When companies in the same group deal with one another, the price is not set in an open market. Transfer pricing rules require those transactions to be priced as they would be between unrelated parties, and the taxpayer must be able to demonstrate it.
This describes the subject in general terms and is not advice; what applies depends on the facts, and the law changes.
Understanding the service
The rules apply to international transactions between associated enterprises, and to specified domestic transactions. The definition of associated enterprise is wider than most groups expect, reaching beyond shareholding to control over finance, supply and management.
Income from such transactions is computed having regard to the arm's length price, determined under one of the prescribed methods. Which method is most appropriate depends on the transaction, the functions performed, the assets used and the risks assumed.
Two outputs matter: contemporaneous documentation, which is the taxpayer's own record of the analysis, and an accountant's report filed with the department. That report was Form 3CEB under the 1961 Act and Rule 10E; the Income Tax Department has published Form 48, the report from an accountant under Section 172 of the Income-tax Act, 2025, read with Rule 85 of the Income-tax Rules, 2026. Which form and date apply should be confirmed for the year concerned.
Larger groups may have further obligations, such as master file and country-by-country reporting, where the prescribed conditions are met.
When it becomes relevant
- Any transaction with a foreign group company, whatever its value
- An Indian subsidiary providing services to its overseas parent
- Royalties, management fees, interest or cost allocations within a group
- A transfer pricing adjustment proposed in an assessment
- A group considering an advance pricing agreement
What the work usually covers
- Identifying associated enterprises and the transactions within scope
- Functional analysis: functions performed, assets used and risks assumed
- Selection of the most appropriate method and benchmarking
- Contemporaneous transfer pricing documentation
- The accountant's report in the prescribed form
- Support where an adjustment is proposed, and in the proceedings that follow
Framework and sources
The law and professional standards this work is carried out under. Links open the official site.
How the work runs
- Map the transactionsIdentify associated enterprises and every transaction with them.
- Functional analysisRecord functions, assets and risks on each side.
- BenchmarkSelect the method and identify comparable data.
- DocumentPrepare the documentation before the due date for the report.
- ReportIssue the accountant's report in the prescribed form.
- DefendSupport the position if an adjustment is proposed.
A general sequence. Engagements differ, and the scope of each is agreed in writing.
Common questions
Is the accountant's report needed even for small transactions?
The report covers international transactions with associated enterprises, and has not been subject to a monetary threshold in the way documentation requirements are. The position for the year concerned should be confirmed.
What has changed under the Income-tax Act, 2025?
The provisions have been renumbered and the accountant's report has been reissued as Form 48 under the new rules. The substance of the arm's length requirement continues.
What happens if documentation is not maintained?
The law provides for penalties for failure to maintain documentation or to furnish the report, and the absence of documentation weakens the taxpayer's position in an assessment.