Every transaction between a Chinese parent and its Indian subsidiary must be priced at arm's length for Indian tax. India has no small-company exemption: any international transaction with an associated enterprise needs an accountant's report in Form 48 (previously Form 3CEB), and detailed documentation is required above prescribed value thresholds. In a China–India group the commonest flows are components and equipment bought from the parent, technology licences, and finished goods sold back, so customs value, royalties and margins have to be consistent. China has its own related-party documentation rules, and the two files must agree.
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Key facts
| Arm's length rule | Prices between related parties must match what independent parties would agree |
|---|---|
| Form 48 | Accountant's report (previously Form 3CEB) for any international transaction with an associated enterprise, whatever the value |
| Local documentation | Required above prescribed value thresholds; confirm current figures with your Indian adviser |
| Typical flows | Components, machinery and technology from China; contract manufacturing and sales in India; services and loans |
| Customs link | The transfer price of imported goods should be consistent with the customs value declared at the border |
| Chinese side | Related-party reporting and contemporaneous documentation under Chinese rules; confirm with a Chinese adviser |
| Disputes | Mutual agreement procedure under the treaty; advance pricing agreements are available |
The Indian rules in short
- Methods: comparable uncontrolled price, resale price, cost plus, profit split and the transactional net margin method, which is the most used for manufacturers and service entities.
- Benchmarking: a search of independent comparables supports the margin earned by the Indian entity, updated each year.
- Form 48: the accountant's report on international transactions, filed with the tax return. Under the Income-tax Act, 2025, form names and sections are new.
- Penalties: failure to keep documents or report transactions attracts a percentage of the transaction value, and adjustments attract penalty on under-reported income.
- Secondary adjustment: an upward adjustment may require the excess money to be brought back or treated as a deemed loan.
Common China–India flows
| Flow | Typical pricing | What India checks |
|---|---|---|
| Indian subsidiary buys components or kits from the Chinese parent | Resale price, cost plus or comparable price | Prices charged to independent buyers; customs value consistency; margin left in India |
| Indian subsidiary buys machinery and tooling from the parent | Cost plus or market price from quotations | Evidence of market price; capitalisation and depreciation |
| Technology licence or know-how from the parent | Royalty as a percentage of sales or lump sum | Whether the technology adds value; benchmarks; treaty rate; Press Note 3 conditions |
| Contract manufacturing for the group | Cost plus a mark-up from benchmarking | Margin in line with comparables; capacity and risk allocation |
| Chinese parent provides management or IT services | Cost allocation or cost plus | Actual benefit; duplication; shareholder activity exclusion |
| Intercompany loan | Interest rate in line with credit rating and currency | Arm's length rate; ECB ceiling; interest limitation |
| Secondment of Chinese staff | Reimbursement with or without mark-up | PE risk and Withholding Tax on reimbursements |
Customs value and transfer price
- India levies customs duty on the transaction value of imports. Where buyer and seller are related, the customs authorities can test whether the price was influenced by the relationship.
- A transfer price accepted for income tax may still be challenged for customs value, and the reverse. Keep the same documents for both.
- Royalty and licence fees linked to the imported goods can be added to the customs value in some cases. Ask your customs adviser before fixing the royalty.
- Imports from China are also subject to trade remedies such as anti-dumping duties on certain products; check the product list before pricing. See restricted sectors, procurement and trade.
The Chinese rules in short
- China requires reporting of related-party transactions with the annual return and contemporaneous documentation above thresholds set in its rules.
- Chinese authorities can adjust prices charged to foreign related parties, and double tax may follow if India adjusts the other side.
- Technology exports and intercompany licences may also require Chinese filings or approvals.
- Your Chinese adviser should confirm thresholds and deadlines. The Indian and Chinese files should describe the same functions, assets and risks.
Safe harbour, APAs and disputes
- India's safe harbour rules offer defined margins for certain transactions and sectors, but the conditions and rates have changed over time. Check the current rules before relying on them.
- An advance pricing agreement fixes the method for several years. A bilateral agreement involves both competent authorities.
- If an adjustment leads to double tax, a case can be filed under the mutual agreement procedure of the treaty within the time limit in the treaty text.
A practical annual cycle
- Fix the intercompany agreements before the year starts.
- Review actual margins at half-year and adjust billing to stay within the range.
- Run the benchmarking study and update the file after year end.
- Prepare Form 48 and local documentation before the filing date.
- Align the Chinese file and the customs values with the Indian numbers.
- Keep invoices, time records and emails that show who did what.
Official sources
Check the rules at the primary sources: Income Tax Department (India), Reserve Bank of India, Ministry of Corporate Affairs, MOFCOM (China), SAFE (China) and the Ministry of External Affairs (India).
Frequently asked questions
Does India have a small-company exemption from transfer pricing?
No. Form 48 is needed for any international transaction with an associated enterprise, whatever the value. Detailed documentation applies above prescribed thresholds that your adviser should confirm each year.
What is Form 48?
The accountant's report on international transactions, previously Form 3CEB, filed with the tax return under the Income-tax Act, 2025.
How are components bought from a Chinese parent priced?
At arm's length, usually with the resale price, cost plus or comparable price method, with documents that also support the customs value.
Can customs value and transfer price differ?
They can, but the authorities may test both. Keep the same documents and explain differences.
Can a Chinese parent charge a royalty to its Indian subsidiary?
Yes, at arm's length, under a written licence and within the 10% treaty rate for withholding. The payment must be supported by a benchmark and by evidence that the technology is used.
What happens if India adjusts the price?
Indian income rises, penalty may apply, and the Chinese side may seek relief under the mutual agreement procedure of the treaty.
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Last updated 26 October 2026. General information only, not legal or tax advice. Indian and Chinese rules change often; confirm current requirements before acting.