Why Transfer Pricing Is No Longer Just a Big-Company Problem

There was a time when transfer pricing was a concern only for the top 500 Indian corporates — the Tatas, the Infosyses, the subsidiaries of Fortune 500 multinationals.

That time is over.

Today:

• A mid-sized IT services company in Chennai billing its Singapore holding company
• A Pune-based manufacturer selling components to its German parent
• A Bengaluru startup paying royalties to its Delaware IP holding entity

All of them are squarely within India’s transfer pricing regime — and most are not adequately prepared.

The Scale of the Shift

• ₹40,000+ crores collected in TP adjustments in a recent cycle
• Increasing TP litigation across courts and tribunals
• OECD BEPS framework embedded into Indian law
• Access to CbCR, Master File, and Local File data

Tax authorities today have unprecedented visibility into how profits are allocated globally.

If your business has related-party transactions — international or even domestic — this matters to you.

What Is Transfer Pricing?

When unrelated parties transact, prices are determined by market forces.

When related parties transact, prices can be manipulated, affecting:

• Profit allocation
• Tax jurisdiction
• Overall tax liability

Transfer pricing rules ensure that related-party transactions occur at arm’s length — as if between independent entities.

Risk of Non-Compliance

If prices deviate:

• Income is adjusted upward
• Additional tax is levied
• Interest and penalties apply
• Case may be referred for TP audit

The Indian Transfer Pricing Framework

Legal Backbone

Sections 92 to 92F of the Income Tax Act cover:

• International transactions
• Specified domestic transactions
• Deemed international transactions

Associated Enterprises (AE)

Entities are considered related if there is:

• ≥26% shareholding
• Management/control overlap
• Significant loan financing
• Other prescribed relationships

Accepted Methods

• CUP (Comparable Uncontrolled Price)
• RPM (Resale Price Method)
• CPM (Cost Plus Method)
• PSM (Profit Split Method)
• TNMM (Transactional Net Margin Method)

TNMM dominates in India, especially for IT/ITES.

What Has Changed (2024–2026)

1. BEPS Is Now Enforced Reality

Country-by-Country Reporting (CbCR)

Applicable for groups with revenue > ₹5,500 crores
Provides jurisdiction-wise:

• Revenue
• Profit
• Tax paid
• Employees
• Assets

Master File & Local File

• Master File: Global structure, value chain
• Local File: Entity-level transaction analysis

Principal Purpose Test (PPT)

Treaty benefits denied if tax avoidance is a primary purpose

Multilateral Instrument (MLI)

Treaties updated without renegotiation — structures may be reinterpreted

2. Safe Harbour Rules (Updated)

Predefined margins for:

• IT / ITES: 17%–24%
• KPO: 24%
• Contract R&D: 24%
• Loans & guarantees: Prescribed spreads

⚠️ Many businesses cannot sustain these margins, forcing full benchmarking.

3. Domestic Transfer Pricing

Applies if transactions exceed ₹20 crores, including:

• Related-party payments
• SEZ-linked transactions
• Tax-incentive-based structures

The 5 Most Litigated TP Areas

1. IT & Software Services

• Classification as captive / low-risk entities
• Authorities often push for higher margins

2. Royalties & Intangibles

• DEMPE framework focus
• Substance over legal ownership

3. Management Fees

• Were services actually rendered?
• Is allocation justified?

4. Intra-Group Financing

• Interest rates
• Guarantee fees
• Cash pooling structures

5. Business Restructuring

• Exit charges
• Transfer of profit potential

Advance Pricing Agreements (APA)

What Is an APA?

A binding agreement with tax authorities on:

• Pricing methodology
• Arm’s length pricing

Key Benefits

• Certainty (up to 5 years + 4-year rollback)
• Reduced litigation
• Elimination of double taxation (in bilateral APAs)

Types

• Unilateral APA – Faster, India-only certainty
• Bilateral APA – Full protection from double taxation

Documentation: Non-Negotiable

Penalties

• Section 271AA: 2% of transaction value (no documentation)
• Section 271G: 2% (failure to furnish data)

Required Documentation (Rule 10D)

• Group & entity overview
• Functional analysis (FAR)
• Comparability study
• Method selection & justification
• Pricing computation

Quality matters more than volume. Boilerplate documentation fails audits.

Secondary Adjustment Risk

Under Section 92CE:

If TP adjustment occurs:

• Excess amount treated as loan to foreign AE
• Notional interest charged if not repatriated

This creates ongoing financial impact, not just a one-time tax cost.

Practical Action Plan (FY 2026–27)

✔ Review inter-company agreements
✔ Conduct functional analysis
✔ Benchmark margins
✔ File Form 3CEB on time
✔ Evaluate safe harbour eligibility
✔ Consider APA for large transactions
✔ Assess secondary adjustment exposure

Mutual Agreement Procedure (MAP)

Used to resolve double taxation:

• Involves treaty partner countries
• Increasingly efficient post-BEPS
• Applicable for major jurisdictions (US, UK, Japan, Germany, etc.)

The IPRS Perspective

Transfer pricing is not just compliance — it is strategic.

Businesses that manage TP well:

• Maintain updated agreements
• Perform proactive benchmarking
• Involve leadership (CFO/Board)

Businesses that don’t:

• Face higher adjustments
• Experience prolonged litigation
• Suffer double taxation

Conclusion

India’s TP environment today is:

• More data-driven
• More scrutinized
• More consequential

At the same time, tools like:

• APAs
• MAP
• Safe harbours
• Robust documentation

…offer strong protection — if used proactively.

The gap between proactive and reactive businesses has never been wider.

If you have not reviewed your transfer pricing policy in the last 12 months, now is the time.

The invariable question being asked by a Startup which has burnt all his cash like the Joker in the Dark Knight, at the time of fund raise. And the same question which have to be answered every other day by every other financial finance professional. A true Groundhog Day! Dilution stakes are always high. The Mathematical answer to this is to draw up the valuation. Start with finding the value of the Enterprise. First use the equivalent term to Rocket Science in Finance, named Discounted Cash Flow. Project at the Cash Flows. Find out Cost of Equity, Discount and Arrive at the Enterprise Value. Much easier to type and when you have to explain it to an Entrepreneur, it turns into a Nolan Script of Memento. You don’t know where it starts nor where it ends There also exists extras such as Multiples, Net Book Value, Berkus and so on to arrive at the enterprise Value. Figure out the Fund requirements for this round, divide the Fund needed with the Valuation, alas, the Dilution %. Straight Forward, Plain and Emotionless way on arriving how much the Founder has to part way in the Enterprise. The Dilution which could range from 1% to 100%, has very deeper significance. The % the founders keep with them and the % they have to off load has not only financial impact but a very huge non-financial impact. So, going back to the First Question, Mathematical Way which is theoretically correct needs to be analyzed further with the lens of a Corporate Lawyer. A 2% difference between 49% and 51% will decide on the party which can exhibit the control over the other. Having 50% and 50% saying they are made for each other will result in stalemate in decision making. So figuring out the right shareholding % can strengthen the bond and can extend the relationship and make the entity stay true to the Going Concern Concept. The 2 Key Shareholding to be kept in mind were the following:

1.    51% and 49%
   

2.    74% and 26%
   

3.    76% and 24%
   

Significance of 51% and 49%: - Ceding the Operational Control Having 51% and 49% shareholding is quite popular in a JV structure. From the Financial Standpoint, 2% differential in the shareholding will not have a major impact in the profits (losses goes without saying) to be split among them. But from a corporate governance point, it will have a huge say as this will results in the operational control in the hands of one party. Though the difference is a negligible 2%, the one who is holding 51% has actually have the control on the key day to day transactions of the company. Any transactions which can be passed as ordinary resolution can be made by that majority shareholder without the validation of the minority. In simple words, when 49% goes to arm wrestle 51%, on all the times where simple touch down is enough 51 will come in top though the weight difference is only 2%. (i) Reliance and Network 18:

Here’s the short and crisp story. Network 18 was Fastly losing money. Needed a person with deeper pockets to help them out. Help and funds came from Reliance through something called as Zero Coupon Optionally Convertible Debentures. As the instrument is Zero Coupon, Network 18 need not worry about the interest. Kind of like free money at that point when injected into the Network 18. The time horizon to convert into equity was 10 years. Network 18 recovered, recouped their losses. Then came the curtains to the Raghav Bahl after 2.5 Years. Reliance wants to convert. They have converted the Zero Coupon Optionally Convertible Debentures and resulting in a stake of 73% handing over the operational control of the company. Significance of 74% and 26%: - Blocking the Special Resolutions The side which has 74% are definitely the one which has the operational control over the day to day affairs of the company. But sometimes that may not be enough. There musts exists a situation where certain extraordinary decision needs to be taken which can warrant or influence the operation of the company. Such decisions needs to be taken only with the voting of 76% of the members. In other words a simple majority will not have any material use on that decision making. The party with 26% can block such decisions by firmly saying no and can go against the wish of the majority. Such existence of special resolution on key matters are protecting the interests of the minority. So having a 2% over 49%, promises the operational control and having a 2% less on 76%, can result on losing out on transactions requiring special resolution.

(i) Reliance and Dunzo

Dunzo, a quick ecommerce startup has raised funds from Reliance and has given away 26% of the Company and rests being retained among the Dunzo and the other investors. Days passed, cash burnt. Dunzo wanted to do another round of fund raise. Knocked on the doors of existing shareholders, didn’t get any positive answers. Left with no option, Dunzo wants to look outside for the fund raise. There comes the blockage by Reliance, a 26% Minority shareholder who has firmly said NO. Any external fund raise needs an approval of 76%, in the given case as Reliance holds 26% it was firmly able to block the request and held the company hostage.

Significance of 76% and 24%: - Supermajority for unrestricted decision making

The party which can hold upon 76% and above can have unrestricted and uninterrupted access on the decision making of the company. Both the ordinary resolution and special resolution can be passed without the need of any other person and can exhibit his absolute domination on the affairs of the company. In some way, the person who holds 24% is more of a silent investor in the company without any real say in the way things can be operated.

(i) Tata Sons vs Cyrus Mistry

The Tata sons was controlled by 2 groups namely Tata Trusts, holding more than 76% (direct and indirect) and the other by Shapoorji Pallonji Group which held 18.4%. The Cyrus Mistry representing the Shapoorji Pallonji Group was appointed as the Chairman of Tata Sons. However due to the fall out in relationship he was ousted by Tata Sons from the position as it held more than 76%. Cyrus Mistry has taken this matter to supreme court with no vein as the Tata Sons has held supermajority.

Conclusion

From dilution wise, every single basis points higher or lowers will go a long way in the decision making, As far as keeping the key % in mind at the dilution those are the above as they have significant impact on the Corporate Governance and on facilitating the Decision Making in the enterprise.

Kirana Club is a dedicated platform tailored to address the challenges faced by Kirana store owners in managing their shops. Specifically, I will delve into the creation of the Indian Kirana League, a quiz competition that attracted participation from over 1 Lakh Kirana stores. This competition not only contributed to the app’s enhanced user retention but also positively impacted the Daily Active Users (DAU) to Monthly Active Users (MAU) ratio.