Transfer Pricing Basics India 2025: What It Is, Who It Covers and Why It Matters

Picture this. BharatSoft Pvt. Ltd. in Bengaluru writes software for its parent company, GlobalSoft Inc. in Delaware, USA. An independent developer would charge $80 per hour for the same work. BharatSoft charges only $20.

BharatSoft records less income. It pays less tax in India. GlobalSoft keeps the extra $60 in the USA, where perhaps the tax rate is lower. The Indian government quietly loses revenue on every invoice raised.

Transfer pricing is the price one related company charges another for goods, services, loans, or intellectual property.

The phrase itself is neutral. Every time a company sells anything internally, it sets a transfer price. The tax concern arises because related companies have the flexibility to set any price they choose. That flexibility can be used to move profits from high-tax countries to low-tax ones.

Transfer pricing rules counter this. They require related-party prices to match what unrelated parties would have agreed under normal market conditions. This benchmark price is the Arm’s Length Price (ALP).

Why Does India Specifically Regulate This?

India loses tax revenue when Indian companies:

• Under-price their exports of services or goods to foreign group entities – booking less income in India
• Over-price their imports of services or goods from foreign group entities – inflating Indian deductions
• Shift profits between Indian entities to exploit tax holidays or exemptions domestically

The transfer pricing framework under Sections 161 to 173 of the Income Tax Act 2025 protects against all three.

The Income Tax Act 2025 has replaced the Income Tax Act 1961. The transfer pricing provisions have been renumbered but the substance largely continues. Here is the complete mapping:

Section 161 is the engine of the entire transfer pricing framework. It lays down three things:

First, any income arising from an international transaction or a specified domestic transaction must be determined with reference to the ALP. So if BharatSoft charges $20 per hour but the ALP is $80, BharatSoft’s income is computed as if it charged $80.

Second, any allowance for expense or interest arising from such a transaction is also subject to the ALP. So if BharatSoft pays a management fee to its parent and the ALP for that service is lower, the excess deduction gets disallowed.

Third, cost-sharing arrangements between AEs are also caught. If three group companies share the cost of a new software platform, each company’s share of that cost must reflect what an independent party would have contributed for that benefit.

The One-Way Rule: Section 161(4)

This is often overlooked, but it matters greatly.

Section 161(4) says that the TP provisions do not apply if computing income at ALP would reduce taxable income or increase a loss.

In plain terms: the arm’s length principle is a government-protection tool, not a taxpayer-benefit tool. It can push your income up, but it will never pull it down.

Two enterprises are ‘associated’ if one participates in the management, control, or capital of the other. Section 162(1) contains 14 sub-clauses in total. Clause (a) itself has three sub-clauses: (i), (ii), and (iii). Any single sub-clause, if satisfied, is sufficient to establish AE status.

The 14 Tests for Associated Enterprise Status

Illustrative Examples

Scenario A: AlphaHoldings (UK) holds 30% of the voting shares of BetaIndia Pvt. Ltd. (India). They are associated enterprises because 30% exceeds the 26% voting power threshold under sub-clause (a)(ii).

Scenario B: GammaCorp (USA) holds 28% in both DeltaIndia Pvt. Ltd. and EpsilonIndia Pvt. Ltd. DeltaIndia and EpsilonIndia are associated enterprises with each other because a common third person holds 26% or more in each under sub-clause (a)(iii).

Scenario C: ZetaIndia Pvt. Ltd. (India) manufactures exclusively using patents and know-how licensed from EtaGroup (Netherlands). ZetaIndia is wholly dependent on EtaGroup’s IP. They are associated enterprises even if there is zero equity ownership between them – sub-clause (f) applies.

Scenario D: ThetaIndia Pvt. Ltd. (India) obtains a loan of Rs. 60 crore from IotaUSA Inc. ThetaIndia’s total book assets are Rs. 100 crore. The loan is 60% of total assets – exceeding the 51% threshold under sub-clause (b). They are associated enterprises.

Associated Enterprises for Specified Domestic Transactions (Section 162(2))

For domestic transactions, the definition is extended. ‘Associated enterprise’ also includes:

• Other units or business divisions of the same assessee, where the transaction relates to payments to related parties under Section 122 or to transfers under Section 140(9)
• Any person referred to in Section 140(13) or 205(4) for transactions referred to in those sections
• Other units or enterprises of the assessee or associated persons for transactions under Chapter VIII to which Sections 140(9) or 140(13) apply

Why does this matter? Consider a company with two divisions: Division A (SEZ unit, fully tax-exempt) and Division B (normal tax). If Division B pays an inflated price to Division A for services, Division B claims a large deduction and Division A pays no tax. TP provisions treat these divisions as associated enterprises and require the price to be at arm’s length.

An international transaction is a transaction between two or more associated enterprises where at least one is a non-resident. Section 163(1) is deliberately wide.

The Deemed International Transaction (Section 163(2))

This provision is important and often overlooked. Even a transaction with a third party (non-AE) is treated as an international transaction if:

• There is a prior agreement between that third party and an associated enterprise relating to the transaction, or
• The terms of the transaction are determined in substance by the associated enterprise

Provided that either the Indian enterprise or the associated enterprise (or both) is a non-resident.

Intangibles: A Broad Scope (Section 163(3))

Section 163(3) lists 12 categories of intangible property. This matters because intangible transactions are among the most common vehicles for profit shifting.

• Marketing intangibles: trademarks, trade names, brand names, logos
• Technology intangibles: process patents, patent applications, technical documentation, technical know-how
• Artistic intangibles: literary works, copyrights, musical compositions, engravings
• Data processing intangibles: proprietary computer software, automated databases, integrated circuit masters
• Engineering intangibles: industrial designs, product patents, trade secrets, engineering drawings, blueprints
• Customer intangibles: customer lists, customer contracts, customer relationships, open purchase orders
• Contract intangibles: favourable supplier contracts, licence agreements, franchise agreements, non-compete agreements
• Human capital intangibles: trained workforce, employment agreements, union contracts
• Location intangibles: leasehold interests, mineral exploitation rights, air rights, water rights
• Goodwill: institutional goodwill, professional goodwill, personal goodwill, going concern value
• Methods, programmes, systems, customer lists, technical data
• Any other item deriving value from intellectual content rather than physical attributes

Many assume transfer pricing applies only to international dealings. That is incorrect. Section 164 brings certain purely domestic related-party transactions within the TP framework. These are called Specified Domestic Transactions (SDTs).

The Rs. 20 Crore Threshold

SDT provisions apply only if the aggregate of all such transactions in a tax year exceeds Rs. 20 crore. Below that, the TP framework for domestic transactions does not apply.

Each category is aggregated. If a company has Rs. 12 crore in transactions under Section 122 and Rs. 9 crore in transfers under Section 140(9), the aggregate is Rs. 21 crore, which crosses the threshold.

The definition of ‘transaction’ is notably wide. Even an unwritten, informal understanding between group companies constitutes a transaction for TP purposes.

Disclaimer: For informational and educational purposes only. Based on the Income Tax Act 2025 (30 of 2025), Income Tax Rules 2026, and provisions as amended by the Finance Act 2026, current as of June 2026. Does not constitute legal or tax advice.