Transfer pricing rules require transactions between your US company and its Indian subsidiary, such as service fees, royalties, loans and cost sharing, to be priced as if the two were unrelated (the arm's length principle). The Indian company must keep documentation, report the transactions in an accountant's report in Form 48 (previously Form 3CEB) and be ready for a transfer pricing audit.
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Key facts
| Principle | Arm's length pricing for international transactions with associated enterprises |
|---|---|
| Accountant's report | Form 48 (previously Form 3CEB), certified by a Chartered Accountant |
| Penalties | 2% of the value of each international transaction for failing to maintain documentation, ₹1 lakh for not filing the accountant's report in Form 48, and ₹5 lakh for not filing the master file |
| Provisions | Sections 161 to 172 of the Income-tax Act, 2025 (previously Chapter X, Sections 92 to 92F of the 1961 Act) |
| Documentation | Maintained annually where international transactions together exceed ₹1 crore; the master file applies where group revenue exceeds ₹500 crore and international transactions exceed ₹50 crore (₹10 crore for intangibles); country-by-country reporting applies at consolidated group revenue of ₹6,400 crore or more |
| Common transactions | Software development and support services, management fees, royalties, loans, cost allocations |
| Typical safeguard | Intercompany agreement plus a benchmarking study each year |
What transfer pricing means for an Indian subsidiary
If your Indian subsidiary provides services to the US parent, the price the parent pays must be one that an independent party would have paid. The same applies to loans, royalties, guarantees and shared costs. Indian tax authorities test both sides: whether the subsidiary earned enough, and whether payments leaving India were fair.
The rules apply to international transactions with associated enterprises. A US parent and its Indian subsidiary are associated enterprises by definition.
The pricing methods
| Method | How it works | Often used for |
|---|---|---|
| Comparable uncontrolled price | Compares the price with prices between independent parties | Goods, loans, royalties with close comparables |
| Resale price | Starts from the resale price and deducts a normal margin | Distribution |
| Cost plus | Cost of providing the service plus a mark-up | Services, contract manufacturing |
| Transactional net margin | Compares the net profit margin with that of comparable companies | Most captive service and development centers |
| Profit split | Splits combined profit on a fair basis | Highly integrated operations |
| Other method | Any other method prescribed by the rules | Where the above do not fit |
For captive development and support centers, the transactional net margin method with a cost-based margin is the most common starting point. The right method depends on the facts.
Documentation and reporting
- Sign an intercompany agreement before services begin, describing the services, pricing basis and payment terms.
- Keep contemporaneous records: functional analysis, invoices, evidence of services actually provided.
- Prepare an annual benchmarking study using comparable companies.
- Have a Chartered Accountant certify Form 48 (previously Form 3CEB) where international transactions exist.
- File the report on time and keep the documentation ready for a transfer pricing audit.
Safe harbour, advance pricing and dispute routes
- Safe harbour (Section 167 of the 2025 Act): prescribed margins for certain transactions, which tax authorities accept if the conditions are met. Eligibility is narrow and the margins are fixed by rules.
- Advance Pricing Agreement (Sections 168 and 169): an agreement with the tax authority on the method and price for several years. It gives certainty but takes time.
- Mutual Agreement Procedure: for double taxation that results from an adjustment, the two tax authorities can resolve it under the treaty.
- Dispute Resolution Panel and tribunal: routes to challenge a transfer pricing order. See tax notices and litigation.
What happens if the price is challenged
A Transfer Pricing Officer can propose an adjustment to the subsidiary's income. The difference can be taxed, and a secondary adjustment (Section 170 of the 2025 Act) may require the excess money to be brought back to India or treated as a deemed loan with interest. Penalties can apply for missing or incorrect documentation.
What this means for a US parent
- The price the US parent pays is also tested by the IRS. A fair, documented price protects you on both sides.
- If the Indian subsidiary acts mainly for the parent, a cost-plus service model is common. The US side should be reviewed by your US tax adviser.
Mistakes to avoid
- Starting services without an intercompany agreement.
- Paying the subsidiary on a round-number fee that nobody has benchmarked.
- Leaving out loans, guarantees or shared costs from the transfer pricing report.
- Filing Form 48 (previously Form 3CEB) late or with a mismatch to the financial statements.
- Treating the study as a one-time exercise instead of an annual one.
See also: Treaty background: India-US tax treaty (DTAA) explained, including the mutual agreement procedure.
How AU Corporate handles this
We prepare benchmarking studies and documentation, certify Form 48 (previously Form 3CEB) and support transfer pricing audits and appeals.
Related services: Taxation and regulatory services
Official sources
Rules on this page can be verified at the primary sources: Ministry of Corporate Affairs, Reserve Bank of India, Income Tax Department and the GST portal.
Frequently asked questions
What is transfer pricing in simple terms?
Transfer pricing is the price charged between related companies. For a US parent and its Indian subsidiary, that price must be one that independent parties would have agreed.
Does a small subsidiary need transfer pricing documentation?
A small subsidiary needs transfer pricing compliance for any international transaction with an associated enterprise, which must be at arm's length. Documentation and the accountant's report depend on prescribed thresholds, which should be confirmed for the transaction values.
Which form reports transfer pricing transactions?
Form 48 (previously Form 3CEB under the 1961 Act), certified by a Chartered Accountant.
Can the price be agreed with the tax authority in advance?
The price can be agreed in advance through an Advance Pricing Agreement, which gives certainty for several years but takes time to negotiate.
Can a transfer pricing adjustment cause double taxation?
A transfer pricing adjustment can cause double taxation. The Mutual Agreement Procedure under the India-US treaty exists to resolve it.
What is transfer pricing and why does it matter?
Transfer pricing requires transactions between related parties, such as the Indian subsidiary and the US parent, to be priced as if between independent parties (the arm's length principle, Section 161 of the Income-tax Act, 2025, previously Section 92). Tax officers review it closely, so agreements and benchmarking should exist from day one.
What are MAP and APA?
The Mutual Agreement Procedure lets the Indian and US tax authorities resolve double taxation under the treaty. An Advance Pricing Agreement fixes your transfer pricing method with the authority in advance for several years, giving certainty on large or recurring intercompany transactions.
What is a Global Capability Center (GCC)?
A GCC is a captive center that a foreign parent owns in India to deliver engineering, analytics, finance, HR or support work for the group. It is usually a wholly owned subsidiary that charges the parent for its services at arm's-length prices.
Which intercompany transactions must be at arm's length?
Service fees, royalties, cost sharing, loans and interest, guarantees, reimbursements, and the purchase or sale of goods or assets between the subsidiary and any group company abroad. Each needs a written agreement and a pricing method you can defend.
What are the transfer pricing documentation thresholds in India?
Transfer pricing documentation must be maintained in India where international transactions together exceed ₹1 crore, and the accountant's report in Form 48 (previously Form 3CEB) is filed for any international transaction. A master file is needed where group revenue exceeds ₹500 crore and international transactions exceed ₹50 crore, and country-by-country reporting applies at consolidated group revenue of ₹6,400 crore or more.
Related guides
The India-US Tax Treaty and Permanent Establishment Risk for US Companies
How the India-US tax treaty applies to payments to your US parent: Withholding Tax rates, Tax Residency Certificate, Form 41 and permanent establishment risk.
Read the guide →Tax Notices and Disputes in India: What US Companies Should Do
What to do on receiving an Indian income tax, GST or transfer pricing notice: first steps, appeal routes, DRP, ITAT, MAP and Advance Pricing Agreements.
Read the guide →Contracts and Arbitration in India: A Guide for US Companies
Intercompany and customer contracts for an Indian subsidiary, governing law, arbitration clauses, the New York Convention and enforcing awards in India.
Read the guide →US Parent Obligations When You Own an Indian Subsidiary
US reporting that follows when you own an Indian subsidiary: Form 5471, FBAR, Form 8938 and international tax regimes. A guide for US finance teams.
Read the guide →The India-US Tax Treaty (DTAA) Explained: Scope, Residency and Relief from Double Tax
How the India-US tax treaty works: who qualifies, which taxes it covers, how treaty and domestic law interact, residency, relief from double tax and disputes.
Read the guide →Sources
Last updated 14 October 2026. General information only, not legal or tax advice. Indian rules change often; confirm current requirements before acting.