Cross-border transactions are a core part of multinational business operations. Even minor differences in pricing between related entities can attract scrutiny from tax authorities and may result in significant adjustments. A prominent example is the Rolls Royce India case of 2015, where a transfer pricing adjustment of INR 6.06 crore was made for several service categories, including technical support and supply chain activities. In addition, Indian operations were attributed 35 percent of global profits based on their role in market development and service delivery. 

Since its introduction in 2001 under Chapter X, sections 92 to 92F of the Income Tax Act, Transfer pricing regulations in India has become a central part of the country’s international tax system. For foreign companies, understanding these rules is critical not only for compliance but also for effective risk management and predictable tax outcomes. 

Legal Framework Governing Transfer Pricing in India 

India follows OECD BEPS recommendations even though it is not an OECD member. The statutory framework includes: 

• Sections 92–92F of the Income Tax Act, 1961 

• Rules 10A–10E of the Income Tax Rules, 1962 

These provisions require that income from international or high-value domestic transactions be calculated according to the Arm’s Length Principle. This ensures that inter-company pricing reflects market conditions and prevents artificial shifting of profits. 

Scope of application: 

• International Transactions: Cross-border dealings involving at least one non-resident party. 

• Specified Domestic Transactions (SDTs): Domestic related-party transactions exceeding INR 20 crore annually. 

By clearly defining what is covered, India ensures that significant value flows within multinational groups are reported and taxed appropriately. 

Data-Driven Insights and Economic Impact 

Transfer pricing today goes far beyond being a simple compliance exercise. It directly affects company finances and also plays an important role in India’s overall economic stability. Since the rules were introduced, companies have been reporting a growing number of cross-border and domestic dealings, and the total transaction values have risen as well. Recent figures show that disputes related to transfer pricing are increasing at more than 20 percent every year, pointing to tougher enforcement and more complicated business structures across global groups. 

When authorities make adjustments, the amounts involved are far from minor. Many cases lead to changes ranging from INR 5 crore to INR 50 crore, which can reshape financial results. From assessment years 2020 to 2024, the value of total adjustments crossed INR 7,000 crore. Multinational companies also report that 25 to 40 percent of their global profits are earned through Indian operations, proving how central India has become to global value chains. 

On a larger scale, these regulations stop large sums from being shifted out of the country. Nearly 80 percent of affected businesses now submit detailed reports as per OECD BEPS Action 13, including Local Files and Country-by-Country Reports. This shows growing maturity in compliance culture. 

Associated Enterprises and Transactional Scope 

An entity qualifies as an Associated Enterprise if it has direct or indirect influence over another entity’s management, capital, or operations. Examples include: 

• Owning 26 percent or more voting rights in another entity 

• Financing 51 percent or more of another entity’s total borrowings 

• Relying on a single supplier for 90 percent or more of raw materials 

• Appointing the majority of directors or key managerial personnel 

Transactions between associated enterprises can involve the transfer of goods or services, provision of loans or guarantees, or cost-sharing arrangements. 

Specified Domestic Transactions extend transfer pricing principles domestically for related-party transactions exceeding INR 20 crore. Illustrative cases include dealings between profit-making and loss-making units or entities availing tax incentives under sections such as 80-IA. 

By clearly defining both associated enterprises and the transactional scope, India ensures transparency and accurate reporting within corporate groups. 

Arm’s Length Principle: How It Works 

The Arm’s Length Principle ensures that pricing between related parties reflects what would be agreed upon between independent parties in similar circumstances. India recognises six methods under Section 92C to determine ALP: 

1. Comparable Uncontrolled Price Method (CUP) 

2. Resale Price Method (RPM) 

3. Cost Plus Method (CPM) 

4. Profit Split Method (PSM) 

5. Transactional Net Margin Method (TNMM) 

6. Other method using reasonable comparables 

Where multiple comparables are available, India applies a range-based approach requiring ALP to fall within a statistical interquartile range. The most appropriate method should be chosen based on the nature of the transaction and the reliability of the data. 

Documentation and Compliance Obligations 

Rule 10D requires taxpayers to maintain detailed documentation for international and SDT transactions, including: 

• A clear explanation of each transaction and the related contractual terms 

• A practical analysis of functions performed, assets used, and risks assumed 

• Reasoning behind the choice of the most appropriate ALP method 

• ALP calculations supported by reliable comparable data 

A Chartered Accountant must certify compliance through Form 3CEB, which must be filed by October 31 of the assessment year. The related Income Tax Return is due by November 30. Documentation follows OECD BEPS Action 13 standards and includes: 

• Local File: Detailed information on individual transactions 

• Master File (Form 3CEAA): Overview of global operations, income flow, and taxes paid 

• Country-by-Country Report (CbCR): Country-level financial and operational data 

Keeping complete and accurate records is essential not only to meet legal requirements but also to protect the business during audits and reviews. 

Recent Reforms and Safe Harbour Rules 

Under the Finance Bill 2025, block assessments now allow eligible taxpayers to opt for a three-year assessment cycle, which helps ease the compliance burden and reduce disputes. Multi-year ALP determinations for similar SDTs will be allowed from April 1, 2026, offering businesses greater certainty in long-term tax planning. 

Safe Harbour rules, originally introduced in 2013 and updated from time to time, help reduce administrative pressure for low-risk transactions. Recent updates have expanded coverage and revised thresholds to better match global practices. 

These reforms show India’s efforts to build a more efficient transfer pricing system that supports both compliance and business growth. 

Conclusion 

Indian companies engaged in cross-border transactions face increasing scrutiny on pricing between related parties. Authorities look at whether local operations truly contribute to revenue, and any mismatch can trigger significant adjustments. Maintaining clear documentation, choosing the right ALP method, and leveraging Safe Harbour rules are practical ways to manage this risk. When done proactively, transfer pricing becomes a tool for businesses to demonstrate transparency, strengthen governance, and align reported profits with the actual economic contribution of Indian operations.