A Trading Entity Is Not a Service Provider: How to Defend the Resale Price Method Against a TNMM Adjustment in India

By CA Mithilesh Reddy, Founder and CEO, and CA Sudheer Polana, Steadfast Business Consulting LLP | Transfer Pricing

Introduction

A distributor’s profit is frequently tested as though its only contribution were an identifiable pool of operating expenditure. That may be appropriate for some service arrangements, but it can be a poor representation of an enterprise that purchases goods, takes title, manages customers and resells at a gross margin.

The choice between the resale price method and the transactional net margin method is not a contest between high and low tax results. It is a question of what is reliably comparable. RPM measures the return earned on resale at the gross profit level, while TNMM usually compares a net margin after a wider set of operating expenses. Each is sensitive to different accounting classifications and functional differences.

This article examines a trading entity purchasing from an overseas associated enterprise and selling to unrelated Indian customers, a common setting for disputes over characterisation, comparable selection and method preference. The analysis is grounded in the actual buying and selling functions.

1. The law does not rank methods by taxpayer preference

For periods governed by the 1961 Act, Rule 10B(1)(b) sets out RPM and Rule 10C governs the most appropriate method. The Income-tax Department guidance describes RPM as working backwards from an uncontrolled resale price after allowing an appropriate gross margin.

For tax years under the Income-tax Act, 2025, the arm’s length price is determined under section 165 (section 92C of the 1961 Act), applied through rule 79 (methods, including the resale price method) and rule 80 (most appropriate method) of the Income-tax Rules, 2026. No method is selected merely because it produces a smaller adjustment. Reliability of comparable transactions, quality of data and functional similarity decide the analysis.

2. Establish that title and commercial risk actually pass

A purchase order and an invoice can describe a sale without proving the full economics. Examine when title passes, who bears inventory loss, whether unsold stock may be returned, who controls price discounts, who gives warranties, who pays customs duties and who carries customer receivables.

If the Indian entity has meaningful inventory, market and credit exposure and independently resells goods, it resembles a distributor rather than a service provider. If the foreign entity controls pricing, retains unsold stock and bears customer risk, the functional characterisation may differ despite the invoice chain.

3. Gross margin is useful only where accounts are comparable

RPM compares gross profit at the point of resale. That appears simpler than TNMM but accounting policy differences can make gross margins unreliable. Freight, customs handling, rebates, warranty expense, marketing support and product returns can be classified above or below gross profit differently across companies.

Before relying on a comparable, reconcile cost of goods sold and operating expenses to audited notes. An apparently higher or lower distributor margin may reflect cost classification rather than any economic difference. Adjustments must be based on reliable information, not an estimate designed only to secure a preferred outcome.

4. Value-adding transformation may change the method

RPM is particularly sensitive to whether the tested party changes the product or adds substantial value before resale. Basic packaging, routine quality checks or market-specific labelling need separate assessment from material technical modification, product development or manufacturing.

The presence of some local activity does not automatically make RPM unavailable. The real issue is whether a sufficiently comparable uncontrolled resale function can be identified and whether material differences can be adjusted reliably.

5. Distributor comparables should be comparable distributors

A functional screen should review product type, customer segment, distribution channel, ownership of valuable marketing intangibles, geographic coverage, credit terms and the division of sales responsibilities. A trading business that invests heavily in its own brand may not be an appropriate benchmark for a limited-rights imported goods distributor.

Companies described as “traders” may operate wholesale, retail, dealership, commission and hybrid models. Their public financial statements may not disclose sufficiently granular gross margins. The report should explain exclusions rather than rely on a keyword-based peer list.

6. Why TNMM may be proposed and when that challenge is fair

TNMM is often proposed because net profit information is more accessible and less affected by the placement of individual costs above or below gross profit. That can be a legitimate reliability consideration where meaningful gross margin comparisons cannot be constructed.

The taxpayer should not answer by declaring RPM inherently superior. It should demonstrate why the available gross-margin data are sufficiently reliable, which adjustments have been made and why a net-margin analysis would obscure the actual controlled purchase and resale function.

7. Foreign exchange, freight and working capital adjustments

Imported-goods distributors can have significant exchange movements and inventory funding costs. Classifying exchange differences as operating or non-operating affects both the numerator and comparability. The classification should follow the nature of the underlying transaction and be applied consistently.

Credit periods and inventory holding patterns can differ substantially between comparable distributors. When material, working capital considerations should be evaluated with reliable supporting data. The adjustment cannot substitute for a fundamentally different functional profile.

8. Build the defence around invoice-level reality

An effective defence file includes intercompany purchase contracts, import documents, warehouse and stock records, customer sales contracts, discount approvals, inventory ageing, returns, warranty obligations, credit-loss experience and segment financials.

The pricing study should connect those records to the FAR conclusion and explain why the chosen comparables perform broadly similar wholesale or distribution functions. Where a challenged comparable is a manufacturer, commission agent or product IP owner, identify the specific difference and its effect on the gross margin.

9. Method consistency does not displace an annual review

Consistent use of RPM may support continuity, but does not prove its suitability indefinitely. A distributor may begin local manufacturing, assume greater branding functions, outsource its warehousing or move to a commission model. Each change can alter the preferred method.

The annual review should reconcile changed contractual terms with actual conduct and document how they affect comparable selection and accounting treatment. A defendable method is the product of the current operating model, not an inherited spreadsheet.

What the Delhi High Court has said on RPM and method choice

Two recent Delhi High Court decisions help a trading entity facing a proposed TNMM substitution. In PCIT v. Fujitsu India Pvt. Ltd., decided on 12 October 2023 by Justices Rajiv Shakdher and Girish Kathpalia, the Revenue challenged a Tribunal order that applied RPM. The Tribunal had found that the assessee resold goods bought from its principal without adding value, so gross margin was the key factor, and that the TPO and the Dispute Resolution Panel had not brought comparable instances on record to support TNMM. The High Court answered the question of law against the Revenue.

In PCIT v. Dentsply India Pvt. Ltd., decided on 18 July 2022 by Justices Manmohan and Manmeet Pritam Singh Arora, trading made up about 95 per cent of the business and the goods came from associated enterprises. The Court held that use of TNMM in the transfer pricing report did not prevent the Tribunal from applying RPM if the circumstances supported it, because a method chosen in the report does not estop the assessee from showing that another method is more appropriate.

Neither decision makes RPM the default. Each turned on a finding that the entity was a reseller without value addition and that reliable gross margin comparisons were available.

Documentation checklist for an RPM defence

Prepare the file around the physical and financial path of the goods. Include the intercompany purchase agreement and pricing mechanism, import documents showing the importer of record and who paid customs duty, and warehouse and stock records showing where the goods sat and for how long. Add customer contracts and price lists showing who set the resale price, discount approvals, returns and warranty records, and receivable ageing with credit-loss history.

Then connect those records to the accounts. Reconcile cost of goods sold and operating expenses to the audited notes, show how freight, duty, rebates, exchange differences and warranty costs were classified, and apply the same classification to each comparable. Explain every excluded comparable in a rejection matrix, in particular manufacturers, commission agents and owners of product IP.

Common mistakes in assessments and appeals

First, asserting trading character from the invoice chain alone. Title, inventory risk, pricing control and credit exposure must be shown from stock, returns and receivable records.

Second, using a keyword-based peer list. Companies described as traders may be wholesalers, retailers, dealers or commission agents, and a manufacturer is not a comparable for an importer that does no processing.

Third, mixing non-operating items into the cost base. Exchange gains or losses, interest and one-off items should be classified by their nature and treated consistently for the tested party and the comparables; a misclassified item can create or remove an adjustment.

Fourth, treating RPM as superior in principle. The submission should show why the available gross margins are reliable and what adjustments were made, rather than argue that RPM is always preferable.

Fifth, assuming the method in the transfer pricing report binds the taxpayer. Dentsply shows that it need not, but the case for a different method must still be made on evidence.

Sixth, not updating the analysis when the model changes. Local assembly, brand investment, outsourced warehousing or a move to commission selling can each change the most appropriate method.

Conclusion

A trading company should be assessed for what it does as a trader, but its legal description does not settle the method. The most persuasive RPM case demonstrates true buy-sell risk, reliable gross margins and a consistent functional comparison.

The question before the reviewer is whether the controlled purchase price can be tested more reliably from an uncontrolled resale margin than from the available alternatives. A sound defence answers that question with records, not slogans.

Frequently asked questions

1. Is RPM mandatory for all distributors?

No. It is a candidate method whose reliability must be assessed against the transaction and available comparables.

2. Does importation from an associated enterprise prove buy-sell character?

No. Title, inventory risk, pricing, credit exposure and actual conduct should be examined.

3. Can a company undertaking local marketing still use RPM?

Potentially, depending on the significance of its functions and comparable differences.

4. Why is gross margin classification so important?

Cost of goods sold and operating expense presentation can materially change reported margins.

5. Can a TPO substitute TNMM without analysing RPM?

The substitution should be evaluated under the statutory most-appropriate-method requirements and the record supporting each alternative.

6. When is the resale price method the most appropriate method in India?

When goods are bought from an associated enterprise and resold to independent customers without substantial value addition, and reliable gross margins of comparable distributors are available. The choice is tested against the factors in Rule 10C, now rule 80 of the Income-tax Rules, 2026, including functions, data reliability and the ability to make accurate adjustments.

7. Can a taxpayer argue for RPM if its transfer pricing report used TNMM?

Yes, if RPM is in fact the most appropriate method. The Delhi High Court in PCIT v. Dentsply India (18 July 2022) held that use of TNMM in the report did not estop the assessee. The taxpayer must still show buy-sell character, absence of value addition and reliable gross margin comparables.

8. Why are manufacturing companies not suitable comparables for a trading entity?

A manufacturer owns production assets, bears production and capacity risk and earns a return on transformation, none of which an importer-distributor performs. Including manufacturers lowers the benchmark margin artificially. Comparables should be distributors or traders with similar products, customers, channels, credit terms and inventory exposure.

9. Which provisions govern the resale price method under the Income-tax Act, 2025?

Section 165 of the Income-tax Act, 2025 provides for determination of the arm’s length price using the most appropriate method. Rule 79 of the Income-tax Rules, 2026 prescribes how each method, including the resale price method, is applied, and rule 80 lists the factors for choosing the method. Rule 10B and Rule 10C apply to earlier years.

Related reading from SBC

• When Is the Berry Ratio the Right Profit Level Indicator for a Limited Risk Contract Manufacturer in India?
• Contract R&D or Routine Software Development: How the Functional Profile Decides the Transfer Pricing Method in India
• Defending the Residual Profit Split Method in India When the TPO Proposes TNMM for an Intangible-Owning Entity
• More articles on the SBC blog

Disclaimer

This article is general professional commentary and not advice on any particular facts. Treaty eligibility, applicable law, procedural requirements and statutory amendments must be verified for the relevant tax period. It is not a description of an identifiable client engagement.

Contract R&D or Routine Software Development: How the Functional Profile Decides the Transfer Pricing Method in India

By CA Mithilesh Reddy, Founder and CEO, and CA Sudheer Polana, Steadfast Business Consulting LLP | Transfer Pricing

Introduction

The phrase “software development services” can describe almost any stage of a technology business, from writing code against detailed instructions to deciding the architecture of a new platform. In transfer pricing, those activities do not become comparable merely because they both produce software. The relevant distinction concerns functions, decision-making, ownership of results and economic risks.

A contract R&D arrangement often appears clear in its intercompany agreement: the overseas principal funds development and owns the intellectual property, while the Indian entity undertakes a defined research programme and earns a cost-plus return. During an assessment, however, the authority may examine research staff, technical initiatives and costs that are not neatly captured by the contract. The resulting disagreement is one of characterisation before it becomes a dispute about a margin.

This article addresses how to establish the functional profile of an R&D centre, how to distinguish its output from routine software development, and when it is defensible to adopt a separate benchmarking segment. The documentation approach builds on SBC’s FAR analysis guide.

1. Classify transactions before classifying the entity

A single legal entity may supply application maintenance, software development, product testing and contract R&D to the same overseas group. Each category can involve different functions and risk assumptions. The analysis should begin with the controlled transactions in the agreements, invoices and accounting records rather than assigning the entity one description and trying to fit every activity within it.

The Income-tax Department transfer pricing guidance makes clear that characterisation and comparability are function-specific. For historical periods, the 1961 Act and Rule 10B framework remain relevant; for tax years under the Income-tax Act, 2025, the corresponding provisions are section 165 of that Act and rules 79 and 80 of the Income-tax Rules, 2026.

2. The difference between execution and direction

A developer may select code libraries, resolve complex bugs and propose technical improvements while remaining within specifications and budget set by the overseas principal. Those activities involve skill, but do not necessarily mean the Indian entity controls the development programme as an entrepreneurial principal.

Ask who approves product roadmaps, allocates strategic R&D funding, chooses whether to abandon a project, authorises major functionality, controls commercialisation and decides what to do if a research hypothesis fails. The relevant evidence includes architecture minutes, project charters, research steering committee records and acceptance criteria.

3. Funding and failed-project risk

An agreement may state that the overseas entity bears all research risks, but that claim should be supported by actual behaviour. Where a research project overruns its budget or produces unusable results, who absorbs the cost? Is the Indian centre reimbursed automatically, reimbursed only after approval, or exposed to uncompensated expenditure?

Risk control and financial capacity are as important as contractual risk allocation. Retrospective true-up entries unsupported by board approvals and actual settlements may weaken the narrative. Keep failed-project expenses in the functional analysis instead of selecting only successful programmes as evidence.

4. Intangible development and DEMPE contributions

DEMPE examines development, enhancement, maintenance, protection and exploitation of intangibles. A local team may undertake development activity without owning the outcome. Conversely, legal ownership abroad does not make substantive local design or commercial decision-making disappear.

The study should reconcile IP registrations, assignment clauses, source repositories, inventor records, release approvals and funding with the actual participants. Determine whether the Indian entity simply implements principal-controlled development or exercises significant independent control deserving a different reward.

5. Segment accounts must be constructed, not asserted

If an entity undertakes more than one business model, a combined operating margin can obscure differences in the cost base and functional profile. Separate segment accounts should reconcile to audited totals and use documented allocation keys for staff, equipment, occupancy, shared software and management overhead.

Projects should be classified on contemporaneous records, not relabelled after an adjustment is proposed. A study is stronger where ERP cost centres, contracts, invoices and time records independently produce the proposed segments. The denominator for benchmarking should be consistent with the treatment of pass-through and non-operating costs.

6. Method selection and comparable screening

The transactional net margin method may be usable for a properly characterised service provider, but it does not eliminate the need for functional comparability. Product companies, owners of valuable intangibles, full-risk R&D centres and routine development providers cannot be equated without examining their economic differences.

Comparable selection should test service mix, owned IP, R&D expenditure, contract profile, outsourced delivery and risks. A company with its own products may earn returns that do not reflect the routine fee of a contract development centre. Equally, a research-intensive captive centre should not automatically be compared with every conventional IT services company.

7. Safe harbour eligibility needs its own statutory test

Indian safe harbour rules distinguish specified eligible service categories. They may prescribe different margins or conditions for routine software development and contract R&D; the applicable table depends on the year and type of transaction. It is unsafe to lift an older percentage into a current-year memorandum.

For earlier assessment years, the official Rule 10TD text should be checked with its amendments. For tax years under the Income-tax Rules, 2026, safe harbour is in rule 89 (eligible international transactions, which includes IT services and contract R&D for generic pharmaceuticals) with the option made in Form No. 49 under the procedure rule that follows it; confirm the notified thresholds, qualifying transactions and block period before relying on any margin. Eligibility depends on the actual functional characteristics, not simply the selection of a favourable category.

8. Defending a recharacterisation before the TPO and DRP

An effective defence begins with a transaction matrix: contractual scope, decision owner, funding, risk controller, IP rights, activity records, cost centres and remuneration. The matrix should identify which facts are accepted and which the proposed adjustment overlooks.

If the authority proposes high-end R&D classification, answer with primary records showing the distribution of decision rights, not generic statements that the company is captive. Where the facts support substantial research functions, the pricing analysis should address them rather than deny their existence. An alternative comparable set may be appropriate without conceding the primary position.

9. A current-year review that anticipates business change

A development centre may move from routine support to platform architecture, independent research or ownership of commercially significant technology over time. Changes in delegated authority and compensation should trigger a review of the agreement and the pricing policy.

Annual updating should capture material project wins and failures, changes in key-person decision-making, new IP assignments, cost overruns and any shift in risk funding. A historic margin remains defensible only if the operating model to which it relates remains materially the same.

Documentation checklist for an Indian development centre

A defensible file is built per controlled transaction and prepared before the return is filed. The records below are the ones a transfer pricing officer most often asks for, and they are most persuasive when they pre-date any notice.

Agreements and scope: the intercompany services or R&D agreement, statements of work, change orders and the pricing schedule, with the invoices and ledger entries showing how revenue was actually recognised. If the agreement says the overseas principal bears research risk, the file should contain the true-up or reimbursement entries showing that it did.

Decision rights: project charters, steering committee minutes, roadmap approvals, architecture decision records, acceptance sign-offs and any delegation-of-authority matrix. These show whether the Indian team executes a brief or sets one.

People and cost: role mapping by project, seniority and qualifications, time records, and ERP cost-centre reports that reconcile to the audited accounts. A role map built from contemporaneous records carries more weight than interviews arranged after an adjustment is proposed.

Intellectual property: assignment clauses, registrations, repository access and commit records, contributor and inventor records, and evidence of who funds filing, maintenance and enforcement.

Benchmarking: the search strategy, a rejection matrix giving the reason each company was excluded, and the working that derives each segment margin from the accounts.

Common mistakes in assessments and appeals

First, describing the entity by a label such as captive or low risk instead of by evidence. A label does not answer a question about who decided what.

Second, relying on the contract to allocate risk when the books show the Indian entity absorbed overruns or unapproved costs. An officer will follow the money, and a risk allocation contradicted by actual settlements weakens the whole characterisation.

Third, preparing segment accounts after the notice with allocation keys that were never used in management reporting. Segments should be traceable to ERP cost centres, contracts and time records.

Fourth, accepting a single characterisation for the whole entity. A small research stream can pull the entire margin into a high-end comparable set unless the activities are separated and each is supported on its own records.

Fifth, treating a margin inside the range as proof of profile. A margin does not establish who controls the programme, and the authority can still recharacterise the entity.

Sixth, not preserving an alternative. Where the primary position is routine development, the submission can still address a comparable set for the activities that genuinely involve research, without conceding the primary case.

Seventh, leaving the factual record thin before the transfer pricing officer. That record is what the Dispute Resolution Panel and the Tribunal read, so role maps and decision-rights evidence should be filed at the first stage.

Safe harbour under the Income-tax Rules, 2026: points to check

For earlier years, Rule 10TD of the Income-tax Rules, 1962 prescribes the safe harbour, and its sub-rules apply different tables to different assessment years, with sub-rule (3B) covering assessment years 2020-21 to 2026-27. Sub-rule (4) bars comparability adjustments to an accepted transfer price, and sub-rule (5) preserves the documentation and reporting requirements.

For tax years under the Income-tax Act, 2025, rule 89 of the Income-tax Rules, 2026 applies. As published on the Income Tax Department website, its table lists IT services with an operating profit margin on operating expense of at least 15.5 per cent up to a revenue ceiling of Rs 2,000 crore, and contract R&D for generic pharmaceuticals at least 24 per cent up to Rs 300 crore, and sub-rule (4) fixes a block of three tax years from 2026-27. The option is made in Form No. 49 within the procedure rule, and the Assessing Officer may refer doubtful cases to the Transfer Pricing Officer.

Two practical points follow. Eligibility turns on the entity’s actual functions, so a centre that performs genuine research cannot assume that a routine software margin applies to it. And an accepted safe harbour price still has to be documented and reported, so the functional file described above remains necessary.

Conclusion

A contract R&D dispute is not won by insisting that a subsidiary is low risk. It is won by demonstrating the programme actually undertaken, the rights in its output, who made the significant decisions and how the real financial results were shared.

The functional assessment, segmented accounts and pricing method should reinforce each other. If they do not, no level of sophistication in comparable screening can correct the underlying mismatch.

Frequently asked questions

1. Is every centre doing research an entrepreneurial R&D entity?

No. Risk control, decision-making, funding and ownership of results need to be examined.

2. Can a captive centre do contract R&D?

Yes. Captive status does not preclude research activity or settle the appropriate return.

3. When are separate segment accounts useful?

Where materially different controlled transactions or functional profiles are recorded and can be reliably reconciled.

4. Does a safe harbour percentage automatically establish the arm’s length price?

No. Safe harbour requires meeting its statutory eligibility, procedural and temporal conditions.

5. Does ownership of a patent decide the DEMPE allocation?

Not by itself. Actual contributions and risks must be analysed with legal rights.

6. What is the difference between contract R&D and software development services in transfer pricing?

Software development services usually execute defined specifications under the principal’s direction. Contract R&D involves a research programme, but the label alone does not decide the profile. What matters is who sets the agenda, funds the work, owns the results and bears failure risk. Both can be low-risk services; either can be entrepreneurial if the Indian entity controls those decisions.

7. Is contract R&D covered by the transfer pricing safe harbour in India?

Rule 10TD of the Income-tax Rules, 1962 covered contract R&D for specified categories for earlier years. For tax years under the Income-tax Act, 2025, rule 89 of the Income-tax Rules, 2026 lists IT services and contract R&D for generic pharmaceuticals among eligible transactions. Eligibility, thresholds and the block period must be checked against the notified text for the year concerned.

8. How can a company respond if the TPO treats its development centre as a high-end R&D provider?

Answer the characterisation with primary records: role mapping, project charters, steering committee minutes, IP assignment and funding records showing that design, ownership and key decisions sit with the principal. Rebuild the comparable set around routine software development, and keep an alternative position on any genuine research activity before the Dispute Resolution Panel.

9. Which documents show who controls an R&D programme?

Roadmap approvals, project charters, architecture decision records, steering committee minutes, budget approvals, acceptance sign-offs, delegation-of-authority matrices and repository records. Funding entries for overruns and failed projects are equally important, because they show who absorbed the cost when a hypothesis failed.

Related reading from SBC

• When Is the Berry Ratio the Right Profit Level Indicator for a Limited Risk Contract Manufacturer in India?
• Defending the Residual Profit Split Method in India When the TPO Proposes TNMM for an Intangible-Owning Entity
• A Trading Entity Is Not a Service Provider: How to Defend the Resale Price Method Against a TNMM Adjustment in India
• More articles on the SBC blog

Disclaimer

This article is general professional commentary and not advice on any particular facts. Treaty eligibility, applicable law, procedural requirements and statutory amendments must be verified for the relevant tax period. It is not a description of an identifiable client engagement.

Defending the Residual Profit Split Method in India When the TPO Proposes TNMM for an Intangible-Owning Entity

By CA Mithilesh Reddy, Founder and CEO, and CA Rajesh Vaishnav, Partner, Steadfast Business Consulting LLP | Transfer Pricing

Introduction

Transfer pricing methods divide into those that test one side of a transaction and those that look at both. A one sided method selects the less complex party, benchmarks its return against comparables, and leaves whatever remains to the other side. It is the workhorse of Indian transfer pricing because it is simpler to apply and easier to verify. It also carries an assumption that is not always true: that only one party to the transaction is doing anything a comparable cannot replicate.

Indian transfer pricing officers rarely accept the profit split method and commonly propose to substitute the transactional net margin method. Defending the choice is not an argument about which method is more favourable. It is an argument about whether the conditions in the rule are satisfied, and it stands or falls on the functional and value chain evidence.

This note deals with what happens when that assumption fails, and with defending the profit split method when a transfer pricing officer proposes to substitute a one sided method in its place. It covers the statutory conditions and their two gateways, the Indian authority and its limits, how economic ownership of an intangible is established, how a residual split is constructed and documented, the high margin problem, and why the case for rejecting the alternative method has to be made affirmatively rather than left implied. The functional evidence on which the whole analysis rests is dealt with in our note on FAR analysis for transfer pricing audit defence.

1. The statutory conditions

Rule 10B(1)(d) of the Income-tax Rules, 1962 (now rule 79(1)(d) of the Income-tax Rules, 2026) provides for the profit split method and identifies the circumstances in which it applies: transactions involving transfer of unique intangibles, or multiple international transactions which are so interrelated that they cannot be evaluated separately for determining the arm’s length price.

Those are the two gateways, and they are disjunctive. The method is available where unique intangibles are involved, and it is available where the transactions are inseparably interrelated, whether or not intangibles are present. A submission should identify which gateway it relies on, and preferably both where the facts support it.

Rule 10C (now rule 80 of the Income-tax Rules, 2026) sets out the factors governing the selection of the most appropriate method, including the nature and class of the transaction, the functions performed, assets employed and risks assumed, the availability and reliability of data, and the degree of comparability. The method is not chosen in the abstract; it is chosen because it is the one that can be applied most reliably on the available data.

Under the Income-tax Act, 2025 the governing provision is section 165 (section 92C of the 1961 Act, determination of arm’s length price), within Chapter X, sections 161 to 177. There is no current administrative guidance on the method. The Central Board’s Circular No. 2/2013 dated 26 March 2013 on the application of the profit split method was withdrawn by Circular No. 5/2013 dated 29 June 2013 and has not been replaced, so a submission cannot rely on Board guidance here and must argue from the rule and the authorities.

2. The Indian authority

The leading tribunal decision is Infogain India Pvt. Ltd. v. DCIT, pronounced by the Delhi Bench on 19 August 2015 for assessment year 2008-09. The Bench held that under Rule 10B(1)(d) the profit split method applies where a transaction involves unique intangibles or where interrelated international transactions cannot be evaluated separately. On the facts the Indian and United States operations were highly integrated and both contributed significantly, so the profit split method was the most appropriate method. Where comparables are unavailable, residual profit may be split on relative contribution measured through key value drivers, consistent with the guidance published by the OECD and the United Nations. A split accepted by the department in adjacent years was directed to be followed.

The decision should be cited for what it says. It did not hold that the profit split method must always displace the transactional net margin method wherever unique intangibles exist. Its reasoning rested principally on the integration of the two operations and the fact that both contributed materially. A submission that overstates the holding gives the Revenue an easy answer.

On the related question of comparability, CIT v. UT Starcom Inc. (India Branch), Delhi High Court, 25 September 2017, is useful in both directions. The Court found no substantial question of law and dismissed the Revenue’s appeal, affirming the Tribunal’s reasoning that a large risk taking company with significant intangibles and assets is not comparable to a limited risk captive. The corollary is that an entity which does own significant intangibles and does carry entrepreneurial risk cannot be benchmarked against routine service providers either, which is often exactly what a proposed transactional net margin analysis does.

3. Why a one sided method breaks down here

The transactional net margin method works by selecting the less complex party as the tested party, finding comparables for it, and setting its return. Everything else falls to the other party by residue. That is a sound approach where the other party is the only one doing anything unusual.

Consider instead a group in which an Indian entity develops and owns a proprietary software platform, and overseas entities distribute it in their markets. If the overseas distributors are routine, they can be tested and the residual accrues to India, which is the correct outcome. A transfer pricing officer who instead tests the Indian developer against routine software service comparables inverts the structure: it caps the developer’s return at a service margin and leaves the residual with distributors that did not create it.

That inversion is the argument. It is not that the profit split method gives a better answer. It is that applying a one sided method with the wrong tested party allocates the return from the intangible to the party that does not own it, which is the opposite of what the arm’s length principle requires.

4. Establishing economic ownership of the intangible

Everything turns on who owns the intangible in economic terms, and that is a DEMPE question: who performs and controls the development, enhancement, maintenance, protection and exploitation functions, who funds them, and who bears the risk.

Legal ownership is the starting point and nothing more. The evidence that matters is operational.

• Development. Where the engineering teams sit, headcount by location, the roadmap and who sets it, who approves releases. Version control and project management records are more persuasive than an organisation chart because they are contemporaneous and were not created for the file.
• Enhancement. Who decides what gets built next, and on whose commercial judgment.
• Maintenance. Who runs the platform, who resolves defects, who carries the operational burden.
• Protection. Who files and maintains the intellectual property, who funds enforcement.
• Exploitation. Who sets pricing and commercial terms, who decides which markets to enter.
• Funding and risk. Who bears development cost, and in particular who absorbs the cost of a project that fails. The party that carries failure risk is the party that should earn the upside.

The corresponding question has to be answered for the overseas entities. Showing that they perform routine distribution functions, do not develop the product, do not carry development risk and operate within commercial parameters set elsewhere is what establishes them as the routine parties.

5. Constructing the split

A residual profit split has two stages, and both have to be documented.

Stage one: the routine return. Each party is allocated a return for its ordinary functions, benchmarked against comparables performing those functions. For a distributor this is a distribution margin; for a service entity, a service margin. This stage is a conventional benchmarking exercise and should be done conventionally, with a documented search.

Stage two: the residual. What remains after routine returns is allocated by reference to relative contribution to the unique value drivers. The allocation key is where the analysis is most often thin, and it is where the officer will concentrate.

Keys commonly used include cumulative development spend, capitalised and amortised over an appropriate life; headcount or cost of the people performing DEMPE functions; the relative significance of identified value drivers weighted on a reasoned basis; and, where the facts permit, a bargaining analysis of what each party could have obtained from an independent counterparty.

Whichever key is used, three things must be shown: that it measures contribution to the residual rather than merely activity; that the data underlying it is reliable and auditable; and that the result is stable, in the sense that reasonable variation in the inputs does not change the conclusion materially. A sensitivity table is worth more than a paragraph of justification.

6. The high margin problem

An entity that owns a valuable platform and licenses it will often report margins far above anything in a routine comparable set. Where it also claims a unit based deduction, the combination attracts attention, and the officer’s working assumption is frequently that the margin is evidence of mispricing.

The answer is structural. In a model where one party owns the intangible and others distribute, a high margin at the owner is what the arm’s length principle predicts, not a departure from it. The comparison being drawn is with service providers that own nothing, and the margin differential is the return on the intangible. Demonstrating that is done by showing the development investment that produced the platform, the period over which it was made, the risk that it would produce nothing, and the fact that the same entity absorbed that risk.

Where a deduction is also claimed, the two issues should be kept separate in the submission. The availability of the deduction is a question under its own provision. It is not a reason to reallocate profit, and conflating the two in the response invites the officer to do the same.

7. A worked example

Assume, hypothetically, that a group owns a commercially valuable intangible developed and managed in India while overseas affiliates carry out distinct distribution functions. The question is whether the Indian entity makes unique contributions and the dealings are sufficiently integrated to support a profit split, and whether a one-sided comparable can reliably measure the Indian entity’s return. The selection must be supported by actual contracts, risk control and contribution records.

Gateway. Both limbs of Rule 10B(1)(d) are engaged. The platform is a unique intangible, and the development and distribution transactions are so interrelated that neither can be priced without reference to the other.

Economic ownership. Established through development headcount and location, roadmap governance records, the funding pattern across years, and evidence that failed projects were absorbed in India.

Routine returns. Overseas distributors benchmarked against independent distributors in their markets; a documented search for each.

Residual. Allocated on a key reflecting cumulative development contribution, with the computation shown and a sensitivity analysis provided.

Meeting the substitution. The submission has to show affirmatively why the transactional net margin method cannot be applied reliably here, not merely that the profit split method can. The reasons are that no reliable comparable exists for an entity owning a platform of this kind; that the proposed comparables perform services and own nothing, so the differential is the very return in dispute; and that a one sided method applied to the intangible owner allocates the residual to parties that did not create it. On comparability the reasoning in UT Starcom applies.

Consistency. Where the department has accepted a split in an adjacent year, that acceptance should be in the submission. Infogain directed that an accepted split be followed, and consistency arguments carry real weight at tribunal level.

8. The allocation key, in figures

The residual stage is where submissions are thinnest, so it is worth showing what an adequately documented key looks like. Take a group with combined profit of 100 from the platform business, an Indian developer that owns the platform, and two overseas distributors.

Stage one, routine returns. Each distributor is benchmarked against independent distributors in its market and allocated a routine return of 8, giving 16 in total. The Indian entity is allocated a routine return for the service element of its activity, benchmarked against independent software service providers, of 14. Routine returns therefore absorb 30, and the residual is 70.

Stage two, the residual. The residual is attributable to the unique contributions. Suppose cumulative development spend is capitalised over a five year life and the amortised balance by entity is 60 in India and 5 across the two distributors, reflecting local adaptation work they have funded. On that key the residual splits 60 to 5 (about 92.3 to 7.7), giving the Indian entity about 64.6 and the distributors about 5.4 between them.

Totals. India takes 14 plus about 64.6, or about 78.6. The distributors take 16 plus about 5.4, or about 21.4.

Sensitivity. The submission should then show what happens if the key moves. If the amortisation life is three years rather than five, or if a different measure of development contribution is used, how much does the allocation change? Where the answer is a few percentage points, the conclusion is stable and the file should say so. Where a plausible change in assumption moves the allocation materially, the key is not doing enough work and a second key should be tested alongside it.

What makes this defensible is not the elegance of the arithmetic. It is that every figure is traceable to an audited number or to a documented computation, and that the submission has already answered the question an officer will ask about each input.

9. The alternatives, and why they were rejected

A method selection analysis is not complete until it explains why the other methods were not used. For a platform licensing model the realistic alternatives are these, and each should be dealt with in a sentence or two rather than left unmentioned.

Comparable uncontrolled price. Available in principle where a comparable licence of comparable technology to an independent party can be found. In practice it fails for a proprietary platform because the comparability requirements for an intangible licence are demanding, and a licence of different technology on different terms is not a comparable price.

Resale price and cost plus. Both are one sided and both require a reliable gross margin comparison. They are unsuited to a model whose value sits in an intangible rather than in a distribution or service margin.

Transactional net margin method with the overseas distributors as tested parties. This is the alternative that should be taken most seriously, because it can be a correct approach. Where the distributors are genuinely routine and the Indian entity is the only party with unique contributions, testing the distributors and leaving the residual in India produces the same answer as a residual profit split, with less complexity. The honest position is that this is often the better method, and the case for a profit split is strongest where the overseas entities also contribute something unique, such as a market intangible they have developed and funded.

Transactional net margin method with the Indian developer as tested party. This is the method usually proposed by the Revenue, and it is the one that has to be rejected affirmatively rather than merely displaced. The objection is not that it produces an unfavourable number. It is that it treats the party owning the unique intangible as the routine party, which inverts the structure of the transaction.

10. Where these cases fail

First, the gateway is asserted rather than established. Stating that unique intangibles exist is not the same as identifying them, showing what makes them unique and showing who owns them economically.

Second, the allocation key is unsupported. A percentage without a derivation is the single most common weakness, and officers go to it first.

Third, the routine stage is skipped. A profit split that allocates total profit without first benchmarking a routine return for each party is not a residual profit split and should not be described as one.

Fourth, the method changes between years. Where the profit split method appears in a profitable year and a one sided method in a lean one, the selection looks outcome driven.

Fifth, the DEMPE evidence is documentary rather than operational. An agreement recording that the Indian entity owns the intangible is a starting point; the functional evidence is what decides it.

Sixth, the case for rejecting the alternative is not made. The officer does not have to prove the transactional net margin method is better; the taxpayer has to show it cannot be applied reliably.

Seventh, Infogain is overstated. Citing it for the proposition that unique intangibles always require a profit split invites the correction, and the correction weakens everything around it.

11. Documentation

1. A value chain analysis identifying each contribution and the party making it.
2. Identification of each intangible, what makes it unique, and the evidence of economic ownership against each DEMPE function.
3. The functional analysis for every party, including the overseas entities whose routine characterisation the analysis depends on.
4. The gateway analysis under Rule 10B(1)(d), identifying which limb or limbs apply and why.
5. The method selection analysis under Rule 10C, including why each other method was rejected and specifically why a one sided method cannot be applied reliably.
6. The routine return benchmarking for each party, with documented searches.
7. The residual allocation key, its derivation, the underlying data and a sensitivity analysis.
8. The comparability analysis supporting rejection of any comparable set proposed by the Revenue.
9. Evidence of consistency with earlier years, including any departmental acceptance.
10. The accountant’s report under section 172 of the 2025 Act (section 92E of the 1961 Act), furnished in Form No. 48 under rule 85 of the Income-tax Rules, 2026 (Form 3CEB for earlier years), describing the transaction consistently with the analysis.

Practitioner’s perspective

The profit split method is treated with suspicion in Indian practice because it is harder to verify than a one sided method and because it has sometimes been used to justify a predetermined allocation. That suspicion is a reason to document it well, not a reason to avoid it where the rule points to it.

In our experience the cases that succeed share three features. The gateway under Rule 10B(1)(d) is established on evidence rather than asserted. The allocation key is derived from auditable data and tested for sensitivity. And the submission makes the affirmative case that a one sided method cannot be applied reliably, rather than only defending the method chosen.

One further point on sequencing. Where a group expects to apply this method, the evidence should be captured as the business runs: roadmap governance, development cost by entity, decision records. Reconstructing DEMPE evidence three years later from memory and organisation charts is possible but it is never as persuasive as records that were kept because the business needed them.

The profit split method under rule 79 of the Income-tax Rules, 2026

For tax years under the Income-tax Act, 2025, the method is applied through rule 79(1)(d) of the Income-tax Rules, 2026, which implements section 165. As published on the Income Tax Department website, the rule states that the profit split method applies mainly where a transaction involves unique intangibles or unique and valuable contributions by each enterprise, or where multiple transactions are so interrelated that they cannot be evaluated separately. It then describes two approaches in terms: a contribution profit split, which divides combined net profit by relative contributions assessed on functions, assets and risks, and a residual profit split, which first allocates part of the combined profit to each enterprise for contributions that can be benchmarked against uncontrolled transactions and then divides the residual by relative contributions.

The earlier Rule 10B(1)(d) did not spell out the residual mechanics, which is why Infogain, decided under the old rule, remained the main Indian authority for a two-stage split. The explicit rule text gives a taxpayer a firmer footing for the two-stage structure described in this article, and it makes the routine-return stage a stated step rather than a matter of practice. It does not shift the burden: the gateway, economic ownership and the allocation key still have to be proved on evidence, and a transfer pricing officer may still say that a one-sided method is more reliable.

Method selection continues to be tested against rule 80, which asks which method is best suited to the facts and gives the most reliable measure of the arm’s length price, by reference to the nature of the transaction, the functions, assets and risks of each enterprise, the reliability of data, comparability and the reliability of adjustments. A file that walks through each of those factors for the profit split method and for the proposed one-sided alternative is the best protection against substitution.

Frequently asked questions

1. When does Rule 10B(1)(d) permit the profit split method?

Where the transaction involves transfer of unique intangibles, or where multiple international transactions are so interrelated that they cannot be evaluated separately for determining the arm’s length price. The two limbs are disjunctive.

2. What is the difference between a contribution split and a residual split?

A contribution analysis divides the combined profit by reference to relative contributions. A residual analysis first allocates a routine return to each party for its ordinary functions and then divides only what remains by reference to the unique contributions.

3. Does the existence of unique intangibles mean the profit split method must be used?

No. Infogain did not so hold. Its reasoning rested principally on the integration of the operations and the fact that both parties contributed materially. The method must still be shown to be the most appropriate on the facts and the available data.

4. Why can a one sided method be inappropriate here?

Because it tests the less complex party and leaves the residual to the other side by default. Where the officer tests the intangible owner against routine comparables, the method caps the owner’s return at a service margin and allocates the residual to parties that did not create it.

5. How is economic ownership of an intangible established?

By evidence against each DEMPE function: who develops, enhances, maintains, protects and exploits, who funds the activity and who bears the risk of failure. Legal ownership is the starting point only.

6. What allocation keys are acceptable for the residual?

Keys that measure contribution to the residual rather than mere activity, derived from reliable and auditable data. Cumulative development spend, DEMPE headcount or cost, and weighted value drivers are commonly used. Whichever is chosen, the derivation and a sensitivity analysis should be documented.

7. Does a high margin at the Indian entity indicate mispricing?

Not where the entity owns the intangible. In a model where one party develops and owns and others distribute, a high margin at the owner is what the arm’s length principle predicts. The differential against service comparables is the return on the intangible.

8. How does a deduction claim interact with the transfer pricing analysis?

They are separate questions and should be kept separate in the submission. The availability of a deduction is governed by its own provision and is not a reason to reallocate profit between associated enterprises.

9. Does consistency with earlier years help?

Yes. In Infogain the Tribunal directed that a split accepted by the department in adjacent years be followed. Departmental acceptance in any year should be in the submission.

10. Which provisions govern this under the Income-tax Act, 2025?

Chapter X, sections 161 to 177, in particular section 165 (section 92C, determination of arm’s length price), section 171 (section 92D, documentation) and section 172 (section 92E, the accountant’s report). Section 536, the repeal and savings provision, preserves the 1961 Act for earlier years and pending proceedings.

11. Is the residual profit split method accepted in India?

It is accepted where the facts support it, but it is not common. The Delhi Tribunal in Infogain India (19 August 2015) held the profit split method most appropriate for integrated operations where both entities contributed materially. Officers often propose TNMM instead, so acceptance depends on proof of the gateway, economic ownership of the intangible and an auditable allocation key.

12. What does rule 79 of the Income-tax Rules, 2026 say about the profit split method?

Rule 79(1)(d) applies the method mainly to unique intangibles or unique and valuable contributions, or to transactions so interrelated that they cannot be evaluated separately. It describes a contribution split and a residual split, the latter allocating benchmarkable returns first and dividing the residual by relative contributions. It succeeds Rule 10B(1)(d) for tax years under the Income-tax Act, 2025.

13. Can the tax officer replace the profit split method with TNMM?

The officer can propose it, but the choice must follow the most appropriate method factors in Rule 10C (rule 80 of the 2026 Rules). The taxpayer should show that a one-sided method cannot be applied reliably, for example because the proposed comparables own no intangibles and the tested party would be wrongly treated as the routine party.

Related reading from SBC

• When Is the Berry Ratio the Right Profit Level Indicator for a Limited Risk Contract Manufacturer in India?
• Contract R&D or Routine Software Development: How the Functional Profile Decides the Transfer Pricing Method in India
• Digital Platforms and India Tax Once the Equalisation Levy Is Gone: SEP, Treaty and PE Compared
• More articles on the SBC blog

Disclaimer

This article is for general information and does not constitute professional advice. It reflects the law as understood at the date of publication and does not take account of later developments. Statutory references give the Income-tax Act, 2025 section with the Income-tax Act, 1961 section in brackets; section 536 preserves the 1961 Act for proceedings pending on 31 March 2026 and for earlier tax years. The selection of the most appropriate method depends on the functional profile and the data available in each case. No reader should act on the basis of this article without taking advice on their own circumstances.

When Is the Berry Ratio the Right Profit Level Indicator for a Limited Risk Contract Manufacturer in India?

By CA Mithilesh Reddy, Founder and CEO, and CA Rajesh Vaishnav, Partner, Steadfast Business Consulting LLP | Transfer Pricing

Introduction

A profit level indicator is a ratio that expresses the tested party’s return against some measure of what it does. The transactional net margin method does not prescribe one. It allows the return to be measured against costs, against sales, against assets, or against any other base that is relevant, and the choice of base is part of applying the method rather than a preliminary to it. Choosing the wrong base produces a comparison between two things that are not alike, however carefully the comparables are screened.

The base that matters here is operating expenses, and the ratio built on it is the Berry ratio. It is the wrong indicator far more often than it is the right one, and a case built on it fails where the functional analysis does not support it. It is not a way of improving a result. It is a conclusion that follows from a particular functional profile, and the profile has to be established first.

This note deals with the base to use where the tested party’s accounts are dominated by purchases it does not control. It covers what the Berry ratio measures and why that matters, the Indian legal authority permitting it and the limits that authority sets, the functional evidence that has to be established before the ratio can be defended, the recharacterisation argument the Revenue usually runs, and the classification reconciliation on which these cases are actually decided. The functional analysis that underpins all of it is dealt with separately in our note on FAR analysis for transfer pricing audit defence.

1. What the ratio measures and why that matters

The Berry ratio is gross profit divided by operating expenses. Expressed differently, it asks how much gross margin the business earns for each rupee it spends on running itself.

What makes it useful is what it leaves out. Cost of goods sold does not appear in the denominator. Where an entity buys components from an associated enterprise, assembles them and sells the output, and where it has no influence over what it pays for those components, the purchases are not a measure of anything the entity does. They are a number passing through its accounts. A cost plus margin computed on total cost treats that number as the base for the entity’s return, which means the return rises and falls with component prices the entity does not set.

Operating expenses, by contrast, are the entity’s own spending: its people, its premises, its plant running costs, its local functions. For a business whose contribution is assembly and local execution, those expenses are a reasonable proxy for the value it adds.

The OECD Transfer Pricing Guidelines describe the Berry ratio as appropriate in narrow circumstances, broadly where the value of the functions performed is proportional to operating expenses, the value of the functions is not materially affected by the value of the products distributed, and the taxpayer does not perform other significant functions that should be remunerated separately.

2. The Indian legal basis

Rule 10B(1)(e) of the Income-tax Rules, 1962 (now rule 79(1)(e) of the Income-tax Rules, 2026) sets out the transactional net margin method and permits the net profit margin realised to be computed “in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base”. The closing words are the statutory foundation.

The Delhi High Court settled the point in Sumitomo Corporation India (P.) Ltd. v. CIT, decided on 22 July 2016 in IT Appeal Nos. 381 and 382 of 2013, 702 of 2014 and 738 of 2015, by Muralidhar and Vibhu Bakhru JJ. The Court held that the words “any other relevant base” permit operating expenses to be used as the base, and that the transfer pricing officer’s view that only cost, sales or assets could be used was plainly erroneous.

The Court was equally clear about the limits, and a submission that quotes the first holding without the second is incomplete. The ratio suits what the Court described as stripped down distributors with no financial exposure or risk in the goods. It is unsuitable where the entity uses intangibles or substantial fixed assets, and it is unsuitable where the comparables’ product mix differs materially. The matter was remanded to the Tribunal.

The Delhi Bench had reached a consistent view in Mitsubishi Corporation India Pvt. Ltd. v. DCIT, pronounced on 21 October 2014. For a high volume, low risk trading model the Berry ratio was held appropriate, because comparables carried much higher inventory and inventory risk, which would distort a cost based or sales based margin. The Bench identified the suitable profile as pure trading with no processing, no significant trade or marketing intangibles and low inventory.

Read together, the two decisions give a workable test. The Berry ratio is available where the entity’s contribution is proportional to its operating expenses and is not proportional to the value of the goods flowing through it. Where the entity owns intangibles, carries meaningful inventory or market risk, or deploys substantial fixed assets, the ratio understates what it should be earning and the courts have said so.

3. The functional analysis that has to come first

The method follows the functional profile. Establishing that profile is the work, and it is done on evidence rather than assertion. For a limited risk contract manufacturer the following has to be demonstrated.

Procurement. Who selects the supplier, who negotiates the price, who bears the consequence of a price movement. Where the associated enterprise nominates the supplier and sets the transfer price, and the Indian entity has no ability to source elsewhere or to renegotiate, the purchases are pass through in substance as well as in form. The evidence is the supply agreement, the purchase orders, the pricing mechanism and any correspondence showing who decided.

Product and process design. Who owns the specification, who approves changes, who holds the technical know how. A contract manufacturer executes a specification it did not write.

Customers. Who holds the customer relationship, who negotiates the sale price, who carries the credit risk. In a global contracting arrangement the Indian entity often supplies to customers under terms agreed by the parent, and that should be visible in the contracts.

Inventory. Who bears obsolescence, who decides production volumes, who carries the risk of unsold stock. This is the single most probative risk indicator for a manufacturing entity and it is frequently glossed over.

Capacity and idle cost. Who bears the cost of underutilisation. An entity guaranteed a return on its operating expenses regardless of volume is not carrying volume risk.

Foreign exchange. Where purchases are denominated in foreign currency and sales in rupees, who carries the exposure.

The documentary sources are the inter company agreement, the board minutes, the delegation of authority, the insurance policies, the actual pattern of profitability across years, and the correspondence that shows who actually decided things. A limited risk characterisation contradicted by a pattern of volatile margins is not a limited risk characterisation.

4. The recharacterisation risk, and how it is met

The standard revenue position is that the entity is not a limited risk manufacturer at all but an entrepreneurial one, with the consequence that a total cost base is appropriate and that entrepreneurial comparables should be used. The two halves of that position have to be met separately.

On characterisation, the evidence set out above is the answer, and it has to be assembled from primary documents rather than from the transfer pricing report of the previous year.

On comparables, the principle is well established in a related context. In CIT v. UT Starcom Inc. (India Branch), pronounced on 25 September 2017, the Delhi High Court found no substantial question of law and dismissed the Revenue’s appeal against the Tribunal’s exclusion of large risk taking companies with significant intangibles and assets from the comparable set for a captive unit subject to limited risk. The reasoning, that functional similarity alone does not make such a company a valid comparable, is the Tribunal’s, affirmed on appeal. The reasoning transfers directly to manufacturing: a company that owns its products, carries its own market risk and funds its own development is not comparable to one that assembles to a specification for a guaranteed return.

5. A worked example

Assume, purely for illustration, an Indian processing enterprise whose total costs are dominated by purchases subject to pricing decisions made by an associated enterprise. Its own contribution is confined to identifiable operating functions. Whether those material purchases may be treated as pass-through for benchmarking depends on evidence that the Indian enterprise does not control supplier selection, purchasing risks or principal customer terms; the Berry ratio is not assumed merely from the size of purchases.

The mechanical problem. With a cost base of, say, 100 of which 88 is component purchases and 12 is operating expenses, a benchmark margin of five per cent on total cost demands a return of 5. The same entity earning a Berry ratio in the comparable range on its 12 of operating expenses earns something quite different. The two indicators are not measuring the same thing, and on these facts only one of them is measuring the entity’s actual contribution.

The analysis. Establish through the supply agreement and the purchase documentation that component sourcing and pricing are controlled by the associated enterprise. Establish through the customer contracts that the parent holds the relationship and negotiates price. Establish through the inventory and capacity arrangements who bears obsolescence and idle cost. Identify operating expenses as the value added base. Select comparables on the functional profile, excluding entities with their own products, intangibles or market risk. Compute the Berry ratio for the tested party and the comparable set on a consistent basis.

What decides it. Consistency of classification. The single most common reason a Berry ratio analysis fails is that operating expenses and cost of goods sold are classified one way in the tested party’s accounts and another way in the comparables’ published accounts. A comparable that includes factory overheads in cost of goods sold while the tested party books them as operating expenses produces a ratio that is not comparable to anything. The reclassification work has to be done, documented and disclosed.

6. The computation, in figures

The mechanics are easier to see with numbers. Take an Indian assembler with the following results for a year, in crore.

Line	Amount
Sales	1,000
Cost of goods sold, almost entirely components bought from associated enterprises	880
Gross profit	120
Operating expenses, being the entity’s own people, premises and plant running costs	100
Operating profit	20

On a total cost basis the operating margin is 20 on 980, a little over two per cent. If the transfer pricing officer benchmarks the entity against manufacturers earning five per cent on total cost, the required profit is 49 and the adjustment is 29.

On a Berry ratio basis the measure is gross profit over operating expenses, 120 over 100, or 1.20. If the comparable set of stripped down assemblers shows a Berry ratio range of 1.10 to 1.25, the entity sits inside the range and no adjustment arises.

The two indicators disagree because they are measuring different things. The total cost measure asks what return the entity earns on every rupee that passes through it, including 880 of components whose price it did not set. The Berry measure asks what return it earns on the 100 it actually spends running the business. Where the entity genuinely controls neither the supplier nor the price, only the second question is about the entity.

Two cautions on the arithmetic. First, the result is highly sensitive to where costs sit. Moving 30 of factory overhead from operating expenses into cost of goods sold changes the ratio from 1.20 to 1.29 and changes gross profit at the same time, which is why the classification reconciliation matters more than any other working in the file. Second, a Berry ratio below 1.0 means the entity’s gross profit does not cover its own operating costs, which is a loss and will require explanation whatever method is applied.

7. The conditions the OECD attaches

The OECD Transfer Pricing Guidelines treat the Berry ratio as appropriate only in narrow circumstances, and the three conditions they identify are worth testing explicitly in the file because an officer is likely to raise them.

1. The value of the functions performed is proportional to operating expenses. This is the central condition and it is the one the functional analysis has to establish. It fails where the entity’s contribution is driven by something other than its own spending, such as an intangible or a risk it bears.
2. The value of the functions performed is not materially affected by the value of the products distributed. This fails where the entity earns more simply because the goods passing through it are more valuable, which is characteristic of a distributor that carries price or inventory risk.
3. The taxpayer does not perform other significant functions that should be remunerated by another method. This fails where, alongside the assembly or distribution activity, the entity performs development, marketing or service functions that are not compensated through the same base.

Each condition should be addressed in the documentation by reference to evidence rather than assertion, and where one of them is doubtful the honest course is to say so and explain why the ratio is still the most reliable measure available, rather than to leave the officer to find the weakness.

8. Where a Berry ratio case fails

First, classification is inconsistent between the tested party and the comparables. This is the dominant failure and it is a data problem, not a legal one.

Second, the entity holds intangibles. Any marketing intangible, customer list, process know how or product right makes the ratio inappropriate on the Sumitomo reasoning, because the return on the intangible is not proportional to operating expenses.

Third, fixed assets are substantial. A manufacturer with a significant asset base is deploying capital that a Berry ratio ignores, and a return that compensates operating expenses but not capital is not arm’s length.

Fourth, the purchases are not genuinely pass through. Where the entity can source alternatively, negotiates its prices, or benefits from favourable purchasing, the characterisation collapses.

Fifth, the ratio is selected because of the answer it produces. Where the file shows a total cost analysis prepared first and a Berry analysis prepared after it gave an unfavourable result, the method selection is not credible.

Sixth, the method changes between years on unchanged facts. Consistency matters more than optimality. A change of method invites the question of what changed, and the answer has to be something in the business.

Seventh, the comparable set is too small. The ratio is sensitive, and a narrow set magnifies classification noise.

9. Documentation

A defensible file contains the following, and it is prepared before the return rather than after the notice.

1. A functional analysis evidenced from primary documents, covering procurement, design, customers, inventory, capacity and currency risk.
2. The inter company agreement, with the pricing mechanism and the risk allocation it records.
3. An explanation of why the purchases are pass through in substance, supported by the sourcing and pricing documentation.
4. The method selection analysis, showing why the transactional net margin method was chosen and why operating expenses is the relevant base under Rule 10B(1)(e), with Sumitomo cited for the legal availability of the base.
5. The comparable search, with the screens applied and the reasons for each rejection, including the rejection of entities with intangibles, significant assets or market risk.
6. The classification reconciliation, showing how each comparable’s published figures were adjusted to a consistent basis, and disclosing the adjustments made.
7. The computation for the tested party and the set, with the range and the tested party’s position in it.
8. A note on the alternative, showing what a total cost analysis would produce and why it is not appropriate on these facts, so that the officer’s likely approach has already been addressed.
9. The accountant’s report under section 172 of the 2025 Act (section 92E of the 1961 Act), which is furnished in Form No. 48 under rule 85 of the Income-tax Rules, 2026 (Form 3CEB for earlier years), with the transaction described consistently with the analysis.

10. The statutory framework in the 2025 Act

Transfer pricing now sits in Chapter X of the Income-tax Act, 2025, sections 161 to 177. The provisions most relevant here are section 163 (section 92B of the 1961 Act, the meaning of international transaction), section 165 (section 92C, determination of arm’s length price), section 166 (section 92CA, reference to the transfer pricing officer), section 171 (section 92D, documentation) and section 172 (section 92E, the accountant’s report).

Two changes are worth noting. Section 165 is now headed determination rather than computation of arm’s length price, and it provides for a tolerance band of up to three per cent as notified by the Central Government. Separately, the general anti avoidance rules have been moved out of the transfer pricing chapter into a standalone Chapter XI, sections 178 to 184.

For proceedings relating to earlier years, section 536 preserves the 1961 Act, so current assessments and appeals continue to be argued on the old numbering.

Practitioner’s perspective

The Berry ratio has a reputation in Indian practice as an aggressive position. That reputation is partly deserved, because it is often reached for when a total cost analysis produces an uncomfortable result. Used properly it is the opposite: it is the indicator that reflects economic reality for an entity whose accounts are dominated by numbers it does not control.

The legal question is settled. Sumitomo confirms that operating expenses can be the base under Rule 10B(1)(e), and the same decision sets out the limits. What remains contested in practice is almost always factual: whether the entity really is stripped down, whether the purchases really are pass through, and whether the comparables have been put on a consistent footing.

Two pieces of advice follow. Establish the functional profile from primary documents before choosing the method, and be prepared to abandon the ratio if the profile does not support it. And treat the classification reconciliation as the centre of the file rather than an annexure, because that is where these cases are actually won and lost.

Where the Berry ratio sits under the Income-tax Rules, 2026

For tax years beginning on or after 1 April 2026, the arm’s length price is determined under section 165 of the Income-tax Act, 2025, which replaces section 92C of the 1961 Act. The manner of applying each method is prescribed in rule 79 of the Income-tax Rules, 2026, which the CBDT notified on 20 March 2026 as the successor to Rule 10B. The transactional net margin method in rule 79(1)(e) still measures the net profit margin against costs, sales, assets employed or to be employed, or any other relevant base, so the legal footing for an operating expense base that Sumitomo recognised under Rule 10B(1)(e) carries over in the same words.

Rule 80 replaces Rule 10C and lists the factors for choosing the most appropriate method: the nature of the transaction, the functions, assets and risks of each enterprise, the availability and reliability of data, the degree of comparability, whether reliable adjustments can be made, and the reliability of the assumptions the method needs. A Berry ratio file should be organised against those factors, because that is how an officer or the Dispute Resolution Panel will test it.

Two points on safe harbour. The safe harbour table in rule 89 of the 2026 Rules covers manufacture and export of auto components among manufacturing activities, so a general contract manufacturer outside that category cannot rely on a prescribed margin and must benchmark. And a safe harbour election does not remove the need for documentation under section 171 and the accountant’s report under section 172.

Frequently asked questions

1. What is the Berry ratio?

Gross profit divided by operating expenses. It measures the return the business earns relative to its own operating spending, and it excludes cost of goods sold from the base.

2. Is the Berry ratio permitted under Indian transfer pricing rules?

Yes. Rule 10B(1)(e) permits the net profit margin to be computed in relation to costs incurred, sales, assets employed or any other relevant base. In Sumitomo Corporation India the Delhi High Court held that operating expenses can be that base and that confining the base to cost, sales or assets was plainly erroneous.

3. When is the Berry ratio appropriate?

Where the value of the functions performed is proportional to operating expenses and not to the value of the goods flowing through the entity, and where the entity does not own intangibles, deploy substantial fixed assets or carry meaningful inventory or market risk.

4. When is it inappropriate?

Where the entity owns intangibles or substantial fixed assets, where it carries inventory or market risk, or where the comparables’ product mix differs materially. The Delhi High Court identified each of these limits in Sumitomo.

5. Why exclude cost of goods sold from the base?

Because where the entity neither selects the supplier nor negotiates the price, the purchases measure nothing the entity does. Including them makes the entity’s return move with component prices it does not control.

6. What is the most common reason a Berry ratio analysis fails?

Inconsistent classification between the tested party and the comparables. Where a comparable books factory overheads in cost of goods sold and the tested party books them as operating expenses, the ratios are not comparable. The reconciliation has to be done and disclosed.

7. Can the method be changed from an earlier year?

It can, but the change has to be explained by something that changed in the business. A change of method on unchanged facts, particularly one that improves the result, undermines the credibility of the selection.

8. How should comparables be selected for a limited risk manufacturer?

On the functional profile, excluding entities that own their products, carry their own market risk or fund their own development. The reasoning in UT Starcom, that a large risk taking company with significant intangibles is not comparable to a limited risk captive, applies directly.

9. What evidence establishes that purchases are pass through?

The supply agreement, the purchase orders, the pricing mechanism, evidence of who nominates the supplier, and evidence that the entity cannot source elsewhere or renegotiate. Assertion in a transfer pricing report is not evidence.

10. Which provisions govern transfer pricing under the Income-tax Act, 2025?

Chapter X, sections 161 to 177. In particular section 163 (section 92B, the meaning of international transaction), section 165 (section 92C, determination of arm’s length price), section 166 (section 92CA, reference to the transfer pricing officer), section 171 (section 92D, documentation) and section 172 (section 92E, the accountant’s report). Section 536, the repeal and savings provision, preserves the 1961 Act for earlier years and pending proceedings.

11. Is the Berry ratio accepted by Indian courts and tribunals?

Its legal availability is accepted. The Delhi High Court in Sumitomo Corporation India (22 July 2016) held that operating expenses can be the ‘relevant base’ under Rule 10B(1)(e), and the Delhi Tribunal in Mitsubishi Corporation India (21 October 2014) accepted it for a high-volume, low-risk trading model. Acceptance in a given case depends on the functional profile, and both decisions concerned trading rather than manufacturing.

12. Can the Berry ratio be used for a contract manufacturer in India?

It can, where component purchases are pass-through costs the entity does not control, it owns no significant intangibles, carries no material inventory or market risk and deploys no substantial fixed assets. Those facts must be proved from the supply agreement, purchase records and customer contracts. If the entity owns plant or know-how, a total cost or asset-based indicator is likely to be more reliable.

13. Which rule replaces Rule 10B of the Income-tax Rules under the Income-tax Act, 2025?

Rule 79 of the Income-tax Rules, 2026 prescribes how the arm’s length price is determined under section 165, and rule 80 lists the factors for the most appropriate method. The accountant’s report under section 172 is in Form No. 48 under rule 85. Rule 10B, Rule 10C and Form 3CEB continue to apply to periods and proceedings governed by the 1961 Act.

Related reading from SBC

• Defending the Residual Profit Split Method in India When the TPO Proposes TNMM for an Intangible-Owning Entity
• A Trading Entity Is Not a Service Provider: How to Defend the Resale Price Method Against a TNMM Adjustment in India
• Contract R&D or Routine Software Development: How the Functional Profile Decides the Transfer Pricing Method in India
• More articles on the SBC blog

Disclaimer

This article is for general information and does not constitute professional advice. It reflects the law as understood at the date of publication and does not take account of later developments. Statutory references give the Income-tax Act, 2025 section with the Income-tax Act, 1961 section in brackets; section 536 preserves the 1961 Act for proceedings pending on 31 March 2026 and for earlier tax years. The selection of a profit level indicator depends on the functional profile established on the facts of each case. No reader should act on the basis of this article without taking advice on their own circumstances.

Decoding Intra-Group Services: Transfer Pricing, Documentation and Litigation in India

Quick answer: how are intra-group services treated in Indian transfer pricing?

Intra-group services (IGS) are services such as IT, finance, HR, legal, procurement or management support that one member of a multinational group provides to another. In India, an IGS charge is tested twice: first on the benefit test (were the services actually received, and did they give the recipient economic or commercial value?), and then on the arm’s length test (is the price one independent enterprises would have agreed, benchmarked using the CUP, Cost Plus, TNMM or Other Method?).

Key takeaways:

• An intercompany agreement or invoice alone does not prove that services were rendered or that the price is at arm’s length.
• The benefit test and benchmarking are separate steps; passing one does not satisfy the other.
• Cost allocation keys must reflect actual service consumption, and shareholder costs should be excluded.
• Courts have limited the Transfer Pricing Officer’s power to question commercial expediency, but taxpayers must still substantiate the services and the price.
• Contemporaneous, consistent documentation is the strongest defence in assessments and appeals.

1. Introduction: why intra-group services attract scrutiny in India

In an increasingly globalised business environment, multinational enterprise (MNE) groups often centralise functions such as information technology (IT) support, finance, human resources, legal, procurement, marketing and management support. Services provided by one group entity to another give rise to intra-group service (IGS) transactions, which are frequently scrutinised by Indian tax authorities from a transfer pricing perspective.

The principal challenge lies in establishing whether the services were actually rendered, whether they provide economic or commercial value to the recipient, whether the costs were appropriately allocated and whether the consideration charged is consistent with the arm’s length principle.

While the centralisation of services may improve operational efficiency and reduce duplication of resources, the associated charges must be supported by adequate documentation and a defensible transfer pricing analysis. This article examines the Indian transfer pricing framework applicable to intra-group services, benchmarking approaches, significant judicial precedents and practical measures to mitigate litigation risks.

2. What are intra-group services?

Intra-group services generally refer to services provided by one associated enterprise (AE) to another within an MNE group. These services may be routine support functions or specialised services requiring significant expertise and resources.

Common examples include, but are not restricted to:

• Management and administrative services: Strategic planning, business coordination, performance monitoring and management support.
• IT support services: Software maintenance, infrastructure management, cybersecurity, technical support and software licensing.
• Finance and accounting services: Financial reporting, budgeting, accounts payable, accounts receivable and consolidation support.
• Human resources services: Recruitment, payroll, employee training and HR policy administration.
• Legal and compliance services: Contract management, regulatory assistance and compliance support.
• Marketing and procurement services: Market research, advertising coordination, sourcing and vendor management.

The provision of services between associated enterprises may constitute an international transaction under Section 92B of the Income-tax Act, 1961, where the prescribed conditions are satisfied. Accordingly, the consideration must be determined having regard to the arm’s length principle under Section 92C, read with the applicable transfer pricing rules.

Note on the Income-tax Act, 2025: The Income-tax Act, 2025 replaces the 1961 Act with effect from 1 April 2026. The equivalent provisions are Section 163 (meaning of international transaction) and Section 165 (determination of arm’s length price). The 1961 Act continues to govern tax years beginning before 1 April 2026, as explained in the Income Tax Department’s FAQs on the transition to the Income-tax Act, 2025.

Quick reference: transfer pricing provisions, 1961 Act vs 2025 Act

Subject	Income-tax Act, 1961	Income-tax Act, 2025
Meaning of international transaction	Section 92B	Section 163
Computation / determination of arm’s length price	Section 92C	Section 165
Maintenance of transfer pricing records	Section 92D	Section 171

The existence of an intercompany agreement or an invoice does not, by itself, establish that the services were actually rendered or that the charges are at arm’s length. The transaction must be evaluated based on its actual conduct, commercial substance and supporting evidence.

3. How do you prove intra-group services were received? (the benefit test)

One of the principal issues in intra-group service disputes is whether the Indian entity has actually received the services for which it has been charged.

The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, particularly Chapter VII, provide guidance on determining whether an intra-group activity constitutes a chargeable service. Broadly, an activity may qualify where an independent enterprise in comparable circumstances would have been willing to pay for it or would have performed the activity in-house.

Chapter VII is also under review: in 2026 the OECD opened a public consultation on revisions to Chapter VII to update and modernise its guidance on intra-group services, so taxpayers should track how the final text develops.

The analysis should be based on the nature of the services, the recipient’s business requirements and the evidence available.

For instance, where a foreign group entity provides IT infrastructure support and cybersecurity services to an Indian subsidiary, evidence such as service tickets, incident reports, system access records, project documentation and correspondence may help demonstrate that the services were performed.

Conversely, a general assertion that the Indian entity benefits from the group’s global expertise or reputation may not adequately establish the receipt of specific services for which a separate charge has been levied.

Key areas requiring attention

• Shareholder activities: Activities undertaken solely because of the service provider’s ownership interest, such as certain parent-level investor reporting and shareholder governance activities, ordinarily should not be charged to subsidiaries as service costs.
• Duplicative services: Where the Indian entity already performs a particular function, additional charges for similar services require examination. However, apparent duplication may be commercially justified in circumstances involving specialised expertise, regulatory requirements or business continuity.
• Incidental benefits: Benefits arising merely from membership of an MNE group do not automatically justify a separate service charge.

For instance, an analysis undertaken to acquire another group entity may incidentally benefit other group entities, but such benefits do not constitute intra-group services for those entities. However, services specifically performed for an associated enterprise, such as acquisition-related analysis for the entity involved in the acquisition, may qualify as intra-group services, depending on the facts and circumstances.

The benefit test and benchmarking are distinct but complementary aspects of transfer pricing analysis. While the benefit test examines whether the services were actually received and provided economic or commercial value to the recipient, benchmarking evaluates whether the consideration charged for such services is consistent with the arm’s length principle. Accordingly, satisfying the benefit test does not, by itself, establish that the price charged for the services is at arm’s length.

Services provided on an on-call basis may qualify as intra-group services where an independent enterprise would be willing to pay for the availability of such services. However, standby charges may not be justified where the need for the services is remote, the benefit is negligible, or similar services are readily available from other sources. The actual utilisation of such services over multiple years may be considered while assessing the benefit. Finally, the description of a payment as management fees or the existence of a contractual agreement does not, by itself, establish that services were rendered; the assessment should be based on the facts and circumstances of each case.

4. How are intra-group services benchmarked in India?

Once it is determined that an intra-group service has been rendered, it is necessary, as for other types of intra-group transfers, to determine whether the amount of the charge, if any, is in accordance with the arm’s length principle. This means that the charge for intra-group services should be that which would have been made and accepted between independent enterprises in comparable circumstances.

The most appropriate method must be selected after considering the nature of the transaction, the functions performed, the assets employed, the risks assumed, the availability of reliable comparable data and the degree of comparability. The permitted methods are listed in Section 92C(1) of the Income-tax Act, 1961 (now Section 165 of the Income-tax Act, 2025).

4.1 Comparable Uncontrolled Price (CUP) Method

The Comparable Uncontrolled Price (CUP) Method compares the price charged in a controlled transaction with the price charged in a comparable uncontrolled transaction, subject to adjustments for material differences.

For intra-group services, relevant information may include comparable services purchased by the Indian entity from independent providers, services provided by the group entity to independent customers, or comparable arrangements between independent enterprises.

For example, where an Indian entity pays its foreign AE for technical support services, comparable third-party contracts may provide a basis for benchmarking if the scope, service levels, contractual terms, geographical market and other relevant conditions are sufficiently similar.

However, generic third-party tariffs may not provide reliable comparables where the services differ materially in complexity, volume, delivery model or risk allocation.

4.2 Cost Plus Method

The Cost Plus Method may be appropriate where the service provider incurs identifiable costs and earns a mark-up that can be compared with the mark-ups earned in comparable uncontrolled transactions.

The analysis generally involves identifying the relevant cost base, determining the costs attributable to the services, identifying comparable independent service providers and evaluating the mark-up earned by such providers.

For example, a group service centre providing routine HR or finance support to multiple group entities may allocate relevant costs among the beneficiaries and earn an arm’s length mark-up.

Particular care is required in determining the cost base. Costs directly related to service delivery, relevant indirect costs and pass-through costs should be analysed separately. The treatment of pass-through costs depends on the functions performed, risks assumed and value added by the service provider. A blanket exclusion of all reimbursed expenses from the mark-up base may not be appropriate in every case.

4.3 Transactional Net Margin Method (TNMM)

The Transactional Net Margin Method (TNMM) may be appropriate where reliable direct price comparisons are unavailable but sufficiently comparable independent enterprises can be identified.

Under this method, the net profit margin earned from the controlled transaction is compared with that earned by comparable independent enterprises, using an appropriate profit level indicator, such as operating profit to operating cost.

For example, a routine IT support service provider may be benchmarked against independent companies performing comparable functions, subject to appropriate comparability adjustments.

However, benchmarking the overall operating margin of an Indian entity does not automatically establish that every intra-group service charge is at arm’s length. Aggregation of transactions must be justified by their economic relationship and the applicable transfer pricing rules.

4.4 Other Method

The Other Method may be appropriate where relevant information concerning the price charged or paid, or that would have been charged or paid, in comparable uncontrolled transactions is available and provides the most reliable measure of the arm’s length price.

Its application should be supported by a clear explanation of the information relied upon and the rationale for selecting the method over other prescribed methods.

Which method should be used for intra-group services?

There is no universally applicable mark-up for all intra-group services. The method and pricing outcome depend on the facts of each arrangement.

Method	Key consideration	Typical IGS use
CUP	Availability of reliable comparable service prices	Third-party contracts for comparable technical support
Cost Plus	Reliability of the cost base and comparable mark-ups	Group service centre providing routine HR or finance support
TNMM	Functional comparability and an appropriate profit level indicator	Routine IT support benchmarked against independent companies
Other Method	Reliability of alternative price information	Where relevant price information for comparable transactions exists

A mark-up adopted under a global group policy does not, by itself, establish compliance with the Indian arm’s length principle. The policy must be supported by an appropriate analysis of the underlying transaction.

5. Cost allocation and pass-through expenses in intra-group services

Where a group entity provides services to multiple associated enterprises, the costs incurred may need to be allocated among the beneficiaries using an appropriate allocation mechanism.

Common allocation keys include employee headcount for certain HR services, IT users or licences for technology services, transaction volumes for finance operations, and actual time spent for specialised or project-based services.

The selection of an allocation key should reflect the relationship between the costs incurred and the services received. For example, employee headcount may be appropriate for certain HR support functions but may not accurately reflect the consumption of IT helpdesk services.

A robust allocation policy should address:

• Identification and reconciliation of the relevant cost pool.
• Exclusion of shareholder costs and costs unrelated to the services.
• Identification of beneficiaries and the rationale for the allocation keys.
• Treatment of duplicative services and pass-through costs.
• Application of the mark-up, where appropriate.
• Reconciliation of allocated costs with intercompany invoices and financial records.

Where the service provider merely incurs an expense on behalf of another group entity without performing significant functions or assuming material risks, the treatment of such expense may differ from that of costs associated with substantive service delivery.

The allocation methodology should therefore be transparent, consistently applied and supported by appropriate records.

6. Key Indian judicial precedents on intra-group services

Indian courts and tribunals have examined intra-group services in the context of the benefit test, commercial expediency, the scope of the Transfer Pricing Officer’s authority and the requirement to determine the arm’s length price using the prescribed framework. The following decisions are particularly relevant.

CIT v. EKL Appliances Ltd. (2012) 345 ITR 241 (Delhi High Court)

In CIT v. EKL Appliances Ltd., the Delhi High Court emphasised that the Transfer Pricing Officer cannot determine the arm’s length price merely by questioning the commercial expediency of a legitimate business transaction.

The decision is frequently relied upon to support the proposition that the tax authority must evaluate the transaction within the statutory transfer pricing framework rather than substitute its own commercial judgment for that of the taxpayer.

Implication: The fact that a taxpayer could have performed an activity in-house, or that the expenditure may not appear commercially necessary to the tax authority, does not by itself determine the arm’s length price. Nevertheless, the taxpayer must substantiate the services and the consideration charged.

Cushman & Wakefield (India) Pvt. Ltd. v. ACIT (2014) 367 ITR 730 (Delhi High Court)

In Cushman & Wakefield, the Delhi High Court examined the distinction between determining whether services were actually rendered and determining whether the consideration paid for those services was at arm’s length.

The decision is significant because the factual question of service receipt and the pricing question are distinct, even though the same evidence may be relevant to both.

Implication: Taxpayers should establish the actual services received and independently support the arm’s length nature of the charges through an appropriate benchmarking analysis.

Knorr-Bremse India Pvt. Ltd. v. ACIT (2016) 380 ITR 307 (Punjab & Haryana High Court)

In Knorr-Bremse India, the Punjab and Haryana High Court examined intra-group service arrangements and the importance of evaluating their commercial substance and the evidence supporting the claimed services.

The decision is frequently discussed in relation to the benefit test and the need to substantiate the nature and scope of services.

Implication: Broad intercompany agreements and general descriptions of management support may be insufficient where the evidence does not establish the services actually rendered and the basis for the charges.

TDK India (P.) Ltd. v. DCIT [2026] 188 taxmann.com 752 (Kolkata ITAT)

The Tribunal reportedly held that intra-group service (IGS) charges, including mark-ups on third-party IT support costs, were at arm’s length. The assessee demonstrated the need for centralised IT, management and other support services, the actual rendition of services, the economic and commercial benefits received, and the basis of cost allocation. Following its own decisions for earlier years, the Tribunal held that the Transfer Pricing Officer’s determination of the arm’s length price at nil was unjustified and directed deletion of the adjustment.

Note: These decisions must be applied in the context of their specific facts and findings. They do not establish that all intra-group service charges are automatically allowable or that a taxpayer is exempt from demonstrating an arm’s length price.

7. Nil adjustments and recurring litigation issues in IGS disputes

A recurring transfer pricing dispute arises when the Transfer Pricing Officer questions the benefit derived from intra-group services and proposes to determine the arm’s length price at nil.

A nil adjustment may be challenged where it is based solely on a subjective assessment of commercial expediency, without a legally sustainable application of the prescribed transfer pricing framework.

However, the taxpayer’s position may be weakened where the evidence does not establish that the services were rendered, the costs were appropriately allocated or the pricing was benchmarked using a reliable method.

Other recurring issues include:

• Insufficient evidence: Reliance on agreements and invoices without supporting service records.
• Inappropriate allocation keys: Allocation of costs using a measure that does not reasonably reflect service consumption.
• Unsubstantiated mark-ups: Application of a standard group mark-up without an adequate benchmarking analysis.
• Duplicative services: Charges for functions apparently performed by the Indian entity or another group company.
• Inconsistent documentation: Differences between intercompany agreements, invoices, cost workings and transfer pricing reports.
• Inadequate comparability: Selection of companies that perform materially different functions or bear different risks.

A strong defence should therefore combine evidence of actual service delivery, a rational cost allocation mechanism, an appropriate benchmarking analysis and a clear explanation of the commercial arrangement.

8. Documentation and litigation risk management for intra-group services

Contemporaneous documentation is critical to defending intra-group service transactions during transfer pricing assessments and appellate proceedings.

Taxpayers should maintain intercompany agreements, service descriptions, correspondence, reports, presentations, service tickets, cost allocation workings, benchmarking studies, invoices and reconciliations with financial records.

The documentation should establish a clear link between the services rendered, the costs incurred, the allocation mechanism and the consideration charged.

The level of detail should be proportionate to the nature of the services. Routine IT support may be evidenced through service tickets and system records, whereas specialised consulting or technology implementation may require detailed project reports, deliverables and records of work performed.

Taxpayers should also ensure consistency between the documentation maintained by the service provider and the Indian recipient. Where services are provided through a centralised group model, the provider’s cost records and allocation workings should support the charges recorded by the recipient.

A proactive review of these records before the filing of the transfer pricing documentation can help identify gaps and reduce the risk of disputes.

Conclusion

Intra-group services remain an important area of transfer pricing scrutiny in India because they involve interconnected questions of commercial substance, service receipt, cost allocation and benchmarking.

A defensible position requires more than an intercompany agreement or a standard mark-up. Taxpayers must demonstrate the services actually rendered, support the allocation of costs, select the most appropriate benchmarking method and ensure consistency between contractual arrangements and actual conduct.

Indian judicial precedents provide important guidance on the limits of transfer pricing scrutiny and the distinction between questioning commercial expediency and determining an arm’s length price. However, their application remains fact-specific and does not eliminate the need for reliable evidence.

Ultimately, a well-documented service arrangement, supported by a rational allocation policy and a defensible benchmarking analysis, places taxpayers in a stronger position to demonstrate compliance with the arm’s length principle and mitigate transfer pricing litigation risks.

Frequently asked questions (FAQs)

What are intra-group services in transfer pricing?

Intra-group services are services, such as IT support, finance, HR, legal, procurement or management support, that one associated enterprise provides to another within a multinational group. In India they can be an international transaction under Section 92B of the Income-tax Act, 1961 (Section 163 of the Income-tax Act, 2025), so the charge must be at arm’s length.

What is the benefit test for intra-group services?

The benefit test asks whether the recipient actually received the service and whether it gave economic or commercial value, meaning an independent enterprise would have paid for it or performed it in-house. It is separate from benchmarking, which tests whether the price is at arm’s length.

Which methods are used to benchmark intra-group service charges in India?

The Comparable Uncontrolled Price (CUP) Method, Cost Plus Method, Transactional Net Margin Method (TNMM) and Other Method are the methods discussed for intra-group services. The most appropriate method depends on the functions performed, assets employed, risks assumed and the reliability of comparable data.

Can the Transfer Pricing Officer determine the arm’s length price of intra-group services at nil?

A nil adjustment based only on a subjective view of commercial expediency can be challenged, and the Delhi High Court has held that the TPO cannot simply question the commercial expediency of a legitimate transaction. However, the taxpayer’s case weakens if it cannot show that services were rendered, costs were allocated sensibly and the price was benchmarked reliably.

What documents support intra-group service charges?

Useful records include intercompany agreements, service descriptions, correspondence, reports, service tickets, cost allocation workings, benchmarking studies, invoices and reconciliations with financial records. They should link the services rendered, the costs incurred, the allocation mechanism and the consideration charged.

Are shareholder activities chargeable as intra-group services?

Ordinarily no. Activities undertaken solely because of the provider’s ownership interest, such as certain parent-level investor reporting and shareholder governance, should not be charged to subsidiaries as service costs, and shareholder costs should be excluded from the cost pool.

Does the Income-tax Act, 2025 change the rules for intra-group services?

The Income-tax Act, 2025 applies from 1 April 2026, and the relevant transfer pricing provisions now appear in Sections 163 (international transaction) and 165 (arm’s length price). The 1961 Act continues to govern tax years beginning before 1 April 2026, so older disputes are still decided under Sections 92B and 92C.

Sources and further reading

• Income Tax Department: Section 92B, Income-tax Act, 1961 (meaning of international transaction)
• Income Tax Department: Section 92C, Income-tax Act, 1961 (computation of arm’s length price)
• Income Tax Department: Section 163, Income-tax Act, 2025 (meaning of international transaction)
• Income Tax Department: Section 165, Income-tax Act, 2025 (determination of arm’s length price)
• Income Tax Department: FAQs on the transition to the Income-tax Act, 2025
• OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022
• OECD: public consultation on revisions to Chapter VII (intra-group services)
• Delhi High Court: CIT v. EKL Appliances Ltd. (ITA 1068 & 1070/2011, 29 March 2012)

Disclaimer: This article is for general information only and is not tax or legal advice. Outcomes depend on the specific facts of each arrangement; please consult a qualified transfer pricing professional.

FAR Analysis for Transfer Pricing Audit Defence: Documentation, Evidence and Practical Checks

By Sudheer Polana, Chartered Accountant

Introduction

FAR analysis in transfer pricing examines the functions performed, assets employed and risks assumed by each party to a controlled transaction. It helps explain the economic contribution of each entity and provides a factual basis for assessing whether the remuneration is consistent with the arm’s length principle.

In an audit, the important question is rarely whether a report contains a FAR table. The more difficult question is whether the table describes the business that actually operated during the relevant period. A contract may call an Indian company a limited-risk distributor, contract service provider or routine support entity. That label is only a starting point. The decision-making authority exercised by employees, rights used, financial exposure and actual settlement of losses must support the characterisation.

This article focuses on the audit-defence side of FAR analysis: how to build an evidence trail, test contractual allocations against actual conduct, document intangible-related contributions and revisit the analysis when the business changes. It complements a broader introduction to FAR Analysis and routine versus entrepreneurial entities, rather than repeating that discussion.

Quick answer: A defensible FAR analysis links each material conclusion to contemporaneous evidence. It should explain who performs an activity, who makes the significant decisions, who controls the relevant assets or rights, who manages economically significant risks and who has the financial capacity to bear them. Contracts, interviews, technical records and accounting entries should tell a consistent story.

1. What FAR analysis must establish during an audit

FAR analysis should connect the group’s operating model to the pricing of the particular controlled transaction. It should cover both sides of that transaction, not merely describe the Indian entity. A local entity’s activities cannot be evaluated accurately without understanding the associated enterprise’s role, authority, resources and exposure.

Functions include the work performed and the decisions made. Assets include tangible resources as well as rights and intangibles used in the business. Risks require more than a list of contractual labels: the analysis should identify the exposure, who decides whether to accept it, who manages it and who has the financial capacity to bear it. For an international perspective, consult the United Nations Practical Manual on Transfer Pricing for Developing Countries.

Descriptions such as “limited-risk distributor”, “captive service provider” or “entrepreneurial principal” should emerge from the evidence. They should not be assumptions used to organise facts after the event. The characterisation also needs to be transaction-specific: an entity may perform routine services under one arrangement and make material contributions under another.

India’s legal references require particular care in 2026. The Income-tax Act, 2025 and Income-tax Rules, 2026 came into force on 1 April 2026. The Income Tax Department’s official legislation portal provides access to the new legislation and comparison utilities for the earlier framework. For earlier tax periods, the applicable provisions of the Income-tax Act, 1961 and Income-tax Rules, 1962 may remain relevant under the applicable transition and savings provisions. Do not copy a section or rule number from an older report into a current-year report without checking the period and the relevant official text. The Government’s official press release on commencement of the new Act provides an additional reference for the transition.

2. Functions: distinguish execution from decision-making authority

Listing activities is only the beginning of functional analysis. The report should explain how the activity is performed, the discretion available to the entity and the authority to change the outcome. The difference between implementation and control often matters more than the activity’s title.

For example, a marketing team may organise campaigns, prepare local material and coordinate agencies. Those tasks do not, by themselves, establish that the team determines market strategy. The analysis should identify who approves the budget, chooses positioning, authorises material commitments and can alter the programme. Similarly, processing a discount within approved limits is different from independently determining pricing policy and accepting the commercial consequences.

Customer-facing activities require the same discipline. Signing standard contracts, issuing invoices and handling complaints establish operational responsibilities. Whether the entity has a broader entrepreneurial role depends on the commercial terms it can determine, the rights it controls and the consequences it must absorb.

During interviews, ask specific questions rather than inviting broad descriptions. Who approved the last material price exception? Who could reject the proposal? What happened when the forecast was missed? Which employee had the authority and competence to decide? Then corroborate answers with approval workflows, emails, meeting minutes, delegation matrices and actual transactions. The US tax authority’s transfer pricing documentation best-practices guidance similarly emphasises factual support; it is a comparative reference, not Indian law.

Practical evidence may include:

• Approval matrices and delegated-authority schedules.
• Job descriptions and reporting lines.
• Budget and pricing approvals.
• Records of rejected or modified proposals.
• Customer-contract deviations.
• Escalation records and examples of decisions made when actual results differed from forecasts.

Employee titles and headcount are useful context, but they do not independently establish where strategic control resides. A report should distinguish employees who make decisions from employees who carry out instructions, while recognising that the actual facts may show a mix of responsibilities.

3. Assets: establish use, control, funding and rights

An asset register is a useful starting point, but it does not establish the economic contribution of an asset on its own. Ownership, funding, operational use, control and the rights attached to the asset need to be examined together.

Office premises, computers, delivery equipment and local infrastructure may support routine operations. Their presence does not automatically establish ownership of underlying technology or entitlement to returns associated with valuable intangibles. Conversely, an entity may make a substantive contribution through internally developed processes, data, software or market-related assets even where those contributions are not recognised as balance-sheet assets.

In technology businesses, technical evidence can be decisive. System architecture, access permissions, deployment approvals, repositories, change logs and responsibility matrices may explain whether local infrastructure simply supports delivery or performs a more substantive function. A local cache used to improve delivery efficiency is not necessarily equivalent to infrastructure that operates proprietary algorithms or supports development of valuable technology.

Rights must also be described precisely. Access to a platform is different from a right to reproduce, adapt, sublicense or commercially exploit the underlying software or content. Read the intercompany licence alongside actual access controls, technical permissions, customer terms and the way the asset is used in practice. The OECD guidance on transfer pricing aspects of intangibles provides further context for distinguishing legal rights from economic contributions.

Useful external reference points include the OECD Transfer Pricing Guidelines and the OECD’s transfer pricing topic page. These are recognised international references, but their relevance and legal status must be considered in light of the applicable domestic law and treaty framework.

4. DEMPE: examine the substance of intangible-related contributions

DEMPE refers to development, enhancement, maintenance, protection and exploitation of intangibles. For transfer pricing purposes, legal ownership is relevant, but it does not by itself settle how intangible-related returns should be allocated. The analysis should identify which entities perform and control the relevant functions, contribute assets, make significant decisions and bear the related risks.

For a software or digital business, a practical DEMPE review should identify the teams responsible for new development, feature changes, maintenance, cybersecurity, registration or enforcement of rights, and commercial exploitation. It should also identify who approves roadmaps, budgets, releases and major changes. A team that provides routine testing under detailed instructions may have a different profile from a team that independently determines product features and controls development decisions.

Local market feedback or compliance support should be evaluated in proportion to its actual significance. Equally, substantive local product design, proprietary data development or independent brand-building decisions should not be omitted merely because formal ownership remains overseas.

Keep the review grounded in records: development plans, sprint and release logs, product approval minutes, funding decisions, licence agreements, IP registrations, enforcement records, commercialisation plans and evidence of who bears cost overruns or failed development expenditure. The OECD’s guidance on aligning transfer pricing outcomes with value creation and its guidance on hard-to-value intangibles provide further context.

5. Risk analysis: follow the decisions and the financial consequences

A risk matrix is not sufficient if it allocates an exposure to the overseas principal without explaining how that allocation operates. The analysis should distinguish between carrying out risk-management activities and controlling the economically significant risk. Contractual allocation is important, but it must be read alongside actual conduct and financial capacity. For comparison only, the US Internal Revenue Service transfer pricing overview summarises the role of section 482 in controlled transactions.

For each material risk, document five things:

1. The source and significance of the exposure.
2. The contractual allocation.
3. The decisions through which the exposure is accepted and managed.
4. The financial capacity of the party said to bear the risk.
5. The treatment of actual favourable and adverse outcomes.

Consider credit risk. A local entity may monitor overdue invoices and follow up with customers. That does not necessarily mean it controls the significant credit risk. The evidence should identify who sets credit limits, approves exceptions, decides whether to continue supplying a customer and bears amounts that cannot be recovered.

Market risk should be tested through pricing decisions, demand forecasts, discounts, rebates, market-entry approvals and treatment of losses. Technology risk may require development and deployment decisions, funding approvals and evidence of who bears obsolescence costs. Service liability can be tested through service standards, remediation authority, refund approvals, claims and compensation records.

A guaranteed-return clause or reimbursement mechanism should be tested for scope, enforceability and actual implementation. Delayed, partial or disputed settlements may indicate that the economic exposure differs from the documented model. Limited-risk does not mean risk-free: routine operational, employment, regulatory or service obligations may remain with the local entity. Where a group also operates in the UAE, the UAE Federal Tax Authority’s Transfer Pricing Guide is a useful jurisdiction-specific reference, subject to UAE law and applicability.

The OECD Transfer Pricing Guidelines discuss the importance of examining actual risk management rather than treating contractual wording or a stated margin as conclusive. For Indian compliance, use the official Income Tax Department transfer pricing guidance and the provisions applicable to the relevant period.

6. Reconcile intercompany agreements with actual conduct

Intercompany agreements establish the stated allocation of functions, rights and risks. An effective FAR analysis tests that allocation against operating evidence. Clauses should be read together, including service scope, approval rights, intellectual-property reservations, indemnities, pricing mechanisms, true-up provisions and termination rights.

An obligation to provide customer support should be considered alongside the entity’s authority to change service standards, approve exceptional refunds and bear the resulting costs. Permission to use group technology should be examined against restrictions on modification, reproduction and independent commercial exploitation.

When actual conduct differs from the agreement, record and investigate the difference. It may be an isolated exception, an activity delegated within the existing model or a substantive change in responsibility. Do not automatically treat every operational deviation as a change in the overall profile, but do not dismiss a recurring pattern as immaterial without analysis.

A useful reconciliation table should contain five columns: contractual position, activity observed, actual decision-maker, supporting evidence and FAR implication. For example, if the agreement says the principal bears credit losses but the local entity repeatedly absorbs unreimbursed bad debts, the file should explain the reason, quantify the effect and assess whether the arrangement operated as documented.

Broad phrases such as “owns the customer”, “manages technology” or “drives the market” should be translated into identifiable rights, decisions and exposures. This improves the quality of the analysis and makes it easier for a reviewer to test the conclusions.

7. Documentation that supports audit defence

The practical test of documentation is whether a reviewer can verify material conclusions without relying entirely on management’s explanation. Each conclusion should point to evidence from the relevant period. The Income Tax Department’s official transfer pricing guidance explains the documentation framework, while the published Rule 10D text is a useful reference for periods to which the 1962 Rules apply. For periods governed by the new framework, verify the corresponding provisions in the Income-tax Rules, 2026. For a broader checklist of required records and deliverables, see SBC’s transfer pricing documentation guide.

Build the file around the transaction and tax period, rather than keeping a large unindexed folder of emails. Each record should be linked to the conclusion it supports. The file should distinguish decisions from implementation activity and preserve evidence of the actual financial outcome.

Suggested evidence map:

• Routine local functions: Job descriptions, approval matrices, work instructions, escalation logs and decision records.
• Overseas intangible rights: Executed agreements, licence schedules, customer terms, access controls and IP registers.
• Infrastructure used for delivery: Architecture diagrams, technical specifications, system permissions and deployment records.
• Risk allocated to the principal: Contractual provisions, risk-control decisions, funding evidence, reimbursement calculations and settlement records.
• Risk protection implemented in practice: Invoices, credit notes, true-up calculations, ledger reconciliations and settlement evidence.
• Annual pricing outcomes: Transaction-level workings, segmented financials, assumptions, comparable data and reconciliation to audited accounts.

Indian transfer pricing documentation provisions have historically required prescribed information to be supported by authentic documents and, as far as possible, to be contemporaneous. The exact requirement, deadline and retention period must be checked under the law applicable to the relevant period. Avoid stating an old rule number or retention period as a universal current rule.

8. Illustrative example: a digital access distributor

Consider a group in which an overseas principal develops a digital platform, acquires content rights and controls major technology and commercial decisions. An Indian entity promotes subscriptions, contracts with customers, invoices users and provides local support. Its intercompany agreement provides a defined return and states that specified commercial exposures are borne by the principal.

The arrangement may support a limited-risk distribution profile if the evidence shows that the Indian entity operates within delegated authority, does not control the underlying platform or exploitation rights, and receives the agreed protection when specified losses arise. Evidence should include subscription pricing approvals, campaign budgets, customer terms, technical access restrictions, risk policies, and records of reimbursements or true-ups.

The conclusion would need reconsideration if the Indian entity independently determines material pricing, develops commercially significant technology, controls valuable local intangibles or routinely bears unreimbursed market losses. The local entity’s involvement in revenue generation does not, by itself, establish entitlement to residual profits. Equally, overseas legal ownership of a platform does not negate a substantive local contribution.

The purpose of the example is not to prescribe a standard characterisation. It is to show how the conclusion should follow the actual operating model during the tested period. The OECD’s guidance on baseline distribution activities (Amount B) may be relevant in eligible cases, but should not be assumed to apply to every distributor or digital-goods arrangement. For further sector context, see SBC’s guides to transfer pricing for IT and software services and transfer pricing for a GCC or captive unit.

9. Review FAR when the business changes

A FAR analysis can become outdated even when the transaction description remains unchanged. A distributor may acquire greater pricing authority, a support team may start developing technology, or the principal may stop compensating certain losses. Annual documentation should identify whether the operating model has changed and whether the pricing continues to reflect it. The pricing policy should be revisited alongside the functional profile; SBC’s article on transfer pricing policy and price setting provides a related perspective. For comparison, the UK tax authority’s transfer pricing documentation guidance describes records considered when reviewing arm’s-length pricing.

At each annual review, ask:

1. Have decision rights moved between entities?
2. Have new assets, systems or intangible-related activities been developed?
3. Have funding arrangements or risk protections changed?
4. Have actual losses, claims or reimbursements been treated differently?
5. Has the business entered new markets or changed its customer and product model?
6. Do the intercompany agreements still reflect actual conduct?

Record when the change occurred, which entity assumed additional responsibilities and whether the pricing arrangements were revised. A significant change may also require analysis of transferred rights, assets or profit potential. Continuing a historical margin without reviewing a changed economic allocation can weaken the rationale for the result.

Keep a dated change log with references to board or management minutes, revised delegations, updated agreements, budget approvals, system changes and financial settlements. The log should show not only what changed but also how the change was evaluated for transfer pricing purposes.

10. Common weaknesses that undermine FAR documentation

First, generic descriptions fail to explain the actual division of responsibilities. Statements that both entities undertake procurement, marketing or management should identify their respective authority, resources and responsibilities.

Second, the report may treat every locally performed activity as a strategic contribution. Local execution can be commercially essential while remaining subject to substantive direction elsewhere. The opposite error is equally problematic: describing local activities as routine despite evidence of independent commercial decisions or substantive development work.

Third, risk matrices can overstate protection. “No market risk” is not an adequate explanation without defining the exposure, identifying the party controlling it and showing how adverse outcomes are treated. More precise analysis distinguishes retained local exposures from risks allocated elsewhere.

Fourth, inconsistent documents undermine credibility. The FAR narrative, intercompany agreements, employee explanations, technical records and financial treatment should describe the same arrangement. Where they differ, document the discrepancy, investigate its cause and assess whether corrective action is appropriate.

Finally, documentation prepared only after a notice is received may be less persuasive than records created in the ordinary course of business. A retrospective explanation may still be necessary, but it should be supported by contemporaneous records wherever available and should not be presented as though it were created at the time of the decision.

11. A practical pre-audit review process

Before finalising the annual FAR analysis, use a repeatable review process:

1. Map each controlled transaction and identify both parties, the contractual scope and the pricing mechanism.
2. Interview the employees who make material decisions, not only those who implement them.
3. Test functions against approvals, delegations, workflow logs and examples of exceptions.
4. Map assets and rights, including access, use, control, funding and restrictions on exploitation.
5. Identify material risks and test contractual allocation against control, financial capacity and actual outcomes.
6. Reconcile agreements with invoices, ledgers, true-ups, reimbursements, claims and settlement records.
7. Compare the current-year operating model with the previous year and document changes.
8. Link each material conclusion to indexed evidence and check that the report, agreements and financial records are consistent.
9. Verify the applicable statutory provisions, filing requirements and documentation timelines from official sources for the relevant tax period.
10. Have a reviewer challenge the conclusions from the perspective of a tax authority: what assertion would be disputed, and which document proves the point?

Conclusion

The value of FAR analysis lies in its ability to explain the business accurately. A credible audit-defence file connects contractual terms, operational decisions, assets and rights, risk control and financial consequences. It does not rely on labels or generic statements about how the group is organised.

The most effective time to test that evidence is before an audit begins, while decision records and explanations are readily available. Annual review should be treated as a substantive exercise, not a process of copying the previous year’s profile. Where the facts change, the documentation and pricing analysis should be reconsidered.

Frequently Asked Questions (FAQs)

1. What is FAR analysis in transfer pricing?

FAR analysis evaluates the functions performed, assets employed and risks assumed by each party to a controlled transaction. It helps establish the parties’ economic contributions and supports the analysis of arm’s length remuneration.

2. How does FAR analysis support transfer pricing audit defence?

It gives the taxpayer a structured factual basis for explaining the transaction. The strongest analysis links each conclusion to contracts, decision records, technical evidence and financial outcomes from the relevant period.

3. Is a signed intercompany agreement enough to establish the FAR profile?

No. The agreement is an important starting point, but its allocation of functions, rights and risks should be tested against actual conduct, decision-making authority and the way costs, gains and losses are treated.

4. Does local marketing automatically create a marketing intangible?

No. The nature, significance and control of the activity must be examined, along with the rights and economic contribution involved. Routine campaign execution does not by itself establish a unique or valuable intangible.

5. Can a limited-risk entity incur losses?

Yes. Limited-risk status does not mean that an entity can never incur a loss. The relevant analysis considers which risks it actually assumes, the contractual protections in place, the cause of the loss and whether the agreed risk allocation operated in practice.

6. What evidence is useful to establish control over risk?

Useful evidence includes decision approvals, risk policies, credit-limit decisions, pricing and market-entry approvals, funding records, indemnity clauses, reimbursement workings and evidence of who ultimately bears adverse outcomes.

7. What is the role of DEMPE in FAR analysis?

DEMPE examines development, enhancement, maintenance, protection and exploitation of intangibles. It helps identify the entities contributing to and controlling intangible-related functions and risks; legal ownership alone does not answer every transfer pricing question.

8. How often should FAR analysis be updated?

It should be reviewed as part of the annual transfer pricing documentation process and whenever a material change occurs in decision rights, assets, rights, risk allocation, business operations or pricing assumptions.

9. Which Indian tax rules apply to FAR documentation in 2026?

The answer depends on the tax period and applicable transition provisions. The Income-tax Act, 2025 and Income-tax Rules, 2026 came into force on 1 April 2026. Earlier periods may require reference to the 1961 Act and 1962 Rules. Check the official Income Tax Department legislation portal rather than assuming that old section and rule numbers continue to apply.

10. What makes FAR documentation effective during an audit?

A consistent evidence chain connecting the transaction, contract, actual conduct, decision-maker, asset or right, economic exposure and financial consequence. Each material conclusion should be traceable to relevant-period records.

Disclaimer

This article is provided for general informational and educational purposes only. It does not constitute legal, tax, financial or other professional advice and should not be relied upon as a substitute for advice tailored to a particular situation. Tax laws, rules, administrative guidance and judicial interpretations may change. Readers should verify the latest position using relevant government and official sources and consult a qualified professional before taking action based on their circumstances.

Data centres are among the few businesses where a transfer pricing question begins with concrete, steel and a power contract. An Indian entity builds or operates a facility, a foreign group sells cloud services from it, and the Indian entity is paid a cost-based fee by its overseas associate. Until this year, defending that fee meant a benchmarking exercise built largely on comparables that did not look much like a capital-intensive infrastructure operator.

The 2026 rules change the starting point. A dedicated safe harbour now exists for data centre services, and it sits alongside a tax exemption that foreign cloud companies can claim on income from using Indian data centres. This article explains what the safe harbour says, who can use it, how the 15% margin is computed, what stays outside it, and how to decide whether to elect it. It is written for CFOs, heads of tax, finance controllers and the advisers who support them.

A word on sources. The rule-level detail below is drawn from the notified Income-tax Rules, 2026 as summarised in professional commentary, and from official Income Tax Department material. Before any position is taken in a return or in Form 49, check the wording against the official notification.

What Changed in 2026 for Data Centre Transfer Pricing

The Union Budget for 2026-27 announced two linked measures for the sector: a long-dated tax exemption for foreign companies that use Indian data centres to serve global customers, and a safe harbour for the Indian operator. The Press Information Bureau’s Budget note records that where the Indian data centre is a related entity of the foreign company and works as a cost-plus centre, a safe harbour margin of 15 percent on cost was proposed.

The CBDT then notified the Income-tax Rules, 2026 on 20 March 2026 as Notification No. 22/2026 (G.S.R. 198(E)), and the Rules came into force on 1 April 2026. The final rules largely mirrored the February draft, with changes to threshold testing, withdrawal timelines and disclosures in Form 49, as KPMG’s summary of the final rules explains. The statutory base is section 167 of the Income-tax Act, 2025, with the international transaction provisions in Rules 86 to 93, as set out in detailed professional commentary on the safe harbour rules.

Who Qualifies as an Eligible Data Centre Provider?

What counts as data centre services

The Rules define data centre services by what the operator actually provides. According to commentary on Rule 86, the definition has three building blocks:

1. Physical infrastructure: land, buildings, mechanical and electrical power equipment, cooling systems and security.
2. IT infrastructure: servers, computers, storage systems, operating systems, security solutions, networks and associated software platforms, and networking equipment.
3. Human resources in India who operate and support the facility.

This is narrower than “anything that runs in a data centre”. An entity that only licenses software, resells cloud capacity or advises on an installed base is not providing data centre services in this sense, even if its customers think of it as part of the cloud. The draft rules published in February 2026 also carved out data hosting services, as the draft Income-tax Rules and commentary on them noted. Check how the final text draws that line before an election is made.

Who the counterparty must be

The eligible transaction is the provision of data centre services to a foreign company. The Income Tax Department’s own FAQs on the Taxation and Other Laws (Amendment) Bill, 2026 describe the intended case: an Indian company that is an associated enterprise of the foreign company providing cloud services and is remunerated on its cost. That description is a useful test of whether your structure is the one the safe harbour was written for.

Conditions to check before relying on the safe harbour

1. The Indian entity provides data centre services as defined, and not a broader or different service.
2. The recipient is a foreign company that is an associated enterprise.
3. The entity is remunerated on a cost-plus basis, so that the operating profit margin on operating expense can be measured.
4. The associated enterprise is not in a notified jurisdictional area or a no-tax or low-tax territory, which Rule 92 excludes.
5. The option has been validly exercised in Form No. 49 for the tax year.

In practice, the third and fifth conditions cause the most trouble. Many operators bill on a basis that is only loosely cost-linked, and many finance teams discover the filing requirement after the return is already prepared.

How the 15% Margin Works in Practice

Operating profit margin is operating profit divided by operating expense, expressed as a percentage, where operating profit is operating revenue minus operating expense. The safe harbour is met where this margin is at least 15% for the eligible transaction. Commentary on Rule 89(2) records no turnover ceiling for this category, which is a notable difference from IT services, where the Rs 2,000 crore revenue threshold applies.

What goes into operating expense

The definition matters more than the percentage. A data centre has large depreciation, power and financing costs, and each of them is treated differently.

These inclusions and exclusions follow the definition of operating expense in Rule 86 as set out in the professional commentary. Operating revenue is defined on the same logic and excludes interest income, foreign currency gains, provisions written back, extraordinary income and similar items.

A worked example (illustrative)

Consider an Indian operator that provides data centre services only to its foreign associate. The figures below are illustrative and are not drawn from any client.

At revenue of Rs 460 crore the operator sits exactly on the floor. At Rs 458 crore the margin is 14.5% and the safe harbour is not met, because Rule 89(5) allows no comparability adjustment or tolerance range once a price is accepted under the safe harbour.

The example also shows a point that finance teams should model before electing. The Rs 90 crore of interest sits outside the operating expense base, so the margin is earned on operating costs only. A heavily debt-funded operator should check whether Rs 60 crore of operating profit leaves it adequately placed after finance cost. If it does not, the question for the group is whether the safe harbour is the right election, or whether the financing arrangements need attention, and not whether the rule can be stretched.

Two further practical points. First, the test is annual, so monthly invoices are provisional and a year-end true-up should be built into the intercompany agreement. Second, the 15% is a floor. Nothing in the rule penalises a higher margin, but any margin above the floor is the foreign associate’s cost and may be questioned in its home jurisdiction, so it should be a deliberate decision and not an accident of billing.

What the Safe Harbour Does Not Cover

The safe harbour is transaction-specific. It protects one price, for one defined service, between the Indian operator and its foreign associate. Five areas stay outside it:

1. The reseller leg. Khaitan & Co’s analysis notes that the safe harbour is limited to transactions between the Indian operator and its overseas associate. It does not extend to later transactions between the foreign company and an Indian reseller, where those parties are associated.
2. Other intercompany charges. Technology support, management fees, cost allocations, licences and intra-group loans each need their own analysis. Some, such as intra-group loans, have separate safe harbour categories with different conditions.
3. Non-eligible activities of the same entity. If the operator also provides managed services, software or consulting outside the definition, those revenues and costs must be segmented and tested under the regular rules.
4. Transactions with excluded jurisdictions. Rule 92 removes safe harbour protection for associates in notified jurisdictional areas and low-tax or no-tax territories.
5. Documentation and reporting. Rule 89(6) confirms that sections 171 and 172 continue to apply, so the documentation and the accountant’s report are still required.

Safe Harbour or Regular Transfer Pricing Method: How to Decide

Electing the safe harbour is a choice, not a default. The regular approach, usually a transactional net margin method with a benchmarking study, remains available. The table sets out the trade-offs.

An Advance Pricing Agreement under section 168 is a third route for operators that want certainty beyond a fixed margin. It takes longer and costs more, so it suits large, long-term arrangements. For most routine cost-plus operators the real choice is between the safe harbour and the regular method, and the right answer depends on the numbers in your own cost base, not on the headline percentage.

The Companion Tax Exemption and Why It Matters for the Transfer Pricing File

The safe harbour is one half of the framework. The other half is an exemption in Schedule IV of the Income-tax Act, 2025 (serial number 13C) for income of a foreign company from procuring data centre services from a specified data centre in India, available up to 31 March 2047. As the Income Tax Department’s FAQs explain, the conditions include that the foreign company does not own or operate the physical infrastructure or resources of the data centre, that all sales to users in India go through an Indian reseller, and that prescribed information is furnished.

The Taxation and Other Laws (Amendment) Bill, 2026 proposed relaxing these conditions by removing the requirement for the Central Government to notify the foreign company and the data centre, and by allowing data centres that are leased and operated by an Indian company. PRS Legislative Research’s summary of the Bill sets out the changes. Reports indicate that the Bill has since been enacted as the Taxation and Other Laws (Amendment) Act, 2026, but the current statutory text should be confirmed before the conditions are applied to a structure.

Why does this belong in a transfer pricing article? Because the same facts will be read by two audiences. The Transfer Pricing Officer reads them for functions, assets and risks. The exemption test reads them for who actually operates the servers. Khaitan & Co’s analysis points out that ambiguity remains over what “operating” the servers means, and that excessive control rights held by the foreign company could put the exemption and the permanent establishment position at risk. A functional analysis that describes the foreign associate as controlling day-to-day operations of the facility may support one position and undermine the other. The two files must tell the same story.

Documentation and FAR Analysis for a Data Centre

Electing the safe harbour shortens the pricing argument, not the file. Your transfer pricing documentation should still explain the business in plain terms and support eligibility. A FAR analysis of functions, assets and risks is the backbone of that explanation, and for a data centre it has some specific questions.

Unlike the IT services category, the commentary reviewed for this article does not list a separate insignificant-risk test for data centre services. Even so, a cost-plus return only makes commercial sense where the foreign associate carries the demand and utilisation risk. A FAR analysis that shows the Indian entity bearing significant market risk will invite questions about why it is on a fixed margin. Your transfer pricing policy should set out the pricing logic, the cost base and the true-up mechanism so that the documentation and the invoices agree.

How to Test Readiness and Elect the Safe Harbour: Step by Step

1. Define the service. Write down exactly what the Indian entity provides and map each element to the definition of data centre services.
2. Confirm the counterparty and jurisdiction. Check that the recipient is a foreign associated enterprise and that it is not in a Rule 92 excluded territory.
3. Build the operating expense bridge. Reconcile the general ledger to the Rule 86 definition, identifying every exclusion, reclassification and judgement. The computation should be reproducible from the audited accounts.
4. Run the margin test on actuals and forecast. Test the current year and the next two years of the block, including a year-end true-up for revenue.
5. Segment non-eligible activities. Separate any services, costs and revenues that fall outside the definition.
6. Compare with the regular method. Estimate the arm’s length range and compare it with the 15% floor, including the effect of excluded interest and the loss of MAP access.
7. File Form No. 49. Furnish the form electronically on or before the due date for the return, with the return filed first, through the income tax e-filing portal. Check the transfer pricing filing due dates for the date that applies to you.
8. Maintain the file. Keep the section 171 documentation current, obtain the Form 48 accountant’s report, and diarise an annual eligibility check across the three-year block.

Common Mistakes We See

1. Treating 15% as automatic. The percentage applies only to an eligible transaction, with a valid election, and where the margin is measured on the defined operating expense.
2. Averaging across activities. Blending data centre revenue with other services inflates or deflates the margin and may disqualify the transaction.
3. Overlooking the interest exclusion. Finance costs sit outside operating expense, which changes the economics for leveraged operators.
4. Filing out of sequence. Form 49 must be furnished on or before the return due date, and the return must be filed on or before the date of the form.
5. Assuming the paperwork disappears. Sections 171 and 172 continue to apply, and Form 48 is still required.
6. Forgetting the MAP bar. If the foreign tax authority adjusts the associate’s side, there is no treaty route for the accepted transaction.
7. Ignoring the exemption conditions. Contracts that give the foreign company control over the servers can create problems well beyond transfer pricing.

Questions CFOs and Heads of Tax Should Ask Before Electing

1. What exactly does the Indian entity provide, and does each service fit the definition?
2. Is our remuneration genuinely cost-based, and can we reconcile it to the accounts?
3. How much of our cost base is financing, and is the 15% margin on operating expense enough after interest?
4. Would the arm’s length range from a benchmarking study be higher or lower than 15%?
5. Are we comfortable giving up the Mutual Agreement Procedure for this transaction?

Frequently Asked Questions

Did India introduce a transfer pricing safe harbour for data centre services in 2026?

Yes. The Income-tax Rules, 2026, notified on 20 March 2026 and in force from 1 April 2026, added the provision of data centre services to a foreign company as an eligible international transaction under the safe harbour framework in section 167 of the Income-tax Act, 2025. The taxpayer must meet the prescribed conditions and validly exercise the option.

What is the safe harbour margin for data centre services in India?

The margin is an operating profit of at least 15% on operating expense, as recorded in commentary on Rule 89(2). It is a floor, tested each tax year on the eligible transaction.

Does the 15% margin apply to every cloud company in India?

No. It applies to an eligible Indian entity that provides data centre services, as defined, to a foreign company, and only where the option is validly exercised. Software, reselling and other cloud services performed by the same or other entities must be analysed separately.

Is there a turnover limit for the data centre safe harbour?

Commentary on the notified Rules records no aggregate revenue cap for this category. The Rs 2,000 crore threshold applies to IT services, not to data centre services. Confirm this against the official text before filing.

How do I opt for the data centre safe harbour?

File Form No. 49 electronically on or before the due date for furnishing the return of income, with the return furnished on or before the date of the form. The Assessing Officer verifies eligibility and may refer doubtful cases to the Transfer Pricing Officer. The applicable dates are tracked in our transfer pricing filing due dates guide.

Do I still need transfer pricing documentation if I use the safe harbour?

Yes. Sections 171 and 172 continue to apply, so the documentation must be maintained and the accountant’s report in Form 48 obtained. The safe harbour protects the declared price. It does not replace the records.

Can I use the Mutual Agreement Procedure if the safe harbour is accepted?

Not for that transaction. Rule 93 bars the treaty route once the transfer price is accepted under the safe harbour. The bar is transaction-specific, so other transactions remain unaffected.

How long does the safe harbour election last?

For eligible transactions other than IT services, the framework applies for a block of three consecutive tax years starting with 2026-27, with later blocks continuing unless the CBDT modifies the Rules. PwC’s India tax summary records the block structure and the MAP restriction.

How does the safe harbour relate to the tax exemption for foreign cloud companies?

They are separate but complementary. The Schedule IV exemption relieves the foreign company’s income from procuring data centre services from a specified data centre, up to 31 March 2047, subject to conditions. The safe harbour fixes the remuneration of the Indian operator. The facts must support both, which is why the transfer pricing file and the exemption analysis should be prepared together.

Conclusion

The data centre safe harbour gives eligible Indian operators something they rarely had before: a defined route to price acceptance for a capital-intensive, cost-plus business. It rewards preparation. The finance teams that benefit most will be those that define the service precisely, reconcile the operating expense base to the accounts, test the margin before year-end, and align the contracts, the FAR analysis and the exemption analysis.

It is not a reason to stop thinking. A leveraged operator, a mixed-service entity or a structure with an associated reseller may do better under the regular method or an advance pricing agreement. If you are weighing that decision, SBC’s Transfer Pricing Services in India cover documentation, benchmarking, policy design and compliance, and can be scoped around your operating model.

Sources and Further Reading

1. Income Tax Department: Income-tax Rules, 2026, Notification No. 22/2026
2. Income Tax Department: FAQs on the Taxation and Other Laws (Amendment) Bill, 2026
3. Press Information Bureau: Budget 2026-27 technology and data centre measures
4. KPMG TaxNewsFlash: Transfer pricing changes in the final Income-tax Rules, 2026
5. PRS Legislative Research: Taxation and Other Laws (Amendment) Bill, 2026
6. OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022
7. OECD BEPS Action 13: Transfer Pricing Documentation and Country-by-Country Reporting

Disclaimer

This article is provided for general informational and educational purposes only. It should not be considered legal, tax, financial or professional advice. Tax laws, rules, forms and administrative guidance, including the Income-tax Act, 2025 and the Income-tax Rules, 2026, may change, and the position described here may be updated or clarified. Readers should verify the latest information from the Income Tax Department, the CBDT, the Ministry of Finance and other relevant official sources before taking any decision. Please consult a qualified professional for advice specific to your circumstances.

Every transfer pricing practice has the same problem in a different shape. The senior time that wins and retains clients is also the time consumed by benchmarking refreshes, documentation drafts and data schedules, and the work arrives in waves. A firm with ten transfer pricing clients in a quiet quarter can have thirty files in the weeks before the autumn compliance deadline.

The 2026 changes have made this worse. A new Income-tax Act, new Rules, a new accountant’s report form, a single safe harbour form and consolidated safe harbour categories have all added analysis and re-papering to existing workloads. White-label back-office support is one way partners manage that load without hiring permanently for a peak.

This guide explains what white-label means in transfer pricing, which workstreams can be outsourced, what must always stay with the partner, how to structure the engagement and quality controls, and how to deal with confidentiality. It is written for partners, practice heads and tax directors who are deciding whether to use a TP back office and how to do it responsibly.

What White-Label Means in Transfer Pricing

In a white-label arrangement, the support provider works behind the partner’s own client-facing brand and delivery structure. The partner remains the primary adviser. The back office performs defined production or analytical tasks, and its work is reviewed, adopted and delivered by the partner as part of the partner’s engagement.

It is easy to confuse this with other models. The table shows the differences.

Why CA and Advisory Firms Use a Transfer Pricing Back Office

The reasons are practical, and they tend to fall into six groups:

1. Seasonal peaks. Benchmarking, documentation and Form 48 schedules cluster around the annual compliance window, and a permanent team sized for the peak is idle for the rest of the year.
2. Specialist depth. Transfer pricing needs people who do it every day, including database searches, comparable screening and functional analysis. Building that bench in-house is slow and expensive for a firm whose core practice is audit or general tax.
3. Database and tooling cost. Benchmarking depends on access to financial databases and on a disciplined process. A back office that runs many files can spread that cost.
4. Regulatory change. The 2026 rule changes require templates, checklists and computations to be rebuilt, and a dedicated team can do that once and apply it across files.
5. Senior time. Partners earn their keep on client judgement, controversy and strategy, and not on formatting working papers.
6. International coverage. Foreign advisory firms that own the global relationship often need India-specific execution without opening an Indian practice.

What Work Can a TP Back Office Handle?

The most scalable work has a defined input, a repeatable process and a reviewable output. The partner supplies the facts and the technical position, and the back office produces the working papers.

What the Partner Must Always Retain

White-label support must not blur professional responsibility. Whatever the commercial arrangement, a handful of responsibilities stay with the partner:

1. Client communication and fact-finding. The partner knows the client’s commercial context and decides what is material.
2. Method and tested party. These are judgement calls that shape the whole analysis.
3. Comparability decisions. The back office can propose, but the partner decides which companies are accepted or rejected, and why.
4. The accountant’s report. Section 172 of the Income-tax Act, 2025 requires an accountant’s report in Form 48, and the signing accountant is certifying the data and the arm’s length position. That certification cannot be delegated to a back office.
5. Representation before tax authorities. Responses to notices and appearances before the Transfer Pricing Officer should remain with the partner team, supported by working papers on request.

Professional bodies expect the signing professional to be satisfied with the work they certify. The Institute of Chartered Accountants of India publishes the Code of Ethics and professional standards that apply to members, and partners should confirm how those standards apply to the use of outside specialists.

The 2026 Rule Changes Driving the Workload

The Income-tax Act, 2025 and the Income-tax Rules, 2026 came into force on 1 April 2026. For transfer pricing practitioners, the changes that add production work are:

Much of this is repeatable work. Once a template, a computation and a checklist exist, they apply across files, and that is exactly where a back office adds value. The PwC India tax summary is a helpful quick reference for the safe harbour block periods and the MAP restriction when planning that work.

Structuring the Engagement: Scope, Responsibilities and a Pilot

Most failures of white-label arrangements are structural, not technical. Responsibilities were assumed instead of written. A simple allocation table avoids that.

Start with a pilot

Do not move a whole portfolio on day one. A sensible onboarding sequence looks like this:

1. Choose one or two representative files of moderate complexity.
2. Agree templates, naming conventions, folder structures and communication channels.
3. Agree turnaround times, review standards and escalation rules for missing data or unusual transactions.
4. Run the pilot to the point of partner review and record every review comment.
5. Hold a debrief, update the standard operating procedures, and only then scale to further files.

For recurring clients, the back office can then maintain a client playbook recording the group structure, transaction categories, preferred databases, data sources, prior-year assumptions and the partner’s review preferences. That avoids repeating instructions each year.

Quality Control for White-Label Transfer Pricing Work

Transfer pricing files involve many working papers and several revisions, so version control and review discipline matter as much as technical skill. A workable production cycle has eight stages:

1. Intake and scope confirmation.
2. Written partner instructions covering the transaction, the method if already decided, tested party assumptions, database preferences and style requirements.
3. Data request and receipt.
4. Production of working papers and first drafts.
5. Internal review inside the back office, before anything reaches the partner.
6. Partner review, with comments captured in a single log and not in scattered email threads.
7. Correction cycle and updated working papers.
8. Final release and archiving.

Measure quality as well as speed. Useful indicators include first-draft accuracy, reconciliation rates between schedules and financial statements, unresolved data points, the number of partner review comments per file, and turnaround by workstream.

A good working rule is that the support team should flag assumptions and open questions on the face of the draft. Partners should be reviewing substance, not reconstructing the work.

Writing Instructions the Back Office Can Act On

Most rework traces back to instructions that were verbal, partial or assumed. For each file, the partner should give the back office a short written brief. A useful brief covers:

1. A description of the transaction and the parties, with the agreements attached.
2. The method already decided, if any, and the tested party.
3. Any facts the client has confirmed and any that are still open.
4. Database preferences, screening criteria and any comparables to include or exclude.
5. The format, style and numbering the partner’s firm uses for reports.
6. The deadline, the review dates and who the contact is for questions.
7. Any matter the partner wants flagged and not resolved, such as an unusual intercompany charge.

A brief of this kind is quick to write and avoids much of the correction that follows. It also creates a record of what the back office was told, which is useful if a position is later questioned.

Confidentiality and Data Protection

A transfer pricing file holds some of a client’s most sensitive information: intercompany pricing, margins, group structure and often employee data. Confidentiality should be operational and not merely contractual. Agree the following in writing:

1. Who can access client data, on which systems, and with what authentication.
2. How documents are transferred, and which channels are prohibited.
3. How long data and working papers are retained, in line with the retention requirements under the Act and Rules, which should be confirmed for the relevant year.
4. How incidents and suspected breaches are escalated, and within what time.
5. What happens to data on termination, including return or deletion.

Data protection law now adds a layer. The Digital Personal Data Protection Act, 2023 and the DPDP Rules, 2025, notified by the Ministry of Electronics and Information Technology, are being phased in, with the main obligations arriving in 2027. As Hogan Lovells’ overview explains, the Act places the compliance burden on the data fiduciary and expects it to ensure that its processors comply. Where a transfer pricing file contains employee names, compensation or similar personal data, the partner firm and the client should understand how the back office handles it.

Finally, consider the engagement letter. Check the Chartered Accountants Act, 1949 and the ICAI Code of Ethics on confidentiality and engagement terms, and consider stating, in the engagement letter, that qualified third-party specialists may assist with the work under confidentiality obligations.

Commercial Models for a TP Back Office

Pricing should reflect how work arrives, and the cheapest hourly rate is rarely the cheapest outcome if rework follows. The common models are:

Risks and How to Manage Them

1. Silent assumptions. If the back office fills a data gap with an assumption, the partner may never see it. Require every assumption to be listed on the face of the draft.
2. Version chaos. Several drafts circulating in email are a common source of errors. Use one controlled folder and one comment log.
3. Over-reliance on database output. A screening result is not an analysis. The partner must apply judgement to the comparables.
4. Unclear liability. Define who is responsible for what, and check that professional indemnity cover is adequate for the arrangement.
5. Capacity mismatch at peak. Agree in advance how priority is managed when several partners need work completed in the same week.

An Illustrative Example

The numbers below are a planning illustration, not a benchmark. Suppose a CA firm with five partners looks after thirty transfer pricing clients. By early October, it expects the following mix before the autumn filing window.

In this illustration, the partners spend their time on the four new structures, the election decisions and the review of everything else. The back office absorbs the repeatable production. The point is not the exact split. It is that the work has been divided by type, with a named reviewer for each piece.

When White-Label Is Not the Right Answer

The model is not suitable for every mandate. It tends to work less well in four situations:

1. Active controversy. A matter at the dispute stage depends on strategy and credibility with the authority, and the partner team should lead it.
2. Genuinely novel structures. Where the characterisation of the entity is itself uncertain, the partner needs to be in the analysis from the start and not at review.
3. Client restrictions. Some clients prohibit third-party access to their data. The partner should respect that and not look for a workaround.
4. Very low volumes. If the firm handles only a few files a year, the cost of setting up templates and instructions may outweigh the benefit.

How to Choose a Back-Office Partner

1. Transfer pricing depth. Ask who will actually do the work, how long they have done transfer pricing, and how many documentation and benchmarking files they have handled.
2. Understanding of the 2026 rules. Test knowledge of the Income-tax Act, 2025, Form 48, Form 49 and the revised safe harbour categories.
3. Process maturity. Ask for sample working papers, review checklists and standard operating procedures.
4. Confidentiality controls. Ask about access control, data transfer methods, retention and incident handling.
5. Willingness to stay behind the brand. The provider should not contact your client or make claims about the work in its own name.
6. Escalation behaviour. Ask how the team handles missing data, unusual transactions and technical uncertainty. The right answer is to raise it with you quickly.

How SBC Works with Partner Firms

SBC supports CA firms, accounting and tax practices and international advisory firms with transfer pricing back-office work for agreed workstreams, including benchmarking, documentation, research, working papers and report preparation. The partner keeps the client relationship and the final technical sign-off, and the scope, review model and responsibilities are written down before work starts.

The same team supports the wider practice described on our Transfer Pricing Services in India page, including policy design and tracking of filing due dates, so a partner can start with one workstream and extend the arrangement as the relationship matures.

Frequently Asked Questions

What are white-label transfer pricing services?

They are back-office transfer pricing services delivered to a professional firm so that the firm can keep the client relationship and present the work within its own engagement structure. The provider produces agreed deliverables, and the partner reviews, adopts and remains responsible for them.

Who can use white-label transfer pricing services in India?

CA firms, accounting and tax practices and international advisory firms that need extra transfer pricing production capacity or India-specific execution can use this model.

What transfer pricing work can be outsourced to a back office?

Common workstreams include transaction mapping, industry research, benchmarking, documentation drafting, working papers, safe harbour computations, data schedules for Form 48 and compliance tracking.

Can a back office sign the accountant’s report in Form 48?

No. The accountant’s report under section 172 of the Income-tax Act, 2025 is a professional certification given by the signing accountant, who must be satisfied with the data and the arm’s length position. A back office can prepare schedules for review, but it cannot take over the certification.

Is it safe to outsource benchmarking?

Yes, if the partner defines the transaction, the method, the tested party and the screening criteria in writing, and then reviews the search, the accepted and rejected comparables and the conclusion. The risk lies in treating database output as the analysis.

How do I protect client confidentiality in a white-label arrangement?

Agree access controls, approved systems, transfer methods, retention and breach escalation in writing, and align the arrangement with the Digital Personal Data Protection Act, 2023 where personal data is involved. Consider referring to third-party specialists in the engagement letter.

How should a white-label engagement start?

Start with a pilot of one or two files. Agree templates, review standards and escalation rules, run the work to partner review, and then scale once the process has been tested.

Does SBC offer white-label transfer pricing back-office support?

Yes. SBC supports partner firms on agreed workstreams, with the partner retaining the client relationship and final technical sign-off. The scope is defined engagement by engagement through our Transfer Pricing Services in India practice.

Conclusion

A transfer pricing back office is a capacity tool, not a substitute for professional judgement. It works when the partner decides what matters, the back office does what it is instructed to do, and both sides know who reviews what. The 2026 changes have made the production side of transfer pricing heavier, and firms that organise that work well will have more senior time for the advice that clients actually pay for.

If you are considering a white-label arrangement, begin with a written scope and a small pilot, and judge the provider on the quality of the work handed back for review.

Sources and Further Reading

1. Income Tax Department: Income-tax Rules, 2026, Notification No. 22/2026
2. Income Tax Department: Rule 1, Income-tax Rules, 2026 (commencement)
3. KPMG TaxNewsFlash: Transfer pricing changes in the final Income-tax Rules, 2026
4. KPMG TaxNewsFlash: Draft rules on transfer pricing reporting, APA and block assessments
5. OECD Transfer Pricing Guidelines 2022
6. OECD BEPS Action 13 final report on transfer pricing documentation
7. Income tax e-filing portal

Disclaimer

This article is provided for general informational and educational purposes only. It should not be considered legal, tax, financial or professional advice. Tax laws, regulations, forms and professional standards, including the Income-tax Act, 2025, the Income-tax Rules, 2026 and ICAI requirements, may change, and the position described here may be updated or clarified. Readers should verify the latest information from the Income Tax Department, the CBDT, ICAI and other relevant official sources before taking any decision. Please consult a qualified professional for advice specific to your circumstances.

Best Transfer Pricing Software 2026: Why TAIGA Is Built Different

By CA Mithilesh Sai Sannareddy, Founder & CEO, Steadfast Business Consulting · Last updated: October 2026

TAIGA, the engine behind TP Doc Gen AI, has been ranked the #1 product in its category on Taxtech500, the tax-tech industry’s product leaderboard. It’s built around one idea: benchmarking, FAR analysis and documentation should live in one system, with every figure traceable to the source it came from. It’s built for India and the UAE specifically, not adapted from a template made for somewhere else.

Why TAIGA Is the Best Transfer Pricing Software for India and the UAE

Most transfer pricing software is built broad and shallow, covering many jurisdictions at a surface level. TAIGA takes the opposite approach: it’s built deep for two jurisdictions, with every default, database and statutory rule matching exactly what an Indian TPO or a UAE Federal Tax Authority officer will actually ask for.

SBC’s 2026 Shortlisting for Transfer Pricing and Tax Technology

Steadfast Business Consulting has also been shortlisted in two Asia-Pacific technology categories at the ITR Asia-Pacific Tax Awards 2026: Transfer Pricing Technology Firm of the Year and Tax Technology Firm of the Year.

These are firm-level technology categories. They should not be described as an award for TAIGA or as an ITR “Best Transfer Pricing Software” award. The shortlisting is relevant because TAIGA / TP DOC GEN AI is part of SBC’s technology-enabled transfer-pricing practice, but the ITR recognition itself is for Steadfast Business Consulting as a firm.

The 2026 categories are currently shortlistings, not confirmed wins. ITR has stated that the winners will be announced on 12 November 2026.

Source: International Tax Review — ITR’s Asia-Pacific Tax Awards shortlist

Related 2026 Recognition

SBC was also shortlisted for Tax Innovator of the Year – Asia-Pacific in the same shortlist, recognising innovation across the firm’s technology-enabled tax practice.

Has SBC been shortlisted for a transfer pricing technology award in 2026?

Yes. Steadfast Business Consulting is shortlisted for Transfer Pricing Technology Firm of the Year – Asia-Pacific and Tax Technology Firm of the Year – Asia-Pacific at the ITR Asia-Pacific Tax Awards 2026. These are firm-level technology categories, not a product-specific software award.

TAIGA is part of SBC’s technology-enabled transfer-pricing practice, while SBC has separately been shortlisted by ITR in the Asia-Pacific transfer pricing technology and tax technology firm categories.

View the ITR Asia-Pacific Tax Awards 2026 shortlist (PDF)

SBC’s Full 2026 ITR Asia-Pacific Tax Awards Shortlist

The recognition above is one part of Steadfast Business Consulting’s broader shortlisting of 10 categories at the ITR Asia-Pacific Tax Awards 2026, spanning India jurisdiction awards, Asia-Pacific regional awards and individual awards:

• Transfer Pricing Advisory Firm of the Year — India
• Tax Disputes Advisory Firm of the Year — India
• Indirect Tax Advisory Firm of the Year — India
• Transfer Pricing Technology Firm of the Year — Asia-Pacific
• Tax Technology Firm of the Year — Asia-Pacific
• Tax Innovator of the Year — Asia-Pacific
• Tax Policy Firm of the Year — Asia-Pacific
• Indirect Tax Advisory Firm of the Year — Asia-Pacific
• Transfer Pricing Practice Leader of the Year — CA Mithilesh Reddy (Individual, Asia-Pacific)
• Tax Disputes Advisory Rising Star — Rajesh Vaishnav (Individual, Asia-Pacific)

Winners across all categories are scheduled to be announced on 12 November 2026 at the IFLR APAC Awards ceremony in Hong Kong, as confirmed in ITR’s published 2026 shortlist announcement.

View the full ITR Asia-Pacific Tax Awards 2026 shortlist (PDF)

India: benchmarked only against Prowess, never a foreign database

Indian tested parties are benchmarked exclusively against Prowess (CMIE), covering 112,189 Indian comparables, with the statutory 35th–65th percentile range and 3% tolerance band applied automatically under Rule 10CA. The output is Form 3CEB, the TP study and annexures, generated from the same underlying engagement.

UAE: Orbis with a regional cascade, aligned to Ministerial Decision 97/2023

For the UAE, TAIGA runs on Orbis, covering 31.6M active companies, cascading regionally (UAE, then Middle East, then Europe, then global), and applies the OECD-aligned 25th–75th interquartile range. It produces the Disclosure Form, Local File and Master File required under Ministerial Decision 97/2023, directly from the same study.

Every number is calculated, never guessed by a model

TAIGA’s deterministic math engine means AI is used to read annual reports and draft narrative; it is never asked to produce the range itself. Every percentile, every tolerance band, and every number that ends up in a filing is computed in code and checked against the workpapers.

Every rejection carries a reason you can show an officer

Through the Knowledge Bank and comparable search, TAIGA records a coded ground for every excluded comparable, along with the exact annual report page it came from. When a TPO or FTA officer asks why a company was excluded, the answer is already on file, not reconstructed from memory.

One study, five filing documents, one audit trail

TAIGA takes a study from client intake through to filing without switching tools: the IRD wizard for intake, AI document reading to pull data from annual reports, the FAR analysis module to characterise the tested party, and Living Documents to keep the filing set current as facts change. A single engagement produces Form 3CEB, the TP study and annexures for India, or the Disclosure Form, Local File and Master File for the UAE.

A second reviewer signs off before anything is filed

Through team workflow and roles, every study is routed from client to preparer to a second reviewer, who signs before anything goes out. A TP Calendar keeps filing deadlines visible across the whole firm, and the MCP server lets the platform connect directly into a firm’s existing tools and workflows.

Your client’s data stays theirs

Every model call runs under zero data retention, and no model ever touches a number directly, as detailed in TAIGA’s Trust Centre.

How Taxtech500 Ranked TAIGA #1

Taxtech500 is the product leaderboard for tax technology and e-invoicing, tracking vendor activity and market engagement across the category. At the end of each month, the #1 product in every category is awarded a digital badge, shown on its listing page and on the Taxtech500 homepage. TAIGA (TP Doc Gen AI) currently holds that #1 position. You can view the live ranking on Taxtech500.

It’s worth being precise about what this means: the ranking reflects that month’s activity and engagement with the tax-tech community. It’s a current, ongoing signal, not a one-time trophy. We think that’s actually a stronger form of validation than a static award, because the #1 position has to be earned again every month, not just once.

Built Inside a Real Transfer Pricing Practice

TAIGA comes out of Steadfast Business Consulting’s own transfer pricing practice, and SBC uses it on live client work. It wasn’t built by a software team guessing what a TP team needs.

“Our goal is to build a premier tax and finance consulting institution with local depth, global reach and practical, independent advice,” says CA Mithilesh Sai Sannareddy, Founder and CEO of Steadfast Business Consulting.

That track record includes Best Firm of the Year, Transfer Pricing, India (ITR World Tax, 2025), and Best Tax Dispute Advisory Firm, India, APAC Region (ITR World Tax, 2026), earned by the same practice that built and uses TAIGA daily.

See It on a Real Study

The best way to evaluate TAIGA is to run it against a study you’ve already completed. Book a demo and bring last year’s file through intake, benchmarking and the final report; whatever comes out of it is yours to keep.

FAQ

What is TAIGA / TP Doc Gen AI?

TAIGA is TP Doc Gen AI’s benchmarking and documentation platform, built by Steadfast Business Consulting for transfer pricing filings in India and the UAE.

What makes TAIGA the best transfer pricing software for India?

It benchmarks exclusively against Prowess (CMIE), applies the statutory 35th–65th percentile range and 3% tolerance band under Rule 10CA automatically, and outputs Form 3CEB directly from the study, built for the Indian filing regime specifically, not adapted from a global template.

What makes TAIGA the best transfer pricing software for the UAE?

It runs on Orbis with a regional cascade, applies the OECD-aligned 25th–75th interquartile range, and produces the Disclosure Form, Local File and Master File required under Ministerial Decision 97/2023.

Is the Taxtech500 #1 ranking permanent?

No, it’s a monthly ranking based on that month’s activity and engagement. TAIGA currently holds the #1 position in its category; you can check the live, current ranking directly on Taxtech500.

Does TAIGA replace a TP advisor?

No. TAIGA is built around a workflow that still requires a human preparer and a second reviewer to sign off before anything is filed. It removes the email chain and the spreadsheet reconciliation, not the professional judgment.

TAIGA (TP Doc Gen AI) is built and used by Steadfast Business Consulting. For the current Taxtech500 ranking, visit the live listing.