As global businesses expand into India through wholly owned subsidiaries, joint ventures, or group entities, the need to structure cross-border transactions fairly and transparently becomes vital. This is where Transfer Pricing (TP) regulations come into play. Governed by the Income Tax Act, 1961, India’s transfer pricing laws aim to ensure that pricing of transactions between associated enterprises reflects an arm’s length standard — the price that would be charged between unrelated parties under similar circumstances.
For foreign subsidiaries operating in India, non-compliance with transfer pricing rules can lead to heavy penalties, prolonged audits, and reputational risk. Understanding and implementing these regulations correctly is crucial for long-term success.
What Is Transfer Pricing?
Transfer pricing refers to the pricing of goods, services, intangibles, and funds transferred between related enterprisesacross borders. For example, if a parent company based in Germany sells software to its Indian subsidiary, the pricing must be similar to what it would charge an unrelated Indian buyer — this is the arm’s length principle.
When Do Transfer Pricing Rules Apply?
Transfer pricing provisions apply when:
There are international transactions between two or more associated enterprises (AEs)
Or when specified domestic transactions exceed prescribed thresholds
Examples include:
Sale or purchase of goods and services
Royalty payments, technical fees
Intercompany loans, guarantees
Cost-sharing arrangements
Licensing of intellectual property
Key Compliance Requirements for Foreign Subsidiaries
1. Transfer Pricing Documentation (Rule 10D):
Every company engaging in international transactions exceeding ₹1 crore must maintain prescribed documentation, including:
Profile of the group and industry
Nature and terms of transactions
Functional, asset, and risk (FAR) analysis
Selection of the most appropriate method (CUP, TNMM, etc.)
Comparable company analysis
2. Form 3CEB Filing:
Mandatory filing of Form 3CEB, certified by a Chartered Accountant, with the Income Tax Department, alongside the tax return. This form discloses the nature and value of all international and specified domestic transactions.
3. Master File and Country-by-Country Reporting (CbCR):
Applicable to multinational groups with global consolidated revenue above specified limits. Indian entities must file:
Form 3CEAA (Master File)
Form 3CEAC/3CEAD (CbCR notifications and report)
Common Challenges and Best Practices
Benchmarking Difficulties: Choosing appropriate comparables for pricing
Currency Fluctuations: Ensuring adjustments are justified
Documentation Delays: Can result in penalties of ₹1 lakh or more
Audit Readiness: Regular internal reviews and legal vetting can reduce exposure
Best Practices:
Start TP planning alongside financial forecasting
Use ERP and invoicing tools that track intercompany transactions
Engage qualified TP advisors and legal counsel
Maintain consistency across group filings in different jurisdictions