Note: The 2025 Income Tax Act replaces the 1961 Act, preserving core principles while introducing a revamped regime. However, this blog aims to explain the Transfer Pricing mechanism and its evolution in Indian jurisprudence through the original act.
Introduction:
When an Indian Subsidiary provides services, offers corporate guarantees, or receives remuneration from a foreign company, a key question arises: Would an independent party have agreed to the same payment terms and pricing?
India’s Transfer Pricing mechanism is primarily governed by Sections 92-92F of the Income Tax Act, 1961, and is guided by the Arm’s length principle. Transfer Price is the actual price charged in a transaction between associated enterprises, at least one of which is located outside India. Given the varying tax rates across the globe, MNE (Multi national enterprise) groups are incentivised to set the transfer price in such a way as to reduce tax liability for the entire group. Today, India is one amongst the most active transfer pricing destinations with developments in the various sectors of IT, business process outsourcing, pharmaceuticals, automotives, financial services, consumer goods, etc and increasing inbound investments. Hence, India houses an evolving Transfer price litigating environment. The Arm’s length Price hence applies here, referring to the price unrelated parties would have agreed to under similar conditions.
A breakdown of Sections 92-92F of the Income Tax Act, 1961 and a brief on the Arm’s Length Principle as a commercial benchmark:
Transfer Pricing was introduced in India via Sections 92-92F of the Income Tax Act 1961 and Rules 10A-10E of the Income Tax Rules 1962, alongside a consistent application of the arm’s length principle through the same sections, including Section 286 of the Income Tax Act, and Rules 10A to 10A to 10THD, 44G and 44GHA of the Income Tax Rules. Further, it specifically mentions Rule 10B for methods, 10C for the most appropriate methods, 10D for documentation and 10AB for other methods. Transfer Pricing today is no longer a compliance issue but a major governance question for MNEs affecting taxation and cross-border risks.
The 1961 Income Tax Act defined Associated enterprises through two different categories:
- General category: where enterprises directly, or indirectly participate in management, control or capital, or are under common control.
- Specific category: where the enterprise is deemed to be associated only in specific circumstances such as significant shareholding, financial arrangements, common directors, key decision-makers, or economic dependence through IP, raw materials or sales.
Section 92A of the Act lists what can be categorised as associated enterprises and includes within this list enterprises with:
- 26% voting power;
- Loans constituting 51% of the book-value of assets;
- Guarantees of at least 10% of borrowings;
- Board-appointment control;
- Trademark dependence;
- Raw material dependence;
- etc
Section 92B of the Act defines International transactions as those between 2 associate enterprises where one or both enterprises are a non-resident. The nature of this transaction may include purchase, sale, lease of tangible or intangible assets, provision of services, or lending/borrowing of money, or transactions affecting profits, losses, income or assets.
Additionally, any transaction with an unrelated person may be deemed as an international transaction where the associate enterprise defines the terms and prior agreements.
Section 92C of the Act outlines the various OECD (Organisation for Economic Co-operation and Development) methods of computation of the Arms Length principle by factoring in:
- Comparable Uncontrolled Price Method
- Resale Price Method
- Cost Plus Method
- Profit Split Method
- Transactional Net Margin Method
The above are not in a particular hierarchy. Instead, the most appropriate method is chosen under Rule 10 C based on the FAR (Functions, Assets and Risks) Ruling.
More Importantly, if the most appropriate method determines more than one price, the arithmetic mean of those prices is taken as the Arm’s length price and if the difference between the actual transaction price and the arm’s length price does not exceed 3% of the actual transaction price, or 1% in the case of wholesale trading, the actual transaction price is considered, disregarding the difference. However, the entire difference is added to the assessee’s income in case it exceeds the threshold.
Transfer Pricing in India has become an evidence-based regime through Sections 92D and 92E. The primary burden of proving the arms length compliance lies with the taxpayer, thus forcing annual maintenance of transfer price documentation. Rule 10D documents (in the case of aggregate International transactions exceeding 10 million in a year) and Form 3CEB must be filed for the taxpayer in the case of international transactions or specific domestic transactions by the return due date (31st October of the assessment year) and retained for eight years. A form signed by the accountant must also be maintained. Additionally, countries that are a part of the same international group must maintain a master file alongside country-by-country reporting. For group-level documentation, India introduced a three-tier documentation framework aligned with BEPS Action 13, requiring master file, local file and CbC report from FY 2016/17. Master File applies to Indian constituents of an MNE group with consolidated revenue above INR 5 billion and either international transactions above INR 500 million or intangible-related transactions above INR 100 million. It also states that CbCR applies to MNE groups with consolidated revenue above INR 64 billion
Finally, Section 92F clearly defines all the technical terms such as “accountant”, “arm’s length price”, “enterprise”, “permanent establishment”, “specified date”, and “transaction” used in Sections 92-92E for ease.
Safe Harbour Rules: certainty, eligibility and recent updates:
Safe Harbour was introduced in Section 92CB to specify conditions under which tax authorities accept the transfer pricing declared without detailed scrutiny, removing the need for tax audits. It simplifies transactions and reduces litigation for specific transactions. The eligible assessees in this case include:
- providers of software development services,
- IT-enabled services;
- Knowledge process outsourcing services;
- Intra-group loan providers;
- Corporate guarantee providers;
- Contract R&D service providers relating to software development, or pharmaceutical drugs;
- Manufacturers/exporters of core/non-core auto components;
- Recipients of low-value adding intra-group services
To benefit from Safe Harbour provisions, the taxpayer must file Form 3CEFA. Once this provision is accepted, the taxpayer cannot resort to MAP(Mutual Agreement Procedure) and claim further benefits. The CBDT Notification No. 21/2025 updated the threshold for availing safe harbour from Rs. 200 Cr to Rs. 300 Cr, and included lithium-ion batteries used in electric and hybrid vehicles within core auto components. Safe Harbour to taxpayers is therefore, not just a legal provision but a strategic choice.
Recent ITAT(Income Tax Appellate Tribunal) rulings and Judicial trends in Transfer Pricing:
Case 1: Netflix Entertainment services India LLP v DCIT, October 2025
Initially, Netflix India claimed that it was merely a low risk distribution arm for access to the Netflix Global streaming service, earning a fixed margin of 1.36% and setting the TNMM (Transactional Net Margin Method) as the benchmark. This claim was rejected by the TPO(Transfer Pricing Officer), who applied Rule 10AB to apply the “Other Method”, considering Netflix India as a fully-fledged entrepreneurial entity, and accordingly allotted 43% subscription shares and a TP adjustment of Rs. 444.93 Cr to the entity. However, the ITAT overturned this decision and accepted Netflix India’s claim as a limited risk distributor. This ruling was justified, given that Netflix India did not own or license Netflix content or technology. Its primary functions consisted of marketing, customer support, invoicing, telecom liaison and routine support. The Tribunal further supported this decision by stating that Open Connect Appliances were logistical tools and not technological assets.
This case thus highlighted the importance of circumstantial evidence over labels.
Case 2: Sankalp Semiconductors Pvt Ltd v DCIT, February 2019
Sankalp Semiconductors offered design services in the semiconductor industry. The TPO considered the transaction to fall within the category of “engineering & design services”, hence denying the comparison done by the assessee to do a new one, treating certain one-time bonus and ESOP(Employee Stock Ownership Plan) costs as operating expenses. It was held that there was no illegality on the side of the AO(Assessing Officer) in referring the case to the TPO in the faceless system of assessment. There remained no objection to the calculation of operating expenses as they were added in the accounts as salaries. Hence, iterating on the effect of correct classification.
Case 3: PCIT v Burberry India Pvt Ltd, January 2025
Burberry India imported luxury goods into the country from AEs and resold them without any alteration in form. The Question that arose was that, whether, in such a case, the most appropriate method would be RPM(Resale Price Mechanism) or TNMM. While the TPO rejected the former on the ground that Burberry India had incurred significant AMP(Advertising, Marketing, Promotion) expense with an adjustment made of Rs. 6.94 Cr. However, ITAT held that RPM was the most appropriate method, further upheld by the Delhi High Court, underlining how the TPM must match the business model.
Case 4: Grupo Antolin India Pvt Ltd, November 2024
In this case, Revenue rejected the Tribunal’s omission of TP adjustment for the transfer price services based on the argument that the nature of the service differed from that documented on paper and an arbitrary allocation method. The Bombay HC rejected the Revenue's appeal, objecting to a re-examination in the light of Section 260A. There were entries depicting the production of such an agreement, the provision of services, and the expertise of AE in the assessee’s trade. The case therefore stressed on how documentation cannot be over-scrutinised in the case of intra-group service payments.
Conclusion:
Boiling it down, Transfer Pricing cannot be explained merely as a question of setting the right price between associated enterprises; it delves into a multiplicity of complex layers, including characterisation, suitable method selection, and strong documentation. The scrutiny goes beyond labels, requiring strategic decision making, applying Safe Harbour Rules and the Arm’s Length Principle. Transfer Pricing in India has thus shifted from being a filing obligation to an evidence-based governance exercise.