Transfer Pricing Compliance and Documentation
If your company deals with a related party outside India, the price you charge or pay has to be an arm's length price, and you have to be able to show it. This guide sets out what has to be filed, what has to be kept, when each of them is due, and what it costs when one is missed.
- The accountant's report has no monetary threshold at all
- Part A of the Master File is due whatever your size
- The penalty for a late accountant's report became a mandatory fee on 1 April 2026
- The safe harbour ceiling for information technology services went from Rs 300 crore to Rs 2,000 crore
Four numbers worth knowing before you start
Three questions, in order
Two Acts are live at once. The Income-tax Act 1961 governs FY 2025-26, the year being filed now. The Income-tax Act 2025 governs tax year 2026-27 onward. Section, rule and form numbers differ between them, so every citation below names the year and the Act.
1. Is the other party an associated enterprise?
Participation in management, control or capital, directly or through an intermediary, and a list of deemed cases including shareholding, loans, guarantees, dependence on supplied intangibles and substantially all raw material purchases. The definition is wider than a group chart: two companies with no common shareholder can be associated enterprises through a supply dependency.
2. Is it an international transaction?
A transaction between two or more associated enterprises, at least one of which is non resident, in the nature of purchase, sale, lease, services, lending, borrowing, intangibles, or a cost sharing arrangement. It includes a transaction with an unrelated party where the terms were in substance determined by an associated enterprise.
3. Or is it a specified domestic transaction?
Certain related party dealings between two Indian parties are also caught, principally where a tax holiday or deduction is involved. The regime was narrowed in 2017 when payments to related persons were removed from its scope, and it is subject to an aggregate threshold, but it was not abolished.
If the answer to question one and either of questions two or three is yes, the arm's length obligation applies to that transaction and the accountant's report is due. Note the order: the threshold questions come after the relationship question, not before.
The specified domestic transaction threshold is an aggregate value in the year: the transactions have to exceed Rs 20 crore in total, under section 92BA of the 1961 Act and section 164 of the 2025 Act alike. An aggregate of exactly Rs 20 crore does not cross it. At or below it, the specified domestic transaction limb does not bite. There is no equivalent relief on the international limb.
Form 3CEB, now Form 48, and the thing everyone gets wrong about it
Every person who enters into an international transaction or a specified domestic transaction in a year has to obtain a report from an accountant and file it. There is no monetary threshold. One transaction is enough.
This is the single most misunderstood rule in Indian transfer pricing. Articles routinely import the Rs 1 crore documentation relief, or the specified domestic transaction threshold, and present it as a threshold for the report. Neither is. The Rs 1 crore figure relieves you of maintaining the prescribed list of documents; it does not relieve you of the arm's length obligation and it does not relieve you of the report.
| FY 2025-26, Income-tax Act 1961 | Tax year 2026-27 onward, Income-tax Act 2025 | |
|---|---|---|
| Provision | Section 92E | Section 172 |
| Form | Form 3CEB | Form 48, filed online only |
| Rule | Rule 10E, Income-tax Rules 1962 | Rule 85, Income-tax Rules 2026 |
| Due | One month before the return due date | One month before the return due date under section 263(1) |
| Consequence of failure | Penalty of Rs 1,00,000 under section 271BA | A mandatory fee under section 428(d): Rs 50,000 for a delay up to one month, Rs 1,00,000 thereafter |
The date is expressed as a month before the return due date under both Acts, not as a fixed calendar date. Check the calendar date against the live circulars page on the day you rely on it.
The penalty became a fee, and that is worse rather than better
Section 447 of the Income-tax Act 2025, which would have carried forward the Rs 1,00,000 penalty for a missing accountant's report, was omitted before it ever operated. In its place section 428(d) imposes a fee: Rs 50,000 for a delay up to one month and Rs 1,00,000 after that. A penalty can be argued against on reasonable cause. A fee is mechanical. Almost every published article still describes this as a Rs 1,00,000 penalty, which is wrong twice over for tax year 2026-27.
Local File, Master File and country by country reporting
India operates the three tier structure that came out of the international base erosion work. They are separate obligations with separate thresholds, and it is common to owe one and not the others.
| Tier | What it is | Threshold | Forms, 1961 Act | Forms, 2025 Act |
|---|---|---|---|---|
| Local File | The prescribed list of information and documents about your own transactions, kept rather than filed, produced when the officer asks | The prescribed list applies where international transactions exceed Rs 1 crore in aggregate. The arm's length obligation applies regardless | Rule 10D | Rule 84 |
| Master File | A description of the whole international group: structure, intangibles, financing, and the financial and tax position | Part A from every constituent entity, whatever the size. Part B where consolidated group revenue exceeds Rs 500 crore and international transactions exceed Rs 50 crore, or Rs 10 crore for intangible property | Form 3CEAA, with Form 3CEAB to designate a filer | Form 56, with Form 57 to designate a filer |
| Country by country report | Revenue, profit, tax paid, capital, employees and assets for every jurisdiction the group operates in | Consolidated group revenue of the international group exceeding Rs 6,400 crore | Form 3CEAD, with Form 3CEAC to intimate and Form 3CEAE to designate | Form 59, with Form 58 to intimate and Form 60 to designate |
Part A of the Master File catches almost everyone
Part A of the Master File form is due from every constituent entity of an international group resident in India, whether or not the revenue and transaction thresholds are met. A great many Indian subsidiaries of foreign groups conclude they are below Rs 500 crore and therefore have no Master File obligation at all. That is wrong, and it is a filing that costs almost nothing to make and is awkward to explain having missed.
The intimation and designation forms have their own dates, and both run backwards from the main filing rather than from the return. The designation form is due at least thirty days before the Master File is due. The country by country intimation is due two months before the report itself. Diarise these separately: they are the two most commonly missed dates in the whole set.
Methods, the range, and the band that is not a cushion
Six methods are available: comparable uncontrolled price, resale price, cost plus, profit split, transactional net margin, and such other method as is prescribed. There is no hierarchy. The most appropriate method is chosen on the facts and the availability of reliable data, and the choice has to be justified in the file rather than asserted.
Once comparables are selected, one of two mechanisms applies, and they are mutually exclusive. This is worth being precise about because a great deal of published commentary merges them.
The arm's length range
Available where the dataset has six or more comparables and the method is not profit split or the other method. The range runs from the thirty fifth percentile to the sixty fifth percentile. If your price falls inside it, it is the arm's length price. If it falls outside, the arm's length price is the median, and the whole difference is adjusted.
The tolerance band
Available on the arithmetic mean route, which applies where there are fewer than six comparables or the method is profit split or the other method. A small percentage variation from the mean is tolerated. It has been one per cent for wholesale trading and three per cent otherwise since AY 2015-16, but it is notified year by year and does not carry forward on its own. As at 19 September 2026 no figure had been notified for either AY 2026-27 under the 1961 Act or tax year 2026-27 under the 2025 Act. It usually issues in October or November, so do not assume last year's percentages until it does.
There is no three per cent cushion around the median. If you are outside the range, you go to the median, not to within three per cent of it. The band belongs to the other route entirely.
Certainty at a stated margin, and the year it changes
Safe harbour lets you declare a margin the department will accept without a transfer pricing examination. It is an election, made in advance, and the price of certainty is that the prescribed margin is usually higher than what you would defend on a benchmarking study. For a business that values a closed file more than the last two points of margin, it is often the right trade.
The regime was substantially rewritten for tax year 2026-27, and the two versions do not overlap. Getting the year wrong here means electing into the wrong regime.
| Up to AY 2026-27, Income-tax Act 1961 | Tax year 2026-27 onward, Income-tax Act 2025 | |
|---|---|---|
| Provision and rules | Section 92CB, Rules 10TA to 10TG | Section 167, Rules in the 86 to 102 range of the Income-tax Rules 2026 |
| Form | Form 3CEFA | Form 49 |
| Eligibility ceiling | Rs 300 crore of transaction value | Rs 2,000 crore for information technology services |
| Information technology margins | 17 per cent up to Rs 100 crore, 18 per cent above that; knowledge process outsourcing at 24, 21 or 18 per cent depending on the employee cost ratio | A single Information Technology Services category, covering software development, IT enabled services, knowledge process outsourcing and software contract research, at an operating margin of at least 15.5 per cent on operating expenses |
| Term | Elected year by year, within the years the rule covers | A block of five consecutive tax years |
The Rs 300 crore ceiling was itself an increase from Rs 200 crore, made in March 2025 and applying to AY 2025-26 and AY 2026-27. Content still quoting Rs 200 crore, and content presenting Rs 300 crore as the current figure without naming the year, are both wrong in different directions.
| Other categories, tax year 2026-27 | Safe harbour |
|---|---|
| Data centre services supplied from India to an associated foreign cloud service provider | A mark up of at least 15 per cent on operating costs |
| Contract research and development wholly or partly relating to generic pharmaceutical drugs | An operating margin of at least 24 per cent on operating expenses |
| Manufacture and export of core automobile components, including qualifying lithium ion batteries for electric vehicles | An operating margin of at least 12 per cent on operating expenses |
| Manufacture and export of non core automobile components | An operating margin of at least 8.5 per cent on operating expenses |
Read every rate against its base. The data centre figure is a mark up on costs; the others are margins on operating expenses. Quoting any of them as a percentage of revenue gives the wrong answer.
The one grid we do not summarise
Intra group loans and corporate guarantees carry forward as safe harbour categories, but their rates move with the currency, the credit rating and the amount. A shortened version of that grid is the easiest thing on this page to get wrong, so we read the applicable band off Rule 89 of the Income-tax Rules 2026 for your facts rather than publish one. Separately, the 2026 Budget introduced a safe harbour of 2 per cent of invoice value for a non resident holding components in a bonded warehouse. That decides how much income is attributed to India, not what margin a service earns, and it should not be read as a row in the table above.
The secondary adjustment, and why cash has to follow the entry
A primary transfer pricing adjustment increases your Indian taxable income. It does not, by itself, move any money. The secondary adjustment rule exists to deal with the cash that is sitting with the associated enterprise because the original price was wrong.
It applies where the primary adjustment is Rs 1 crore or more and arises from your own return, from an officer's order you accepted, or from an advance pricing agreement, a safe harbour election or a mutual agreement procedure resolution. The excess money has to be repatriated to India within the prescribed window. If it is not, it is treated as an advance to the associated enterprise and notional interest runs on it, year after year, until it is.
There is an exit. You may instead pay additional income tax on the excess money under section 170 of the 2025 Act, which is the final payment of tax on it, and the repatriation obligation and the notional interest both fall away. The rate is 18 per cent with a 12 per cent surcharge on that tax, which comes to 20.16 per cent of the excess money. No cess is added, and no deduction or tax credit is allowed for it.
The foreign currency interest rule points at a benchmark that no longer exists
If you neither repatriate nor pay, notional interest runs. For a rupee adjustment the rule works: the one year SBI marginal cost of funds lending rate as at 1 April of the tax year, plus 325 basis points. For a foreign currency adjustment, Rule 83 of the Income-tax Rules 2026, which replaced Rule 10CB, still prescribes six month LIBOR as at 30 September plus 300 basis points. LIBOR has ceased, and as at 19 September 2026 no replacement benchmark had been notified. Substituting SOFR or another reference rate and calling it the prescribed calculation is not safe without a departmental clarification. On a live foreign currency case, repatriating in time or paying the 20.16 per cent are the cleaner routes, and a position taken on a substitute rate should be documented as exactly that.
One arm's length price, three years
From 1 April 2026, where a transaction has been referred to the Transfer Pricing Officer for a year, the taxpayer may elect to have the officer's arm's length price for that year apply to similar transactions in the two following years as well. The first year is the one already under reference; the election extends it to the second and third. The officer has to declare the option valid within a month, and once it is in force no fresh reference is made for those years.
This is a three year block, it is elected by the taxpayer rather than imposed, and it is the most consequential practical change in this area for the current cycle. It is also almost absent from published commentary. For a company with a stable, recurring, well documented transaction it converts three separate arguments into one.
It is not free of risk. A determination you dislike binds the two following years once you have elected. It suits a stable transaction with a defensible benchmarking position and suits a volatile one badly.
How the option is exercised, and the window is late
The election is made online in Form 46 under Rule 82 of the Income-tax Rules 2026, with an accountant's certificate in Form 47. The window opens only when the third tax year has ended and closes on 30 June immediately after it. So for a first year of 2026-27, Forms 46 and 47 are filed between 1 April 2029 and 30 June 2029. An election made in the wrong form or outside that window is simply not an election, so diarise it the year the reference is made rather than the year it falls due.
The penalties, in both currencies of the law
| Default | FY 2025-26, Income-tax Act 1961 | Tax year 2026-27, Income-tax Act 2025 |
|---|---|---|
| Documentation not kept, transaction not reported, or incorrect information | 2 per cent of the value of each transaction, section 271AA(1) | 2 per cent of the value of each transaction, section 442(1) |
| Master File information not furnished | Rs 5,00,000, section 271AA(2) | Rs 5,00,000, section 442(2) |
| Accountant's report not furnished | Rs 1,00,000 penalty, section 271BA | A fee of Rs 50,000 up to one month and Rs 1,00,000 thereafter, section 428(d). The penalty section was omitted |
| Information not furnished to the officer on demand | 2 per cent of the value of the transaction, section 271G | 2 per cent of the value of the transaction, section 457 |
| Country by country report not furnished or inaccurate | Rs 5,000 to Rs 50,000 per day, escalating, section 271GB | Rs 5,000 per day up to a month, Rs 15,000 per day beyond, Rs 50,000 per day after a penalty order, and Rs 5,00,000 for inaccurate information, section 459 |
| Under reporting or misreporting of income | 50 per cent of the tax on under reported income, 200 per cent on misreporting, section 270A | Section 439 |
A two per cent penalty on transaction value, not on the adjustment, is the item that surprises people. On a Rs 40 crore intra group services flow that is Rs 80 lakh for a documentation failure, irrespective of whether the price was right.
Questions clients ask about the transfer pricing file
Our transactions are small. Do we still need a benchmarking study?
The arm's length obligation applies whatever the size, and the accountant's report has no threshold. What the Rs 1 crore figure changes is whether the prescribed list of documents has to be maintained. In practice we would still want a defensible basis for the price, because the report requires the accountant to state a method and a result.
Can we just use the same benchmarking study as last year?
Only if the facts and the market have not moved, and only with the data refreshed. A study rolled forward without updating comparables is the most common weakness we see in files that then fail on examination. The new three year block option is the proper way to get multi year certainty.
The parent prepares the Master File. Do we have to do anything?
Yes. Part A is an Indian filing by the Indian constituent entity. Where there are several Indian entities in the group, one is designated and a separate form makes the designation, due at least thirty days before the Master File itself.
Is the specified domestic transaction regime still alive?
Yes. It was narrowed in 2017, when related party payments were taken out of its scope, and it carries an aggregate threshold, but it survives under both Acts, principally for tax holiday and deduction linked dealings between Indian parties.
Should we take the safe harbour?
It depends on the gap between the prescribed margin and the margin you would defend, and on how much the certainty is worth to you. The 2026 change makes it a serious option for information technology services businesses that were previously far above the ceiling. We would work the numbers both ways before recommending either.
How far back can the department go?
The assessment limitation is extended by twelve months where a reference is made to the Transfer Pricing Officer, and the officer's order has to be passed a set period before that limitation expires. The practical effect is that transfer pricing years stay open longer than ordinary years. The timelines are set out on the disputes guide.
Where to go next
Where this connects
The price you set here is the amount you pay out, so it drives the withholding position on the cross border payments guide. A transfer pricing study that describes what people in India actually do for a foreign group is also evidence in a permanent establishment argument, covered on taxable presence. And the domestic corporate tax position generally sits under Direct Taxation.
Where to go next
International Taxation
Back to the main page: what we do, how an engagement runs, and how to reach us.
Withholding Tax on Cross Border Payments and Treaty Relief
The payer's problem: deciding whether a payment abroad is chargeable to Indian tax at all, at what rate, what the treaty does to that rate, and what paperwork has to exist before the money leaves. Form 10F, Form 15CA and Form 15CB have all been renumbered.
Permanent Establishment and Taxable Presence in India
When a foreign enterprise becomes taxable in India without ever setting up a company: business connection, significant economic presence, the three kinds of permanent establishment, what the Multilateral Instrument did to your treaty, and how much profit India can attribute once a presence is found.
Cross Border Structuring, Repatriation and Foreign Tax Credit
The outbound side: putting money into a foreign subsidiary under the 2022 overseas investment rules, claiming credit for tax paid abroad, getting profit back to India or out to a foreign parent, and the three rules that constrain how you structure it.
International Tax Disputes and How They Are Resolved
What happens when the department disagrees: the transfer pricing assessment cycle, the Dispute Resolution Panel and its thirty day window, the appeal ladder, mutual agreement procedure between two governments, advance pricing agreements as a way of avoiding the argument entirely, and where the global minimum tax stands for an Indian group.
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Tell us what you buy from or sell to a related party abroad, and when your return is due. We will tell you which of these filings you owe and which you do not.
Position as at 19 September 2026. Reviewed every six months.
This page is general information, not professional advice. Cross-border tax in India is in the middle of the largest transition it has had in sixty years. The Income-tax Act 2025 replaced the Income-tax Act 1961 on 1 April 2026 and renumbered every section; the Income-tax Rules 2026 replaced the 1962 Rules on the same day and renumbered every rule and every form. The 1961 Act still governs the return being filed for FY 2025-26. That means almost every figure and citation has two correct answers depending on the year you are asking about, and a great deal of published material, including material updated this year, gives only one of them. Take professional advice before acting on anything on this page. We are happy to be that adviser, but we do not act on a web page, ours or anyone else's, without one.