—Guide
Transfer Pricing in India: A Practical Guide for Subsidiaries of Foreign Groups
What transfer pricing means for Indian subsidiaries of foreign groups: the arm's length principle, common transactions, documentation and annual reporting.
If your Indian company belongs to a foreign group, its transactions with group companies must be priced as if they were between independent parties. That's transfer pricing, and India enforces it closely. This guide explains the essentials.
Note: this describes the framework under the Income-tax Act, 1961. The Income-tax Act, 2025, applicable from tax year 2026-27, continues it under renumbered provisions.
The Arm's Length Principle
Transactions between associated enterprises — group companies — must be priced at arm's length: the price independent parties would agree in comparable circumstances. If they aren't, the tax officer can adjust your income.
Common Transactions
- Services to the parent: software development, engineering, back-office, research.
- Purchases of goods from group companies for resale in India.
- Royalties for trademarks or technology.
- Management fees and cost allocations from the parent.
- Intra-group loans and guarantees.
- Reimbursement of expenses.
How Pricing Is Tested
A functional analysis identifies what each party does, the assets it uses, and the risks it bears. The most appropriate method is chosen — often the transactional net margin method for services — and results are compared with independent comparable companies.
Documentation
Where international transactions exceed ₹1 crore in aggregate, the Indian entity must maintain detailed documentation each year: the group structure, business, transactions, functional analysis, method and benchmarking.
Annual Reporting
A Chartered Accountant certifies the transactions in the accountant's report, filed before the income-tax return. Larger groups may also have master file and Country-by-Country reporting obligations.
Safe Harbours
For eligible transactions like certain IT and ITeS services, the tax department accepts prices meeting prescribed margins, giving certainty without benchmarking.
Practical Tips
- Have written intercompany agreements.
- Monitor margins during the year and true up before year end.
- Keep documentation updated annually.
- Consider an APA for certainty on significant transactions.
Getting Help
Think Filing prepares transfer pricing documentation and annual certifications for Indian subsidiaries.