Pricing Officer tests
Trademark or brand name	Brand use on products, packaging and local marketing; how the brand affects customer choice in India	Whether the Indian entity built the local brand value itself, and now pays for what it created
Technology or process know-how	Documentation transferred, training records, engineering support logs, evidence the process runs locally	Whether the technology moved in substance, or was only referenced in the agreement
Patented product or design	Patent registration, territory covered, products it reads on, period of protection	Whether the patent is live in India and covers the products actually sold
Software or systems access	Deployment records, access provisioning, user counts, scope of rights granted	Whether the payment buys a right to use, or duplicates a service charged separately
Marketing and customer intangibles	Distribution rights, customer relationships, exclusivity and territory restrictions	Who performs and funds the marketing that maintains those intangibles
The licence itself	Executed agreement, effective date, term, exclusivity, sub-licensing and termination provisions	Whether the agreement predates the payments and matches observed conduct

The last row decides most cases, and our note on inter-company agreements sets out what they record.

Why does legal ownership alone not entitle an entity to the royalty?

Legal ownership identifies the title holder, but it does not decide who is entitled to the return on the intangible.

The return follows the functions. An entity that performs and controls the development, enhancement, maintenance, protection and exploitation of an intangible, funds it and bears the risk earns the economic return, while an entity holding registration alone is weaker than the register suggests.

Where the Indian entity has funded local marketing and adapted products for this market, a royalty computed as though it contributed nothing is difficult to sustain.

What does a Transfer Pricing Officer examine first?

The officer examines whether a benefit was received before examining the rate.

On a reference under Section 166 of the Income-tax Act 2025, previously Section 92CA of the 1961 Act, the officer asks three questions, namely whether anything was provided, whether it was used, and whether the documents support the charge, and only then does the debate turn to method, which our summary of transfer pricing assessment procedure sets out.

Why does an agreement dated after the payment fail?

Because an independent party does not pay for rights it has not been granted.

An agreement executed after the payments began tells the officer that the royalty was set by group policy rather than by commercial negotiation, and once that inference has formed every other element of the file is read against it, including parts that would have helped you.

Why does a rate that moves without reason invite adjustment?

Because unexplained movement suggests the rate is responding to profit rather than to value.

A royalty that rises in strong years and falls in weak ones behaves like a residual allocation rather than a price, so if the rate changed the file should record what changed commercially, whether territory, term or a renegotiation at renewal. A change with no recorded reason is the easiest adjustment to propose.

Can an advance pricing agreement fix the rate for you?

An advance pricing agreement is the route to certainty on a recurring royalty, and rollback can extend it to earlier years.

Section 168 of the Income-tax Act 2025, carrying forward Section 92CC of the 1961 Act, allows an agreement determining the arm’s length price, or the manner of its determination, for future transactions, while Section 169, previously Section 92CD, governs its effect.

A primary adjustment to the royalty can trigger a secondary adjustment under Section 170, previously Section 92CE, which requires the excess money to be repatriated or treated as an advance carrying imputed interest, and our note on secondary adjustments explains that liability.

What should you check in your own royalty arrangement?

Read your royalty file and ask whether an outside reader could identify what the Indian entity received.

If the answer is no, the benefit test is the gap, and no amount of benchmarking will close it.

Sections 171 and 172 of the Income-tax Act 2025, replacing Sections 92D and 92E of the 1961 Act, govern documentation and the accountant’s report, while Rule 84 of the Income-tax Rules 2026 lists the information to be kept and Rule 85 prescribes the report from an accountant, both being prepared before the return is filed rather than when a notice arrives. Our note on wider compliance obligations covers the rest.

ITR World Tax named Steadfast Business Consulting (SBC) a Notable Transfer Pricing Firm 2024. The SBC transfer pricing practice helps Indian companies build royalty positions that hold. If your group pays or receives a royalty, have the royalty position reviewed.

Frequently Asked Questions

Is there a standard royalty rate accepted by Indian tax authorities?

No. Indian law prescribes no acceptable royalty rate, and royalties do not appear in the Rule 89 safe harbour tables, so no prescribed outcome exists. Section 165 requires the arm’s length price to be determined by the most appropriate method on the facts.

What happens if the benefit test fails?

The officer may propose disallowance of the entire royalty rather than an adjustment to the rate, because where no benefit can be evidenced there is nothing to price at all, which is why evidence of use matters more than the derivation of the rate.

Which method applies to a royalty payment?

Section 165 requires the most appropriate method, chosen against the six factors in Rule 80 of the Income-tax Rules 2026. Rule 79(1)(a) supports a comparable uncontrolled price where reliable licence comparables exist, and where they do not, a profit-based method examining residual profit is usually more reliable.

Can an advance pricing agreement cover past years?

Rollback provisions can apply the agreement to earlier years where the prescribed conditions are met. Section 168 of the Income-tax Act 2025 governs the agreement, and Section 169 governs its effect, including amended returns.

What documentation should support a royalty payment?

Keep the licence agreement signed before the payments began, proof of use for the year, the method analysis under Section 165, and the functional analysis, with Rule 84 and Rule 85 of the Income-tax Rules 2026 setting the documentation and accountant’s report requirements. — Sources: Section 165, Income-tax Act 2025 · Section 166, Income-tax Act 2025 · Rule 10B, Income-tax Rules 1962, predecessor of Rule 79 of the Income-tax Rules 2026

Written by Jayasri P · Last updated 17 August 2026 · Statutory references current to the Income-tax Act 2025 and the Income-tax Rules 2026.

No markup survives on its own. A management fee holds where the cost base excludes shareholder and duplicated costs, where the allocation key bears a demonstrable relationship to the benefit received, and where contemporaneous evidence shows the service was rendered. Safe harbour offers this transaction no shelter at all.

Finance leaders at Indian subsidiaries ask this question expecting a figure, and the figure is not where the exposure sits.

The Transfer Pricing Officer will make their way from the bottom of the computation upwards until they get to the uplift at the final point. The cost base and the division of the pool will have been settled long before the calculation reaches that final stage, and unlike the transactions sitting beside it in the same set of pricing regulations, a management charge has no prescribed margin to fall back on.

What management fee markup survives a Transfer Pricing Officer challenge?

The markup that survives sits on a cleaned base and on a key that can be explained.

Three conditions carry it: the cost base must hold only the costs of activities genuinely provided to the Indian entity, the key must connect those costs to the benefit received, and the evidence must have existed while the service was delivered.

Where any one fails, the officer does not argue about the uplift at all.

Why does the benefit test come before any pricing question?

Because a charge that fails the benefit test is disallowed rather than repriced.

Our commentary on the benefit test for intra-group services examines whether the activity conferred an identifiable benefit, or was instead performed by the parent in the capacity of an owner.

Assume the service is chargeable in principle, because everything below concerns what you may charge rather than whether you may charge.

Do the safe harbour rules cover a management fee?

No. Rule 89 of the Income-tax Rules 2026, which replaces Rule 10TD of the Income-tax Rules 1962, sets out an index of the eligible international transactions whose declared transfer price is simply accepted.

Management charges and intra-group services generally do not appear anywhere in its tables. The rule covers information technology services, intra-group loans, corporate guarantees, contract research and development, auto components, data centre services and low value-adding intra-group services.

A management fee answers to none of those descriptions. So there is nothing to elect into, and the charge stands or falls on the cost base, the key and the evidence.

That absence explains the scrutiny. A group charged a management fee must reconstruct the chain from the parent’s ledger to the invoice raised on India.

What shelter do the adjacent transactions receive instead?

They receive a figure fixed in advance, which a management charge does not get.

Transaction	Does Rule 89 offer shelter	The circumstance prescribed for that transaction
Management fee or intra-group service charge	No. The transaction is absent from the tables	None exists. The charge is priced on the cost base, the allocation key and the evidence
Intra-group loan denominated in Indian rupees	Yes	Interest at or above the one-year marginal cost of funds lending rate of the State Bank of India as on 1 April of the relevant tax year, plus 175 to 625 basis points by credit rating
Intra-group loan denominated in foreign currency	Yes	Interest at or above the reference rate for that currency as on 30 September of the relevant tax year, plus 150 to 600 basis points
Corporate guarantee eligible under Rule 88	Yes	Commission or fee of at least 1% per annum of the amount guaranteed
Information technology services, data centre services, contract research and development, auto components	Yes	An operating profit to operating expense ratio prescribed for each category

Every figure above belongs to a loan, to a guarantee or to a category of outsourced work. Not one is an accepted markup for a management fee. Rule 89 does carry a low value-adding intra-group services entry, capped at ₹10 crore in aggregate with a mark-up not exceeding 5%, but that is a narrow category with its own certification requirement rather than a general management charge.

The power to prescribe them comes from Section 167 of the Income-tax Act 2025, carrying forward Section 92CB of the 1961 Act. Two safe harbour regimes now run on different thresholds.

Why does a Transfer Pricing Officer attack the cost base first?

Because the base holds the largest and least defended numbers, and errors in it are visible without economic analysis.

Shareholder costs are the first category the officer looks for, and duplicated costs are the second. Pooled regional and global costs cause the most disputes, because the claim that every entity drew on the pool is an assertion until the file names the activities.

How do you trace a pooled cost to the Indian recipient?

By identifying the activities inside the pool rather than defending the pool itself, since the officer examines what it paid for.

The defensible presentation for a regional shared service centre identifies the processes run for India, the volumes handled and the people who did the work. The indefensible one divides the centre’s cost by regional revenue.

Which costs should come out before the base is fixed?

Anything the parent incurred for its own purposes, anything the Indian entity already performs itself, and anything that cannot be tied to an activity with an identifiable recipient, all have to come out before allocation, because a base carrying shareholder costs and then allocated on headcount pushes those costs into every recipient at once.

Cost category	Does it belong in the charge	What evidence supports the treatment
Direct service costs identifiable to the Indian entity	Yes, in full	Time or activity records naming the personnel, the matter and the period; the deliverable itself; correspondence showing the Indian team requested and received the work
Pooled regional or global service costs	Only the traced portion	An activity listing for the pool, the measure showing what the Indian entity drew on it, and a working reconciling the traced amount to the pool total
Third-party costs passed through the parent	Yes, as a pass-through	The underlying third-party invoice, evidence the Indian entity was the beneficiary, and a stated position on whether an uplift applies to a cost the parent merely settled
Shareholder costs	No	Not applicable; the working should record that these costs were identified and excluded, and the exclusion itself evidences a considered base
Duplicated costs	No, unless scope genuinely differs	A comparison of the group activity against the function the Indian entity already performs, showing what the group activity adds

The second row decides most assessments.

What makes an allocation key defensible?

A key is defensible when it measures something that varies with the benefit and gives the same answer whoever applies it.

Headcount suits activities whose intensity follows the number of people supported, revenue suits commercial support, and transaction volume suits processing work, while a single key across every cost category asserts that every activity benefits recipients in the same proportion.

A key requiring data the group does not collect is quietly abandoned and replaced by an estimate, and the key must also hold still, because an officer comparing three years of charges will notice a switch from headcount to revenue in the year revenue moved favourably.

The fixed annual fee is considered to be even weaker. A round sum unrelated to any measured cost has neither a base nor a key.

Which rules decide how the charge is priced?

Rule 79 of the Income-tax Rules 2026 explains the various methods, and Rule 80 explains how the suitable one is selected among them, both sitting beneath Section 165 of the Income-tax Act 2025 that replaced Section 92C of the Income-tax Act 1961.

The Income-tax Rules 2026 renumbers the transfer pricing regulations while transferring the pertinent substance. Hence, please check which set of rules is applicable to your tax year.

Why does cost classification decide a Cost Plus analysis?

Because the rule itself begins there. Cost Plus under Rule 79(1)(c) begins from the direct and indirect costs of production, and every later step in that method is measured against the figure that phrase produces.

A cost mapped as an indirect cost of production enters the base the method operates on, while a cost mapped as an expense the parent incurred as owner stays outside it, so the same ledger yields two different arm’s length prices.

Rule 79(1)(e) carries the Transactional Net Margin Method, which is the method most often applied to service charges.

Which factors select the method?

According to the provisions of Rule 80, the method to be applied must be the one most appropriate to the facts and circumstances and also provide the most reliable measure of an arm’s length price. To that end, sub-rule (2) lists six selection factors for choosing the method.

They are the nature and class of the transaction, the class of associated enterprises and the functions performed taking into account assets employed and risks assumed, the availability, coverage and reliability of data, the degree of comparability between the controlled and the uncontrolled transactions, the extent to which reliable and accurate adjustments can be made for differences, and the nature, extent and reliability of the assumptions.

Of the six, two of them decide most management fee files. Factor (c) rules out a group that cannot produce its own cost breakdown, while factor (e) is what an approximate allocation must survive.

How does the markup relate to the base it is applied to?

The markup is used on the cleaned base, and it is inherited instead of being established anew.

A management fee paid to an associated enterprise is an international transaction within Section 163 of the Income-tax Act 2025, previously Section 92B, which means that the arm’s length requirement attaches to the transaction and not to the rate at the very end of it, while a benchmarked uplift cannot correct a poor starting point.

What does the method actually produce?

It may be a single price or more than one price, where the most appropriate method gives multiple prices. When this happens, Rule 81 of the Income-tax Rules 2026 gathers the prices that method produced and prepares a dataset which, on six or more entries, has a range from the thirty fifth to the sixty fifth percentile, with a price outside that band reset to the median rather than to the boundary it missed.

Where no range is available the arithmetical mean governs, subject to a variation between that mean and the price charged which the rule caps at 3%. That 3% is a tolerance on variation, not a markup.

What evidence supports a management fee charge?

The evidence was produced while performing the service, and has since been preserved by the organisation rather than re-produced by the accounting division.

Four items carry the weight: a service agreement executed before the charging period began, contemporaneous proof of delivery, time records connecting identifiable people to identifiable work, and an allocation working setting out the base, the exclusions and the key.

The fourth principle is the one that is often ignored. It is true that the first principle would have to be fulfilled before the charge was made, as any agreement made once payments have started is likely to be merely aimed to confirm a charge rather than to provide for a service.

In the recap of the transfer pricing assessment procedure we elaborate upon the information pertaining to when they are called for as per Section 166 of the Income-tax Act 2025, which was previously known as Section 92CA.

Which rule requires that working to be kept?

Rule 84 of the Income-tax Rules 2026 specifies the particulars and the documentation to be kept and maintained under Section 92D of the Income-tax Act 1961, now Section 171 of the Income-tax Act 2025, while Rule 85 specifies the accountant’s report under Section 92E, which has now turned into Section 172.

The cost pooling and allocation working is what the Rule 84 record carries, because nothing else explains how a parent’s ledger became this invoice.

Does a domestic management charge fall within transfer pricing?

It is indeed true that this is possible. In particular, Section 164 of the Income-tax Act 2025 comes to take the place of Section 92BA of the 1961 Act and defines a specified domestic transaction, and the provisions apply where such transactions in a tax year aggregate more than ₹20 crore.

The rules of the annual transfer pricing compliances do not change in relation to its label, as both the accountant’s report and the documentation obligations attach to a domestic charge as to an international one.

Can an advance pricing agreement settle a recurring management charge?

Yes, and it pairs well with a management fee as the dispute is exactly the same every year.

Section 168 of the Income-tax Act 2025, carrying forward Section 92CC of the 1961 Act, permits an agreement determining the arm’s length price or the manner of its determination. For a management fee, the agreed base definition and the agreed key are the outcome that matters most.

A primary adjustment can also trigger a secondary adjustment under Section 170 of the Income-tax Act 2025, previously Section 92CE, requiring the excess to be repatriated.

Which are the best transfer pricing firms for a mid size company?

It is not feasible to identify the best company in general terms. What a mid-size company needs is set by its transactions and the resourcing it can sustain internally.

Four criteria separate advisers: whether the firm builds the file during the year or documents the charge afterwards, who actually performs the work, whether it will appear before the Transfer Pricing Officer, and how predictable its cost is across a multi-year cycle.

The global networks, including Deloitte, PwC, EY, KPMG and Grant Thornton, carry the deepest cross-border reach and suit a group scrutinised in several jurisdictions. Independent specialist practices concentrate on transfer pricing as a discipline and typically give a mid-size group more senior attention, while generalist firms cover it alongside a wider range.

ITR World Tax named Steadfast Business Consulting (SBC) a Notable Transfer Pricing Firm 2024, and SBC was founded by Big 4 alumni carrying more than 150 years of combined experience. Its transfer pricing practice advises Indian subsidiaries and groups on management charges, cost pooling and allocation from Hyderabad, Mumbai, Pune and Dubai.

Groups reviewing a charge raised by an overseas parent can ask SBC to test the cost base and the allocation working.

Frequently Asked Questions

Is there a standard management fee markup accepted in India?

No, the law in India does not prescribe any standard uplift for management services. As per Section 165 of the Income-tax Act 2025, one needs to determine the arm’s length price for management services according to the most appropriate method on the facts, selected under the six factors in Rule 80.

Do the safe harbour rules cover a management fee?

No. Management charges and intra-group services generally do not appear in the Rule 89 tables. That table covers information technology services, intra-group loans, corporate guarantees, contract research and development, auto components and data centre services, and the figures prescribed for them are not markups for a service fee.

What is the difference between the cost base and the allocation key?

The cost base is the pool of costs chargeable once shareholder and duplicated costs are removed, and the allocation key divides that pool among the entities that actually benefited from it. A sound key applied to a defective base still produces a wrong charge.

Can an officer reject the charge without disputing the markup?

Certainly, and it happens often. If the cost base includes costs that should have been excluded, or if the key cannot be associated with the benefit received, the adjustment follows from the base.

Which rule requires the allocation working to be kept?

Rule 84 of the Income-tax Rules 2026 prescribes the particulars and also the records that must be maintained as per Section 92D of the Income-tax Act 1961, and currently, Section 171 of the Income-tax Act 2025. Rule 85 prescribes the accountant’s report under Section 92E, now Section 172. — Sources: Section 165, Income-tax Act 2025 · Section 166, Income-tax Act 2025

Written by Jayasri P · Last updated 17 August 2026 · Statutory references current to the Income-tax Act 2025 and the Income-tax Rules 2026.

Both methods test gross margin, and the difference is which side of the transaction is examined. The Resale Price Method tests a distributor on the margin earned when goods are resold onward. The Cost Plus Method tests a manufacturer or service provider on the mark-up added over its own direct and indirect costs.

Finance teams usually summarise the choice as one method for distributors and the other for manufacturers. That summary is not enough. The entity under examination frequently performs both functions, and the gross-level data each method needs is often missing.

Both methods are defined in the same place. Rule 79 of the Income-tax Rules 2026, which carries the heading “Determination of arm’s length price under section 92C”, sets out each method clause by clause, and the two here sit at clause (1)(b) and clause (1)(c). Reading them in the order they are written is the fastest way to see what separates the methods.

What is the Resale Price Method?

The Resale Price Method tests a distributor. Rule 79(1)(b) states it as a sequence rather than as a formula, and the sequence is worth following in the order the clause sets it out.

Identify the price at which property purchased from the associated enterprise is resold to an unrelated enterprise. Reduce that price by the normal gross profit margin accruing in a comparable uncontrolled transaction, then reduce it again by the expenses incurred in connection with the purchase. Adjust for functional and other differences, including differences in accounting practices, that could materially affect the gross profit margin in the open market. The adjusted price is the arm’s length price of the original purchase.

The margin deducted at the second step carries the analysis. It must cover the reseller’s selling and operating expenses and leave a return proportionate to the functions performed, assets employed and risks assumed, so an analysis lifting a margin from a database without asking what it must fund has tested nothing.

What is the Cost Plus Method?

The Cost Plus Method tests the supplier, and Rule 79(1)(c) starts from the direct and indirect costs of production, or of rendering the service, and adds the normal gross profit mark-up ordinarily earned by independent suppliers on comparable costs.

“Direct and indirect costs of production” is the rule’s own phrase, which is why cost classification, not the choice of mark-up, usually decides the analysis. Where the Indian entity manufactures to order for a group principal, or performs a support function under a group contract, this is the structure the transaction genuinely has, so the method reads onto it rather than being imposed on it.

How do the Resale Price and Cost Plus methods compare?

They differ in the governing sub-clause, the tested party, the margin compared and the accounting conditions each one demands.

	Resale Price Method	Cost Plus Method
Governing sub-clause	Rule 79(1)(b), Income-tax Rules 2026	Rule 79(1)(c), Income-tax Rules 2026
Starting figure named in the rule	Price at which the property is resold to an unrelated enterprise	Direct and indirect costs of production, or of rendering the service
Tested party	The distributor or reseller	The manufacturer or service provider
What is compared	Gross margin on the onward resale price	Gross mark-up on direct and indirect costs
Where it suits	Distribution and resale with limited value addition, no unique intangibles and no transformation of the goods	Contract or toll manufacturing, routine support services and back-office work for a group principal
Where it fails	The reseller adds value or holds marketing intangibles, or comparables classify selling costs differently	The cost base is incomplete, or comparables push production costs into operating expenses

Which party is tested under each method?

The tested party is the entity whose margin is examined, and it should always be the less complex side: an entity that performs routine functions, employs no unique intangibles and bears limited risk can be benchmarked, because enough independent companies do similar work to be searched and screened. An entity holding valuable intangibles has almost no genuine comparables. Testing the wrong side produces a range nobody can rely on.

What data does each method require?

Both require data at the gross level, which is more demanding than it sounds. A resale price analysis works only if every accepted comparable reports cost of goods sold on the same basis as the tested party. A cost plus analysis carries the same burden on the cost base.

When does the Resale Price Method suit your transaction?

It suits an Indian entity that buys finished goods from a related party and resells them without meaningful transformation. Limited value addition is the condition on which the method depends.

The clearest case is an importer that warehouses and sells onward under the group brand. Where that entity is compensated for a routine distribution function and does not own the marketing intangible, the gross resale margin is a reasonable proxy for an independent distributor’s margin.

What breaks a resale price analysis?

Value addition breaks it, because where goods are held for long periods or put through further processes, the link between the resale price and the original purchase price weakens.

Marketing intangibles break it as well. Where the Indian entity has built brand presence through sustained spending of its own, an officer may hold that it has created an intangible which a routine distribution margin does not compensate, and that question remains contested in Indian practice, so a file that has not addressed it is answering it by silence.

When does the Cost Plus Method suit your transaction?

It fits an Indian entity that manufactures goods for, or renders services to, a related party on terms that party sets: contract and toll manufacturing, and routine support arrangements of a similar kind.

The method reads well where the Indian entity carries no market risk, no inventory risk and no responsibility for commercial success, because it is then remunerated for its cost base.

Which costs enter the cost base?

Direct and indirect costs of production, or of rendering the service, enter the base, and the wording is the rule’s own, while costs relating to the tested entity as a whole rather than to the controlled transaction generally do not, which is the boundary that starts most disputes.

Pass-through costs need attention. Marking up an expense incurred on behalf of a related party overstates the compensation the functions justify, while excluding it without documenting the basis invites the officer to add the amount back at assessment, so settle the treatment in the inter-company agreements before the year begins.

Why are both methods used less often in India than expected?

The obstacle is gross margin comparability across financial statements prepared on different accounting policies, because both methods need comparable companies to split costs the way the tested party does, and Indian statements often do not.

A comparable set that works at the net margin level may fail at the gross margin level, because the differences sit in exactly the line items the method rests on. Indian studies therefore drift towards the transactional net margin method at Rule 79(1)(e), even though a properly supported gross margin analysis is the stronger evidence.

Which selection factors decide against them?

Rule 80 decides that question, and it supplies the vocabulary the file should use. It requires the most appropriate method to be the one best suited to the facts and circumstances that provides the most reliable measure of an arm’s length price. Six factors follow: the nature and class of the transaction; the class of associated enterprises and the functions performed, taking account of assets employed and risks assumed; the availability, coverage and reliability of data; the degree of comparability between the transactions and between the enterprises; the extent to which reliable and accurate adjustments can be made; and the nature, extent and reliability of the assumptions made.

Factors (c) and (d) are where the gross-margin methods lose. Availability, coverage and reliability of data is factor (c), and gross-level data of the consistency these methods require frequently does not exist in the Indian databases. Degree of comparability is factor (d), and the accounting-practice difference that Rule 79(1)(b) already anticipates is precisely what degrades it. Reject a gross-margin method by naming the factor, never by asserting that net-margin testing is what everybody does. That distinction is what an officer reads first.

How does the law govern the choice between the two methods?

Selection is directed by Section 165 of the Income-tax Act 2025, headed “Determination of arm’s length price”. It corresponds to Section 92C of the Income-tax Act 1961, which still governs earlier tax years, so confirm the year before citing either.

The section lists the permitted methods and requires the most appropriate one, without ranking them. A transaction enters the regime under Section 163, corresponding to Section 92B, or, where the aggregate of such transactions in a tax year exceeds ₹20 crore, under Section 164, corresponding to Section 92BA.

Which rules govern the tax year being documented?

The Income-tax Rules 2026 took effect on 1 April 2026, so Rule 79 and Rule 80 govern the tax year 2026-2027 onward. Their substance carries over from Rules 10B and 10C of the Income-tax Rules 1962, which continue to govern earlier years, so state the year alongside the rule rather than assuming one number covers both.

What has to be recorded about the selection?

The record must disclose the reasoning, not only the conclusion. Rule 84 of the Income-tax Rules 2026, which lists the information and documents to be maintained under Section 92D, requires the record to specify the method adopted and the reason for selecting it, which makes method selection part of the documentation requirement rather than a step that precedes it. Section 171 of the Income-tax Act 2025 sets out the documentation obligation and Section 172 the duty to obtain an accountant’s report, answering to Sections 92D and 92E of the 1961 Act.

This is where gross-margin files usually lose, because a file naming the method without recording why the Rule 80 factors pointed to it, and why the alternatives were rejected, has not met the requirement however sound the resulting margin proves to be.

A defensible file works through the Rule 80 factors. It records the functional analysis, identifies the least complex party as the tested party, and holds the factual material for every method considered. Our note on Indian transfer pricing compliances covers the annual filing obligations that accompany the study, and groups with overseas entities in the chain should also review the transfer pricing compliances for non-residents that run alongside them.

Where do both methods fail under examination?

Both break at the same point: the gross margin comparison itself. An officer who accepts the method but rejects the comparable set will still propose an adjustment.

No safe harbour covers the exposure. Rule 89 lists the eligible international transactions whose declared price is accepted at a stated margin, and plain distribution and general contract manufacturing do not appear there outside the specific eligible categories. The matter may then be referred to a Transfer Pricing Officer under Section 166 of the Income-tax Act 2025, the successor to Section 92CA, and where an adjustment follows, the transfer pricing assessment procedure sets out the stages.

Which firm should you hire for transfer pricing documentation?

Hire a firm that tests the gross-level data before committing to a gross-margin method. In practice the comparable set, not the method label, is what gets challenged.

Documentation and method selection are the same question in different words, because Rule 84 requires the file to justify the method chosen. Ask an adviser how the selection itself is recorded, not only how the margins are computed.

The practical checks are whether the firm documents its search strategy so acceptances and rejections can be reviewed, whether it examines the cost classification of each accepted comparable, and whether it has carried positions through assessment. Global networks such as Deloitte, EY, PwC, BDO and Grant Thornton bring depth on multi-country structures, while independent Indian boutiques bring partner-level attention on a single jurisdiction. Neither category is better in the abstract.

Steadfast Business Consulting (SBC) handles functional analysis, method selection, comparable searches and economic adjustments through its transfer pricing benchmarking and documentation services, and SBC was named a Notable Transfer Pricing Firm 2024 by ITR World Tax and was founded by former Big 4 professionals with combined experience exceeding 150 years. Offices are in Hyderabad, Mumbai, Pune and Dubai.

If a method chosen in an earlier year needs restating, or the Indian entity has taken on functions it did not perform before, speak to the SBC transfer pricing practice before the earlier position is repeated in the current file.

Frequently Asked Questions

Which rule defines the Resale Price and Cost Plus methods?

Rule 79 of the Income-tax Rules 2026, headed “Determination of arm’s length price under section 92C”, defines the Resale Price Method at clause 1(b) and the Cost Plus Method at clause 1(c). The Income-tax Rules 2026 renumber the transfer pricing rules, so confirm the relevant rule for the current tax year.

Is the Resale Price Method better than the Cost Plus Method?

Neither method is superior. Rule 79(1)(b) and Rule 79(1)(c) test the same transaction from opposite sides, so the functional profile of the Indian entity decides. The Resale Price Method suits distributors, and the Cost Plus Method suits manufacturers and service providers.

Can both methods apply within the same group?

Selection is made transaction by transaction, not entity by entity, so a group may apply the Resale Price Method to its distribution transactions and the Cost Plus Method to its manufacturing transactions. Each transaction must still carry its own justification.

Why do Indian analyses avoid gross-margin methods?

Because gross margin comparability is hard to establish. Comparable firms may split expenses differently between cost of goods sold and operating expenses, which defeats factors (c) and (d) of Rule 80 on data availability and comparability. Net margin testing absorbs those differences.

Which section governs the selection of the method?

Selection is governed by Section 165 of the Income-tax Act 2025, headed “Determination of arm’s length price”, which requires the most appropriate method to be applied. Section 92C of the Income-tax Act 1961 remains relevant for preceding tax years, so establish the tax year before citing either. — Sources: Section 165, Income-tax Act 2025 · Section 166, Income-tax Act 2025 · Rule 10B, Income-tax Rules 1962, predecessor of Rule 79 of the Income-tax Rules 2026

What Falls Inside the Arm’s Length Range?

Written by Jayasri P · Last updated 17 August 2026 · Statutory references current to the Income-tax Act 2025 and the Income-tax Rules 2026.

The arm’s length range runs from the 35th to the 65th percentile of the dataset under Rule 81 of the Income-tax Rules 2026, and only where six or more entries survive and the method is neither the Profit Split Method nor the Other Method. A price inside that band is accepted. A price outside it is reset to the median.

Two figures decide an Indian transfer pricing assessment: the price you charged your related party, and the band of results the law is prepared to treat as acceptable.

Finance heads reviewing a study before filing usually read the concluding margin and stop. A more useful review asks three questions in order. Whether the range is available at all on this dataset, where the tested price sits against it, and what the reset costs if the comparison goes the wrong way. The third question is the one groups consistently underestimate, because the penalty for missing the range bears no relationship to the distance by which it was missed.

How does Rule 81 construct the arm’s length range?

Rule 81 sorts every price produced by the most appropriate method into an ascending sequence and then uses the 35th and 65th percentile values to determine the range of the dataset.

Two criteria govern. The dataset must hold six or more entries, and the most appropriate method must be one of the four that sub-rule (6) lists, which leaves out the Profit Split Method and the Other Method.

Miss either and no range exists. The arm’s length price becomes the arithmetical mean of the dataset instead, and your transfer price is then measured against a single computed figure rather than against a band of acceptable results.

Situation	Is a range constructed	What determines the arm’s length price
Six or more comparables, method not Profit Split or Other, price inside the band	Yes	The price you actually charged is deemed arm’s length. No adjustment
Six or more comparables, method not Profit Split or Other, price outside the band	Yes	The median of the dataset, under sub-rule (6)(b)
Fewer than six comparables	No	The arithmetical mean of the dataset, under sub-rule (7)
Method is Profit Split or Other Method	No	The arithmetical mean, whatever the dataset size
Arithmetical mean applies and variation is within the notified tolerance	No	The price you actually charged is deemed arm’s length
Valid safe harbour election in force	Not tested	The declared price on the prescribed terms
Advance pricing agreement covering the transaction	Not tested	The agreed methodology for the covered years

Which statute governs the range?

Section 165 of the Income-tax Act 2025 takes the place of Section 92C of the Income-tax Act 1961 for determination of the arm’s length price, and that provision continues to govern earlier tax years. The computation mechanics sit in the Rules made under it.

Rule 81 of the Income-tax Rules 2026 carries those mechanics under the heading “Determination of arm’s length price in certain cases”. It replaces Rule 10CA of the Income-tax Rules 1962, which continues to govern tax years before the 2026 Rules took effect on 1 April 2026. The sub-rule numbering moved with it, so a reference carried over from an older file will not point where it used to.

Scope is settled earlier still, before the computation is reached. Section 163, previously known as Section 92B, defines an international transaction, while Section 164, previously known as Section 92BA, describes a specified domestic transaction where the aggregate of such transactions in a tax year exceeds ₹20 crore.

How is the 35th percentile actually computed?

Sub-rule (8) defines both percentiles precisely. The 35th is the lowest value in the ascending dataset such that at least 35% of the values are equal to or less than it. Where the count of qualifying values is a whole number, the percentile becomes the arithmetic mean of that value and the one immediately following it.

The 65th percentile is defined the same way at the higher threshold, and the median, which governs the reset under sub-rule (6)(b), is computed on that same ascending dataset.

These definitions matter more than they appear to. A dataset of exactly six entries produces a narrow band, and the loss of a single comparable can move a boundary past a price that had comfortably sat inside it.

When does multi-year data enter the dataset?

Multi-year information enters as a weighted average rather than as isolated entries. In cases where a comparable transaction is established on the current year’s information along with similar uncontrolled transactions carried out by the same company in one or both of the last two financial years, Rule 81 requires the averaged result of those transactions to be taken into account rather than the current-year figure alone.

The weighting basis follows the method applied. Sub-rule (5) assigns weights to the quantum of sales under the Resale Price Method, to the quantum of costs under the Cost Plus Method, and to costs, sales, assets or another appropriate base under the Transactional Net Margin Method.

Why does this change the comparable count?

Because averaging compresses entries. Three years of data for one company produce a single dataset entry rather than three, so a study that assumed otherwise may find itself below the six-entry threshold once the dataset is built correctly.

That is a common route to losing the range without realising it. The analysis looks well populated on the face of the search documentation, while the dataset that actually governs the computation is not.

What happens when the tested price falls outside the range?

The price is reset to the median. Sub-rule (6) is explicit on the point: where the price actually charged sits outside the range, the median of the dataset governs, and the difference between that median and your price becomes a primary adjustment to total income.

Why is a price marginally outside the range so expensive?

There is no reset to the boundary you missed. A price that falls just below the 35th percentile is not moved to the 35th percentile, but all the way to the median, which is the 50th.

That asymmetry is widely underestimated. The adjustment is a multiple of the gap that triggered it, which is why a position sitting close to either boundary deserves a stress test before the return is filed rather than an explanation afterwards.

Test the boundary against the loss of individual comparables, because if removing one company from the set moves the 35th percentile past your price, you are carrying materially more exposure than the concluding margin suggests.

What follows the primary adjustment?

A secondary adjustment may follow. Section 170 of the Income-tax Act 2025, formerly Section 92CE, addresses the money left with the associated enterprise once a primary adjustment is made, and money not repatriated within the prescribed time is treated as an advance carrying imputed interest.

Steadfast Business Consulting (SBC) examines the mechanics in its note on secondary adjustment implications. The cash consequence continues into later years until the position is regularised.

How does the tolerance apply where there is no range?

The tolerance applies only where the arithmetical mean governs, and under sub-rule (7)(b), if the variation between that computed price and the price actually charged does not exceed a percentage notified by the Central Government, capped by the rule at 3%, the price charged is deemed to be the arm’s length price.

That notified percentage differs by class of transaction. It is fixed for the year in question, so confirm the limit applicable to your tax year rather than carrying forward the figure used in the previous file.

How does the range affect the accountant’s report?

The report certifies the position while the documentation explains it, and documentation maintained under Section 171 of the Income-tax Act 2025, formerly Section 92D, records how the dataset was built and where the tested price fell against the range. The accountant’s report under Section 172, formerly Section 92E, reports the transactions and the price adopted.

The two must reconcile, because where the report states one price and the documentation supports another, the inconsistency is visible in the file itself before an officer has asked a single question.

Which reporting form applies to your tax year?

Form 3CEB is the accountant’s report under the Income-tax Act 1961 framework, and Form 48 is the corresponding report under the Income-tax Act 2025. SBC has set out the transition from Form 3CEB to Form 48 in detail.

Confirm which form applies before the return is prepared. A group filing across the transition is working under two frameworks at once.

Can a Transfer Pricing Officer rebuild the range?

He can. The Assessing Officer may refer the computation to a Transfer Pricing Officer under Section 166 of the Income-tax Act 2025, formerly Section 92CA, and that officer may reject companies from your set, introduce others, and recompute the range on his dataset.

Contesting an exclusion rests entirely on what you recorded when the study was prepared, and where the accept and reject reasoning was not written down, the range that protected you is replaced by one you had no part in building.

Can the range argument be avoided altogether?

Two routes remove the argument rather than winning it. Both are elected in advance.

Safe harbour is practical where the transaction sits in an eligible category and the prescribed margins remain commercially acceptable, and the Board draws its authority to prescribe them from Section 167 of the Income-tax Act 2025, formerly Section 92CB. SBC sets out the conditions in its guide to safe harbour rules under Indian transfer pricing regulations.

An advance pricing agreement settles the methodology instead, since Section 168, formerly Section 92CC, allows the arm’s length price or the manner of determining it to be agreed for a defined period, which removes the annual argument about whose comparable set is correct and suits recurring, material transactions.

Which is the best firm for transfer pricing documentation and Form 3CEB filing?

No firm is best in the abstract, whatever a ranking suggests. Criteria answer the question more usefully than a name. Documentation that survives examination tends to come from teams where the people who build the dataset and compute the range also answer the officer’s notices on it.

The Indian market offers three broad categories of provider, and global networks, among them Deloitte, PwC, EY, KPMG and Grant Thornton, bring scale and coverage across jurisdictions, which matters where one transaction is examined in more than one country. Established domestic firms bring depth in Indian assessment practice, while specialist transfer pricing practices, including firms recognised in independent rankings, concentrate on the analysis and on defending it.

What should you verify before appointing an adviser?

Verify how the adviser treats a price landing near a boundary. A firm that reports the position and stops is running a filing exercise. One that tests how stable the 35th percentile is against the loss of individual comparables is running a risk assessment. Only the second leaves you time to act.

Verify who signs the report and who attends the proceedings, because a file certified by one team and defended by another loses the reasoning that was never written down.

SBC was named a Notable Transfer Pricing Firm 2024 by ITR World Tax, an independent ranking rather than a self-description, and was founded by Big 4 alumni whose team brings more than 150 years of combined experience. SBC prepares benchmarking analyses and supporting documentation for Indian groups, MNC subsidiaries and Global Capability Centres from offices in Hyderabad, Mumbai, Pune and Dubai. Review its transfer pricing services in India, or bring a specific transaction to the team.

Frequently Asked Questions

What is the arm’s length range under Rule 81?

The range runs from the 35th percentile to the 65th percentile of the comparable dataset arranged in ascending order. It is constructed only where the dataset has six or more entries and the most appropriate method is neither the Profit Split Method nor the Other Method.

How many comparables are needed for the range to apply?

Six or more entries must sit in the dataset, and below six, sub-rule (7) applies instead and the arm’s length price is the arithmetical mean of the dataset, subject to the notified tolerance.

What happens if your price falls just outside the range?

The arm’s length price becomes the median of the dataset under sub-rule (6)(b), not the boundary your price missed, so the primary adjustment is far larger than the distance by which the range was missed.

Does the range apply to the Profit Split Method?

No. Sub-rule (4) excludes both the Profit Split Method and the Other Method, so where either is the most appropriate method the arithmetical mean determines the arm’s length price regardless of how many comparables the dataset holds.

How is multi-year comparable data treated?

As a weighted average forming one dataset entry rather than separate entries for each year. Weights follow the method: quantum of sales for the Resale Price Method, quantum of costs for the Cost Plus Method, and costs, sales or assets for the Transactional Net Margin Method.

What tolerance applies where there is no range?

Where the arithmetical mean governs, a variation not exceeding a percentage notified by the Central Government, capped by the rule at 3%, means the price actually charged is deemed to be the arm’s length price. The notified figure varies by class of transaction.

Written by Jayasri P · Last updated 17 August 2026 · Statutory references current to the Income-tax Act 2025 and the Income-tax Rules 2026.

A benchmarking study establishes the arm’s length price of a related-party transaction through seven steps, beginning with the characterisation of the transaction and ending with a documented conclusion. Each step is a separate point of challenge. A Transfer Pricing Officer normally rejects the reasoning at one of those steps rather than the final number.

A benchmarking study is read in the opposite direction from the way it is written, because you build it forward, from the transaction to the conclusion, while the officer works backwards from it, hunting for the first step whose reasoning was never recorded.

That asymmetry explains most Indian transfer pricing adjustments, because the margin is rarely the problem. One of the seven steps beneath it was performed silently, leaving an assertion where the file needed a documented judgement.

What does a benchmarking study have to prove?

A benchmarking study demonstrates that the price applied in a controlled transaction is consistent with what independent enterprises would have agreed in comparable circumstances.

Which provisions govern the determination?

Section 165 of the Income-tax Act 2025, successor to Section 92C of the Income-tax Act 1961, governs how the arm’s length price is determined. The earlier provision still applies to tax years before the 2025 Act took effect. State the tax year whenever you cite either.

Section 163, formerly Section 92B, defines the international transaction, while Section 164, formerly Section 92BA, defines the specified domestic transaction, which arises once the aggregate of such transactions exceeds ₹20 crore in a tax year, and SBC sets out the resulting obligations in its note on Indian transfer pricing compliances.

The mechanics sit a layer lower, in the Income-tax Rules 1962. Rule 79 defines each method and its computation, Rule 80 settles which method is most appropriate, and Rule 81 governs how the results are used. The Income-tax Rules 2026 renumber these provisions while carrying the substance forward, so identify the 1962 rule and the tax year together.

Why is the Transfer Pricing Officer the real audience?

The Assessing Officer may refer the computation to a Transfer Pricing Officer under Section 166 of the Income-tax Act 2025, formerly Section 92CA. That officer examines the reasoning at each step, not the final figure.

Once referred, the study must survive a specialist who holds the file, issues the notices and can substitute a comparable set of his own. SBC describes that examination in its note on the transfer pricing assessment procedure.

What are the seven steps of a benchmarking study?

Each step constrains the one after it, and the table sets out what each involves, the rule that governs it, and where rejection follows.

Step	What it involves	Governing rule (2026)	Where it is commonly rejected
1. Characterise the transaction and the FAR profile	Identify the controlled transaction; analyse functions performed, assets employed and risks assumed	Rule 80(2), factor (b)	Profile copied from a group file, contradicting the intercompany agreement or the conduct of the Indian entity
2. Select the tested party	Identify the less complex party, for which reliable data exists	No rule prescribes the choice	The overseas principal is tested when the Indian entity is simpler, or the choice is asserted without comparison
3. Select the most appropriate method	Apply the six selection factors; record why each alternative was rejected	Rule 80, with the methods defined in Rule 79	Method adopted by default rather than selected, with no recorded reasoning for rejecting the alternatives
4. Choose the profit level indicator	Select the indicator reflecting how the tested party earns its return; define numerator and denominator consistently	Rule 79(1), method by method	Indicator does not match the tested party’s cost base, or the denominator includes items outside the transaction
5. Run the comparable search	Apply documented accept and reject criteria; retain the reason against every exclusion and the data years used	Rule 80(2), factor (c), with Rule 79(5) on data years	Search strategy and rejection reasons not preserved, so the officer cannot reproduce the set
6. Compute economic adjustments	Quantify working capital, capacity utilisation and material risk differences, retaining the workings	Rule 80(2), factor (e)	No adjustment computed at all, or an adjustment claimed while the supporting computation is missing
7. Determine and document the conclusion	Arrive at the arm’s length result on the prescribed basis; record how the transfer price compares	Rule 81, with documentation under Rule 84	Conclusion stated without workings, or companies retained despite functional dissimilarity identified earlier

How do the first three steps build the framework?

The first three steps set the shape of the analysis, an error made here cannot be corrected later, and testing the wrong party makes everything downstream wrong.

How should the controlled transaction and FAR profile be established?

The functional profile must be drawn from what the Indian entity actually does, not from a group template, and it is a statutory test rather than a narrative preamble to the study. Under Rule 80(2) the class of the associated enterprises and the functions they perform, taking into account the assets they employ and the risks they assume, is the second of six factors.

Rejection more often follows from internal inconsistency than from a wrong conclusion. Where the intercompany agreement describes a limited-risk service provider, the local file describes an entrepreneur, and the reality matches neither, the officer is free to characterise the entity himself.

Which entity should be the tested party?

The tested party is normally the less complex of the two: the party that owns no valuable intangibles and bears no entrepreneurial risk. In most Indian inbound structures that is the local entity.

Selection fails when it is asserted instead of demonstrated. Show that the entity performs routine functions, owns no non-routine intangibles, and can be tested against available data. That is a selection. Naming the tested party is not.

How is the most appropriate method chosen?

Rule 80 of the Income-tax Rules 2026, which replaces Rule 10C of the Income-tax Rules 1962, requires the method best suited to the facts of the transaction, giving the most reliable measure of the arm’s length price.

Rule 80(2) lists six factors, and each is a place where a file is either reasoned or silent:

• 1. The nature and class of the transaction.
• 2. The class of associated enterprises and the functions performed, taking into account the assets employed and the risks assumed.
• 3. The availability, coverage and reliability of the data.
• 4. The degree of comparability between the controlled and the uncontrolled transactions, and between the enterprises entering into them.
• 5. The extent to which reliable and accurate adjustments can be made.
• 6. The nature, the extent and the reliability of the assumptions on which the method depends.

Three of those factors are themselves steps. Factor (b) is step 1, factor (c) drives step 5, and factor (e) drives step 6. Rule 79 defines the methods, from the Comparable Uncontrolled Price Method to the Other Method.

Officers reject method selection more often than any individual comparable, because the file records the outcome without the reasoning, and where nothing explains why a price-based or gross-margin method was unavailable on these facts, the step has been skipped rather than performed.

How do the remaining four steps produce the result?

The last four steps convert that framework into a defensible number. They are mechanical, and mechanical steps fail for mechanical reasons.

Which profit level indicator fits the tested party?

The indicator should reflect how the tested party actually earns its return. A cost-based indicator suits a service entity remunerated on its cost base, while a sales-based indicator suits a distributor or a reseller.

The common rejection is definitional. Where the denominator sweeps in costs that are unrelated to the tested transaction, the margin no longer compares like with like. The same follows where the numerator mixes operating and non-operating items inconsistently.

What makes a comparable search defensible?

A search is defensible when a third party can reproduce it from the file alone, which means recording the period covered and the classification applied, every filter in the order it was applied, and a stated reason against each rejected company.

Factor (c) of Rule 80(2) tests the availability, coverage and reliability of the data. Two failures dominate. The first is an undocumented strategy, where the final set appears without the funnel behind it, and the second is the retention of companies the functional analysis has already shown to be dissimilar.

Why does the choice of data years matter?

Rule 79(5) sets the conditions on which years of comparable data may be used, and the file must align the tax year under examination with the years analysed and explain the link between them.

Rejection follows where earlier-year data is used without justification, and equally where a single year is used when a wider period is called for.

Multiple-year data carries a consequence that files rarely anticipate: Rule 81(2) does not put three years of prices into the dataset. It puts one entry, a weighted average, computed on quantum of sales under the Resale Price Method, on quantum of costs under the Cost Plus Method, and on costs, sales or assets under the Transactional Net Margin Method, so eight single-year comparables can collapse to fewer than six dataset entries, and the range is lost with them.

Which economic adjustments should be computed?

Compute the adjustments the analysis has identified as material, and retain the workings. Working capital, capacity utilisation and risk differences arise most frequently in Indian analyses.

The frequent failure is silence. A study that identifies a difference, does not adjust for it and does not explain why none was required has recorded a problem without resolving it, and factor (e) of Rule 80(2) asks how far reliable adjustments can be made.

How is the arm’s length conclusion documented?

Close the study by stating the final comparable set, computing the arm’s length result, and measuring the transfer price against it.

Rule 81 provides in sub-rule (6) that a range from the thirty-fifth to the sixty-fifth percentile of the arranged data is formed where the most appropriate method is one of the four that sub-rule lists and at least six entries are available. A value within that range is treated as the arm’s length price under clause (a), and where the transfer price falls outside it, clause (b) substitutes the median. Where sub-rule (6) cannot apply, sub-rule (7) requires the arithmetical mean, subject to the prescribed tolerance not exceeding three per cent.

An incorrect price does not stop at the primary adjustment, because it can also trigger the secondary adjustment under Section 170 of the Income-tax Act 2025, formerly Section 92CE, which SBC examines in its note on secondary adjustment implications.

What documentation must support the study?

The study is supported by the documentation required under Section 171 of the Income-tax Act 2025, formerly Section 92D, and by the accountant’s report under Section 172, formerly Section 92E, while Rule 84 lists the documents to be maintained and Rule 85 prescribes the form of that report.

Why does a sound analysis still fail at documentation?

Because Rule 84 asks for documents, not conclusions. The analysis may be correct and the comparables sound while the file still fails, and that happens when the search output, the rejection matrix and the adjustment workings were never assembled into the record.

When is safe harbour an alternative to a full study?

Where a transaction falls within an eligible category and the election is validly made, the safe harbour route substitutes prescribed margins for a full benchmarking exercise, on terms SBC sets out in its guide to safe harbour rules under Indian transfer pricing regulations.

Which are the best transfer pricing firms for benchmarking studies?

No firm is best in the abstract. The studies that survive examination share one trait: the people who run the search and compute the adjustments also draft the replies to the notices.

Three kinds of firm operate in the Indian market: the large international networks such as Deloitte, PwC, Ernst & Young, KPMG and Grant Thornton, which provide scale and global coverage; established domestic practices that offer depth in Indian assessment practice; and specialist boutiques that concentrate on the benchmarking analysis itself. Which one fits depends on the shape of your related-party dealings, not on firm size.

What should you ask before appointing an adviser?

Ask to see the search documentation from a comparable engagement with client identifiers removed, because a firm that can produce a complete accept and reject matrix, the filter sequence and the adjustment workings prepares files for examination rather than for filing. Ask, second, who attends the proceedings.

What does SBC bring to a benchmarking engagement?

In 2024, ITR World Tax recognised Steadfast Business Consulting (SBC) as a Notable Transfer Pricing Firm, an independent ranking rather than a title the firm conferred on itself, and the firm was founded by Big 4 alumni whose team brings more than 150 years of combined experience.

SBC advises multinationals, Global Capability Centres and Indian groups from offices in Hyderabad, Mumbai, Pune and Dubai, and the team that prepares the analysis handles the assessment. Review the transfer pricing services in India or request a benchmarking review.

Frequently Asked Questions

Is a benchmarking study required every year?

Yes. The arm’s length price is determined for each tax year, and a study rolled forward without refreshing the data is treated as stale.

Can one study cover several related-party transactions?

It can, provided each transaction is separately characterised and benchmarked. Aggregating unrelated transactions into a single blended margin is a common ground of challenge.

What happens if the officer rejects your comparable set?

The officer can exclude companies from your set, introduce comparables of his own and recompute the result, and your ability to contest that turns on the record, because an exclusion can only be challenged where your own criteria were documented against it.

Does the accountant’s report replace the benchmarking study?

No. The report under Rule 85 is a compliance filing that reports the transactions entered into, and it does not contain the search documentation, the adjustment workings or the reasoning behind the method and the tested party, all of which sit in the Rule 84 documentation.

How many comparables does a benchmarking study need?

Six is the threshold, because Rule 81(4) allows the range only where at least six entries are available and the method is neither the Profit Split Method nor the Other Method, with the arithmetic mean applying below that number.

How early should a benchmarking study be started?

Start during the year rather than after it closes. Early work reconciles the functional analysis against conduct and leaves time to assemble the documentation.