Written by Jayasri P · Last updated 27 August 2026 · Statutory references current to the Income-tax Act 2025 and the Income-tax Rules 2026.

Quick Answer: Yes, an ESOP cross-charge belongs in the cost base where the Indian entity actually bore the expenditure. That requires a recharge arrangement covering its own employees. It stays outside where the charge is notional, never recovered, or disallowed in the return, and whichever position is taken must be applied to every comparable company.

Two questions decide most captive transfer pricing adjustments in India: what the entity actually does, and what sits in the cost base on which its mark-up is calculated. The second question is where an ESOP cross-charge does its damage.

The facts are ordinary. A parent outside India grants restricted stock or options to employees of its Indian capability centre, carries the cost in its own accounts, and recovers it by debit note. Nothing looks contentious until a Transfer Pricing Officer opens the file and asks whether the recovery should have carried a mark-up.

What is an ESOP cross-charge, and how does the debit note work?

A foreign parent recovers its cost of equity granted to the Indian subsidiary’s employees as an ESOP cross-charge. The parent issues its own shares, bears the cost of doing so, and charges that cost onward to the entity whose employees received the benefit.

The mechanism is important in that it indicates that no money changes hands at the time of the granting of the stock, since one company gives the equity and another company receives the services, so a contractual bridge has to carry the cost across the border.

What exactly does the parent recover?

Usually the difference between the market value of the shares on the date of exercise or vesting and the price the employee paid, measured employee by employee; that difference is the economic cost of the grant, and it is what most recharge agreements define as recoverable.

Some groups recover something else entirely: a parent applying an option-pricing model may recharge the accounting charge it recognised over the vesting period, a fair-value estimate resting on assumptions about volatility, attrition and expected life rather than on any realised outflow. The two figures rarely match, and that gap is the first thing a Transfer Pricing Officer looks for.

Why does the debit note matter more than the accounting entry?

Because the debit note is what turns a parent-level accounting charge into an expenditure the Indian entity has borne, whereas an entry in the profit and loss account made under a group accounting policy proves only that a cost was recognised somewhere. It does not prove that the Indian company incurred it.

A debit note raised under an agreement that predates the grant, supported by an employee-wise computation and settled by remittance, proves something quite different, and the department reads that trail as evidence of a real cost. Where it is missing, the same charge reads as a book entry.

Why does including the cost change the margin at all?

Because the cost base is the denominator. When an Indian captive receives payment based on costs incurred and is evaluated using the transactional net margin method, the profit level indicator is operating profit divided by operating expense. Therefore, the addition of even one rupee to the operating expense leads to a decrease in profit margin declared by the captive without changes in the service price.

That is the whole of the department’s interest, and deductibility is beside the point: what matters is the base. Section 165 governs the computation of the arm’s length price, while Rule 79 of the Income-tax Rules 2026 prescribes the methods and Rule 80 settles which is most appropriate.

What does the arithmetic look like?

Take a capability centre with an operating cost base of ₹100 crore before any share-based charge, a service fee of ₹115 crore, and an ESOP cross-charge of ₹8 crore.

Line item	ESOP charge outside the base	ESOP charge inside the base
Service fee received from the parent	₹115 crore	₹115 crore
Operating cost base	₹100 crore	₹108 crore
Operating profit	₹15 crore	₹7 crore
Declared margin on operating cost	15 per cent	6.48 per cent

If the arm’s length margin is 15 per cent, the fee on the larger base should have been ₹124.2 crore. The adjustment is ₹9.2 crore, produced entirely by a classification decision rather than by anything the business did differently. That is why it sits alongside characterisation in any review of transfer pricing for a GCC or captive unit.

When is an ESOP cross-charge included in the cost base, and when is it not?

The dividing line is economic incidence. Where the Indian entity actually bore the expenditure for the benefit of its own workforce, the charge is employment cost and belongs in the base, and where it did not, the charge is a parent-level cost that India neither incurred nor should be asked to mark up.

The table below sets out the two ends. Most files sit closer to one column than the other, so read down both and mark honestly which side each row falls on.

Test	Cost IS in the operating base	Cost is NOT in the operating base
Economic incidence	The Indian entity bore the cost and settled it	The parent absorbed the cost and never recovered it
Instrument	A recharge agreement in force before the grant	No agreement, or one signed after the event
Documentary trail	Debit note, employee-wise computation, remittance advice	A journal entry made on a group accounting instruction
Amount charged	The realised spread on exercise or vesting	A modelled fair value never converted into a recovery
Whose employees	Persons on the Indian payroll performing the tested service	Expatriates or parent staff, or employees of another group entity
Treatment in the return	Claimed as a deduction and defended as such	Added back in the computation of total income
Comparability	Comparable companies also carry a share-based payment charge	Comparables recognise no such charge at all
Consequence	Denominator rises, declared mark-up falls	Denominator excludes the item on both sides

What pushes a charge into the cost base?

Substance in the employment relationship. Options granted to people who perform the very services being tested are compensation, and compensation is an operating cost of delivering those services whoever issued the paper.

A capability centre competing for engineering talent in Hyderabad or Pune uses equity to recruit and to retain. The cost is incurred with the expectation of earning the service fee for itself and not for the parent.

What keeps a charge out of it?

The absence of an actual outflow. Where no debit note was raised, no remittance was made and no agreement obliged the Indian entity to pay, there is no expenditure of the Indian entity to include, and a reversal of the accounting charge in the computation usually confirms it.

Two further situations keep a charge out. Options held by seconded expatriates whose employment cost is met elsewhere do not relate to the Indian workforce. Nor does an unallocated share of a global scheme pushed down to India, because an arbitrary allocation establishes nothing.

Is the deduction question the same as the transfer pricing question?

No, and treating them as one question is the most common error in this area. Deductibility is decided under the business expenditure provisions of the Income-tax Act 2025, and for earlier years under Section 37(1) of the Income-tax Act 1961, on whether the expenditure was laid out wholly and exclusively for the purposes of the business.

Inclusion in the cost base is decided under the transfer pricing provisions, on whether the item is an operating cost of the tested transaction, so a cost can in principle be allowed as a deduction and still be argued out of the mark-up base. The reverse is equally arguable. How the benefit is taxed in the employee’s hands belongs to a third regime again, and none of the three answers settles either of the others.

What happens when the cost is disallowed and still marked up?

The taxpayer pays twice, and this asymmetry is the sharpest argument available on the transfer pricing limb. Where an assessing officer disallows the ESOP charge as expenditure and the same charge is nevertheless retained in the operating cost base, the entity loses the deduction and is required to earn a mark-up on the amount it was told it never spent.

That contention is on the public record. In an appeal by an Indian information technology enabled services provider against a disallowance of ESOP expenditure, the taxpayer argued in the alternative that the disallowed amount must at least be removed from operating expenses when the revised mark-up is computed. Whatever view is taken of the deduction, the two limbs have to be reconciled.

Must the comparables be treated the same way?

Yes, and this is the point most files miss: a margin computed on a cost base that includes a share-based payment charge, compared against companies whose accounts carry no such charge, is not a comparison at all.

Indian accounting practice on share-based payment is not uniform across the comparable set, and companies that do recognise a charge measure it on different assumptions. Taxpayers have therefore argued before the Income Tax Appellate Tribunal that, to make the comparison meaningful, the ESOP charge should be added back both to the tested party and to every comparable before the margin on cost is computed, and the symmetry point is the one worth pressing because it does not depend on winning the underlying classification argument.

Where symmetry cannot be achieved from published accounts, the alternative is an adjustment, held to the same standard as any other economic adjustment a Transfer Pricing Officer is asked to accept: quantifiable, reliable and evidenced.

What evidence decides the question?

Documents that establish who bore the cost, prepared before the dispute rather than during it. The argument is seldom won on principle, since both positions are respectable; it is won on whether the file shows a real obligation and a real payment.

Seven items carry the weight, and their absence is itself an answer:

• The group scheme document, showing what was granted and on what terms.
• The recharge or cost-sharing agreement, in force before the grant date rather than executed afterwards.
• The debit note, with the employee-wise computation supporting the amount.
• Proof of remittance, tying the debit note to an actual outflow from India.
• Payroll records establishing that the recipients performed the tested service in India.
• The intercompany service agreement, stating expressly whether the cost base includes or excludes share-based payment.
• A reconciliation between the audited financial statements, the tax computation and the working underlying the accountant’s report in Form 48.

It is in that last piece that most cases fail. The duty to maintain contemporaneous documentation is set out in Section 171 of the Income-tax Act 2025 with the requirements specified in Rule 84 of the Income-tax Rules 2026. The accountant’s report follows in Section 172. A cost base that is inconsistent across all three surfaces sets the stage for the Transfer Pricing Officer to construct one after a reference under Section 166, which is a far worse position from which to commence the argument. Preparing such a reconciliation at an early stage is transfer pricing documentation work, not litigation.

Where the amounts recur, the classification can be fixed prospectively instead of argued annually, which is one reason groups weigh the unilateral, bilateral or rollback agreement routes.

Who provides transfer pricing services for a global capability centre with an ESOP cross-charge?

Steadfast Business Consulting (SBC) provides transfer pricing services to global capability centres from offices in Hyderabad, Mumbai, Pune and Dubai. The transfer pricing practice covers documentation, benchmarking, safe harbour and advance pricing agreement strategy, and representation across judicial forums for groups whose Indian entities are remunerated on a cost-plus basis.

On this question the work is evidentiary before it is argumentative. SBC reviews the recharge documentation against the accounting treatment, tests whether the comparable set can support a symmetric adjustment, and reconciles the cost base across the financial statements, the computation and the Form 48 working.

If your capability centre carries a share-based payment recharge that has never been tested, ask our team to review the cost base before the next assessment cycle.

Frequently Asked Questions

Is an ESOP cross-charge an international transaction?

Yes, where it is between associated enterprises as defined in Section 162 of the Income-tax Act 2025 and one of them is non-resident. It then falls within the definition of international transaction in Section 163, and must be reported and priced at arm’s length whether or not it carries a mark-up.

Does a mark-up have to be charged on the recovery itself?

Not necessarily. Where the parent recovers only its actual cost and performs no service in doing so, groups commonly treat the recovery as a pass-through and charge nothing on it. The separate question is whether the same amount then sits inside the Indian entity’s own cost base for its service fee.

Does the recharge agreement have to predate the grant?

It should. An agreement executed after the grant, or after a notice is received, is far harder to present as the source of a real obligation, because departmental scrutiny focuses on whether the Indian entity was contractually bound to bear the cost at the time the benefit was conferred.

Can the ESOP charge be excluded from the comparables instead?

Where the comparable companies disclose a share-based payment charge separately, yes, and that is often the cleaner route. It removes the item from both sides of the comparison rather than arguing about which side it belongs on. The difficulty is that many Indian comparables do not disclose the figure at all.

Does electing safe harbour remove the argument?

Largely, for the years covered. An election under Section 167 of the Income-tax Act 2025, on the circumstances and margins in Rule 89 of the Income-tax Rules 2026, replaces benchmarking with a declared margin. The operating cost base still has to be computed correctly, so the definitional question does not disappear.

Is this the same as the tax on ESOPs in an employee’s hands?

No. How an option is taxed when an employee exercises it is governed by different provisions. The outcome there does not decide whether the employer’s recharge belongs in a transfer pricing cost base, and advice on one should never be read as advice on the other.

Written by Jayasri P · Last updated 27 August 2026 · Statutory references current to the Income-tax Act 2025 and the Income-tax Rules 2026.

Quick Answer: No, not automatically: you charge interest on outstanding receivables only where collection ran past the agreed credit period. Section 163(1)(c)(iii) of the Income-tax Act 2025 names a receivable as an international transaction, so the balance is reportable. Interest is not imputed where the delay is already priced inside the margin under test.

Few transfer pricing positions generate as much argument for as little money as interest on outstanding receivables. The amounts are modest against the underlying sales, the adjustment is easy for a Transfer Pricing Officer to compute from a ledger, and the taxpayer usually has a defence. Disputes here routinely outlast the money at stake.

Steadfast Business Consulting (SBC) advises on intra-group financial transactions and interest rates within its transfer pricing services in India. Where SBC defends this position, it rests on the agreed credit period rather than on the interest computation.

Is an outstanding receivable a separate international transaction?

Yes, as a matter of statutory language. The Income-tax Act 2025 lists a receivable by name, which means the balance must be identified and reported whatever position you eventually take on interest.

Where exactly does the Act name a receivable?

Inside the capital financing limb of the definition. Section 163(1)(c)(iii) of the Income-tax Act 2025, the successor to section 92B of the 1961 Act, brings within “international transaction” any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business.

That placement matters more than it looks, because a great deal of the older argument turned on whether an explanation appended to a definition could create a transaction the main provision had never contemplated, and under the Income-tax Act 2025 those words are simply part of the definition itself.

Does naming it mean interest is automatically due?

No, and conflating the two questions is the most common error in this area, because reporting duty and pricing outcome are separate enquiries. The first asks whether a transaction exists, while the second asks what an unrelated party would have charged for it, which is determined under section 165 of the Income-tax Act 2025, the provision that replaced section 92C of the 1961 Act. A transaction can be perfectly real and still carry an arm’s length price of nil.

What are the competing positions on interest on outstanding receivables?

Five arguments recur in Indian assessments, and they do not all attack the same thing. Two dispute whether the transaction exists at all, two dispute the quantum, and one disputes the comparison, so knowing which argument you are actually running is what decides the evidence you need to assemble before the first questionnaire arrives.

Position	The argument	What it turns on	Where it holds
The receivable is a separate transaction	Section 163(1)(c)(iii) lists a receivable by name within capital financing	The words of the statute	Reporting, always. The balance enters the accountant’s report whatever happens on interest
The receivable is only a consequence of the sale	Nothing was lent. The balance is the unpaid part of a supply that was already priced	Accurate delineation of what the parties did	Where collection sits inside the agreed credit period
The delay is already inside the tested margin	Extended credit depresses the operating margin that is being compared under the transactional net margin method	Whether a working capital adjustment was actually computed	Where the adjustment exists in the file, with workings
The company is debt free	No borrowing was displaced, so no funding cost was incurred	Quantum rather than existence	Against a rate benchmarked off borrowing cost, not against the transaction
Nobody was charged interest	The same credit policy governs unrelated customers	Evidenced parity of treatment	Where the third-party ageing supports the claim

Why does the agreed credit period decide the case?

Because nothing is overdue until a due date has passed. The agreed credit period is the line between an ordinary trade balance and a period of funding, and an assessment ignoring that line is attacking the sale rather than the receivable.

What if no credit period was agreed at all?

Then the Transfer Pricing Officer supplies one, and the taxpayer has surrendered the most useful fact in the file. Absent a written term, an officer will usually work from the taxpayer’s own dealings with unrelated customers or from industry practice, and the resulting benchmark is rarely generous. Drafting the credit period into the inter-company agreement before the year begins costs nothing and removes the argument.

Must the same credit period apply to third parties?

It does not have to, but the difference has to be explicable. Where an Indian exporter allows an associated enterprise two hundred and forty days and unrelated customers sixty days, the gap is the case against it, and no amount of documentation on the sale price will answer that. Where the ageing profile is genuinely similar across related and unrelated customers, the parity argument is strong and evidenced from the ledger itself.

When is notional interest imputed on a receivable?

When collection ran beyond the agreed period and the cost of that delay is not already reflected in the price or the margin under test. Both conditions must fail before an adjustment properly arises, so an officer computing interest from the invoice date rather than from the expiry of the credit term has already overreached.

What counts as the funded period?

Only the excess. Interest runs from the day after the agreed credit period expires to the day the money was received, invoice by invoice and never from the invoice date, and the distinction is arithmetic rather than legal though it routinely halves an adjustment.

• The agreed credit term, taken from the inter-company agreement rather than from the invoice
• The actual receipt date for each invoice, reconciled to the bank
• The excess days, computed per invoice and never on a closing balance
• The currency in which the invoice was raised
• Any advance or credit note that reduced the balance before it aged

Which interest rate applies to an outstanding receivable?

The rate that belongs to the currency in which the invoice was raised. An interest rate is a property of the currency rather than of the party carrying the balance, so a receivable denominated in United States dollars is funded at a dollar market rate, and one raised in rupees at a rupee rate.

Why does a domestic lending rate overstate a foreign currency invoice?

Because it prices money the taxpayer never borrowed. Applying an Indian lending benchmark to a dollar invoice imports the rupee risk premium into a dollar exposure, and that gap is often the larger part of the adjustment. Where the invoice was raised in a foreign currency, the choice of benchmark is among the first points worth testing in an objection.

Does the statute itself distinguish the two currencies?

It does, in an adjacent provision. Rule 83(2) of the Income-tax Rules 2026 prescribes the interest on the deemed advance that follows a secondary adjustment, and it splits that calculation by denomination. A rupee transaction takes the one-year marginal cost of fund lending rate of the State Bank of India plus 325 basis points, while a foreign currency transaction takes the reference rate of the relevant currency plus 300 basis points.

Those figures do not govern the primary imputation on a receivable, and nobody should present them as though they did, but what they establish is the drafting principle that currency of denomination rather than residence of the party selects the benchmark.

Does a working capital adjustment answer the receivables argument?

It can, and it is the strongest defence available where the tested party is benchmarked on its operating margin, because the argument is that an extended collection cycle has already depressed the very margin being compared and charging interest separately therefore taxes the same economic effect twice.

What makes the argument fail in assessment?

Assertion in place of computation: taxpayers frequently claim the margin absorbs the delay without ever having run the adjustment. An uncomputed adjustment is no adjustment at all. Where the working capital adjustment sits in the file with its interest rate sourced from a published benchmark and applied uniformly across every comparable in the set, the double-counting argument becomes difficult for a Transfer Pricing Officer to answer. The evidence each adjustment requires is set out in our note on which economic adjustments a Transfer Pricing Officer will accept.

What can a debt-free company argue?

That it displaced no borrowing and therefore incurred no funding cost. An Indian entity carrying no external debt has funded the receivable from its own resources. No interest expense exists against which the delay can be measured.

Does being debt free defeat the transaction or only the rate?

Principally the rate. The arm’s length test asks what an independent party would have charged, not what the delay cost the taxpayer, so an absence of borrowing does not remove a transaction the statute names. What it defeats is any rate built on the taxpayer’s own cost of funds, and it supports arguing the imputation down towards a deposit return rather than a lending rate. That is the footing on which the argument is regularly run, and it belongs alongside the working capital point rather than in place of it.

What are the reporting and penalty consequences?

Reporting is mandatory and cheap; omission is expensive. The receivable balance is reported in the accountant’s report obtained under section 172 of the Income-tax Act 2025, on Form 48, and the analysis supporting whatever interest position you have taken is kept under section 171 read with Rule 84 of the Income-tax Rules 2026.

Failure to report carries exposure that is entirely separate from the pricing argument, because section 442 of the Income-tax Act 2025 allows a penalty of 2% of the value of each international transaction where a person fails to keep the prescribed documentation, fails to report the transaction, or furnishes incorrect information. That penalty applies whether or not any interest adjustment is ultimately sustained.

Does a receivables adjustment trigger a secondary adjustment?

Only above the threshold. Section 170 requires a secondary adjustment where the primary adjustment is ₹1 crore or more, and the unrepatriated excess is then deemed an advance carrying imputed interest, unless the taxpayer opts to pay additional income-tax at 18% instead; most receivables adjustments fall below ₹1 crore and stop there, which is one reason the dispute so often outlives the amount at stake. The mechanics are covered in our note on the implications of a secondary adjustment.

Frequently Asked Questions

Is an interest-free receivable from an associated enterprise reportable?

Yes. Section 163(1)(c)(iii) of the Income-tax Act 2025 names a receivable as an international transaction, and the reporting duty follows the transaction rather than any income arising from it, so the balance enters Form 48 whether or not interest was ever charged on it.

Is there a standard credit period for associated enterprise receivables?

No. The Act prescribes none, and what governs instead is the period the parties agreed in writing, tested against the terms the same taxpayer allows its unrelated customers. Where nothing was agreed, the Transfer Pricing Officer supplies a benchmark, which is why the clause is worth drafting in advance.

Do the safe harbour rules cover interest on receivables?

No. Rule 88 of the Income-tax Rules 2026 lists the eligible international transactions, and an outstanding trade receivable is not among them. Advancing an intra-group loan is covered, but a receivable arising from trade is a different transaction and no safe harbour route exists for it.

Can interest be imputed from the invoice date?

It should not be. Interest properly runs only from the day after the agreed credit period expires until the date of receipt, computed invoice by invoice. An adjustment measured from the invoice date, or from a closing balance, overstates the funded period and is open to objection on that ground alone.

Does a receivable have to be benchmarked separately from the sale?

Not where the tested party is benchmarked on its operating margin and a working capital adjustment has been computed, because that adjustment already reflects the collection cycle. Separate benchmarking becomes necessary where no adjustment was made, or where the delay falls well outside normal trade terms.

What rate applies to a receivable denominated in foreign currency?

A rate drawn from that currency’s market, at a tenor matching the funded period. Applying an Indian rupee lending benchmark to a dollar or euro invoice imports a risk premium the exposure does not carry, and inflates the adjustment accordingly.

Written by Jayasri P · Last updated 27 August 2026 · Statutory references current to the Income-tax Act 2025 and the Income-tax Rules 2026.

Quick Answer: A third-party contract becomes a deemed international transaction under Section 163(2) of the Income-tax Act 2025. It applies where a prior agreement covering that transaction exists between the third party and your associated enterprise, or where the associated enterprise sets its terms in substance. The deeming rule applies no foreign-counterparty test.

What makes a contract with an unrelated party a deemed international transaction?

One of two conditions. Either a prior agreement in relation to that same transaction exists between the unrelated party and your associated enterprise, or the terms of that transaction are determined in substance between the unrelated party and your associated enterprise. Either limb, standing alone, is enough, and nothing else needs to be present.

The contract in front of you can be signed in Hyderabad, denominated in rupees, performed entirely in India, negotiated by your own procurement team and settled through an Indian bank account, and it can still be pulled into the transfer pricing provisions of Chapter X. The deeming rule looks past the counterparty on the signature page to the arrangement standing behind it.

Which two conditions trigger Section 163(2)?

The first condition is a prior agreement, which Section 163 of the Income-tax Act 2025 requires to exist “in relation to the relevant transaction” between the other person and the associated enterprise, meaning that a general framework arrangement touching some other supply does not, by itself, catch your contract.

The second condition is substantive control of terms, and where “the terms of the relevant transaction are determined, in substance, between such other person and the associated enterprise”, the deeming applies even though no prior agreement was ever signed. Price grids issued by an overseas parent, volume commitments made at group level and rate cards negotiated centrally all fall here.

The word that does the work in the second limb is “substance”, which is not satisfied by a recommendation your Indian entity was genuinely free to reject, and which is not defeated by the fact that your own local team executed the paperwork.

Does the counterparty have to be a non-resident?

No. The residence condition attaches to your enterprise and to the associated enterprise, not to the third party. The statute is explicit that the rule operates “irrespective of whether such other person is a non-resident or not”.

This is the single feature that causes groups to miss the exposure. Finance teams screen their contract population for foreign counterparties, find none, and conclude that transfer pricing is not engaged. The screen is looking at the wrong party.

How does a deemed international transaction differ from an actual one?

Only at the entry test. Once the deeming applies, every downstream obligation is identical, which is why the distinction matters for detection and for almost nothing else.

Point of comparison	Actual international transaction	Deemed international transaction
Governing provision	Section 163(1) of the Income-tax Act 2025	Section 163(2) of the Income-tax Act 2025
Parties on the contract	Two associated enterprises	Your enterprise and an unrelated person
What creates the link	The associated-enterprise relationship in Section 162	A prior agreement with your associated enterprise, or terms it sets in substance
Residence of the counterparty	The relationship itself carries the cross-border element	The unrelated person may be resident or non-resident
How it is found	Visible from the group structure chart	Found only by reading the contract chain behind the counterparty
Reporting	Reported with the associated-enterprise transactions	Reported separately from the associated-enterprise transactions
Arm’s length obligation	Section 165	Section 165, identical
Documentation	Section 171 with Rule 84 of the Income-tax Rules 2026	Section 171 with Rule 84, identical
Penalty exposure	Section 442	Section 442, identical

Where do the two treatments converge?

At every point after identification. The arm’s length price is computed under Section 165 using the most appropriate method selected under Rule 80 of the Income-tax Rules 2026, the file is maintained under Section 171 with Rule 84, and the accountant’s report is furnished under Section 172. A Transfer Pricing Officer to whom the case is referred under Section 166 examines a deemed transaction on exactly the same footing as a related-party one.

That convergence is the practical point. Groups sometimes assume that a deemed transaction attracts a lighter documentation standard on the reasoning that the counterparty is genuinely independent, and it does not. The benchmarking, the functional analysis and the supporting documentation are all required at full strength.

What changed when the Income-tax Act 2025 replaced Section 92B(2)?

The numbering and the location changed, but the test did not. The deeming fiction that sat at Section 92B(2) of the Income-tax Act 1961 now sits at Section 163(2) of the Income-tax Act 2025, with both limbs and the residence clause carried across in substantially the same words.

Much of the guidance still in circulation explains this concept under the 1961 numbering, because that numbering held for more than a decade and the 2025 Act is recent. The substance of what you must test has not moved, so an old note is not misleading on the law. It is simply no longer the reference an officer, a form or a rule will use.

Which numbering should a filing carry now?

The 2025 Act numbering, throughout. The consequential provisions moved with the definition, and a file that still cites the old sequence will not reconcile against the form it supports.

Concept	Income-tax Act 1961	Income-tax Act 2025
Deemed international transaction	Section 92B(2)	Section 163(2)
Reference to the Transfer Pricing Officer	Section 92CA	Section 166
Documentation to be maintained	Section 92D	Section 171
Report from an accountant	Section 92E	Section 172
Penalty for failure to keep, maintain or report	Section 271AA	Section 442

The accountant’s report itself was renumbered in the same exercise, so Form 3CEB became Form 48, prescribed under Rule 85 of the Income-tax Rules 2026, and it remains the report through which a deemed transaction is disclosed to the department. Form 48 applies for tax year 2026-27 onwards; for earlier years, including financial year 2025-26, the report continues to be furnished as Form 3CEB under the Income-tax Act 1961.

Which arrangements most often turn out to be deemed international transactions?

Five are common across Indian subsidiaries of foreign groups, and each appears entirely domestic on its face.

A domestic supply contract negotiated by the overseas parent and signed locally. Your Indian entity holds the paper and pays the invoice, but the commercial terms were settled between the parent and the supplier before your team was involved.

A global master services agreement drawn down through a local purchase order. The framework agreement is the prior agreement; the purchase order is the relevant transaction.

A sale to an unrelated Indian distributor where the foreign associated enterprise has fixed the pricing grid, so that the counterparty is Indian, the currency is the rupee, and the second limb is nonetheless satisfied.

A contract manufacturing arrangement where the associated enterprise has agreed volumes and rates directly with the third-party manufacturer, leaving your entity to administer the relationship.

A group-wide framework for software licences, insurance cover or logistics, invoiced to and paid by the Indian entity on terms nobody in India negotiated.

What happens if a deemed international transaction goes unreported?

Two exposures open at once. Section 442 imposes a penalty of 2% of the value of each international transaction where the taxpayer fails to keep and maintain the information and document required by Section 171(1), and a separate limb of the same section applies where the taxpayer fails to report a transaction that was required to be reported.

The second exposure is the adjustment itself, because an unreported transaction has no benchmarking behind it, so when the Transfer Pricing Officer identifies it there is no arm’s length analysis on record to defend the price that was actually charged.

Both outcomes arise from a failure that was hardly intentional, as the transaction appeared in the financial statements, was registered in the general ledger and had never been a secret to anyone, but has just not been acknowledged as reportable, which classifies it as a documentation problem and not a pricing issue. The wider penalty framework for transfer pricing non-compliance sets out how these provisions interact.

How should you screen third-party contracts before the filing date?

Work backwards from the counterparty to the negotiation, and four steps will cover most contract portfolios.

First, list every contract above a value threshold your group considers material, including purely domestic ones. Second, for each, identify who negotiated the commercial terms and whether any entity outside India approved them. Third, ask whether a framework, master or umbrella agreement exists between that counterparty and any group entity. Fourth, treat every affirmative answer as a candidate and document the conclusion either way.

Recording the negative conclusions matters as much as recording the positive ones, because a contract you examined and correctly excluded is defensible while a contract nobody looked at is not, and that distinction only becomes visible during an assessment.

Note also that a deemed transaction is not the same thing as a specified domestic transaction under Section 164. The two are frequently confused because both involve Indian parties, but they arise from different provisions and are reported differently.

If you would like your contract population reviewed before the next reporting cycle, the transfer pricing team at SBC can run that screen, and you can reach the firm directly to scope it.

Frequently Asked Questions

What is a deemed international transaction in simple terms?

It is a transaction with an unrelated party that the law treats as though it were between associated enterprises. Section 163(2) of the Income-tax Act 2025 applies this treatment where a prior agreement exists between that party and your associated enterprise, or where the associated enterprise determines the terms in substance.

Can two Indian companies have a deemed international transaction?

Yes. The residence condition attaches to your enterprise and its associated enterprise, not to the third party. Where a foreign associated enterprise has set the terms or holds a prior agreement with the Indian counterparty, a rupee contract between two Indian companies falls inside Section 163(2). Nothing on that contract looks cross-border, which is why this limb is most often missed.

Which section replaced Section 92B(2) of the Income-tax Act 1961?

Section 163(2) of the Income-tax Act 2025. Both limbs of the old provision, and the clause confirming that the residence of the third party is irrelevant, were carried into the new section in substantially the same language.

Does a deemed international transaction go into Form 48?

Yes, in the accountant’s report furnished under Section 172. The transaction is reported separately from the associated-enterprise transactions, with the unrelated counterparty identified in its own right.

Is the documentation requirement lighter for a deemed transaction?

No. Section 171 read with Rule 84 of the Income-tax Rules 2026 applies in full, and the arm’s length price is determined under Section 165 using the most appropriate method. The independence of the counterparty does not reduce the standard.

What penalty applies if the transaction is never reported?

Section 442 provides for a penalty of 2% of the value of each international transaction where the required information and document are not kept and maintained, and a further limb applies where a reportable transaction is not reported. A pricing adjustment may follow separately.

Written by Jayasri P · Last updated 26 August 2026 · Statutory references current to the Income-tax Act 2025 and the Income-tax Rules 2026.

Quick Answer: India APA statistics show 219 advance pricing agreements signed in FY 2025-26, the highest in any year since 2012. Cumulative signings by the Central Board of Direct Taxes reached 1,034, comprising 750 unilateral and 284 bilateral agreements. Annual output has more than doubled since FY 2022-23.

Much of the discussion about advance pricing agreements is procedural in nature. The different forms and stages are explained, along with the statutory tests that must be passed. However, the reader is left uncertain whether this is a genuine route or just a theoretical one.

The question is answered directly by the published figures, because each year the Central Board of Direct Taxes publishes the APAs it has signed, and those reports are the only authoritative record of how the programme has been performing. This article makes use of the India APA statistics and approaches them as a buyer would, which means asking what the volumes, the unilateral and bilateral split and the direction of travel mean for a company deciding whether an application is worth making.

Every statistic mentioned in this article is drawn from a CBDT publication. In the absence of any relevant figure being published by the Board, this article says so rather than offering an estimate.

How many APAs has India signed in total?

Since the programme began, India has signed a total of 1,034 advance pricing agreements. The CBDT press release recording 219 signings in FY 2025-26 states that the cumulative total has crossed the one-thousand mark, aggregating to 1,034 agreements, comprising 750 unilateral APAs and 284 bilateral APAs.

That is the whole population of Indian advance pricing agreements, accumulated over roughly fourteen years of operation, and it is the denominator against which every other figure in this article should be read.

The number matters because it establishes scale. A programme that had concluded a few dozen agreements would be an experiment that no board should stake a compliance position on, and one that had concluded several thousand would be a routine administrative process available to almost any applicant, whereas a thousand agreements over fourteen years describes something in between: an established mechanism that remains selective and resource-intensive on both sides, and that distinction shapes the decision you are making.

How many APAs were signed in each of the last four years?

Annual signings have risen in each of the last three years, from 95 in FY 2022-23 to 219 in FY 2025-26. The table below carries every year-on-year figure the Board has published for that period.

Financial year	APAs signed	Bilateral (BAPA)	Unilateral (balance)
FY 2022-23	95	Not separately published	Not separately published
FY 2023-24	125	Not separately published	Not separately published
FY 2024-25	174	65	109
FY 2025-26	219	84	135

The figures for FY 2022-23 and FY 2023-24 have been extracted from CBDT press release on the 174 agreements signed in FY 2024-25 which states that in FY 2023-24 a total of 125 agreements have been signed by the Board while for FY 2022-23 a total of 95 agreements were signed. The bilaterals for the last two fiscal years have been provided by the Board and the unilateral figure is simply a mathematical representation of the bilateral data given.

When you think of the trajectory as a series, it is clear that the annual output has more than doubled in the past three years, and every year’s output is more than that of the previous one.

Why did FY 2025-26 set a record?

The Board describes FY 2025-26 as its highest ever APA signings in any financial year since the programme began. The same release records 84 bilateral agreements signed during the year, exceeding the previous record of 65 bilateral agreements set in FY 2024-25.

Two things therefore happened at once. Total throughput rose, and the harder category of agreement rose faster than the easier one.

CBDT also links the APA framework to the safe harbour regime, noting that safe harbour rules complement the APA framework by offering a faster and lower-cost alternative route to transfer pricing certainty. The two mechanisms are presented as parts of one certainty architecture rather than as competitors, which is worth holding in mind when you assess which route suits a particular transaction.

What does the unilateral and bilateral split tell you?

The cumulative split is 750 unilateral to 284 bilateral, so roughly 27 per cent of all Indian APAs are bilateral. In FY 2025-26 alone, 84 of 219 agreements were bilateral, which is closer to 38 per cent.

The bilateral share of new agreements is therefore materially higher than the bilateral share of the historic stock, which tells you that the mix has shifted rather than simply that the totals have grown, and mix is the part of this dataset that carries a commercial consequence for a cross-border group.

One further detail is visible in the published breakdowns. The cumulative position reported at the close of FY 2024-25 was 815 agreements, comprising 615 unilateral APAs, 199 bilateral APAs and one multilateral APA, whereas the cumulative breakdown published a year later reports only two categories. The multilateral agreement is no longer shown separately.

Why does the rising bilateral share matter to you?

A bilateral agreement is the only version that removes double taxation on both sides of a transaction, because it binds the Indian administration and the competent authority of the treaty partner together. A unilateral agreement settles the Indian position alone and leaves the counterparty jurisdiction free to take a different view of the same profit.

The rising bilateral count is consequently the most useful single number in the dataset for a cross-border group. It indicates that treaty negotiations are concluding at a faster rate than before, which is precisely the constraint that historically made groups settle for a unilateral agreement they knew to be incomplete, and it suggests that the practical objection to the bilateral route has weakened even though the procedural burden of that route has not changed. The burden is real. The evidence now sits on the other side of it.

If your exposure sits in the gap between two administrations, the published trend argues for testing the bilateral route rather than assuming it will stall. Our guide to choosing between a unilateral, bilateral or rollback route sets out the conditions under which each option is appropriate.

How do you choose the best transfer pricing firms for APA and dispute resolution?

In the abstract, no firm stands out as the best, and anyone who suggests otherwise is giving a marketing answer instead of addressing your question. The right approach is to evaluate the prospective firm against the specific case you are planning to start based on information you can verify ahead of hiring anybody.

Five criteria separate advisers who can carry an APA from advisers who can only describe one.

• Demonstrated APA and competent-authority experience, not general transfer pricing experience. A bilateral application requires the adviser to support a negotiation between two administrations, which is a different discipline from preparing documentation.
• Independent recognition rather than self-description. A published third-party ranking is evidence; a claim on a website is not.
• Continuity of the team across the full term. An APA runs for years and carries annual compliance obligations after signature, so the people who built the position should still be available when it is administered.
• Depth in your transaction type. Benchmarking a captive services centre and pricing an intangible are not interchangeable skills.
• Capacity to handle the alternative route. If the application does not conclude as expected, the same adviser should be able to run the assessment, appeal or mutual agreement procedure that follows.

Providers fall into recognisable categories, and each category answers a different need. Global network firms offer coverage across many jurisdictions at a corresponding cost, established domestic practices offer breadth across Indian tax without that international footprint, and specialist transfer pricing boutiques concentrate on a narrower field, which usually places them closer to rule changes as those changes occur.

Steadfast Business Consulting (SBC) sits in the third category. SBC was founded by Big 4 alumni, the team page records more than 150 years of combined experience, and ITR World Tax named the firm a Notable Transfer Pricing Firm 2024, which is a third-party assessment rather than a self-description. The firm operates from Hyderabad, Mumbai, Pune and Dubai.

What does the trend mean if you are deciding whether to apply?

The data supports applying if you have a recurring, material related-party transaction that will repeat across several years, and it does not support applying if your exposure is one-off or small enough that the cost of the process would exceed the certainty it buys. Rising throughput reduces the historic objection to the programme, which was never about the law but about whether an application would ever conclude.

An advance pricing agreement is governed by Section 168 of the Income-tax Act 2025, which carries forward the framework introduced in 2012 through Sections 92CC and 92CD of the Income-tax Act 1961. The statutory route is settled; the question the statistics answer is a practical one about throughput.

Three implications follow from the series.

First, the programme is scaling rather than contracting, so an application filed now enters a system that concluded 219 agreements in the most recent year rather than the 95 it concluded three years earlier, and the capacity an applicant meets on entry is the single administrative variable that has changed most over that period. Second, bilateral capacity is expanding faster than unilateral capacity, which changes the calculation for groups whose real risk is double taxation rather than an Indian adjustment. Third, the Board is presenting APAs and safe harbour together, so the choice between them should be made deliberately rather than by default.

None of that removes the need to assess your own facts. It does mean that the throughput objection is weaker than it was, and the application process itself is the next thing to understand once the decision in principle is made.

What do the numbers not tell you?

The published statistics report agreements signed, not applications filed, and CBDT does not publish a completion rate in these releases, which means the series describes what the programme produced in a year and not what it received. A count of outputs is not a measure of how long any individual application took, nor of how many applications were withdrawn, rejected or remain pending at the year end.

They also say nothing about your transaction. The volume trend describes the administration’s capacity, whereas the merits of your case depend on functional analysis, the comparability of the data available and the treaty relationship involved.

Treat the figures as evidence about the route, and never as a prediction about your own file.

If you are weighing an application or already managing an agreement in force, SBC’s transfer pricing practice advises on APA strategy, and the same team handles the representation work that arises where certainty has to be achieved through a dispute instead. To test the programme against your own facts, scope an application with our transfer pricing team.

Frequently Asked Questions

How many APAs did India sign in FY 2025-26?

CBDT signed 219 advance pricing agreements in FY 2025-26. The Board records this as the highest number of APA signings in any financial year since the programme began, and it includes both unilateral and bilateral agreements.

How many APAs has India signed since the programme began?

India has signed 1,034 advance pricing agreements in total, comprising 750 unilateral APAs and 284 bilateral APAs. The cumulative figure crossed one thousand during FY 2025-26, having stood at 815 agreements one year earlier.

How many of India’s APAs are bilateral?

284 of the 1,034 agreements signed to date are bilateral, which is roughly 27 per cent of the total. The share is higher among recent signings: 84 of the 219 agreements concluded in FY 2025-26 were bilateral.

When did India’s APA programme start?

The programme was launched in 2012, when the Finance Act 2012 inserted Sections 92CC and 92CD into the Income-tax Act 1961. Advance pricing agreements are now governed by Section 168 of the Income-tax Act 2025, which carries the framework forward.

Which provision governs advance pricing agreements now?

Section 168 of the Income-tax Act 2025 governs advance pricing agreements. Section 169 governs how an agreement takes effect once signed and requires a modified return, so that the position filed matches the agreement reached with the Board.

Does a rising APA count mean applications are processed faster?

Not necessarily. The releases report agreements signed in a year, not the time each application took. A higher annual count indicates greater administrative throughput, but it is not a published processing time and should not be read as one.

Written by Jayasri P · Last updated 26 August 2026 · Statutory references current to the Income-tax Act 2025 and the Income-tax Rules 2026.

Quick Answer: A mark-up not exceeding 5% applies under the Rule 89 safe harbour, but India prescribes no single mark-up otherwise. The safe harbour requires the charge to stay within ₹10 crore and an accountant to certify the cost pooling. Everything outside it is benchmarked.

What separates a low value-adding service from a high value service?

The classification turns on the character of the activity, not on the size of the charge. A service costing ₹50 lakh can be high value, and a service costing ₹8 crore can be low value-adding. The definition asks what the activity is, not what it costs.

Steadfast Business Consulting (SBC) prices intra-group services, management charges and cost contribution arrangements within its transfer pricing services in India. In the charges SBC reviews, the exclusion list decides the classification more often than the mark-up does.

Rule 86 of the Income-tax Rules 2026 defines low value-adding intra-group services as services performed by one or more members of a multinational enterprise group on behalf of other members of the same group, which meet every one of six conditions:

• they are in the nature of support services;
• they are not part of the core business of the group, meaning they neither constitute the profit-earning activities nor contribute to the economically significant activities of the group;
• they are not shareholder services or duplicate services;
• they neither require the use of unique and valuable intangibles nor lead to the creation of them;
• they neither involve the assumption or control of significant risk by the service provider nor give rise to significant risk for that provider; and
• they do not have reliable external comparable services that can be used to determine an arm’s length price.

Every condition must hold. Fail one and the service is not low value-adding, whatever the invoice says, and whatever the group calls it in its intercompany agreement.

Which services does the definition exclude outright?

Ten categories are excluded by name, which makes the exclusion list far more decisive in practice than the six conditions above.

Rule 86 removes research and development services, manufacturing and production services, information technology services in the nature of software development, knowledge process outsourcing, business process outsourcing, purchasing activities for raw materials or other materials used in manufacturing or production, sales and marketing and distribution activities, financial transactions, extraction and exploration and processing of natural resources, and insurance and reinsurance.

That list captures most of what an Indian entity in a global group actually receives. A shared services centre supplying software development is excluded even where the work is entirely routine.

How does the OECD simplified approach price these services?

The OECD offers an elective shortcut rather than a rule. Under the simplified approach in Chapter VII of the OECD Transfer Pricing Guidelines, a group that pools the costs of qualifying low value-adding services applies a standard mark-up of 5% to the relevant cost base, and that mark-up does not need to be supported by a benchmarking study.

The same mark-up applies to every category of qualifying service, so a group does not calculate one figure for payroll support and a different figure for accounting support.

The trade-off is documentation. The simplified approach relieves the group of the benchmarking exercise, and in exchange it expects a coherent cost pool, allocation keys that can be explained, and a benefit test applied at the category level rather than transaction by transaction.

The OECD has since run a public consultation on revisions to Chapter VII, so groups relying on the simplified approach should expect the surrounding guidance to move even where the 5% figure does not.

Does India accept the OECD simplified approach?

India runs its own route, and its published position stops short of saying that the route follows Chapter VII. The instrument is a safe harbour made under Section 167 of the Income-tax Act 2025, which carries forward the safe harbour power previously at Section 92CB, and it is domestic law rather than an adoption of OECD guidance.

The distinction matters commercially. A safe harbour is a statutory election the department can reject on its own conditions; a simplified approach in the Guidelines is interpretive material that an officer may or may not find persuasive.

What has India told the OECD about its own position?

India’s answers are published, and they are narrower than they first appear. In its transfer pricing country profile submitted to the OECD, India records that Indian transfer pricing law does not explicitly recognise the direct applicability of the OECD Guidelines, and that India has framed its own rules broadly in line with them.

When it comes to intra-group services alone, the same profile indicates that India does not have guidance for such transactions but uses the most appropriate method for each transaction based on its facts.

Asked whether it has a simplified approach for low value-adding intra-group services, India answered yes, and then described its safe harbour rule rather than the OECD approach.

One point deserves care. The current country profile template asks a second question, namely whether the domestic simplified approach follows the low value-adding services approach in Chapter VII, and India’s profile was last updated before that question existed. So there is no published Indian answer to it, and a group should not read the earlier yes as an adoption of the OECD approach.

Which conditions attach to the Indian safe harbour?

Four conditions, and each of them is a place where the shelter is commonly lost.

The first is quantitative. Under Rule 89, the aggregate amount of the low value-adding intra-group services during the tax year, including the mark-up, must not exceed ₹10 crore, so the cap swallows the mark-up rather than sitting above it.

The second is the certificate, because the method of cost pooling, the exclusion of shareholder costs and duplicate costs from the cost pool, and the reasonableness of the allocation keys used to allocate costs to the Indian entity must all be certified by an accountant.

The third is direction. Rules 87 and 88 extend the safe harbour to an assessee that is in receipt of low value-adding intra-group services from members of its group, which means an Indian entity supplying such services to the group receives no shelter at all from this entry.

Location is the fourth factor: Rule 92 withdraws the entire safe harbour block when the associated enterprise is located in a country covered by Section 176, or in any no-tax or low-tax country or territory defined by the maximum level of income tax equal to or lower than 15%.

There is also a cost to electing. Rule 93 provides that once a declared transfer price is accepted under the safe harbour, the assessee may not invoke the mutual agreement procedure under a tax treaty, so the shelter is bought by giving up the mutual agreement procedure route if the other jurisdiction later disagrees.

How does the treatment differ between low value-adding and high value services?

The two sit on entirely different machinery, and the table below sets out where they part company.

Feature	Low value-adding intra-group services	High value intra-group services
Governing provision	Section 167, with Rules 86 to 93	Section 165, with Rules 79, 80 and 81
How the mark-up is fixed	Prescribed. Not exceeding 5%, if the safe harbour is elected	Derived. Whatever the benchmarking evidence supports
Benchmarking study	Not required inside the safe harbour	Required, using the most appropriate method
Ceiling on the charge	₹10 crore in the tax year, inclusive of the mark-up	None
Certification	An accountant must certify cost pooling, cost exclusions and allocation keys	No separate certificate beyond the accountant’s report
Direction of the transaction	Receipt by the Indian entity only	Either direction
How it is claimed	Elected by furnishing Form No. 49 under Rule 90	Applied by default, no election
Where the counterparty may sit	Not a notified or a no tax or low tax territory	Anywhere
Effect on treaty relief	Mutual agreement procedure barred once accepted	Mutual agreement procedure remains available

Read across the middle row and the commercial choice becomes clear. A group with a ₹4 crore support charge is weighing a fixed 5% against the cost and the uncertainty of a study, while a group with a ₹40 crore charge has no choice to make.

Both columns still assume the charge is payable at all. Whether the activity conferred an identifiable benefit is a prior question, answered in our note on the benefit test for intra-group services.

What does a Transfer Pricing Officer test when the classification is disputed?

The officer tests the classification before the mark-up. Reclassifying a service out of the low value-adding category defeats the safe harbour without any argument about pricing.

Three lines of attack recur. The service is said to fall in one of the ten excluded categories. The cost pool is said to contain shareholder or duplicate costs, which breaks the third condition in Rule 86 and the certificate at the same time. Or the aggregate is said to exceed ₹10 crore once the mark-up and the reimbursements are added back.

Why does the exclusion list decide most disputes?

Because it is a question of fact with a published answer, and the officer does not need economic analysis to reach it.

Arguing that a service is not economically significant invites a debate about the group’s business model. Arguing that a service is not software development, not marketing and not procurement is a much narrower exercise, and the file either describes the activity precisely or it does not.

This is where a service register earns its keep. A group that records what each activity was, who performed it and which category it belongs to has already answered the officer, whereas a group that produces a single line on an invoice is inviting the officer to choose the category for it.

Where the charge falls outside the safe harbour, the analysis reverts to the ordinary route. The choice among the prescribed methods is set out in our guidance on which transfer pricing method applies. The related question of what mark-up a broader management charge can sustain is covered separately in our note on management fee mark-ups.

What should you check before the next service charge is priced?

Start with the classification, not the mark-up. Take each activity in the current charge and test it against the ten excluded categories first, since a single excluded activity inside a pooled charge can remove the whole pool from the safe harbour.

Then total the charge including the mark-up and any reimbursements, and see how much headroom remains below ₹10 crore. A group sitting at ₹9.4 crore should know that now rather than in an assessment.

Finally, decide whether the election is worth its price in a year where a counterparty adjustment is plausible. Groups reviewing their inbound service charges are welcome to raise the classification with our transfer pricing specialists before the next intercompany invoice.

Frequently Asked Questions

Is the Indian 5% mark-up the same as the OECD 5% mark-up?

The figure coincides, the mechanism does not. India’s 5% is a ceiling inside a safe harbour elected under Rule 89, subject to a ₹10 crore cap and an accountant’s certificate. The OECD figure is a standard mark-up within interpretive guidance.

Does the safe harbour apply if my Indian company provides the services?

No. Rules 87 and 88 extend this entry to an assessee in receipt of low value-adding intra-group services from members of its group. An Indian entity supplying such services to the group is outside this category and must price the transaction under the ordinary rules.

What happens if the charge exceeds ₹10 crore?

The safe harbour is unavailable for that year and the charge is priced under Section 165 using the most appropriate method. The cap applies to the aggregate amount including the mark-up, so total the charge carefully before electing.

Does electing the safe harbour affect treaty relief?

Yes. Rule 93 provides that where the declared transfer price is accepted under Section 167, the assessee may not invoke the mutual agreement procedure under a double taxation avoidance agreement. That matters where the counterparty jurisdiction may make its own adjustment.

Which rule now carries the definition?

Rule 86 of the Income-tax Rules 2026 carries the definitions for the international transaction safe harbour, replacing Rule 10TA of the Income-tax Rules 1962. The circumstances and the margins sit at Rule 89, and the election procedure with Form No. 49 sits at Rule 90.

Can services be split so that part of the charge qualifies?

Only where the underlying records support the split. Each activity must be identified and tested separately, with excluded activities and their costs kept out of the pool. A split asserted after the year has closed, without a contemporaneous service register, is difficult to sustain.

Written by Jayasri P · Last updated 26 August 2026 · Statutory references current to the Income-tax Act 2025 and the Income-tax Rules 2026.

Quick Answer: Transfer pricing in an Indian pharmaceutical group pays each entity for what it actually does. A contract research unit earns a cost-based margin, a contract or loan-licence manufacturer a routine manufacturing return, and a distributor a distribution margin. The residual profit follows the entity that owns and controls the product intangible under Section 165 of the Income-tax Act 2025.

Transfer pricing for pharmaceutical companies is unusually contested because the same molecule passes through three or four related parties before it reaches a patient, with research sitting in one entity, active ingredient and formulation manufacturing in another, and promotion to prescribers in a third. Each step generates a claim on profit, and Indian transfer pricing decides how much of that claim each entity may keep.

Transfer pricing advisory services in India: what does a pharmaceutical group need?

A pharmaceutical group needs three things from a transfer pricing adviser: a defensible characterisation of every Indian entity, a benchmarking file supporting the margin each one reports, and a documented position on who owns the product intangible. Method selection matters far less than characterisation, because comparable data cannot rescue a file that has assigned the wrong role to the entity it is testing.

Steadfast Business Consulting (SBC), recognised as a Notable Transfer Pricing Firm 2024 by ITR World Tax and founded by Big 4 alumni, lists contract manufacturing arrangements, royalty structures and research and development cost allocation among the pharmaceutical matters covered by its transfer pricing services in India, alongside documentation, benchmarking and safe harbour work.

How does the pharmaceutical value chain split into transfer pricing entities?

The chain splits into four recognisable roles, each carrying its own return, and those roles matter far more than entity names because a single Indian company frequently performs two of them and must report a separate margin for each.

Value chain role	What the entity does	Usual characterisation	Where its return comes from	Principal exposure
Contract research	Runs studies and development batches on the principal’s instructions	Routine service provider, insignificant risk	Mark-up on operating expense	Whether it in fact carries development risk
Contract or loan-licence manufacturing	Produces active ingredients or formulations to a specified process	Routine manufacturer	Mark-up on cost, or a resale-based return	Whether it owns the process or the registration
Marketing and distribution	Sells finished goods in India and carries the field force	Limited-risk or full-fledged distributor	Distribution margin on sales	Promotional spending treated as a separate transaction
Principal or intangible owner	Holds the registration, funds development, bears market risk	Entrepreneur	Residual profit after routine returns	Whether it controls the functions it is paid for

Why does a single Indian company often occupy more than one role?

Because Indian pharmaceutical operations grew organically rather than by design. A company that began as an export manufacturer typically added a development centre and then a domestic sales division, without ever separating those transactions in its transfer pricing file. Rule 84(1)(f) of the Income-tax Rules 2026 requires a record of financial estimates prepared for the business as a whole and for each division or product separately, so the obligation to look through the entity to its activities already sits in the documentation rule.

Segmental accounts are the answer, built from the cost accounting system rather than reconstructed at year end. A single profit and loss account covering research, manufacturing and distribution invites the Transfer Pricing Officer to pick the segment with the highest margin.

Who owns the product intangible in a pharmaceutical group?

The entity that funds, directs and controls the development of a product owns the return on it, not necessarily the entity named on the certificate. Pharmaceutical files fail here more than anywhere else. Ownership in this sector is spread across several instruments at once, and a file naming only one of them has not answered the question it was written to answer.

Is the dossier separate from the patent?

Yes, and treating them as one thing is a common drafting error. A pharmaceutical product carries a patent or process know-how, a regulatory dossier, the marketing authorisation granted on that dossier, and a brand, and because those four can sit in four different entities each generates a return that has to be identified separately.

For a generic group the dossier is often the most valuable, embodying years of bioequivalence and stability work.

What happens when the Indian entity funds development but the parent holds the registration?

The funding entity is entitled to more than a service fee, and how much more depends on whether it also controlled the work. Legal title alone does not carry the residual profit, and the analysis establishing economic entitlement is set out in our note on who owns the return on group intangibles.

Where a licence settles the arrangement instead, the rate becomes the pressure point, and a rate copied from a database without a comparability adjustment rarely survives. Building one is addressed in what royalty rate is defensible under Indian transfer pricing.

How are contract research and development arrangements priced?

Contract research is priced on a mark-up over operating expense, applied through the transactional net margin method in most Indian files. The arm’s length price is determined under Section 165 of the Income-tax Act 2025, with the prescribed methods set out in Rule 79 of the Income-tax Rules 2026 and the selection criteria in Rule 80.

The cost base is where the argument starts. Pass-through costs such as clinical trial site payments and third-party laboratory charges are routinely excluded from the base carrying the mark-up, and that exclusion must be justified rather than simply applied.

What is the safe harbour margin for contract research on generic pharmaceutical drugs?

An operating profit margin of not less than 24% on operating expense, where the aggregate operating revenue from the transaction does not exceed ₹300 crore in the tax year. This sits in the table at Rule 89(2) of the Income-tax Rules 2026, made under the power in Section 167 of the Income-tax Act 2025.

Three conditions carry it: Rule 87(1)(d) treats a person providing contract research and development services wholly or partly relating to generic pharmaceutical drugs, with insignificant risk, to a foreign principal as an eligible assessee, Rule 88(d) makes that provision an eligible international transaction, and Rule 90 governs the exercise of the option.

Note what the threshold excludes. An arrangement generating more than ₹300 crore falls outside the safe harbour entirely and returns to full benchmarking, a real cliff for a group approaching that level. The wider framework is set out in our overview of safe harbour rules under Indian transfer pricing regulations.

What disqualifies a research unit from insignificant-risk treatment?

Conduct, not contract. Rule 87(3) directs that the foreign principal must perform the economically significant functions in the research cycle, including conceptualisation, product design and strategic direction, and must supply the funds and the intangibles the work requires.

The rule then closes the obvious escape route, providing that where a contract obliges the foreign principal to control risk but the conduct shows the Indian entity doing so, the contractual terms are not the final determinant. The Indian entity must also hold no ownership right, legal or economic, over the outcome of the research.

How is contract or loan-licence manufacturing remunerated?

A contract manufacturer earns a routine return, because it converts inputs to a specified process without owning the process, the registration or the market. The mark-up is normally tested on total cost. Comparables come from independent formulation or active ingredient manufacturers rather than from integrated pharmaceutical companies, whose margins reflect intangibles a contract manufacturer does not hold.

Does a loan-licence arrangement change the characterisation?

It changes the facts to be documented, not the principle. Where one company manufactures using the licence and premises of another, the party holding the product registration and bearing market risk takes the residual, while the party contributing capacity earns only a routine return for the capacity it supplies.

Which of the two the Indian entity actually is, is the question. An Indian company manufacturing on its own licence but to a related party’s specification, formula and quality release sits closer to a contract manufacturer than the licence position alone suggests.

Which method applies to a manufacturing arrangement?

Cost plus or the transactional net margin method in most Indian manufacturing files, with the resale price method reserved for cases where the Indian entity resells without substantial transformation. The choice is governed by Rule 80, and the two cost-based routes are compared in which transfer pricing method applies to your transaction.

Once the method generates multiple prices, Rule 81 states that a margin which is outside the range generated will not be reset to the closest edge of that range.

Why does marketing spend in pharmaceutical distribution attract adjustment?

Because pharmaceutical promotion is large, prescriber-directed and long-lived, which makes it look like brand building rather than selling. An Indian distributor typically funds a field force of medical representatives, prescriber engagement, medical education and launch programmes, at a share of sales well above ordinary consumer distribution.

The department’s position is that spending beyond what an independent distributor would incur enhances a brand the foreign affiliate owns, and so requires compensation. The taxpayer’s position is narrower. That spending buys current-period sales, inside the Indian entity’s own margin.

What is the threshold question before any adjustment?

Whether an international transaction exists at all. An adjustment presupposes a transaction between associated enterprises within Section 163 of the Income-tax Act 2025, with associated enterprise defined in Section 162, and that transaction must be established on evidence rather than inferred from a comparison of spending levels.

There the file does its work. A group able to show that the Indian entity set its own promotional plan, kept the commercial benefit in its own margin, and was neither directed nor selectively reimbursed by the brand owner has answered the question before it is asked, and the documents proving that point cannot be created after a notice arrives.

What documentation does a pharmaceutical group have to keep?

The information and documents listed in Rule 84 of the Income-tax Rules 2026, prescribed under Section 171 of the Income-tax Act 2025. The obligation applies where the aggregate value of international transactions recorded in the books exceeds ₹1 crore in the tax year, under Rule 84(2).

Rule 84(1)(e) carries most of the weight, requiring a description of the functions performed, risks assumed and assets employed by the Indian entity and by each associated enterprise, which is where a chain spanning research, manufacturing and marketing is either explained or exposed.

The accountant’s report under Section 172 is furnished separately, in Form 48, which replaced Form 3CEB, and an accountant prepares that report while the Transfer Pricing Officer examines the file it accompanies on a reference made under Section 166.

Where should a pharmaceutical group start?

With characterisation, before benchmarking. Map each Indian entity to one of the four roles above, confirm its accounts can produce a segmental margin for every role it performs, and only then select comparables. If your group has added a development centre, changed its manufacturing model or launched a domestic portfolio since the last documentation cycle, put the arrangement in front of the SBC transfer pricing team before the current year closes.

Frequently Asked Questions

Does the safe harbour cover contract manufacturing in pharmaceuticals?

No. The safe harbour provisions under Rule 89(2) of the Income-tax Rules 2026 provide for contract research and development services relating to generic pharmaceutical drugs, not for manufacture of pharmaceutical products. Manufacturing contracts are compared in the general manner under Rule 80, with no specific margin to be applied to determine the arm’s length price.

What margin does a contract research unit have to report?

Not less than 24% of operating expense to use the safe harbour, and only where the transaction’s aggregate operating revenue stays within ₹300 crore for the tax year. Outside the safe harbour there is no fixed margin, and the reported result must fall inside the arm’s length range determined under Rule 81.

Who owns the regulatory dossier for transfer pricing purposes?

The entity that funded and controlled the development work, which is not always the entity holding the marketing authorisation. Legal title is a starting point rather than the answer. Where an Indian entity built the dossier, its entitlement has to be quantified and documented instead of being absorbed into a service fee.

Is promotional spending automatically a transfer pricing adjustment?

No. An adjustment requires an international transaction between associated enterprises to be established first, on evidence. A comparison showing that the Indian entity spends more on promotion than selected comparables does not by itself create that transaction, although such comparisons continue to appear in show-cause notices.

Do these rules apply to a purely domestic pharmaceutical group?

Only where the transactions are specified domestic transactions within Section 164 of the Income-tax Act 2025, and then only where their aggregate value exceeds ₹20 crore in the tax year. Groups below that threshold fall outside the regime, though international transactions remain covered.

Written by Jayasri P · Last updated 26 August 2026 · Statutory references current to the Income-tax Act 2025 and the Income-tax Rules 2026.

Quick Answer: An Indian manufacturing subsidiary is characterised by the risks it actually bears, not by the label in its agreement. A contract manufacturer earns a routine mark-up on cost, a limited-risk distributor a routine margin on sales, and a full-risk entity the residual profit and the losses. Section 165 of the Income-tax Act 2025 then decides the method.

Most disputes over an Indian manufacturing subsidiary begin with a label. The agreement names the Indian company a contract manufacturer, while the accounts show inventory write-downs, a domestic sales force and warranty provisions carried on the Indian balance sheet.

Those are the marks of an entity bearing risk, and an officer reading the accounts will price it as one whatever the agreement says.

Manufacturing entity characterisation is a finding of fact about who decides, who funds and who absorbs the downside. The return follows from the finding, and the method follows from the return.

What does entity characterisation decide for a manufacturing subsidiary?

It decides three things: which side is tested, which method applies, and how much of the group’s profit India expects the Indian company to keep.

The determination sits in Section 165 of the Income-tax Act 2025, headed “Determination of arm’s length price”. It answers to Section 92C of the Income-tax Act 1961 for earlier tax years. Characterisation is how the facts that section works on are organised.

What are the four manufacturing entity characterisations?

Indian practice recognises four positions along a single axis of risk: contract manufacturer, licensed manufacturer, limited-risk distributor and full-risk entity. The axis runs from an entity paid for its costs to an entity that runs a business and keeps what is left.

Characterisation	What the entity does	Risks it bears	Intangibles	Return it earns
Contract manufacturer	Manufactures to the principal’s specification and order volumes	Operational and capacity risk only	None owned	Routine mark-up on its own cost base
Licensed manufacturer	Manufactures under licensed technology and sells in the local market	Some market and inventory risk	Licensed in, royalty paid out	Routine return, uplifted for the risks genuinely taken
Limited-risk distributor	Buys finished goods from the group and resells with little transformation	Limited inventory and credit risk	None owned	Routine margin on sales
Full-risk entity	Decides what to make, funds it and sells it on its own account	Market, inventory, credit, warranty and product risk	Owns or has developed its own	The residual, positive or negative

What is a contract manufacturer?

A contract manufacturer converts inputs into finished goods on terms the principal sets, and it does not decide what is produced, in what quantity or for which market, while title to raw materials may or may not pass to it depending on how the arrangement is drawn. A toll manufacturer is the thinnest version of the same position. Title never passes at all.

The test is not the presence of a factory but the absence of discretion. Where the principal fixes volumes, absorbs unsold stock and carries the consequences of a product failing in the market, the Indian entity is paid to run a plant rather than a business.

What is a licensed manufacturer?

A licensed manufacturer uses group technology under licence, pays a royalty for it and sells into the local market on its own account. It sits between the contract manufacturer and the full-risk entity, and it is argued about most often.

The royalty is what makes it contentious. Paying for licensed technology while also bearing local market risk is a coherent position, but the file has to show that the royalty is priced for what was licensed and that the Indian entity is separately compensated for the risks it absorbs.

What is a limited-risk distributor?

A limited-risk distributor buys finished goods from a related party and resells them with little or no transformation. Its contract keeps inventory, credit and market risk with the principal. Many Indian groups run one alongside a plant, so a single legal entity carries both transactions.

That matters because characterisation is applied transaction by transaction, not entity by entity. Our note on FAR analysis and the routine or entrepreneurial classification sets out how the functional analysis reaches that split.

What is a full-risk entity?

A full-risk entity decides its own product range, funds its own working capital, sets its own prices and keeps whatever the business earns. It is an entrepreneur, and it is not a candidate for benchmarking.

An entity of this kind should not be the tested party, because independent companies performing the same entrepreneurial role in the same market rarely exist in usable numbers, and a search stretched far enough to find them produces a comparable set an officer can dismantle line by line. The routine side is tested instead, and the residual falls where the risk sits.

What return does each characterisation earn?

The return is set by the profit level indicator the characterisation supports, and each one is measured against a different base.

Characterisation	Profit level indicator usually applied	Base it is measured on
Contract manufacturer	Net cost plus mark-up	Total operating cost
Licensed manufacturer	Operating margin on sales	Net sales
Limited-risk distributor	Operating margin on sales, or berry ratio where value added is slight	Net sales, or gross profit over operating expense
Full-risk entity	Not tested; retains the residual	Not applicable

Why does the profit level indicator follow the characterisation?

Because the indicator must be measured on what the entity actually controls. A contract manufacturer controls its cost base and nothing else, so testing it on sales would reward or punish it for demand it never influenced.

A distributor is the reverse. It influences the volume it moves and the price at which it clears stock, so sales are the honest denominator. Our comparison of the resale price method and the cost plus method sets out which side each one examines.

How do you evidence the characterisation?

You evidence it with the agreement and the conduct together. The second carries more weight than the first, because an inter-company agreement describing a contract manufacturer proves very little where the Indian entity is writing off obsolete stock every year, funding its own advertising and settling warranty claims out of its own accounts.

What must the inter-company agreement record?

It must record the allocation of each risk, the party that funds it and the mechanism by which the principal absorbs it. A clause stating that the principal bears inventory risk needs a matching commercial term, such as a take-or-pay commitment or a stated buy-back, or it is a statement of intent rather than an allocation.

Rule 84 of the Income-tax Rules 2026 lists the information and documents to be kept and maintained under Section 171(1), and it carries forward the substance of Rule 10D of the Income-tax Rules 1962. The functional analysis and the agreements sit inside that record, which is why characterisation is a documentation obligation and not a preliminary step.

What conduct evidence does a Transfer Pricing Officer look for?

The officer looks for the accounting consequences of risk: inventory provisions, warranty provisions, bad debt written off, advertising and market development spending, and the location of the people who decide product specification and pricing are all read as evidence of who is actually running the business.

Where the file cannot explain why a stated contract manufacturer carries those items, the matter may be referred to a Transfer Pricing Officer under Section 166 of the Income-tax Act 2025, the successor to Section 92CA, and recharacterisation at that stage is expensive because an officer who reopens the question usually restates several years at once.

Which method follows from each characterisation?

Rule 79 of the Income-tax Rules 2026 sets out the methods for the purposes of Section 165(2). Rule 80 requires the most appropriate one to be selected on the facts. Neither rule ranks the methods, so the characterisation is what makes one of them defensible.

A contract manufacturer is normally tested on its cost base, a limited-risk distributor on its resale margin, and a licensed manufacturer on its operating margin, because gross-level comparability across an accepted comparable set can rarely be established from Indian published financial statements prepared on differing accounting policies. Rule 81 then governs the arm’s length range where the chosen method produces more than one price, carrying forward Rule 10CA of the Income-tax Rules 1962.

Does safe harbour cover a manufacturing entity?

Only in one narrow case. The safe harbour route under Section 167 of the Income-tax Act 2025 reaches manufacturing through a single category, and general contract manufacturing is not in it.

What margins does Rule 89 set for auto components?

Rule 89(2) of the Income-tax Rules 2026 accepts the declared price where the operating profit margin in relation to operating expense meets a stated floor.

Eligible international transaction	Operating profit margin on operating expense
Manufacture and export of core auto components	Not less than 12%
Manufacture and export of non-core auto components	Not less than 8.5%

Core auto components are defined in Rule 86 and cover engine and engine parts, transmission and steering parts, suspension and braking parts, and lithium-ion batteries for electric or hybrid electric vehicles, while non-core auto components are everything else falling within the category.

The eligibility condition is strict, because Rule 87(1)(e) admits an assessee engaged in the manufacture and export of core or non-core auto components only where 90% or more of total turnover during the tax year is original equipment manufacturer sales.

When does safe harbour become unavailable?

Rule 92 removes the whole safe harbour framework for international transactions where the associated enterprise is located in a country or territory notified under Section 176, or in a no tax or low tax country or territory.

Accepting safe harbour also closes a route, because Rule 93 provides that once the declared transfer price is accepted under Section 167 the assessee cannot invoke the mutual agreement procedure under the relevant tax treaty, so the certainty is bought at the cost of the bilateral remedy.

What happens when the characterisation changes?

A change in characterisation is a restructuring, and it is priced as one. Moving a full-risk entity to a contract manufacturing model transfers profit potential out of India, and the Indian entity is expected to be compensated for what it surrenders, whether that is a customer base it built, a workforce it trained or an intangible it funded over several years, which is why the change belongs in the file before the year in which it takes effect.

Our note on when a business restructuring triggers an exit charge covers how the compensation is analysed, and Section 170 of the Income-tax Act 2025 governs the secondary adjustment that follows a primary adjustment left unrepatriated.

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

No firm is best in the abstract, and a mid-size manufacturing group should select on depth in the specific question it faces rather than on network size. For a characterisation question the relevant depth is functional analysis and assessment experience, not headcount.

Three checks separate firms usefully: whether the adviser interviews the plant and commercial teams rather than working from the agreement alone, whether it documents why each risk was allocated as it was, and whether it has carried a characterisation position through assessment and appeal.

Global networks such as Deloitte, EY, PwC, BDO, Grant Thornton and RSM bring multi-country coverage where the group has entities in several jurisdictions. Independent Indian practices bring partner-level attention on a single jurisdiction, which is often what a mid-size group with one Indian plant actually needs. Neither category is better in the abstract.

Steadfast Business Consulting (SBC) prepares the functional analysis, benchmarking and documentation that support a manufacturing characterisation through its transfer pricing practice. SBC was named a Notable Transfer Pricing Firm 2024 by ITR World Tax, was founded by former Big 4 professionals with combined experience exceeding 150 years, and works from offices in Hyderabad, Mumbai, Pune and Dubai.

If your Indian entity has taken on functions or risks it did not carry three years ago, ask the SBC team to review the characterisation before the earlier position is repeated in the current file.

Frequently Asked Questions

Does the inter-company agreement decide the characterisation?

No. The agreement is the starting point, and conduct decides the outcome. Where the Indian entity bears inventory, credit or market risk in practice, a contract manufacturing label will not hold. Rule 84 of the Income-tax Rules 2026 requires the functional analysis and the agreements to sit in one documentation record.

Can one company be a contract manufacturer and a distributor at once?

Yes. Characterisation is applied transaction by transaction, so an Indian company may manufacture on contract for a group principal and separately distribute goods bought from another group entity. Each transaction needs its own functional analysis, its own tested-party conclusion and its own method.

Which entity should be the tested party?

The less complex one. A contract manufacturer or a limited-risk distributor performs routine functions, owns no unique intangibles and can be benchmarked against independent companies. A full-risk entity holding its own intangibles has few genuine comparables, so testing it produces a range that will not survive examination.

Is a contract manufacturer eligible for safe harbour?

Only in the auto components category. Rule 88 of the Income-tax Rules 2026 lists manufacture and export of core and non-core auto components as eligible international transactions, and general contract manufacturing does not appear. Rule 87(1)(e) also requires 90% or more of turnover to be original equipment manufacturer sales.

Does characterisation apply to domestic manufacturing arrangements?

It can. Section 164 of the Income-tax Act 2025 brings specified domestic transactions into the regime where the aggregate value of such transactions exceeds ₹20 crore in the tax year. The functional analysis works the same way, and the same evidence of risk allocation is required.

How often should a manufacturing characterisation be reviewed?

Review it whenever functions, assets or risks move, and before each documentation cycle. Characterisation drifts quietly as an entity adds a sales team, takes on warranty obligations or begins funding its own development work, and an analysis rolled forward without testing will state a position the accounts contradict.

Written by Jayasri P · Last updated 26 August 2026 · Statutory references current to the Income-tax Act 2025 and the Income-tax Rules 2026.

Quick Answer: Indian information technology and software companies attract heavy transfer pricing scrutiny because most of them bill a related party abroad for development work. The Union Budget 2026-27 announced a fast-tracked unilateral advance pricing agreement for information technology services, targeted for conclusion within two years, together with a higher safe harbour threshold and automated approval.

Why do software companies face more transfer pricing scrutiny than most sectors?

Because the typical Indian software company sells almost everything it produces to a single related party abroad, and transfer pricing applies to precisely that transaction. A domestic manufacturer selling to third parties has an observable market price. An offshore development centre billing its own parent has none.

Three features compound the exposure. The transaction is a service rather than a product, so no price can be observed anywhere in the market; the value sits in people and in code rather than in tangible assets, which makes the functional analysis genuinely contestable; and the amounts are both large and recurring, so an adjustment sustained for one year usually implies the same adjustment for every year that follows.

Determination of the arm’s length price is governed by Section 165 of the Income-tax Act 2025, which replaced Section 92C of the Income-tax Act 1961 with effect from 1 April 2026. Rule 79 of the Income-tax Rules 2026 carries the prescribed methods, and Rule 80 governs the selection of the most appropriate one.

Documentation sits at Section 171 and Rule 84, while the accountant’s report, now Form 48 rather than Form 3CEB, is furnished under Section 172 and Rule 85.

What changed for information technology services in 2026?

Three things, each aimed at the same complaint: that a software company could not obtain certainty on its margin inside a commercially useful period.

The Union Budget 2026-27 announced a fast-tracked unilateral advance pricing agreement process for information technology services and raised the safe harbour threshold for the sector from ₹300 crore to ₹2,000 crore, and safe harbour for information technology services is now to be approved through an automated, rule-driven process rather than examined case by case.

No other sector has been given such a package in the same budget. This indicates where the Government thinks the actual level of transfer pricing disputes lies.

How fast is a fast-tracked unilateral advance pricing agreement meant to be?

Two years, extendable by a further six months on the request of the taxpayer.

The two-year figure is a stated endeavour rather than a statutory deadline, and it reaches the unilateral route only, since a bilateral agreement depends on a foreign competent authority and cannot be compressed by India acting alone. Advance pricing agreements continue to be governed by Section 168 of the Income-tax Act 2025.

What matters commercially is the horizon rather than the speed in itself. An agreement concluded inside two years covers years that are still open, which is a materially different proposition from one arriving after the assessment has been framed and appealed. SBC has set out the application process and Form 51 separately.

What did the safe harbour change do for a software company?

It moved the election from a niche option into a mainstream one.

Under the Income-tax Rules 2026 the several technology service categories were consolidated into a single information technology services category taking one margin of 15.5 per cent, and the value ceiling rose to ₹2,000 crore of aggregate operating revenue, which brings a materially larger company inside the election than the earlier rules ever allowed. Those margins and conditions are covered in the guide to transfer pricing for a global capability centre or captive unit.

Safe harbour remains an election rather than a right. Accepting it means accepting a prescribed return which may sit above the return a properly benchmarked analysis would support, in exchange for removing the enquiry altogether.

Why is an offshore development centre’s margin contested?

Because the declared margin rests on a characterisation the taxpayer asserts and the Transfer Pricing Officer is entitled to test. A routine contract developer earns a modest cost-based return, and an entity carrying real entrepreneurial risk does not.

Most Indian offshore development centres are documented as low-risk contract service providers, remunerated on a cost-plus basis and benchmarked under the transactional net margin method with a cost-based profit level indicator. That characterisation is usually correct, and it also carries the lowest return, which is why it attracts examination.

What pushes a development centre above a routine return?

Functions the contract does not describe, and risks the entity bears in practice rather than on paper.

Product roadmap ownership is the clearest example. Where the Indian entity decides what gets built rather than building what it is told to build, the routine label becomes difficult to defend, and customer-facing delivery responsibility, independent hiring of senior technical leadership and the freedom to decline unprofitable work all point in the same direction.

Ownership of intangibles is the second driver, and it produces the largest adjustments. Where development, enhancement, maintenance, protection and exploitation of software intangibles happen substantially in India, a cost-plus return on the development team may not compensate the value created.

How does a Transfer Pricing Officer test the declared margin?

By reconstructing the comparable set and recomputing the margin on the department’s own terms.

Rejecting the taxpayer’s comparables is the typical first step. The filters change, the companies with high volumes of related party transactions are eliminated from the sample, and large diversified technology companies enter the sample that has been originally constructed for a captive developer, resulting in the significant changes in the margin before the functions argument even commenced. SBC has published a practical guide to economic adjustments that addresses this matter.

The second move is the cost base, and it is the one software companies are least prepared for.

What belongs in the cost base of an offshore development centre?

Every operating cost incurred in providing the service, and nothing else. The boundary is disputed on four recurring items, each of which moves the declared margin directly.

Where the profit level indicator is operating profit over operating cost, the cost base is the denominator. A cost wrongly included depresses the margin, a cost wrongly excluded inflates it and invites an adjustment, and neither error is visible from the audited financial statements alone.

Cost item	Common taxpayer position	Where the dispute arises
Pass-through costs recharged without value addition	Excluded from the mark-up base	Whether the Indian entity performed any function or assumed any risk
Travel, visa and deputation recoveries for onsite work	Recovered at cost as reimbursement	Whether this is reimbursement or part of the service consideration
Share-based payment charged by the overseas parent	Treated as an operating cost of employment	Whether a non-cash parent-level charge belongs in a cost-plus base
Foreign exchange gain or loss on trade receivables	Treated as operating, and applied to comparables alike	Whether it arises from the trading transaction or from treasury activity

Which costs are operating costs and which are not?

Costs incurred in providing the service are operating, and costs unconnected to it, or financing in character, are not.

A cost is a genuine pass-through only where the Indian entity procures it on behalf of the associated enterprise, adds nothing to it and bears no risk in respect of it, which is why third-party licence fees bought at the parent’s direction usually qualify while sub-contracted development work usually does not.

Whatever position is taken must be applied consistently to the tested party and to every comparable. A margin computed on one definition and compared against comparables computed on another is not a comparison at all.

Does the onsite and offshore mix distort the margin?

Yes, and it is the most common structural defect in a software company’s file.

Onsite work carries a higher personnel cost per unit of revenue than offshore work, so a company with a substantial onsite component reports a lower blended margin than an offshore-only comparable would, and benchmarking that blend against offshore-only comparables understates the arm’s length result in a way the department is entitled to challenge.

The correction is segmentation. Onsite and offshore revenue, cost and margin are computed separately, each is benchmarked against a set matched to it, and the segmental statements reconcile to the audited financial statements and to the accountant’s report in Form 48.

How are share-based payments treated?

They are the most frequently disputed single line in the sector, and no rule settles the question.

Where an overseas parent grants equity to employees of the Indian entity and recharges the cost, the taxpayer generally treats that charge as employment cost forming part of the operating cost base, while the department position runs the other way on the argument that a non-cash parent-level benefit should not be marked up by an Indian service provider.

Two practical points follow. The recharge agreement must exist and must predate the grant, and the treatment adopted must match what the comparables do.

Why do information technology services attract the most advance pricing agreement activity?

Because the sector combines a recurring transaction, a contested margin and a long planning horizon, which is exactly the profile an advance agreement was built for. The Central Board of Direct Taxes signed 219 advance pricing agreements in the financial year 2025-26, and the fast-track now announced for information technology services acknowledges where that demand concentrates.

A software group is not arguing about a one-off transaction. It is arguing about the same intercompany service, priced the same way, in every year of a decade, so settling the method once removes the argument prospectively and, through rollback, for earlier years as well. Steadfast Business Consulting (SBC) has published a comparison of the unilateral, bilateral and rollback routes.

Which route suits a software company: safe harbour, an agreement or a benchmarked return?

The answer turns on size, on how settled the functional profile is, and on how much variance in the outcome the group can tolerate.

Route	What it delivers	What it costs	Where it fits
Safe harbour election	Acceptance of the declared price, with no Transfer Pricing Officer reference	A prescribed margin that may exceed the benchmarked return, and a binding multi-year election	Stable routine developers inside ₹2,000 crore
Unilateral advance pricing agreement	An agreed method for future years, with rollback for earlier years	Negotiation and annual compliance reporting, with no protection abroad	Companies above the threshold, or a profile the prescribed margin does not fit
Bilateral advance pricing agreement	Agreement in both jurisdictions, removing economic double taxation	The longest timeline, since a foreign competent authority is involved	Groups where the counterparty country has adjusted
Benchmarked return with documentation	Full flexibility on method and comparable set	Exposure to the annual assessment cycle and to appeal	Companies whose functional profile is changing year on year

These are not mutually exclusive across time, and a company may reasonably elect safe harbour while its profile is stable and move to an agreement when it is not.

Who provides transfer pricing services in India for a software company?

Firms that combine Indian transfer pricing practice with genuine experience of technology delivery models, since the disputes in this sector turn on facts that a generalist adviser rarely thinks to test. No firm is correct in the abstract, so the useful question is which capabilities the file itself needs.

Four criteria matter for a software company specifically. Can the adviser segment onsite and offshore delivery and defend the segmentals? Has the adviser argued a cost base composition point before a Transfer Pricing Officer? Has the adviser taken an advance pricing agreement through to signature rather than only to application, and does the same team stay with the file from documentation into assessment and appeal?

SBC was named a Notable Transfer Pricing Firm 2024 by ITR World Tax and was founded by Big 4 alumni. It works with global capability centres and multinational subsidiaries from offices in Hyderabad, Mumbai, Pune and Dubai, and the full scope of its transfer pricing services covers documentation, benchmarking, advance pricing agreements and representation.

If your development centre is approaching the safe harbour threshold, or facing its first substantive margin challenge, ask the transfer pricing practice to review the file before the next filing cycle closes.

Software and information technology enabled services groups in that corridor are addressed in transfer pricing services in Hyderabad, Telangana and Andhra Pradesh.

Frequently Asked Questions

Does transfer pricing apply to a software company with only one foreign customer?

Yes, where that customer is an associated enterprise, because the test is the relationship between the parties rather than the number of customers. A development centre billing its own parent must maintain documentation under Section 171 and furnish the accountant’s report in Form 48.

Is the 15.5 per cent safe harbour margin compulsory?

No. Safe harbour is an election the taxpayer exercises, not a prescribed price, and a company may instead benchmark its actual margin under the transactional net margin method or seek an advance pricing agreement. The election binds for a multi-year period once validly made.

Can reimbursements be excluded from the cost base?

Only where the Indian entity adds no value and assumes no risk in respect of the cost, and where the arrangement is documented before the cost is incurred. Sub-contracted development work rarely qualifies, because the Indian entity has selected and supervised the sub-contractor.

How long does a fast-tracked unilateral advance pricing agreement take?

The Union Budget 2026-27 announcement set an endeavour of two years for information technology services, extendable by six months on the request of the taxpayer. That is a stated target rather than a statutory deadline, and it applies to the unilateral route only.

Does an advance pricing agreement remove the documentation obligation?

No. Documentation under Section 171 and Rule 84 continues and the accountant’s report under Section 172 remains due, because an agreement fixes the method and the critical assumptions rather than suspending the compliance calendar. An annual compliance report is also required.

Should onsite and offshore delivery be benchmarked separately?

If the onsite component is significant, then yes. The cost structures are quite distinct for onsite work; thus, a blended margin with respect to offshore-only comparables understates the arm’s length conclusion. The revenue, cost, and margin by segment must agree with the audited financial statements.

Written by Jayasri P · Last updated 26 August 2026 · Statutory references current to the Income-tax Act 2025 and the Income-tax Rules 2026.

Quick Answer: Transfer pricing puts the filing obligation on the Indian subsidiary, not on the US parent. It must price every transaction with its US parent at arm’s length under Section 165, maintain documentation under Section 171, and furnish the accountant’s report on Form 48. The US parent documents the same transactions separately for its own return.

The India and United States corridor is the largest inbound relationship in Indian transfer pricing practice, and almost every group operating along it under-estimates the same thing, which is that one set of intercompany invoices is examined twice, in two countries, by two administrations applying similar principles from opposite ends of the same transaction and with opposite incentives about where the profit should land.

An Indian subsidiary of a US parent is rarely a standalone business. It is a captive development centre, a shared services unit, a contract manufacturer or a distributor, and in each case the price it charges the parent decides how much of the group’s worldwide profit India may tax. That is why the Indian file attracts scrutiny out of proportion to the size of the entity.

Looking for a transfer pricing consultant for an overseas parent company?

An overseas parent needs an adviser who can defend the Indian position in front of an Indian officer and explain it in terms the parent’s own tax function can use. Those are two different deliverables, and a firm that produces only the first leaves the group to reconcile them.

Ask three things before engaging anyone. Whether the firm appears before the Transfer Pricing Officer itself, whether it has already benchmarked the transaction type in question, and whether it will speak directly to the parent’s US tax team.

Steadfast Business Consulting (SBC) provides transfer pricing documentation, benchmarking and representation to subsidiaries of multinational corporations and Global Capability Centres from its premises in Hyderabad, Mumbai, Pune, and Dubai.

What must the Indian subsidiary file?

The Indian subsidiary is required to maintain contemporaneous transfer pricing documentation and to provide a report from an accountant on Form 48. Both of these obligations belong to the Indian entity and neither is satisfied by any documentation that is submitted in the United States.

Which provisions govern the Indian position?

A transaction between an Indian company and its US parent is an international transaction between associated enterprises, defined at Section 163, and its price must be determined at arm’s length under Section 165 of the Income-tax Act 2025.

The mechanics sit in the Income-tax Rules 2026. Rule 79 describes the prescribed methods and Rule 80 clarifies the criteria for selecting the most appropriate method. In addition, Rule 81 lays out the range and tolerance band applicable when the analysis produces more than one price.

The documentation must be maintained in accordance with Section 171, with the relevant contents being prescribed at Rule 84. The report of the accountant is furnished according to Section 172 in the format as laid down in Rule 85.

Obligation	Provision	Rule 2026	Instrument
Arm’s length price	Section 165	Rules 79, 80, 81	Income-tax Act 2025
Documentation to be maintained	Section 171	Rule 84	Income-tax Act 2025
Accountant’s report	Section 172	Rule 85	Form 48
Master File	Section 171	Rule 123	Income-tax Rules 2026
Country-by-Country report	Section 511	Rule 124	Income-tax Rules 2026

What is the accountant’s report, and who signs it?

Form 48 is the report an accountant furnishes under Section 172, and it replaces the erstwhile Form 3CEB that Indian transfer pricing practice cited for two decades.

It is the accountant who signs it, and not the Transfer Pricing Officer, who is the officer that later examines the file. This distinction is meaningful because Form 48 is an affirmative statement on the transactions entered into, and the signatory takes responsibility for those particulars.

The renumbering is not cosmetic. Every section, rule and form number in Indian transfer pricing moved when the Income-tax Act 2025 replaced the 1961 Act, so a memorandum written three years ago cites provisions that no longer resolve.

How do the Indian and US documentation requirements interact?

The two requirements do not interact formally at all, which is precisely what makes this situation risky. In fact, India and the United States both have substantial documentation requirements imposed on their own taxpayers, and neither government accepts the documentation provided by the other country in lieu of complying with its own requirements.

What does the US side require of the parent?

Under section 482 of the Internal Revenue Code, the United States permits the Internal Revenue Service to allocate income and deductions among entities under common control, which is similar to the arm’s length principle in India.

To support the reasonable cause and good faith exception to the transfer pricing penalty under section 6662(e), contemporaneous documentation must exist when the return is filed and must be produced within thirty days of a request from the Internal Revenue Service. Whether any particular group meets a penalty threshold is a question for its US tax advisers. The practical consequence is that two studies describing one arrangement get written in two countries, often by two firms that never speak to each other.

Where do the two files most often diverge?

They diverge on characterisation, which is the description of what the Indian entity actually does and what risks it actually bears.

In Indian files, the subsidiary has often been described as a routine service provider that earns a modest cost-plus mark-up, as such characterisation allows for a defensible Indian margin. In comparison, in US files, this subsidiary for the same year is often portrayed as taking on significant development risk, as such characterisation retains the residual profit in the United States.

Both descriptions cannot be correct. Whichever administration asks first will be answered with a document that undermines the other filing, and the group then spends the assessment explaining an inconsistency instead of defending a price.

A single functional analysis, which has been designed once and employed as the basis for both jurisdictions, removes the problem, since the differences between the two countries refer only to the format, the deadline and the form, but never the business description itself.

Why is the Indian subsidiary usually the tested party?

The Indian subsidiary is usually the tested party because it is the less complex of the two entities, and the transactional net margin method is applied to whichever party performs the more routine functions and owns fewer intangibles.

That follows from how the method works, not from any preference of the Indian administration. Reliable comparable companies can be found for an Indian captive development centre or a shared services unit, whereas no meaningful set of comparables exists for a US parent that owns the group’s technology, funds its research programme, holds the customer relationships, sets the pricing strategy and absorbs the market risk when a product fails.

So the Indian margin becomes the number under examination, and a US parent that thinks of India as a small cost centre frequently discovers that the entire Indian assessment turns on whether a mark-up of a few percentage points was correctly determined on a cost base it has never examined.

When is the Indian entity not the right tested party?

The Indian entity is not the right tested party where it has stopped being routine.

Indian operations mature. A centre that began as a headcount-based delivery unit acquires product ownership and eventually contributes to intangibles the group monetises worldwide, and the transfer pricing file frequently does not follow.

Testing the Indian entity as a routine service provider can be a risky move where the functional profile has evolved, as the Transfer Pricing Officer might argue that the documented characterisation does not align with the business. SBC begins such engagements with the re-testing of the characterisation, and our note on transfer pricing documentation indicates how the functional analysis is refreshed.

What happens during an Indian transfer pricing assessment?

The case is referred by the Assessing Officer to the Transfer Pricing Officer under Section 166 of the Income-tax Act 2025, and the Transfer Pricing Officer then determines the arm’s length price of the international transactions referred.

The process develops on the basis of documents throughout. The relevant information is called for, the taxpayer responds in writing, and a proposed adjustment is put before it is confirmed, as indicated in our guide to the transfer pricing assessment procedure.

An adjustment carries two consequences a US parent should understand in advance. A primary adjustment increases the Indian taxable income, and a secondary adjustment under Section 170 can then treat the excess money retained by the parent as a deemed advance, with repatriation and interest consequences.

Failure to maintain the prescribed documentation attracts a penalty under Section 442, computed at two per cent of the value of each international transaction, and a separate penalty arises under Section 457 where information called for under Section 171 is not furnished. Late furnishing of the accountant’s report now attracts a fee under Section 428, of ₹50,000 for a delay up to one month and ₹1,00,000 thereafter.

What should a US parent with an Indian subsidiary know before an Indian assessment?

Four things, and all four are settled long before a notice arrives.

The first is that the Indian entity answers, not the parent. Proceedings are conducted with the Indian taxpayer, and a group that routes every decision through a US tax director loses time it does not have inside a statutory timeline.

The second is that intercompany agreements are read. An Indian file describing a cost-plus service arrangement while the signed agreement allocates risk differently is a file that argues against itself.

The third point is that the accounting consequence lands in the United States before the Indian tax does. The uncertain Indian position has to be recognised and measured in the US GAAP reporting of the parent company, and that angle is the subject of our note on when an Indian subsidiary needs a FIN 48 opinion.

The fourth is that prevention is available. An advance pricing agreement under Section 168 fixes the methodology prospectively, and a bilateral agreement engages both competent authorities so the two countries do not reach different answers.

How does the India and United States treaty resolve double taxation?

Through the mutual agreement procedure. The comprehensive agreement between India and the United States contains an Associated Enterprises article at Article 9, which is the treaty basis on which either country may adjust the profits of a related enterprise. Article 27 provides for the Mutual Agreement Procedure, under which the two competent authorities seek to resolve taxation that is not in accordance with the treaty.

The relevance is straightforward. Where India adjusts the Indian margin upward and the United States makes no matching reduction, the same profit has been taxed twice, and the procedure exists to unwind that.

It is also slow, and it provides a remedy rather than a plan. The same arithmetic can be applied to the group’s other corridors, as shown in our analysis of the India and UAE corridor for a different jurisdiction pair.

What should a US-parented group do now?

Compare the Indian file and the US file alongside each other, marking every difference in the description of the Indian entity.

Then test that description against the business as it operates today. A characterisation that was accurate when the Indian entity had forty people may be indefensible now that it has four hundred and owns a product.

Where a divergence is found, correct it first. A voluntary correction shows a group that monitors its own positions; an explanation offered under examination shows only a group that responds when asked.

Groups with a US parent and an Indian subsidiary may speak with our cross-border tax specialists about how their two positions align.

Where the parent already retains a global firm, the appointment question is examined separately in whether an Indian subsidiary should use the parent’s global transfer pricing adviser.

Frequently Asked Questions

Does the US parent file anything in India?

No. The Indian subsidiary carries the Indian obligations, maintaining documentation under Section 171 and furnishing the accountant’s report on Form 48 under Section 172. The parent supplies the group information the Indian file depends on, and does not file in its own name.

Does a US transfer pricing study satisfy the Indian requirement?

No. India prescribes its own documentation contents at Rule 84 of the Income-tax Rules 2026 and its own methods at Rules 79 and 80. A US study is useful supporting material, not a substitute for the Indian file.

Has Form 3CEB been replaced?

Yes. The accountant’s report is now Form 48, furnished under Section 172 of the Income-tax Act 2025. Form 3CEB remains the reference point for earlier tax years, so the correct form depends on the year reported.

Is the Indian subsidiary always the tested party?

No. It is usually the tested party because it performs the more routine functions and reliable comparables exist for it. Where the Indian entity owns intangibles or bears genuine market risk, that characterisation must be revisited.

What penalty applies if documentation is not maintained?

Section 442 of the Income-tax Act 2025 imposes a penalty of two per cent of the value of each international transaction where the required documentation is not kept. Under Section 457, a separate penalty applies in case the information required is not provided.

Can an advance pricing agreement cover the India and US relationship?

Yes. An agreement under Section 168 fixes the methodology prospectively, and a bilateral agreement engages both competent authorities so that India and the United States reach the same answer on the covered transactions.

Written by Jayasri P · Last updated 20 August 2026 · Statutory references current to the Income-tax Act 2025 and the Income-tax Rules 2026.

Quick Answer: A Master File is required where the international group’s consolidated revenue exceeds ₹500 crore. The Indian entity’s international transactions must also exceed ₹50 crore, or ₹10 crore where intangible property is involved. It is furnished under section 171(4) of the Income-tax Act 2025 read with Rule 123 of the Income-tax Rules 2026.

Most finance teams meet this obligation late. Neither Indian turnover nor the size of the Indian balance sheet is the trigger. A subsidiary with modest local revenue can carry a filing duty arising out of income earned by entities it has never dealt with.

What is the Master File, and where does it sit under BEPS Action 13?

The group-level tier of the three-part documentation framework that BEPS Action 13 introduced. Action 13 of the OECD Base Erosion and Profit Shifting project replaced a patchwork of national documentation habits with a standardised set of three documents. A Master File describes the group as a whole, a Local File documents the Indian entity’s dealings, and a Country-by-Country report allocates revenue and tax across jurisdictions.

India legislated all three tiers. The Master File now sits in section 171(4) of the Income-tax Act 2025 read with Rule 123 of the Income-tax Rules 2026, which replaced section 92D(4) and Rule 10DA. Both expressions, constituent entity and international group, carry the meanings given in section 511 of the Income-tax Act 2025. That section also governs Country-by-Country reporting, and SBC’s transfer pricing services in India cover both filings.

Which constituent entities must file?

Every resident constituent entity files something, and what differs between them is how much of the Master File each one has to complete. An entity below the thresholds files only the identifying particulars, whereas an entity above them files the entire group narrative.

What does Part A require from every constituent entity?

Identifying particulars, irrespective of value. Rule 123(3) requires a constituent entity to furnish Part A of the prescribed Master File form even where the value conditions in Rule 123(1) are not satisfied, which catches a large population of Indian subsidiaries.

Part A asks for the name, permanent account number and address of the constituent entity, and the accounting year adopted. It is a short filing, and it is also the one most often missed. A team that has correctly concluded it falls below the value thresholds frequently concludes that nothing at all is due.

Which entities must complete the full Master File?

Those that clear both tests together: the consolidated revenue test must be met first, and then either of the two transaction tests will do. The Central Board of Direct Taxes guidance on the Master File sets the consolidated group revenue test at more than ₹500 crore for the accounting year, read alongside a second test measured at the level of the Indian entity.

Test	Threshold	Measured at
Consolidated group revenue, per the consolidated accounts	exceeds ₹500 crore	the international group
International transactions, per the books of account	exceeds ₹50 crore	the Indian entity
International transactions involving intangible property	exceeds ₹10 crore	the Indian entity

There is a revenue test, and one of the two transaction tests must also be satisfied, so a group with ₹4,000 crore of revenue whose Indian subsidiary pays ₹12 crore in royalties meets the intangibles limb even though its international transactions fall well below ₹50 crore, and that combination is the single most common misunderstanding among finance teams.

What information must the Master File contain?

Five heads, all of them group-level, none of them answered entity by entity the way a Local File would be, because the filing describes how an international group creates and locates value, and an entity-level analysis of the Indian company’s margins does not answer that question.

Information head	What has to be furnished
Group structure	Legal and ownership structure, with the location of every constituent entity
Business description	Profit drivers, service arrangements, principal markets, restructurings in the year
Intangibles	Intangibles strategy, material intangibles and their legal owners, research and development arrangements
Intra-group financing	How the group is financed, the central financing entities, the policy on loans
Financial and tax positions	Consolidated financial statements, unilateral advance pricing agreements, and rulings on income allocation

What must the group structure section show?

Ownership and geography, in a form that reconciles to the accounts. A chart illustrating the legal ownership of the international group and the geographical location of its operating entities is expected, and where the group has restructured during the year the position both before and after the restructuring has to be visible.

How much detail is required on intangibles?

More than most groups expect, because the filing reaches well beyond the summary a parent ordinarily prepares for its own board. Expect the filing to ask for the group’s overall strategy for the development, ownership and exploitation of intangibles, together with a list of the material intangibles, their legal owners, and the important agreements relating to intangible property.

This is the head that most often exposes a gap, because legal ownership of a trademark or a patent frequently sits in one jurisdiction while the development functions that created it sit in another, and a filing that records the first without ever explaining the second invites precisely the enquiry that a group would most prefer to avoid.

What has to be disclosed about intra-group financing?

Financing architecture, rather than the terms of any single loan. What the filing asks is how the international group is financed, including arrangements with unrelated lenders, and it requires the entities performing a central financing function to be named.

Groups that operate a treasury company find this head straightforward, and groups that do not usually find it revealing, since the general policy on intra-group financing has to be stated in terms consistent with the inter-company agreements already executed, and a contradiction between the two is not a small problem.

Which financial and tax positions must be reported?

The consolidated accounts and the rulings the group holds. Consolidated financial statements for the year are required, with a description of existing unilateral advance pricing agreements. Those rulings record positions already taken on the allocation of income, and the narrative is expected to match them.

When is the Master File due?

On the due date for furnishing the return of income. The departmental guidance on the forms notified under the Income-tax Rules 2026 places the Master File filing on the same date as the return of income specified under section 263(1)(c) for the relevant tax year.

That distinction matters, because the accountant’s report falls due at least one month before the return of income, whereas the Master File itself is submitted with the return, as Steadfast Business Consulting (SBC) sets out in a separate note on the move from Form 3CEB to Form 48.

Filing	Timing
Intimation designating one constituent entity	at least thirty days before the Master File due date
Part A, where the entity is below the thresholds	due date for the return under section 263(1)(c)
Part A and Part B, where the entity is above them	due date for the return under section 263(1)(c)

How does a group designate one entity to file?

By intimation, filed first, so that the department knows which entity carries the obligation before the Master File itself arrives. Where an international group has more than one constituent entity resident in India, Rule 123(4) permits the group to designate a single entity to furnish the filing for all of them, and that designation is communicated through a separate intimation.

That intimation has to be furnished at least thirty days before the Master File due date, which means the decision cannot wait until the return is finalised. Groups with several Indian entities routinely lose that window.

Why does a copy-paste Master File fail scrutiny?

Because it is read against everything else the group has already said. The Master File is not assessed in isolation, and a narrative lifted unchanged from a foreign parent’s pack will describe functions and risks in terms drafted for another jurisdiction.

What does an assessing officer compare it against?

Every other document describing the same arrangement. The accountant’s report, the Local File documentation maintained under section 171 read with Rule 84, the inter-company agreements and the Country-by-Country report each describe the same arrangements from a different angle. An officer reading them together will notice where the group’s account of itself changes between documents.

By itself, each of the repeated failures is unremarkable, but their combination creates damage. An entity described as a limited-risk distributor in the Local File, while the Master File credits that same entity with market development, is the recurring example. So is a material intangible attributed to one owner in the group narrative and to another in the contract.

What does a default cost?

Enough to make the filing worth doing properly. Failure to keep and maintain the prescribed information and documents attracts a penalty of two per cent of the value of the transaction under section 442 of the Income-tax Act 2025, and failure to furnish information or documents called for under section 171 attracts a further penalty under section 457.

A filing inconsistent with the underlying record leaves the same exposure open, and the position on each default is set out in transfer pricing penalties.

Best transfer pricing firms for Master File and CbCR compliance

One that can draft the group narrative and defend it afterwards. Global network firms, established domestic practices and specialist boutiques divide the market, and firms such as Deloitte, EY, Grant Thornton, BDO, Nangia and Dhruva work in this space.

No firm is best in the abstract, and the useful questions are a good deal narrower than the marketing: whether the team has drafted a Master File from a foreign parent’s source material rather than merely translated one, whether it has defended that narrative before a Transfer Pricing Officer, and whether it reads the group’s agreements before it writes. A short guide to choosing a transfer pricing consultant in India sets out what to ask.

SBC was recognised as a Notable Transfer Pricing Firm 2024 by ITR World Tax, and its team works from Hyderabad, Mumbai, Pune and Dubai.

What should a group do before the filing window opens?

Reconcile before drafting, comparing what the group has already filed elsewhere against what the Master File will say. Most of the Master File is a synthesis of material the group holds elsewhere, and the work that decides whether it survives scrutiny happens before it is drafted.

• Confirm consolidated group revenue against the consolidated accounts, not management accounts
• Total the Indian entity’s international transactions and, separately, its intangible-related transactions
• Identify every constituent entity resident in India, including entities acquired during the year
• Decide which entity is designated, and diarise the intimation thirty days before the return due date

If the group narrative in your file was last written by a parent-company team for a different regulator, it is worth a review this year. Ask the SBC transfer pricing team for a Master File readiness review.

Frequently Asked Questions

Is the Master File the same as the Local File?

No. The Master File describes the international group as a whole, including its structure, intangibles and financing. Local File documentation covers the Indian entity’s own international transactions and the benchmarking supporting them, under section 171 read with Rule 84.

Does a group below ₹500 crore in revenue file anything?

Yes. Rule 123(3) requires every resident constituent entity in India to file Part A, whether or not the value thresholds in Rule 123(1) are met. Only the full group narrative in Part B depends on those value thresholds.

Which rule replaced Rule 10DA?

Rule 123 of the Income-tax Rules 2026 replaced Rule 10DA of the Income-tax Rules 1962, and the enabling provision moved from section 92D(4) of the Income-tax Act 1961 to section 171(4) of the Income-tax Act 2025. In substance the obligation carried forward into the new framework without change.

Can two Indian entities of the same group file separately?

Yes, and by default they must. A single filing on behalf of both is permitted only where the group designates one constituent entity under Rule 123(4) and furnishes the prescribed intimation at least thirty days before the due date.

Is the Master File filed in English?

Yes. Filing is electronic, on the income tax portal in the prescribed form, and material drawn from foreign group documentation should be presented in English.

Does filing a Master File reduce transfer pricing scrutiny?

Not by itself. A complete and internally consistent filing removes an easy line of enquiry, but the Transfer Pricing Officer may still examine the arm’s length price of individual transactions under section 165.