Transfer pricing

Arm's-length pricing of dealings with group companies, the documentation, and the 2026 safe harbour

Transfer pricing applies when you transact with an associated enterprise (broadly, a group company, including a foreign parent or subsidiary): those dealings must be at arm's length, the price unrelated parties would have used. A Form 3CEB accountant's report is mandatory for any international transaction regardless of value, and full contemporaneous documentation is required once aggregate international transactions exceed Rs 1 crore. Specified domestic transactions are caught above Rs 20 crore. For IT, ITES and BPO captives, the Income-tax Rules 2026 consolidated the safe harbour to a single 15.5% margin on operating cost, with the turnover cap raised to Rs 2,000 crore and automated approval, a major, timely change. The recurring trap: conduct beats contract, so using a parent's brand or IP without a written, arm's-length licence still triggers transfer pricing.

Last reviewed: 29 May 2026

Guidance, not advice. We explain the rules, we don't assess your situation. Always seek financial or tax advice from your accountant, or contact Income Tax Department. Read our editorial scope →

When transfer pricing applies

Transfer pricing applies to transactions between associated enterprises (AEs). Two enterprises are associated broadly where one holds 26% or more of the voting power of the other, there is 51% common control, one appoints a majority of the board, or by other control tests, any one is enough. Their dealings (services, goods, loans, guarantees, IP) must be at arm's length, the price independent parties would agree, found using one of six prescribed methods (the Transactional Net Margin Method dominates Indian IT and BPO cases). The arm's-length result can be a range (the 35th to 65th percentile with enough comparables) with a tolerance band. Crucially, the substance of the conduct governs: if a captive bears real risk, or uses the parent's brand without a written licence, the position is tested on what actually happens, not the contract label.

The documentation and thresholds

Compliance turns on thresholds. A Form 3CEB accountant's report is mandatory for any international transaction (and any specified domestic transaction) regardless of value, filed by the return due date. Full contemporaneous documentation (Rule 10D local file) is required once aggregate international transactions exceed Rs 1 crore. Specified domestic transactions (between specified related persons, or involving 115BAB or SEZ units) come into transfer pricing above Rs 20 crore. Larger groups also file a Master File (broadly where group revenue is Rs 500 crore or more and Indian international transactions exceed Rs 50 crore) and country-by-country report (group consolidated revenue of about Rs 6,400 crore or more). Penalties for documentation failures are significant, so a business with cross-border group dealings should not treat transfer pricing as optional.

warningThe Form 3CEB report is required for every international transaction, with no minimum value, and missing it carries a Rs 1 lakh penalty. If you transact with a group company abroad at all, you have a transfer-pricing filing.

Safe harbour (2026) and Advance Pricing Agreements

The Income-tax Rules 2026 overhauled the safe harbour from 1 April 2026: IT services, ITES, BPO and contract software R&D are consolidated into a single 15.5% margin on operating cost, with the turnover cap raised dramatically to Rs 2,000 crore (from Rs 300 crore) and automated, rule-driven approval for IT services, no officer scrutiny. Other categories have their own margins (for example contract manufacturing 12%, pharma R&D 24%, services 15%). Opting for safe harbour gives certainty but is a one-way door: it permanently bars the Mutual Agreement Procedure for that transaction. For larger or more complex cases, an Advance Pricing Agreement (5 years forward plus a 4-year rollback) locks in the method with the tax authority. Most GCCs and IT captives use safe harbour or an APA.

Companion guides

Source / notes

Income-tax Act 1961 Chapter X (ss.92-92F, transfer pricing) (Income-tax Act 2025 approx. ss.171-175); Rule 10D (documentation) + Form 3CEB
Income-tax Rules 2026 (safe harbour: IT/ITES 15.5%, Rs 2,000 crore cap, from 1 April 2026)
Income-tax Act 1961 s.92CC (APA) + s.92BA (specified domestic transactions, Rs 20 crore) + s.286 (Master File / CbCR)

Frequently asked questions

Does transfer pricing apply to my company?+

If you transact with an associated enterprise, broadly a group company (including a foreign parent or subsidiary, or a commonly-controlled company), then yes. Those dealings must be at arm's length, and you must file a Form 3CEB accountant's report for any international transaction regardless of value. Full documentation is required once your international transactions exceed Rs 1 crore. A purely domestic business with no group dealings is generally outside it.

What is the new safe harbour for IT and BPO companies?+

From 1 April 2026, the Income-tax Rules 2026 set a single safe-harbour margin of 15.5% on operating cost for IT services, ITES, BPO and contract software R&D, and raised the turnover cap to Rs 2,000 crore (from Rs 300 crore), with automated approval for IT services. Declaring within the safe harbour gives certainty without a transfer-pricing dispute, but it permanently bars the Mutual Agreement Procedure for that transaction.

Can I avoid transfer pricing by not having a written agreement?+

No, the opposite. Transfer pricing tests the substance of the conduct, not just the contract, so using your parent's brand or IP, or receiving services from a group company, without a written, arm's-length arrangement still triggers it, and a no-documentation position is weaker, not safer. A captive that bears real risk can be re-characterised regardless of how the contract labels it. Document the dealings properly and price them at arm's length.

What happens if I miss the transfer-pricing documentation?+

Penalties. Failing to file Form 3CEB carries a Rs 1 lakh penalty; not maintaining the required documentation or Master File carries a penalty of 2% of the transaction value; and a transfer-pricing adjustment itself can bring under-reporting (50%) or mis-reporting (200%) penalties on the additional tax. Documentation must be retained for eight years. So cross-border group dealings need the compliance done properly and on time.