Transfer Pricing in India: Applicability, Associated Enterprises & International Transactions Explained (FY 2025-26)

Your company can have a transfer pricing problem even when it has never sold a single product to a foreign group company.

Loan from the parent, corporate guarantee, royalty and even certain transactions involving an independent third party can bring transfer pricing into the consideration.

This article explains exactly where that line is drawn for FY 2025-26 – when transfer pricing applies, who qualifies as an Associated Enterprise under Section 92A, what counts as an international transaction under Section 92B, how the ₹ 20 crore SDT threshold works and what TP compliance follows once the rules apply.

With years of experience advising businesses on transfer pricing matters, Master Brains delivers profound expertise in Indian transfer pricing.

Key Takeaways

• Transfer pricing can apply to sales, loans, guarantees, royalties and services.
• Check Section 92A first to determine whether the parties are Associated Enterprises.
• Check Section 92B next to determine whether the transaction is an international transaction.
• Third-party transactions can also be covered under Section 92B (2) in specified situations.
• The ₹ 20 crore threshold applies to SDTs, not to international transactions generally.
• Once TP applies, check ALP, documentation and Form 3CEB requirements.

Phase 1: TP Applicability & Thresholds

1.1 What Is Transfer Pricing in India?

Transfer pricing (TP) is the process of determining price/terms of transactions between associated enterprises (AEs) so that the resulting income or expenditure are at arm’s length price (ALP).

“Arm’s Length Price” means the price which independent and unrelated companies would charge in an open market for the same transaction.

The CBDT handles India’s direct tax framework and Transfer Pricing Officers (TPO) specifically examines ALP for international and domestic transactions referred to them.

The TP law exists to prevent multinational groups from shifting their Indian profits to lower-tax countries by overcharging or undercharging their Indian entities. This is a part of global standards set by Organization for Economic Co-operation and Development (OECD) under anti-tax avoidance initiatives.

1.2 When do Transfer Pricing Provisions Apply to an Indian Company?

For business in FY 2025-26, transfer pricing provisions can apply through two separate routes:

1. International transactions, including deemed international transactions
2. Specified Domestic Transactions (SDTs)

1.3 What Makes Two Entities Associated Enterprises Under Section 92A?

An Associated Enterprise (AE) means a related party under transfer pricing law. 

Section 92A has two sub-sections: Section 92A (1) gives the general definition of AE while Section 92A (2) gives 13 specific rules where two companies are automatically deemed to be AEs.

Understanding Section 92A (1) vs Section 92A (2) Criteria

While Section 92A (1) explains the basic concept of AE, Indian courts have held that Section 92A (1) and Section 92A (2) must be read together. A company is treated as an AE if it meets the general control idea and satisfies at least one of the 13 cases under Section 92A (2).

Source: PCIT v. Page Industries Ltd. (Karnataka HC, 2021) 

ACIT., Circle-7, Surat vs Veer Gems, (ITAT- Ahmedabad, 2017)

Summary Table of Section 92A (2) Associated Enterprise Conditions

1.4 What counts as an International Transaction Under Section 92B?

An international transaction is any transaction between two or more AEs (where at least one party is non-resident) involving but not limited to:

• Tangible property: goods, machinery
• Intangible property: patents, trademarks, copyrights, licences, know-how
• Capital Financing: loans, guarantees, securities, advances, debts
• Services: technical, marketing, legal, accounting, consultancy
• Any other transaction impacting profits, incomes, losses or assets of enterprise
• Cost sharing agreements

Example: An Indian company buys machinery from its foreign AE in Slovenia for ₹ 2 crore. This can qualify as an international transaction under Section 92B and is subject to ALP. 

1.5 What are Deemed International Transactions Under Section 92B (2)?

A transaction with an unrelated third party (resident or not) is treated as a deemed international transaction with a related foreign entity if:

1. There was a prior agreement about the deal between the third party and your foreign related company

OR

2. The terms and prices were set by your foreign related company.

Section 92B (2) stops businesses from avoiding transfer pricing rules by routing transactions through unrelated third parties.

Example: An Indian subsidiary buys raw materials from an independent supplier in Germany. However, the price and quantities were negotiated and fixed by the US parent company. Under Section 92B (2), this purchase is treated as a deemed international transaction.

Don’t assume a foreign transaction is automatically an international transaction

A transaction with a foreign company does not become an “international transaction” for TP on the spot. The transaction must satisfy the TP conditions, including the AE relationship {Exception: Deemed international transaction, Section 92B (2)}. Practical check: Before applying an arm’s length price, first identify who the parties are, whether they are AEs or whether transaction under Section 92B (2).

1.6 What are Specified Domestic Transactions and the ₹ 20 Crore Threshold?

A Specified Domestic Transactions (SDT) are domestic transactions covered under the six clauses of section 92BA of the income tax act where the total value of such transactions exceeds ₹ 20 crore. 

Specified clauses contain:

• Section 80A
• Section 80-IA (8)
• Section 80-IA (10)
• Chapter VI-A or Section 10AA
• Section 115BAB (6)
• Section 115BAE (4)
• any other transaction as may be prescribed

So that these transactions are controlled by transfer pricing principles of ALP and corresponding income, expenses or profits are not artificially manipulated. 

How to Calculate the ₹ 20 Crore SDT Threshold?

Specified Domestic Transactions apply only if the total value of all such domestic transactions across the business exceeds ₹ 20 Crore in a financial year. 

If the total value is ₹ 19.5 Crores, SDT rules do not apply. However, once you cross ₹ 20 Crore by even a small amount, SDT transfer pricing rules apply.

Common TP mistake: Applying the ₹ 20 crore threshold to international transactions

The ₹ 20 crore threshold is specific to only Specified Domestic Transactions under Section 92BA. There is no ₹ 20 crore exemption for international transactions.

Phase 2: Economic Analysis & Benchmarking Methods

2.1 What Are the 6 Methods for Calculating Arm’s Length Price Under Section 92C?

Once transfer pricing applies, you must calculate the Arm’s Length Price using the Most Appropriate Method (MAM) listed under Section 92C(1).

1. Comparable Uncontrolled Price (CUP) Method compares the price charged in a related-party deal directly with prices charged between independent companies for similar products. 
2. Resale Price Method (RPM) takes the final selling price of an independent customer and subtracts a standard profit margin and associated purchase expenses.
3. Cost Plus Method (CPM) takes the direct production cost and adds an arm’s length profit mark-up.
4. Transactional Net Margin Method (TNMM) compares the net profit percentage (earned on cost or revenue) against similar independent companies. This is the most popular method in India.
5. Profit Split Method (PSM) combines total profits from a transaction and splits them between related entities based on their actual contributions and risks.
6. Any Other Method (Rule 10AB) allows using modern valuation models, discounted cash flow (DCF) reports or third-party valuation quotes when traditional methods are not working.

2.2 How Do FAR Analysis and Database Benchmarking Work?

Conducting FAR Analysis

Choosing the right pricing method requires a clear FAR analysis:

1. Functions: What work is actually done? (R&D, assembly, marketing, shipping).
2. Assets: What assets are used? (Factories, machines, software, brand names).
3. Risks: Who takes the risks? (Market risk, credit risk, currency fluctuation risk).

Database Searches for Comparables and Tolerance Band Rules

International tax consultants use financial databases (like Prowess, Capitaline TP & AceTP) to find independent comparable Indian companies.

Arm’s Length Range: When using methods like TNMM with six or more comparable companies, the 35^th percentile to the 65^th percentile is used as ALP range.

Tolerance Band: If your price falls outside this percentile range, the middle point (median) is taken as the arm’s length price. A small variation allowance is permitted 1% for wholesale traders and 3% for all other businesses. Source: Ministry of Finance Notification dated 6^th Nov 2025

For transfer pricing support, explore our FEMA, FCRA & International Taxation Services.

Phase 3: Statutory Compliance & TP Documentation 

3.1 What is Form 3CEB and when is the filing deadline of Form 3CEB?

Every assessee that has entered into an international transaction or SDT must get an Accountant’s Report under Section 92E. This report in Form 3CEB must be filed electronically on or before 31st October following the end of the financial year. (31 October 2026 for AY 26-27). The income-tax return (ITR-6) for a taxpayer required to furnish Form 3CEB is due by 30 November 2026.

3.2 What is the Three-Tier BEPS Documentation Framework?

India follows a modern three-level documentation structure as per OECD’s BEPS Action 13:

A. Local File (Rule 10D Transfer Pricing Study):

A detailed report maintained by the Indian company containing business descriptions, FAR analysis, method selection, database search records and profit calculations. It applies to:

1. International transactions exceeding ₹ 1 crore OR
2. SDT exceeding ₹ 20 crore in a year

B. Master File (Rule 10DA / Form 3CEAA):

A global report MNE group’s structure, business operations, supply chain, FAR analysis, intangibles and R&D, financing arrangements, business restructurings, and consolidated financial statements etc. It applies if:

1. Consolidated group revenue exceeds ₹ 500 Crore AND
2. International transactions exceed ₹ 50 Crore or intangible property transactions exceed ₹ 10 Crore.

C. Country-by-Country Reporting (Rule 10DB / Form 3CEAD):

CbCR is a summary report filed by the ultimate parent company of large multinational groups with global revenues exceeding 750 million Euro (₹ 6,400 Crore in India). 

For detailed information, read Transcending Borders with Transfer Pricing Documentation.

Phase 4: Risk Mitigation & TP Dispute Resolution

4.1 How do Secondary Adjustments work Under Section 92CE?

Secondary adjustment under Section 92CE can arise where a primary transfer-pricing adjustment is made as per section 92CE(1) provisions.. It applies when the amount of primary adjustment exceeds  ₹ 1 crore. 

Section 92 CE Repatriation and Deemed Interest Taxation

If a transfer pricing adjustment increases your taxable income, Section 92CE requires that the extra profit money must actually be brought into India from the foreign related party within 90 days.

If not:

• The amount is treated as a deemed loan given to the foreign company. Interest income is added to your tax return until the money arrives.
• You can pay a one-time tax of 18% on the unrepatriated amount to close the issue permanently. This additional tax is subject to 12% surcharge and 4% Health & Education cess (effective at 20.966% approx).

(Surcharge rate is as per section 2(4) of Finance Act, 2025 and it may vary)

Source: Section 92CE – Income Tax Department & CBDT Notification No. 52/2017 

4.3 What is the Thin Capitalization Rule under Section 94B?

Section 94B limits how much interest expense an Indian company can deduct on loans taken from foreign related entities.

It applies if annual interest paid to foreign AE exceeds ₹ 1 Crore. Maximum interest deduction allowed is capped at 30% of EBITDA or actual interest paid, whichever is lower.

Any disallowed interest can be carried forward for up to 8 years and claimed in future years when there is enough EBITDA margin.

Source: Section 94B – Income Tax Department

4.4 How Do Safe Harbour Rules Reduce Risk?

Safe Harbour rules (Rule 10TD) are simple profit margins offered on specified TP transactions by the tax department. If your business accepts these profit margins, the tax department agrees not to contest them.

These transactions relate to IT services, Knowledge Process Outsourcing (KPO), software R&D, auto component makers, corporate guarantee, intra group loans and low-value support services.

Safe Harbour margins in AY 26-27 for IT related transactions are normally in range between 17% to 18% profit on total operating costs.

4.5 What is the Advance Pricing Agreement (APA) under Section 92CC?

An APA is an advance legal agreement between a taxpayer and the CBDT that fixes transfer pricing methods and prices for some future and previous years.

An APA can cover five future years, with rollback available for four preceding years, giving a total of 9 consecutive years of tax peace.

“5 future years + 4 rollback years = 9 years”

Phase 5. Practical TP compliance checklist

1. Identify the parties, determine whether an AE relationship exists under section 92A 
2. Identify the transaction, determine whether it is covered by Section 92B or Section 92BA. 
3. Check Section 92B (2), where an independent third party is involved. 
4. Determine the ALP under section 92C, select and apply the most appropriate method under Rules 10B/10C. 
5. Prepare documentation, where Section 92D/Rule 10D requirements apply. 
6. File Form 3CEB, where Section 92E applies. 
7. Submission before the income-tax return and filing deadlines 
8. Consider other TP provisions, such as secondary adjustment, APA or safe-harbour provisions for your business.

Know more Smart Transfer Pricing: Strategies for Business Growth

Phase 6: Penalties for Transfer Pricing Non-Compliance

6.1 What are the penalties for transfer pricing non-compliance?

Failing to follow transfer pricing rules can result in heavy penalties under the Income-tax Act, 1961:

Section 271AA: 2% of the value of each international transaction/SDT for failure to maintain documents or furnishing incorrect information and ₹ 5 lakhs flat for failure to furnish documents and information required under Sec 92D(4).

Section 271BA: ₹ 1 lakh for failure to furnish the accountant’s report under Section 92E (Form 3CEB).

Section 271G: 2% of the value of each failure to furnish documents/information under Sec 92D(3).

Section 271J: ₹ 10,000 per incorrect report/certificate imposed on the accountant who furnished it.

Section 270A: 50% of tax payable on under reporting income or 200% of tax payable in case of misreporting.

7. TP Frequently Asked Questions (FAQs)

1. When do transfer pricing provisions apply to an Indian company?

Transfer pricing applies to international transactions between Associated Enterprises (AE) where at least one party is a non-resident, irrespective of transaction value. They also apply to qualifying Specified Domestic Transactions (SDT) exceeding ₹ 20 crore in aggregate in a financial year. 

2. What makes two entities ‘associated enterprises’ under Section 92A?

Two companies are Associated Enterprises if one participates in the management, capital or control of the other or if common entities control both. Section 92A(1) and 92A(2) prescribes specific conditions where companies can become AEs through relationships via voting power, loans, guarantees, management control, board appointments or business dependence. 

3. What counts as an ‘international transaction’ under Section 92B – do loans, guarantees and cost-sharing qualify?

Yes. Section 92B covers transactions between Associated Enterprises where either or both enterprises are non-residents. These will include transactions involving goods, services, intangibles, loans and guarantees. Financial transactions such as intercompany loans and guarantees can therefore fall within international transactions. Cost-sharing arrangements are also explicitly covered under section 92B(1). 

4. What are specified domestic transactions and what is the ₹ 20 crore threshold?

Specified Domestic Transactions (SDT) are certain domestic transactions covered by six clauses of Section 92BA of the Income Tax Act. They will be subject to transfer pricing regulations if the aggregate value of these transactions exceed 20 crore. The specified clauses are Sections 80A, 80-IA, 10AA, 115BAB and 115BAE. The ₹ 20 crore threshold applies to the aggregate value of qualifying SDTs during a financial year. 

5. Which compliances follow once TP applies – TP study, Form 3CEB, three-tier documentation?

TP compliance requirements include maintaining TP documentation, filing Form 3CEB and complying with  Local File, Master File and CbCR requirements where applicable. 

6. What are the penalties for transfer pricing non-compliance?

Transfer pricing penalties depend on the type of compliance failure. Some of the penalties for transfer pricing non-compliance are:

Section 271AA: 2% of the transaction value in case of failure to maintain documents and ₹ 5 lakhs in case of failure to furnish document/information under Sec 92D

Section 271G: 2% of transaction value for each failure to furnish required information/documents

Section 271BA: ₹ 1 lakh for failure to furnish Form 3CEB.

Transfer Pricing Made Simple?

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This article is for informational purposes and not a substitute for professional advice.