Written by Jayasri P · Last updated 17 August 2026 · Statutory references current to the Income-tax Act 2025 and the Income-tax Rules 2026.
An exit charge arises where a restructuring moves something of value between associated enterprises and an independent party in the same position would have required payment to give it up. The test is not whether profit falls in India. It is whether an asset, an intangible or a profit-earning activity was transferred.
Group reorganisations reach the board as operating decisions rather than tax events. A distributor becomes a limited-risk distributor, procurement is centralised into a regional hub, or manufacturing moves to a contract model, and the reason given is cost or control.
Where a reorganisation shifts functions, assets or risks between associated enterprises, the authority in the country that gave something up will ask what left and what was paid for it, and in India that question lands at assessment, years after the project has closed and the people who designed it have moved on.
Does a business restructuring trigger a transfer pricing exit charge?
It occurs only when something of value is being passed. Restructuring will cause an exit charge to arise when there is movement of functions, assets, or risks between associated enterprises in circumstances where an independent enterprise surrendering the same thing would have demanded payment.
Two elements have to be present: a transfer of something an independent party would pay to acquire, and an arrangement carrying a term, a notice period or a settled expectation of continuation which the restructuring cuts short.
Neither element is satisfied by a fall in Indian profit on its own, and that single point separates a reorganisation managed calmly from one argued about for years.
What counts as a business restructuring for transfer pricing purposes?
In India business restructuring refers to any redeployment of functions, assets and risks between associated enterprises, and it needs no transfer of shares, no court-approved scheme and no change in legal ownership. Most of the restructurings that produce adjustments in India are carried out without any corporate action at all.
Three categories of value can move. They are tangible assets, intangibles such as know-how, customer relationships and brands, and an ongoing activity whose profit potential is worth more than the assets on its balance sheet. Indian files are weakest on the last two, because a customer base leaves no entry anywhere.
The table below sets out what moves, what is compensable, and the pricing basis.
| Restructuring type | What moves | Is compensation typically expected | What a Transfer Pricing Officer tests | Likely pricing basis |
|---|---|---|---|---|
| Full-fledged distributor converted to a limited-risk distributor | Market risk, inventory risk and credit risk, together with the customer relationships and local marketing intangibles built up under the previous model | Yes, where the Indian entity surrenders customer relationships or a marketing intangible it developed and funded | Whether value created and paid for in India has been transferred, and whether the original arrangement carried a term or a notice period | Other Method under Rule 78, because a comparable transfer of a customer base is rarely observable |
| Full manufacturer converted to a contract or toll manufacturer | Production and capacity risk, process know-how, and in many cases plant, equipment and supplier arrangements | Yes, where know-how, capacity rights or tangible assets pass to another group entity | Whether know-how developed in India moved out of India, and how the tangible assets were valued on transfer | CUP under Rule 79(1)(a) for plant and equipment where a comparable price is observable; Other Method under Rule 78 for know-how |
| Centralisation of procurement into a regional hub | Supplier contracts, negotiating rights and purchasing volumes | Sometimes, depending on whether the Indian entity surrendered contractual rights it could have retained | Whether the supplier relationships carried value, and whether the Indian entity had a realistic alternative to accepting the change | Other Method under Rule 78 |
| Centralisation or migration of intangibles | Legal title, or the development, enhancement, maintenance, protection and exploitation functions relating to the intangible | Yes, in most fact patterns | Who performed and controlled those functions before the move, and what the transferred intangible was worth at that date | Profit Split under Rule 79(1)(d) where uniquely valuable intangibles move, otherwise Rule 78 |
| Termination or renegotiation of an existing arrangement | Nothing tangible; the arrangement itself ends, narrows or is repriced | Yes, where the arrangement carried a term, a notice period or an established expectation of continuation | The terms of the original agreement and the conduct of the parties under it | Other Method under Rule 78, applied to what a similar uncontrolled surrender would command |
| Transfer of a going concern | A functioning activity with its assets, assembled workforce, contracts and profit potential | Yes | Whether the activity was priced as a bundle carrying goodwill and profit potential, or asset by asset at written-down value | Profit Split under Rule 79(1)(d) where uniquely valuable intangibles form part of the bundle, otherwise Rule 78 |
Which restructurings fall inside the Indian transfer pricing net?
Cross-border and domestic reorganisations can both be covered and provided for. Section 163 of the Income-tax Act 2025 carries forward the meaning of international transaction from Section 92B of the Income-tax Act 1961, which means that the business reorganisation involving two associated enterprises, one of which is a non-resident, is included in that meaning.
A domestic reorganisation is caught separately. Section 164 of Income-tax Act 2025, which carries forward Section 92BA of Income-tax Act 1961, brings specified domestic transactions within the arm’s length requirement where their aggregate in the relevant tax year exceeds ₹20 crore.
No border needs crossing, since the ₹20 crore threshold is aggregate.
Does a reduction in expected future profit require compensation?
Not by itself. A restructured organisation that earns less than it did previously has not, by that fact alone, been deprived of anything an independent party would have charged for.
An independent enterprise has no entitlement to its historical margin, because conditions change, contracts end, and profitability falls without anyone owing compensation.
The compensable event is the transfer, not the outcome. Ask what left the Indian entity and where it went, rather than starting from the profit and looking for a justification. A margin comparison run before the functional work is done produces a number without a case behind it.
How do the options realistically available to each party change the answer?
They set the price, and in some cases remove the charge. The arm’s length principle aims to determine what independent parties would have agreed, and an independent enterprise accepts a restructuring only where no option realistically available to it would leave it better off.
If the Indian entity had a genuine alternative, such as continuing the existing arrangement or serving a different principal, then accepting materially worse terms without payment is not conduct an independent party would have adopted.
The test cuts both ways. Where the Indian entity was terminable at short notice and held no customer relationships of its own, the compensation the analysis supports may be small or nil.
Documenting the alternatives genuinely open at the time is therefore not a mere defensive exercise but the analysis itself.
Why does the FAR profile before and after the restructuring decide the case?
The distinction existing between the above-mentioned profiles is proof of what has moved. It is necessary to clarify what functions have been performed, what assets have been employed, what risks have been borne by the Indian entity before the change and after it, and the difference between both descriptions is the transferred item the whole dispute is about.
Most files fail here for a procedural reason rather than a technical one, because the functional analysis is refreshed only after the reorganisation, so the file describes the destination without ever recording the starting point. Reconstructing that profile years later, from memory and old presentations, is materially weaker.
What contemporaneous evidence should you keep?
Keep what was true at the time. Contemporaneous documentation is required under Section 171 of Income-tax Act 2025, successor to the Section 92D of the Income-tax Act 1961 for prior tax years, and Rule 84 of the Income-tax Rules 2026 lists the information and documents to be held and kept under that same section. The accountant’s report follows under Section 172, which carries forward Section 92E, while Rule 85 prescribes it.
Four primary elements carry most of the weight: the functional analysis in both states, intercompany agreements with their terms and termination provisions, the commercial case put to management, and the valuation support. The before-and-after functional analysis is what Rule 84 documentation must carry.
The agreements warrant consideration with the term and notice period determining whether early termination was compensable. This memo on what the intercompany agreement has to record lays out the drafting points, and the annual cycle is summarised in Indian transfer pricing compliances.
How is the arm’s length price of a restructuring determined?
By the most appropriate method, drawn from a closed list. The arm’s length price is computed by that method under Section 165 of the Income-tax Act 2025, which replaces Section 92C of the Income-tax Act 1961.
Rule 79 of the Income-tax Rules 2026, which replaces Rule 10B of the Income-tax Rules 1962, provides the methods for determining the arm’s length price under Section 165, with the comparable uncontrolled price method at sub-rule (1)(a) and the resale price, cost plus, profit split and transactional net margin methods at sub-rules (1)(b), (1)(c), (1)(d) and (1)(e) respectively. The other method sits outside that list, in Rule 78, made for the purposes of Section 165(1)(f).
It should be noted that every rule number cited in this article comes with one caveat, since these are the Income-tax Rules 1962 and the Income-tax Rules 2026 will give new numbering to the transfer pricing rules while preserving their substance.
Which method fits a transfer that happens only once?
Usually the other method, which Rule 78 sets out for the purposes of Section 165(1)(f). A restructuring is a single event, so a conventional comparable rarely exists, and Rule 78 meets that squarely: it permits any method taking into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction between non-associated enterprises under similar circumstances, considering all the relevant facts.
There are two alternatives left. Where a comparable transfer price is observable, such as in the sale of machinery or tooling, the comparable uncontrolled price method available at Rule 79(1)(a) is preferable; but for rare or uniquely valuable intangibles, the profit split method at Rule 79(1)(d) is most suitable.
Rule 80 settles the choice of method against six different selection criteria. Of these criteria, two of them form the basis of the majority of restructuring assignments: criterion (c), which is the availability, coverage and reliability of information, which is obviously not the case with a one-off transfer, and criterion (f), which is the nature, extent and reliability of assumptions that lie in the core of restructuring valuation.
Why is no arm’s length range available for a restructuring?
The range is closed to precisely the methods a restructuring usually needs. Rule 81 builds a dataset, arranged in ascending order, where the most appropriate method produces more than one price. Sub-rule (4) then opens the thirty-fifth to sixty-fifth percentile range only where the dataset holds six or more entries and the most appropriate method is neither the profit split method nor the other method.
Therefore, a restructuring that is priced using either of those two methods gets no range at all. Sub-rule (7) applies instead, and the arm’s length price is the arithmetical mean of the dataset. Where the variation does not exceed the tolerance notified by the Central Government, which the rule caps at three per cent, the price actually charged may still be deemed to be the arm’s length price, and that tolerance measures deviation from the mean rather than from a range.
So the latitude a benchmarking study takes for granted is unavailable on the transaction that needs it most. Nor is shelter available elsewhere, since business restructurings do not appear in the safe harbour tables at Rule 89.
When it is deemed necessary by the Assessing Officer, the transaction is referred to a Transfer Pricing Officer under Section 166 of the Income-tax Act 2025, the successor to Section 92CA of Income-tax Act 1961, and then the functional profile is scrutinised by the Officer before and after the change, the agreements, and the pricing basis for anything transferred. All details are elaborated in this note on how a restructuring is examined at assessment.
What happens after a primary adjustment is made?
A second consequence occurs when the funds do not come back again. Where a primary adjustment is made and the funds are not repatriated within the prescribed time, a secondary adjustment arises under Section 170 of the Income-tax Act 2025, which carries forward Section 92CE of the Income-tax Act 1961. The excess is then seen as an advance on which interest is imputed.
That converts a one-off exposure into a recurring one, and this analysis of secondary adjustment provisions considers the practical implications.
Can an advance pricing agreement remove the uncertainty before the restructuring?
For a planned reorganisation, an advance pricing agreement is the only route to certainty. Section 168 of Income-tax Act 2025, carrying forward Section 92CC from Income-tax Act 1961, provides for an agreement which allows the arm’s length price to be determined in advance, with Section 169 being the successor of Section 92CD, which governs how effect is given to a concluded agreement.
The value is not only the outcome. Reaching an agreement forces the group to describe, before the event, what the Indian entity does today and what it will do afterwards, so the question is answered while the facts survive.
The cost encompasses time and disclosure; forming an agreement could take years, not just months; in addition, it opens the group’s value chain to examination, and therefore suits material arrangements that will recur.
Who advises on the transfer pricing of a business restructuring?
Advisers handling Indian restructurings combine functional analysis with valuation support, because the question is decided on the facts and then priced. Steadfast Business Consulting (SBC) lists business restructurings, together with a review of agreements and contracts, as a named capability on its transfer pricing services in India page, and works from offices located in Hyderabad, Mumbai, Pune, and Dubai.
SBC was founded by Big 4 alumni, and the team page states 150 or more years of combined experience. ITR World Tax named the firm a Notable Transfer Pricing Firm in 2024.
You can ask any prospective adviser when they would record the pre-restructuring functional profile, and how they would support the value of anything transferred. You can raise a planned reorganisation with SBC at the design stage.
Frequently Asked Questions
Is a fall in Indian profit after a restructuring enough to trigger a charge?
A decline in expected future profit is not by itself compensable. The first consideration has to be whether an asset, an intangible or an ongoing activity with profit potential was transferred, or whether an arrangement carrying a term was terminated early.
Which transfer pricing method applies to a restructuring?
Usually the other method under Rule 78 of the Income-tax Rules 2026, because a one-time transfer usually cannot be found in the form of a conventional comparable. The comparable uncontrolled price method at Rule 79(1)(a) is used in the case of an observable asset sale, while the profit split method at Rule 79(1)(d) is used when uniquely valuable intangibles move.
Does an arm’s length range apply to a restructuring?
In most cases, not at all. Rule 81 opens the percentile range from the thirty-fifth to the sixty-fifth only in cases where the data set contains six or more entries and the method is neither the profit split method nor the other method, so a restructuring priced under either takes the arithmetical mean instead.
Which documentation matters most for a restructuring?
The functional analysis before and after the change, the intercompany agreements with their term and notice provisions, and the valuation support for anything transferred. The Rule 84 of the Income-tax Rules 2026 lists what has to be kept under Section 171 of Income-tax Act 2025, and Rule 85 covers the accountant’s report.
Can an advance pricing agreement cover a planned restructuring?
This is correct, and it is the only way to achieve certainty in advance. Section 168 of the Income-tax Act 2025 permits entering into an agreement determining the arm’s length price in advance, while Section 169 clarifies how effect is given to the said agreement.