Introduction

Transfer Pricing ("TP") regulations were introduced in India in 2001, and the law has consistently evolved since its introduction almost a quarter of a century ago. Indian TP law today aligns with global best practices, such as the introduction of an interquartile range of 35th to 65th percentile, Safe Harbour regimes, secondary adjustments, and a robust Advance Pricing Agreement ("APA") regime.

While the APA regime is criticised for its pace of closure (an average of 42.8 months for unilateral and of 50.2 months for bilateral APAs), and the aggressive positions adopted by the tax administration, the certainty offered, for up to nine years once the APA is signed, has retained the attraction of taxpayers.

Ever since the first set of TP audits took place in India, certainty on Indian TP positions has been a cause of concern among multinationals, given the country's long dispute resolution cycle where the losing party tends to litigate matters all the way to the Supreme Court. APAs thus offer a comparably unparalleled level of certainty.

Indian TP law has several nuances and unique features. The definition of “transaction” is very wide in the law: it includes an arrangement, action or understanding in concert, whether such arrangement, action or understanding is formal, or in writing, or intended to be enforceable by legal proceedings. India also has very wide definitions of “associated enterprises” and international transactions, and these include deeming fictions that can bring transactions with third parties into the ambit of TP. The definition of transaction also includes the use of intangible property, which is defined to include various types of intangible assets, including marketing-related, customer-related, contract-related, human capital-related, goodwill-related etc. 

Even though TP jurisprudence has rapidly evolved (there are over 11,000 reported rulings), only a few precedents address the interplay of a dynamic business landscape with TP laws. This article first explains TP jurisprudence, then looks at key issues such as alternate dispute resolution methods, secondary adjustments, and the growing impact of the Organisation for Economic Co-operation and Development's ("OECD") Two-Pillar Solution on transfer pricing in India for 2025–26.

Trends in Jurisprudence

Intra-group services ("IGS")

IGS are widely viewed by the administration as a profit extraction measure, largely entailing no withholding of tax in India. However, courts have systematically narrowed this scrutiny. A case in review is A.T. Kearney Limited [2024] 161 taxmann.com 310 (Delhi), wherein the High Court of Delhi has reinstated the law that the exchequer cannot arbitrarily challenge IGS transactions if the taxpayer provides a detailed cost breakdown and justifies commercial rationale. Consequently, it narrows the power of the authorities to question legitimate business transactions.

Further, tax tribunals have been insisting on the satisfaction of five tests (need, benefit, rendition, non-duplication, and non-stewardship) and robust documentation before deciding in taxpayers’ favour. A Mumbai tribunal’s ruling in the case of CLSA (ITA 6748/Mum/2017) emphasises the importance of quality documentation in defending IGS transactions.

In EWAC Alloys Ltd. v. Deputy Commissioner of Income-tax, [2025] 181 taxmann.com 225, a Mumbai tribunal held that where the authorities accept that IGS have been rendered in part, a blanket determination of the "arm’s length" price at nil for the balance is unsustainable. It emphasised that the benefit test must be applied proportionately and not in an all-or-nothing manner. The tribunal further affirmed that low value-adding IGS need not yield precisely quantifiable outcomes: contemporaneous documentation, rational allocation keys, and OECD-aligned cost-based mark-ups are sufficient to justify "arm’s length" compensation.

Intra-group financing

Intra-group financing in India is largely in the form of loans, convertible debentures and guarantees. Indian tax laws provide for thin capitalisation rules. Intra-group loans and guarantees are also closely scrutinised by tax authorities during audits. A special bench in the case of Hyderabad Infratech Private Limited (ITA-TP No.1856/Hyd/2019) ruled that the interest payment is to be benchmarked with reference to the rate of interest applicable to the loans extended in currency concerned. In another matter, the case of Cyient Limited v. DCIT (ITA No 913/HYD/2024), a Hyderabad tribunal ruled observed that both corporate guarantees and comfort letters have an in-built obligation to receive the payment to the lender on behalf of the borrower. Hence, the issuance of a comfort letter is an international transaction that needs to be benchmarked.

Interestingly, in the case of Asian Paints v. ACIT (ITA no.268/Mum. /2018), a Mumbai tribunal distinguished an order from an earlier year. In that order, the tribunal had held that a comfort letter is not an international transaction. However, at a later date, the taxpayer disclosed a comfort letter as contingent liability. Subsequently, the aforementioned Mumbai tribunal ruled that a comfort letter is an international transaction, especially given that the taxpayer has itself reported it as such.

Intangibles

The transitional nature of intangibles, and their growing eminence in the corporate landscape, adds another layer of scrutiny. Advertising, Marketing & Promotion ("AMP") spend agreements are being challenged using Development, Enhancement, Maintenance, Protection, and Exploitation ("DEMPE") principles. Tax tribunals, however, are demanding more stringent proof of the application of DEMPE to AMP transactions. Furthermore, Indian courts have strategically distanced themselves from the Bright Line Test ("BLT") conceptualised in American jurisprudence. Persistently, judicial opinions have stressed adherence to acceptable legal principles, as opposed to outdated international methodologies.

In Netflix Entertainment Services India LLP v. DCIT, [2025] 179 taxmann.com 644, a Mumbai tribunal rejected the tax authorities’ recharacterisation of the Indian entity as a content/technology entrepreneur. The tribunal observed that ownership of cache devices and routine facilitation did not amount to DEMPE or IP exploitation, upheld Transactional Net Margin Method ("TNMM") as the most appropriate method, and deleted the adjustment based on hypothetical royalty benchmarks.

Royalty payments continue to face close scrutiny in TP disputes. In Samsung India Electronics (ITA 40/2018 (2024), the court rejected the Indian Revenue Service's (IRS) attempt to recharacterise the taxpayer as a contract manufacturer in the absence of supporting evidence, emphasising that mere subsidiary status does not imply control by the parent.

The court relied on OECD guidance on intangibles and contract manufacturing to hold that the IRS must substantiate functional characterisation with cogent material and cannot assume direction or dependence without contractual or factual basis.

Additionally, the tribunal in Sony India Pvt. Ltd. v. ACIT, ITA No. 9080/Del/ 2019 held that neither the BLT nor the intensity adjustment is a permissible method for benchmarking AMP expenses, and deleted both the substantive and protective AMP adjustments. It further ruled that royalty payments cannot be benchmarked at nil under the Comparable Uncontrolled Price ("CUP") method, as tax authorities must rely on comparable uncontrolled data and cannot question the commercial necessity of the payment.

The Supreme Court’s dismissal of the IRS' challenge in Pr. CIT v. Pernod Richard India Pvt. Ltd, SLP Diary No. 74598/2025, further solidifies judicial resistance to treating AMP expenditure as a standalone international transaction in the absence of a demonstrable arrangement.

Comparability analysis

In November 2025, a Mumbai tribunal ruled in favour of Shell India Markets Pvt. Ltd. regarding a complex TP dispute. The central conflict arose when the TP officer rejected Shell’s at-cost pricing for upstream technical services, which was strictly mandated by Production Sharing Contracts ("PSCs") that prohibited profit markups. The officer instead applied routine profit markups and valued downstream support services at nil. The tribunal ultimately upheld Shell’s at-cost method, recognising the contractual profit restrictions as a critical economic circumstance. It noted that other consortium members operated under identical terms, providing strong market evidence that justified using the “Other Method” under Indian tax rules.

Furthermore, the tribunal criticised the officer for using outdated financial data from previous years, which violated statutory requirements for current-year data. Regarding downstream support functions, the tribunal rejected the nil valuation because the officer failed to use an authorised TP method or review the company’s cost-allocation documentation. While several issues were remanded for fresh analysis, the tribunal completely deleted the upstream services adjustment. This ruling emphasises that TP assessments must prioritise actual economic substance, industry practices, and contemporary data over mechanical benchmarking.

Additionally, in Pr. CIT v. American Express, ITA 656/2019, the Delhi High Court held that comparability must be assessed on both functional and economic parameters, including scale, and that significant turnover disparities can materially affect pricing and margins, warranting exclusions. The judgement highlights the onus on tribunals to record clear findings on functional similarity before including comparables.

Business restructuring

Business restructuring and deemed international transactions are other areas where taxpayers are seeing more detailed inquiries. A Mumbai tribunal in the case of Diamond Dimexion [2024] 159 taxmann.com 118 (Mumbai - Trib.), upheld an addition made by the tax administration towards consideration paid to shareholders pursuant to a merger. The acquiring company split the consideration into equity, Compulsorily Convertible Debentures ("CCDs"), and cash. The tribunal upheld the finding of the tax officer that the taxpayer should have received interest on the CCDs and the cash given, which, according to the officer, was deemed a loan in advance. A Delhi tribunal dealt with business restructuring in the case of McKinsey Knowledge Centre Pvt. Ltd. (Delhi ITAT, ITA No.154/Del/2016). Here, the taxpayer provided research and information services to McKinsey & Co on a fixed-rate remuneration model up to assessment year 2010/11. From the assessment year 2010/11 onwards, the remuneration model was changed to a cost-plus model. The issue in question was whether a change in the remuneration model amounted to business restructuring and whether a separate exit charge is required for change in the remuneration model. The tribunal rejected the IRA's contention that the taxpayers had declared higher profits in previous years to avail themselves of a higher amount of deduction under section 10A.

Location savings

Regarding the extant legal jurisprudence on location savings in operations, location saving is a pertinent issue for emerging markets like India, as multinational enterprises ("MNEs") set up shop in these markets and leverage low-cost resources. Such relocations to a low-cost jurisdiction has spurred the IRA to argue that a higher return is warranted for Indian operations because of location savings. The IRA has applied high markups for captive IT-enabled development centres and alleged that India offers location-specific advantages to MNEs, such as highly specialised and skilled manpower. The Bombay High Court in the case of Watson Pharma (Income Tax Appeal No. 124 of 2016) upheld a tribunal ruling to the effect that where local comparables are used, there is no location-saving advantage, and no adjustment of "arm's length" price on account of locational advantage is warranted.

Transfer Pricing – an issue of fact or an issue of law?

A dispute arose in the Indian TP eco-system as to whether the ALP determination including choice of comparable companies, choice of filters used, correctness of application of filters, choice of method, etc would be a factual exercise or a question of law. If the ALP determination is merely a factual exercise, then the high courts cannot admit an appeal arising from these, unless perversity is demonstrated.

In a notable ruling in case of P.CIT v. Softbrands India Private Limited (I.T.A. No.398/2017), the Karnataka High Court held the ALP determination exercise to be a factual matter and ruled that for matters involving ALP determination, the Income Tax Appellate Tribunal ("ITAT") shall be the fact-finding authority, and said matters are not appealable before a high court. This decision was challenged before the Supreme Court.

The Supreme Court, in the case of SAP Labs India Private Limited v. the Income Tax Officer (Civil Appeal No. 8463 of 2022) overruled the Softbrands ruling and held that while determining the "arm’s length" price, the tribunal must follow the guidelines prescribed under domestic income tax law.

Critical Developments Over the Last Few Years

Secondary adjustment

The law on secondary adjustment is once again in the limelight, post the Supreme Court ruling in SAP Labs (discussed above). Additional tax burdens owing to secondary adjustments give reasons for taxpayers to keep litigating their TP positions in India. Indian law requires the taxpayer to undertake secondary adjustment in the following scenarios:

• Suo-moto voluntary adjustments made by the taxpayer in the tax return;
• adjustments made by the tax officer and accepted by the taxpayer; and
• adjustments resulting from APA, MAP or Safe Harbour regimes.

The Indian taxpayer’s associated enterprise repatriates the excess money (the difference between the "arm’s length" price, determined as per primary adjustment, and the price at which a transaction is undertaken) within 90 days of the specified date. Failure to do so will lead the excess money (not repatriated to India) to be deemed as an advance by the taxpayer and incur an interest rate of the State Bank of India ("SBI") base rate (approximately 10% currently), plus an additional 325 base points for Indian Rupee ("INR") transactions, or 6Million LIBOR + 300 base points for transactions in currencies other than INR. This figure is computed on such excess money till the date such failure continues.

If the associated enterprise does not wish to remit the money, the Indian taxpayer has the option of paying additional tax at the rate of 18% tax, plus an applicable surcharge on such excess money or part thereof (translating to approximately 21%). Where additional income tax is paid by the taxpayer, the taxpayer will not be required to make secondary adjustments and will compute interest from the date of payment of such tax. This implies that the taxpayer will, in any case, be required to compute interest up to the date of payment of such additional tax.

This heavy additional tax burden implies that it is likely that taxpayers will seek to litigate TP positions all the way to the Supreme Court.

Rationalisation of the TP Safe Harbour rules

The Finance Bill of 2026 has worked towards rationalising and strengthening the TP landscape in India by modifying the Safe Harbour regime.

• Software development services, IT-enabled services, knowledge process outsourcing and R&D contracts for software have been consolidated into a single category of “Information Technology services”. A uniform Safe Harbour regime margin of 15.5% for these functions now applies, replacing earlier margins of 17 or 18% depending on size, and 24% for R&D services. While not expressly framed as being targeted at Global Capability Centres ("GCCs"), the revised approach is particularly relevant for such entities, which typically undertake a mix of software development, Information Technology Enabled Services ("ITES"), and knowledge-based services within integrated operating models. By providing a more predictable and commercially reasonable margin across these activities, the Safe Harbour rules indirectly support GCC structures by offering tax certainty and lowering the risk of protracted TP disputes. In that sense, the reform can be seen as part of a broader effort to create a stable and facilitative tax environment for multinational groups operating service hubs in India, even if the policy intent is articulated in more general terms.
• The eligibility threshold has been expanded significantly, rising from INR3 billion to INR20 billion. Taxpayers may opt for a continuous five year term under an automated, rule-based approval process. This change recognises the integrated operating models of GCCs and captive IT providers, while reducing interpretational friction.
• A new Safe Harbour regime has been introduced for Indian companies providing data centre services to foreign related-party cloud service providers. The prescribed Safe Harbour is a margin of 15% on cost.
• A dedicated Safe Harbour regime has been proposed for foreign companies using bonded warehouse models in India. Where opted, taxable profits from eligible business will be deemed at 2% or more of gross receipts, providing certainty in income attribution without further scrutiny.

Legal clarity on procedural issues

Budget 2026 has introduced a clarificatory amendment to Section 92CA(3A) of the Income Tax Act, 1961, to resolve disputes over how the 60 day period for passing a transfer pricing officer's order should be computed. The law now prescribes a clear statutory formula: where the assessment limitation expires on 31 March, the transfer pricing order deadline is deemed to fall on 30 January (or 31 January in a leap year), and when the limitation expires on 31 December, the deadline is deemed to be 1 November.

This clarification applies retroactively from 1 June 2007, and directly addresses conflicting judicial interpretation from Assistant Commissioner of Income-tax (International Taxation) v. Shelf Drilling Ron Tappmeyer Ltd. (2025 INSC 946), where the Supreme Court had delivered split verdicts on computation of limitation. By codifying the method, the amendment removes uncertainty and curtails procedural litigation.

Another critical clarification is that the Budget 2026 has introduced an amendment to address disputes over whether assessments routed through the Dispute Resolution Panel ("DRP") were completed within the correct statutory time limits. Conflicting interpretations of the interaction between Section 153 (general limitation) and Section 144C (DRP procedure) of the Income Tax Act had created uncertainty on whether DRP timelines operated within, or in addition to, the overall assessment period. The amendment now makes clear that once a draft assessment order is issued within the permitted limitation period, the subsequent completion timeline is governed exclusively by the DRP framework. This clarification applies retroactively, deeming DRP timelines to have always governed assessment completion once a valid draft order was issued, thereby settling past limitation disputes.

Block period of three years

A three-year block period has been introduced for TP audits, wherein taxpayers can opt to extend the ALP determined in one year, in relation to international transactions, or a specified domestic transaction, to two consecutive years immediately following such a year.

Choice of method

Despite detailed guidelines provided by OECD and the United Nations ("UN"), selection of method for specific transactions is a considerably litigated issue in INDIA. Sabic India (P.) Ltd., W.P. (C) No. 965 of 2021, is a touchstone case, which focuses on the TP authority’s rejection of the TNMM and the adoption of the residual “other method”. The court made a pointed observation that any deviation from established methodologies must be well-supported by reasoned analysis. The lack of clear justification led to uncertainty and inconsistency in tax assessments, undermining the credibility of the adjustment. Further, the bench also highlighted that the “other method” should be considered a method of last resort, and emphasised the importance of consistency with prior years.

The tribunal in Vodafone Idea Ltd. v. ACIT, 8361/Del/ 2019 held that the CUP method must be applied only with reference to uncontrolled transactions. Since the third party organisation ("TPO") relied on a related party arrangement as a comparable, the adjustment failed the basic requirement of Rule 10B(1)(a). The tribunal further observed that the authorities cannot substitute their commercial judgement for the taxpayer’s decision to pay royalties for brand use.

Option to file cross-objections

An area that continues to create uncertainty for taxpayers is the powers given to the tax administration to file cross-objections against the findings of the DRP. The DRP was an optional process introduced to prevent the appellate system getting clogged with TP appeals and to reduce instances of raising high-pitched demands on taxpayers pursuant to audits. Orders passed by the DRP have to be mandatorily factored in by the officer before passing the final order. The taxpayer is at liberty to appeal the order before the tribunal. However, now the Tax Office has been given the option to file cross-objections against such an order. This could virtually lead to relief given by the DRP being challenged by the Tax Office and is completely contrary to the intent of introducing the DRP. Moreover, it negates the finality associated with the passing of the final order by the assessing officer.

Advance pricing agreements

The APA program was introduced in India in 2012, with effect from July 1, 2012. India’s Central Board of Direct Taxes ("CBDT") released the annual APA Report for financial year ("FY") 2024-25 in September 2025. CBDT has entered into 815 APAs till March 2025. This year, the IRA signed the highest number of APAs, a total of 174. The IRA also signed the highest number of Bilateral Advance Pricing Arrangements ("BAPAs") in any financial year till date, with  65 (including one MAPA). The largest number of APAs in FY 2024-25 were signed in the following sectors:

• Information technology (83);
• services (11)
• industrial and commercial goods (9); and
• banking and finance (8).

India’s leading treaty partners for APA signing in the period under review were:

• The USA (39);
• Singapore (9);
• the United Kingdom (8); and
• Australia (6).

Though the APA program has been successful in enabling a positive economic environment for multinationals doing business in India, the Government must remain committed to increase the efficacy of the programme further. Out of a total 2,062 applications filed up to 31 March 2025, a total of 1,204 applications have been disposed, and 858 applications are under processing.

The Finance Bill of 2026 proposed a plan for Unilateral Advance Pricing Arranegements ("UAPAs") for companies engaged in IT services to be fast-tracked for completion within a period of two years, with an extension of six months at the request of the taxpayer. Further, Budget 2026 has amended the APA framework to allow associated enterprises, as well as the taxpayer, to file modified returns aligned with the outcome of an APA. Previously, only the APA applicant could revise its return, leaving related parties without a statutory remedy. The new provision applies to agreements entered into, on, or after 1 April 2026, covering tax year 2026-27 onward.

This change ensures that income adjustments under an APA can be consistently reflected across all affected entities. Additionally, the Central BorCBDT has recently introduced an additional “critical assumption” in APA to accommodate revised Safe Harbour rules, enabling taxpayers to opt into updated regimes where applicable. This administrative refinement reflects increasing convergence between the APA and Safe Harbour frameworks and enhances flexibility in long-term TP certainty.

The evolving jurisprudence on the interaction between APA outcomes and corresponding adjustments across jurisdictions remains an area to watch, with proceedings before the Bombay High Court (Gemological Institute of America Inc) likely to clarify whether APA benefits can extend beyond the contracting taxpayer to associated enterprises.

Mutual agreement procedure (MAP)

The average time needed to close MAP applications in India as of October 31, 2025, stands at 45.7 months for cases started after January 1, 2016.

The number of MAP cases closed in 2024 is substantially more than the number of new MAP applications invoked. As a result, the total number of MAPs in India’s inventory is gradually reducing. The CBDT APA report, while quoting the OECD report, states that the calendar year 2024 showed an opening inventory of 421 MAP cases, comprising:

• 96 new invocations;
• 131 closures; and
• a closing inventory of 386 cases.

This has been attributed to the maturing of India’s relationships with treaty partners.

In AON Consulting Pvt. Ltd. v. Principal Commissioner of Income Tax, ITA 244/2024, the High Court of Delhi held that MAP settlements are voluntary, fact‑specific, and confined to the contracting states involved. Further, it observed that principles agreed under India-USA MAPs could not be extended by the Tax Department to transactions with another contracting state.

India’s response to Amount B

The OECD/G20 Inclusive Framework on base erosion and profit shifting ("BEPS") released a report on Amount B of Pillar One on 19 February 2026, in order to set out a simplified and streamlined pricing framework that determines a return on sales for eligible distributors undertaking baseline marketing and distribution activities. The framework, while envisioned as being friendly towards taxpayers and compliance administrators, has been criticised due to a lack of definitive edge on key terms and chinks in the methodology being employed.

India has expressly recorded its reservations on the incomplete nature of the OECD/G20 Inclusive Framework report on Amount B, with five major points of contention:

• The non-inclusion of "low-capacity jurisdictions" and "qualifying jurisdictions" in its definition clause;
• use of operating expense as a cross-check mechanism to determine the minimum/maximum return of the distributors under Amount B, as opposed to the distributor’s functional contribution being reflected in the sales made by it, which most developing jurisdictions have been advocating for;
• evident lack of geographical market considerations and qualitative screening criteria throughout the report;
• the technical design of the pricing methodology employed; and
• the quandary around baseline distributors in scope of Amount B.

Conclusion

From a policy standpoint, India’s approach reflects a careful balancing of multiple, and sometimes competing, objectives. At its core is a clear intent to safeguard taxing rights, both as a source jurisdiction where economic activities physically occur, and as a market jurisdiction where value is increasingly understood to be created through user participation and demand. This dual emphasis has become particularly significant in the context of digitalisation and globalised business models, where traditional nexus and profit allocation rules are under increasing strain.

At the same time, India’s broader economic strategy remains strongly rooted in attracting sustained foreign direct investment. This creates an inherent tension: while the tax administration must remain vigilant in preventing BEPS, it must also ensure that the tax environment is predictable, transparent, and not overly adversarial. In this context, TP continues to serve as a critical instrument to protect the tax base and provide a signal of India’s commitment to coherent and rule-based taxation of cross-border transactions.

Encouragingly, recent administrative trends indicate a deliberate shift from a purely enforcement-driven approach towards a more facilitative and dispute prevention-oriented framework. The expansion and refinement of Safe Harbour rules, coupled with the increasing efficiency and uptake of advance pricing agreements (including expedited and bilateral APAs), underscore a growing recognition that certainty and early resolution are integral to an investment-friendly tax regime. These mechanisms not only reduce litigation but also allow taxpayers and the administration to allocate resources more efficiently, thereby enhancing overall compliance outcomes.

Going forward, the real test for India will lie in sustaining this delicate equilibrium. As global consensus evolves, particularly under the OECD’s BEPS 2.0 framework, India will need to continue calibrating its domestic TP regime to remain aligned with international standards, while retaining sufficient flexibility to address its unique economic realities. A consistent emphasis on administrative capacity, transparency in audit practices, and timely resolution of disputes will be critical in reinforcing taxpayer confidence.

Ultimately, a stable and credible transfer pricing ecosystem can serve as a cornerstone of India’s international tax policy, one that both protects revenue and supports its aspiration to be a preferred global investment destination.