India

Group taxation is not permitted under the Indian tax law.

Transfer pricing

Transfer pricing on international transactions

The Indian transfer pricing regulations (ITPR) require that income arising from ‘international transactions’ between ‘associated enterprises’ be computed with reference to the arm’s-length price (ALP). Similarly, it requires that any expense or interest from such transactions be determined having regard to the ALP. The terms ‘international transactions’ and ‘associated enterprises’ have been defined in the ITPR.

The ITPR also contain the concept of a ‘deemed international transaction,’ under which a transaction with an unrelated third party (Indian or foreign) can be subject to transfer pricing if:

• there is a prior agreement in relation to that transaction between the third party and an associated enterprise of the taxpayer; or
• the terms of the transaction are, in substance, determined between the third party and that associated enterprise of the taxpayer.

Further, certain related-party domestic transactions are classified as ‘specified domestic transactions’ where their aggregate value exceeds INR 200 million, and these too are subject to transfer pricing rules.

Initially, the ITPR prescribed five ALP methods, broadly aligned with the OECD Guidelines, and a sixth ‘other method’ was introduced in 2012. Taxpayers must apply the most appropriate method to determine ALP.

Taxpayers must annually maintain prescribed transfer pricing documentation for all international transactions and specified domestic transactions with associated enterprises, within specified timelines. Taxpayers that are constituent entities of an international group must also maintain master file and country-by-country (CbC) reporting information.

Taxpayers are further required to obtain an Accountant’s Report from an independent accountant certifying the nature and amount of international and specified domestic transactions. This certificate must be filed one month before the income tax return. The primary burden of demonstrating arm’s-length compliance rests with the taxpayer.

From FY 2026/27 onwards, a new form of the certificate under the New Income-tax Act has been notified requiring more detailed disclosures as compared to its previous version. In addition to the enhanced disclosure regarding details about the other transacting party, it also requires extensive disclosures on the ALP determination approach including details on the number of comparables and their margins, transactions covered by an APA, etc.

The ITPR generally adopt the arithmetic mean of comparable prices as the ALP, allowing a notified tolerance band (historically ±1% for wholesalers and ±3% for others under the old Income-tax Act, 1961). The ITPR also set out rules for applying a range, discussed separately. Where the transfer pricing officer concludes that ALP has not been correctly applied, the officer may recompute taxable income after providing the taxpayer an opportunity to be heard. Non-compliance attracts stringent penalties.

Notified Jurisdictional Area (NJA)

The Indian government may designate any country or territory that lacks an effective information‑exchange mechanism as an NJA.

All transactions between an Indian taxpayer and a person located in an NJA, or any transaction in which one of the parties is in an NJA, will be governed by the ITPR. In such cases, the ±3% range benefit and the Safe Harbour Rules will not apply.

Safe Harbour Rules

Safe Harbour Rules, introduced in 2013 prescribe:

• Eligible taxpayers and qualifying international transactions;
• Minimum operating margins; and
• Procedures, audit timelines, and related compliance requirements.

They were later extended to cover certain domestic transactions and profit attribution to a PE.

The Safe Harbour Rules were initially applicable for a maximum of five tax years beginning with FY 2012/13. Thereafter, the CBDT had amended the Safe Harbour Rules on multiple occasions over the years. Some of the significant amendments included reducing the target operating margins for certain eligible international transactions, expanding the coverage to receipt of low value-adding intra-group services, enlarging the scope of intra-group loan transactions, extending the safe harbour to a foreign company engaged in selling raw diamonds in any notified special zone, etc.

The revised Safe Harbour Rules were applicable for a maximum of three tax years beginning with FY 2016/17 with the taxpayers having an option to apply the original Safe Harbour Rules or the revised Safe Harbour Rules for FY 2016/17, whichever is more beneficial. Subsequently, the applicability of the revised Safe Harbour Rules was extended annually for consequent tax years and finally in March 2025, it was extended for two tax years (FYs 2024/25 and 2025/26).

Recently, in March 2026, the Safe Harbour Rules were revised again under the New Income-tax Act. Under this revised Safe Harbour Rules, different services such as software development, IT enabled services, knowledge process outsourcing, and contract R&D for software development were clubbed under a single category of IT services with a rationalised turnover threshold and operating margins. It is applicable to a block period of five consecutive tax years in case of eligible IT service transactions, and three consecutive tax years in case of other eligible transactions commencing from FY 2026/ 27. 

Where a taxpayer has opted to be covered under the Safe Harbour Rules and the transfer price declared has been accepted by the tax authorities, then such a taxpayer cannot invoke proceedings under a Mutual Agreement Procedure (MAP).

Advance pricing agreements (APAs)

An APA is a binding arrangement between a taxpayer and the tax authorities that pre-empts potential transfer pricing disputes for transactions covered under the APA.

The CBDT has prescribed detailed rules on APA procedures, including forms, administration, and the constitution of APA teams comprising income-tax authorities and experts in economics, statistics, law, and other relevant fields. APAs may cover both existing and proposed transactions, it can also address profit attribution to permanent establishments (PEs).

The rules provider for both unilateral and bilateral/ multilateral APAs. Where a bilateral APA agreed between competent authorities is not acceptable to the taxpayer, the taxpayer may instead opt to proceed with a unilateral APA, without MAP benefits. The law also permits roll-back of APAs for up to four years preceding the first year covered by the APA.

Further, the rules also elaborate on the APA related procedural aspects covering aspects pertaining to APA application, withdrawal, rectification of defective application, negotiation procedure, compliances post-APA, cancellation, revision and renewal of APA.

Additionally, the Union Budget 2026 also announced that from FY 2026-27, the foreign associated enterprise (whose income is impacted as a result of an APA for FYs covered by such APA) will be allowed to furnish a return or modified tax return within three months.

Rules prescribing the use of ‘range’ and multiple year data

The CBDT has notified rules for applying the ‘range’ concept and multiple‑year financial data in determining the ALP for international and specified domestic transactions.

The ‘range’ concept is available only where the ALP is determined using the Transactional Net Margin Method, Resale Price Method, Cost Plus Method, or Comparable Uncontrolled Price Method. It requires a minimum number of external comparables and prescribes the methodology for computing the lower and upper percentiles. If the requisite number of comparables is not met, the range concept will not apply and the arithmetic mean will continue to be used.

Multiple‑year data may be used only when the most appropriate method is the Transactional Net Margin Method, Resale Price Method, or Cost Plus Method. It allows the usage of the data from the current year and up to two preceding financial years, with the current year’s data being mandatory. If current‑year data is available but is not comparable (on qualitative or quantitative grounds), that comparable must be excluded.

Master file and country-by-country (CbC) reporting documentation as per base erosion and profit shifting (BEPS)

The Indian government has introduced a three-tier transfer pricing documentation framework aligned with BEPS Action 13, requiring preparation of a master file, local file and CbC report from FY 2016/17. The CBDT has notified the final rules in this regard including under the New Income-tax Act. 

The master file requirement applies to every Indian constituent entity (CE) of an international group (inbound or outbound) with consolidated group turnover above INR 5 billion in the prior accounting year of the parent entity and specified thresholds of international transactions. The master file must be filed with the Director General of Income-tax (Risk Assessment). Where the parent company is non-resident, the Indian CE must file the master file in India even if it is filed in the parent jurisdiction or by a designated entity there. If multiple Indian CEs of the same group are required to file, the group may designate any one CE (resident or non-resident) to file the master file on behalf of all. 

The prescribed master file contents are broadly in-line with the OECD BEPS Action 13 but with additional Indian requirements, including: (i) functions, assets, and risks (FAR) analysis for all CEs contributing at least 10% of group revenue, assets or profits; (ii) detailed information on group financing, including names and addresses of the top ten unrelated lenders; and (iii) a list and addresses of all group entities involved in development and management of intangibles. Certain master file–related filings apply even where a CE has no international transactions. 

The CbC report obligation applies to groups with a consolidated turnover above INR 64 billion in the prior accounting year of the parent entity (earlier it was INR 55 billion). A parent entity of an outbound group or an alternate reporting entity of an inbound group, if resident in India, must file the CbC report in India. For Indian CEs of foreign-parented groups, the CbC report is generally filed in the parent or alternate reporting jurisdiction, with India accessing it through exchange-of-information agreements. If the parent is not obliged to file, or there is no effective exchange arrangement, or there is a systemic failure notified to the Indian CE, the Indian CE (or designated Indian CE) must file the CbC report in India. 

Where multiple Indian entities belong to the same international group, one must be designated for master file filing and related communications for both the master file and CbC report. The rules prescribe specific forms for notifications and filings. The master file is due on the normal income-tax return due date. CbC reports by an Indian parent or alternate reporting entity are due within 12 months of the end of the parent’s reporting year. Where an Indian CE (or designated CE) must file due to foreign non-reporting or systemic failure, the filing deadline is 12 months from the end of the group’s reporting year, or six months from the end of the month in which systemic failure is communicated, whichever is applicable. 

Significant penalties apply for non-compliance or inaccurate information. CBDT has also issued guidance on the appropriate use of CbC report information by the Indian tax authorities.

Restrictions on interest deduction

BEPS Action Plan 4 recommends rules to curb base erosion through excessive interest deductions and other financial payments. In line with this, the Indian Income-tax Act restricts interest deductions claimed by Indian companies and Indian PEs of foreign companies, while specifically excluding taxpayers engaged in banking or insurance, and interest on loans from a PE of a non-resident bank. Pursuant to Union Budget 2024, finance companies located in an IFSC have also been excluded.

The rules apply to interest and similar expenses (including on existing debt) paid to:
(i) overseas associated enterprises, or
(ii) third-party lenders where the debt is backed, implicitly or explicitly, by a guarantee or equivalent deposit from an overseas associated enterprise.

Interest exceeding 30% of the taxpayer’s EBITDA for the year will be treated as “excess interest” and disallowed. However, this disallowed interest can be carried forward for up to eight consecutive years, subject to the above limits. This provision will not apply where the total interest paid or payable does not exceed INR 10 million.

These provisions broadly follow the “fixed ratio rule” recommended under BEPS Action Plan 4, with some differences. Notably, they do not reduce the withholding tax liability, or the taxability of the non-resident associated enterprise on the corresponding interest income. The rules apply from FY 2017/18 onwards.

Secondary adjustment

To align the ITPR with the OECD Guidelines and international practice, ‘secondary adjustment’ provisions have been introduced. A secondary adjustment is an adjustment in the books of account of the taxpayer and its associated enterprise to reflect that the actual allocation of profits between the Indian taxpayer and its associated enterprise, consistent with the transfer price determined as a result of primary adjustment – thereby eliminating the mismatch between cash balances and taxable profits. 

Secondary adjustment is required only where the primary transfer pricing adjustment arises from: 

• A voluntary adjustment made by the taxpayer in its return of income
• An adjustment made by the Tax Officer and accepted by the taxpayer
• An agreed position under an APA
• Application of Safe Harbour Rules
• Resolution under the MAP

However, no secondary adjustment is required if the aggregate primary adjustment does not exceed INR 10 million. 

Where excess money arising from a primary adjustment is not repatriated to India within the prescribed time, it is deemed to be an advance by the Indian taxpayer to its associated enterprise. Time limits have been prescribed having regard to the circumstance leading to the primary transfer pricing adjustment. Interest is then imputed on this deemed advance until the excess money is repatriated. 

For Indian Rupee denominated transactions, the imputed annual interest is computed at the one‑year marginal cost of funds-based lending rate of the State Bank of India as on 1 April of the relevant tax year plus 325 basis points. For foreign currency denominated transactions, interest is computed at six-month London Interbank Offered Rate (LIBOR) as of 30 September of the relevant tax year plus a spread of 300 basis points – as per the New Income-tax Act the law now requires the interest to be computed at the reference rate of the relevant foreign currency as on the 30 September of the relevant tax year plus a spread of 300 basis points.

The secondary adjustment provisions apply to primary adjustments made from FY 2016/17 onwards.

It has also been clarified that interest is computed on the excess money or part thereof; and repatriation of excess money can be made from any non‑resident associated enterprise of the taxpayer. These clarifications apply retrospectively from FY 2017/18 onwards. The provisions also apply to APAs signed on or after 1 April 2017, and no refund is available for taxes already paid under the pre‑amended provisions. 

To simplify compliance, taxpayers may choose either:

• To offer the imputed interest to tax each year until the excess money is repatriated; or
• To pay a one‑time additional tax at 18% on the excess money (or part thereof), plus surcharge at 12% and health and education cess at 4%.

Interest is payable up to the date of payment of this additional tax. No credit for, or deduction in respect of, such additional tax is allowed under the Act. This is applicable from 1 September 2019 and is broadly aligned with internationally accepted best practices.

Mutual Agreement Procedure

India has a MAP provision under its DTAAs, supported by specific provisions in domestic tax law. To align with the OECD BEPS Action 14 minimum standard and enhance clarity, India amended its MAP rules in May 2020, prescribing detailed filing procedures, timelines for notifying foreign competent authorities, and an aim to resolve the MAP cases within an average timeline of 24 months. In August 2020, the CBDT issued comprehensive guidance on procedural and technical aspects, including criteria for admission or rejection of MAP cases and their implementation. In June 2022, the CBDT further updated this guidance to clarify the interaction between MAP and the Direct Tax Vivad se Vishwas Act, 2020, and to underscore the applicant’s obligation to make full and accurate disclosure during the MAP process.