Transfer Pricing in India: Arm's Length Rules, Form 3CEB and Documentation

Transfer pricing in India is the set of rules that tests whether payments between related businesses were priced as if the parties were strangers. An Indian subsidiary that pays or charges its U.S. or Canadian parent for services, goods, royalties, loans or guarantees is inside those rules from the first rupee. The test is the arm's length price (ALP), and the paperwork is an accountant's report that is filed online each year.

What is transfer pricing in India?

India's rules sit in Chapter X of the Income-tax Act, 2025 (replacing the Act of 1961 for tax years from 2026-27). Income from an international transaction or a specified domestic transaction, and expenses and interest on it, must be determined having regard to the arm's length price. The ALP is the price applied or proposed in a transaction between persons other than associated enterprises, in uncontrolled conditions.

Associated enterprises include enterprises where one holds at least 26% of voting power in the other, a loan makes up at least 51% of the borrower's total assets, a guarantee covers at least 10% of the borrower's borrowings, or more than half the board is appointed by the other enterprise. A U.S. parent that owns a Pune company is the textbook example.

A specified domestic transaction is a transaction between related domestic parties, such as certain deduction-linked dealings, which counts only if the aggregate in the year exceeds Rs 20 crore.

Which method sets the arm's length price?

The most appropriate method depends on the nature of the transaction, the functions performed and the data available. The Act allows the actual price to stand where it differs from the single arm's length price by no more than a percentage notified by the government, not exceeding 3%. For the comparables, the Form 48 FAQ explains that one comparable is used as is, two to five are averaged, and six or more use the median.

Documentation, Master File and the accountant's report

1. Identify all related-party flows. Services, royalties, interest, guarantees, reimbursements, share transactions and asset transfers all count.
2. Keep information and documents under rule 84 of the Income-tax Rules, 2026: ownership structure, group profile, business description, transaction terms, functional analysis, forecasts and comparability analysis. These are not required if the aggregate value of international transactions in the tax year does not exceed Rs 1 crore. They should be contemporaneous and in existence on the specified date.
3. Benchmark each transaction with a database search and write the analysis.
4. File the accountant's report online. Form 48 (earlier Form 3CEB) is mandatory for everyone with an international or specified domestic transaction, needs a PAN, and cannot be filed offline.
5. Consider the Master File. A constituent entity of an international group keeps group information if group revenue exceeds Rs 500 crore and either international transactions exceed Rs 50 crore or intangibles transactions exceed Rs 10 crore (rule 123, with Form 56 and related forms).
6. Check secondary adjustments. If a primary adjustment of Rs 1 crore or more is made or accepted, excess money not repatriated is treated as a deemed advance that attracts interest.
7. Use safe harbour or an advance pricing agreement (APA) where the facts suit them. Treaty disputes go to mutual agreement procedure, now Form 55.

Dates and penalties

The "specified date" is one month before the return due date. For AY 2026-27 (FY 2025-26), transfer pricing cases must file the return by 30 November 2026, so Form 3CEB is due on 31 October 2026. For tax year 2026-27 the same pattern gives 31 October 2027. Returns for transfer pricing cases are not affected by the 28 September 2026 extension, which covers other audit-category assessees.

• Documents: 2% of the value of each transaction where required information or documents are not kept (section 442), and 2% where requested information is not furnished (section 457).
• Late report: under section 428, a fee of Rs 50,000 for a delay up to one month and Rs 1,00,000 thereafter, from tax year 2026-27. Earlier years follow the 1961 Act.
• Misreporting: failure to report an international transaction is a listed case of misreporting, carrying a penalty of 200% of tax on the under-reported income.
• Safety net: under-reported income arising from a Transfer Pricing Officer adjustment is excluded from penalty if you kept the prescribed documents, declared the transaction and disclosed all material facts.

A worked example

A Hyderabad subsidiary spent Rs 40 crore providing development services to its U.S. parent and charged cost plus 12%, or Rs 44.8 crore. A benchmarking study finds an arm's length mark-up of 18%, giving Rs 47.2 crore. The gap of Rs 2.4 crore is more than 3% of the price charged, so the tolerance does not help. The extra income is taxed in India, and because the adjustment exceeds Rs 1 crore, a secondary adjustment may follow unless the parent repatriates the shortfall.

Mistakes to avoid

• Missing the Form 3CEB date because the return date is later
• Treating a management fee as outside transfer pricing because it is "just cost recharge"
• Preparing the benchmarking after the return is filed
• Ignoring loans and guarantees given to group companies
• Forgetting to align the Indian price with what the U.S. parent reports

How we can help

Our Aurora, Illinois firm coordinates the U.S. side of intercompany pricing: parent-level documentation, treaty and foreign tax credit effects, and U.S. forms. Your Indian Chartered Accountant benchmarks and files Form 3CEB or Form 48. See cross-border tax and business tax returns and planning. Browse the full India: Tax and Compliance section.

Frequently asked questions

General information only. It is not tax, legal, accounting or immigration advice for your situation, and rules change; confirm the current rules with the official source or a licensed professional in the relevant country.