Transfer pricing: meaning, arm's length price and compliance
Transfer pricing rules require transactions between associated enterprises, especially cross-border ones, to be priced at arm's length and documented.
Short answer
Transfer pricing refers to the prices charged in transactions between associated enterprises, such as an Indian subsidiary and its foreign parent. Indian tax law requires these international transactions, and specified domestic transactions above a threshold, to be at an arm's length price, as if between unrelated parties. The rules, formerly sections 92 to 92F, continue under the 2025 Act.
- Applies to
- International transactions and specified domestic transactions
- Standard
- Arm's length price
- Accountant's report
- Required for covered transactions
- Documentation
- Detailed records where transaction value exceeds the prescribed limit
How transfer pricing works
Associated enterprises include companies under common control, holding and subsidiary companies, and entities linked by significant shareholding, management or financing. Their transactions, such as service fees, software licences, royalties, loans, guarantees and cost allocations, must be priced using a prescribed method, such as the comparable uncontrolled price, transactional net margin, or cost plus method, with comparable data supporting the result. If the tax officer finds the price is not at arm's length, the income is adjusted upwards and penalties can apply.
Compliance requirements
Taxpayers with international or specified domestic transactions must obtain a report from a chartered accountant in the prescribed form, Form 3CEB under the old rules, before the return due date, and maintain transfer pricing documentation supporting the pricing. Larger groups have additional master file and country-by-country reporting obligations. Safe harbour rules and advance pricing agreements offer certainty for eligible transactions.
Why it matters for startups
Indian subsidiaries of foreign startups, and Indian startups with foreign subsidiaries, have transfer pricing obligations from their first year. Typical issues are cost-plus service arrangements, intercompany loans and IP licences. Put intercompany agreements in place, benchmark the margin, and prepare documentation every year to avoid adjustments and penalties. Revisit pricing whenever the business model or functions of each entity change.
Related services
Sources
Written by the Refogo Editorial Team from the official sources above and checked on 2026-10-31. Laws, rates and due dates change, and authorities often extend deadlines, so confirm your own case with a qualified professional. This is general information, not legal or tax advice. Read our editorial policy or report an error to support@refogo.com.
Common questions
Does transfer pricing apply to domestic transactions?
Only to specified domestic transactions above the prescribed threshold, mainly involving entities with tax holidays or concessional rates.
What is an arm's length price?
The price that would be charged between unrelated parties in similar circumstances, determined using a prescribed method.
Is a transfer pricing audit mandatory for a small subsidiary?
An accountant's report is needed for any international transaction with an associated enterprise, regardless of size. Detailed documentation applies above the prescribed value.