If you’re a business owner, a finance pro, or just someone curious about how companies price things between their own group companies, this is for you. Grab a coffee, and let’s break it down together.

What Is Transfer Pricing?

Imagine you run a group of companies—maybe one in Mumbai, another in Singapore, and a third in Bengaluru. When these companies buy, sell, or lend to each other, how do you decide the price? That’s what transfer pricing is all about. The law says these deals should happen at an “arm’s length” price—which is just a fancy way of saying: “Pretend you’re strangers. What price would you agree on if you weren’t related?” This rule is there to make sure profits don’t get shuffled around just to save on taxes.

In India, transfer pricing is governed by Sections 92 to 92F of the Income Tax Act, 1961. The rules are pretty much in line with global standards (think OECD guidelines), but with some local twists to suit the Indian context.

How Did We Get Here?

Until 2012, India’s transfer pricing laws only cared about cross-border transactions—so, deals between an Indian company and its foreign cousin. But then the government noticed some clever folks were shifting profits within India itself, especially when one part of the group had a tax break and the other didn’t. So, from 1 April 2013, the net widened to catch certain big-ticket domestic transactions.

And hereon Entered: Specified Domestic Transactions (SDTs).

What Are Specified Domestic Transactions (SDTs)?

SDTs are a special category of domestic deals between related parties that the taxman wants to keep an eye on. But not every small deal gets scrutinized—only if the total value of these transactions crosses ₹20 crore in a financial year.

Here’s what counts as an SDT:

• Transactions where the law says you must use market value (Section 80A)
• Transfers between different units of the same company (Section 80-IA(8))
• Deals where profits might look suspiciously high (Section 80-IA(10))
• Transactions linked to certain tax deductions (Sections 80-IAB, 80-IB, 80-IC, 80-ID, 80-IE, and Section 10AA)
• Transactions with “specified persons” (Section 40A(2)(b))

Anything else the government decides to add in the future

So, if you’re moving goods, services, or money between group companies and the total value is above ₹20 crore—and especially if one part of the group is enjoying a tax holiday—the transfer pricing rules kick in.

What’s Changed Lately? (2025 Updates)

Let’s get you up to speed with what’s new and noteworthy:

1. Block Assessment Period: Now, you can apply the arm’s length price determined in one year to the next two years as well. This three-year “block” aims to cut down on repetitive audits and disputes. More details are expected soon, but it’s a move towards consistency.

2. Safe Harbour Rules: These have been expanded, especially for loans in Indian currency. The interest rates are now pegged to the SBI Base Rate, plus a spread based on your credit rating.

3. Tolerance Range: For assessment year 2024-25, the allowed deviation from arm’s length price is set at 1-3%. So, if you’re a little off, you might still be safe from penalties.

4. Faceless TP Assessments: The sunset date for faceless (i.e., online and anonymous) transfer pricing assessments is gone. This means more flexibility and potentially less hassle for taxpayers.

What Do You Need to File and When?

Form 3CEB: This is your main transfer pricing report. It’s pretty detailed—covering general info, international transactions, and SDTs. You need a Chartered Accountant to sign off on it.

Due Date: Usually 30 November after the end of the financial year (but always check for extensions).

Penalties: Miss the deadline or mess up your documentation, and you could be staring at a ₹1,00,000 penalty (or more if things get serious).

How Do You Prove Your Prices Are Fair?

You need to show—using one of several approved methods—that your prices are what unrelated parties would agree to.

The main methods include

Comparable Uncontrolled Price (CUP) Method

Imagine you’re selling widgets from your Mumbai office to your group company in Chennai. The CUP method asks: “If you sold those same widgets to an unrelated customer, what price would you charge?” If you have a real, comparable sale to an outsider, that’s your benchmark. This method is super precise when you can actually find a similar deal with an independent party—think of it like checking the price of tomatoes at the local market before selling to your cousin.

When does it work best? When you’re dealing with commodities, standard products, or services where market prices are easy to find.

What’s the catch? Finding a truly comparable transaction isn’t always easy—tiny differences in terms or conditions can throw things off.

Resale Price Method (RPM)

Now, let’s say your group company in Delhi buys goods from your manufacturing arm in Pune and then resells them to customers. The RPM starts with the final resale price to the independent customer. From that, you subtract the typical gross margin for a distributor (to cover their costs and profit), and what’s left is the “arm’s length” price for the initial sale between your group companies.

Best for: Distribution businesses—think retail, wholesale, or where your group company’s main job is to act as a middleman.

Why use it? It’s handy when you don’t have a direct comparable sale but know what distributors in your industry usually earn.

Watch out for: You need to adjust for things like warranties or extra services, since those can affect the margin.

Cost Plus Method (CPM)

Suppose your company in Bengaluru manufactures parts and sells them to your related company in Hyderabad. The CPM is all about starting with the actual cost of making those parts—materials, labor, overhead—then adding a reasonable mark-up for profit. That total becomes your transfer price.

When does it shine? For manufacturing or routine service transactions, especially when you can’t find good external price data.

What’s tricky? Deciding what counts as “cost” and what’s a fair mark-up—get those wrong, and you might be in for a tax headache.

Profit Split Method (PSM)

Let’s say you and your overseas group company work together to develop a new product. Both sides bring something valuable to the table—maybe one has the tech, the other the brand. The PSM says: “Let’s look at the total profit from this collaboration and split it based on who contributed what.” It’s a bit like splitting the bill at dinner based on who ordered the most expensive dishes.

Great for: Complex, integrated operations—like joint R&D or when unique intangibles are involved.

How does it work? There are two main ways:

• Contribution Analysis: Split profits based on each party’s relative contributions.
• Residual Analysis: First, give each party a basic return for routine functions, then split the leftover profit based on unique contributions.
• Downside: It can get complicated, since you need to value everyone’s contributions—and that’s not always straightforward.

Transactional Net Margin Method (TNMM)

This one’s the workhorse for many Indian companies. Instead of focusing on prices or gross margins, TNMM looks at the net profit margin from your controlled transaction and compares it to what similar independent companies earn. If your margin is in the same ballpark, you’re probably okay.

• When to use: When other methods don’t fit—especially for service providers, contract manufacturers, or when you can’t find close product comparables.

• How it works: Pick the “tested party” (usually the simpler company in the transaction), check its net margin, and compare it to similar businesses.

• Why it’s popular: It’s flexible and works even with limited data, but it’s less precise than CUP or RPM.

Any other method that fits the facts

Pick the one that makes the most sense for your transaction. And yes, you’ll need to keep solid paperwork to back up your choice.

Example

Let’s say “XYZ Ltd.” runs a factory in Himachal Pradesh and claims a deduction under Section 80-IC. It sells goods worth ₹25 crore to its group company “ABC Ltd.,” which doesn’t get any tax break. Since the value is over ₹20 crore and one party gets a profit-linked deduction, this counts as an SDT. XYZ Ltd. has to make sure the sale price is at arm’s length, keep all the documentation, and report the deal in Form 3CEB.

Why Should You Care?

• Domestic Deals Matter Now: It’s not just international transactions—big domestic deals between group companies are under the microscope.

• Documentation Is Your Shield: Good records and timely filings are your best defense against penalties.

• Use Safe Harbours and APAs: These can give you peace of mind and reduce the risk of disputes.

• Plan for Block Audits: With the new three-year block period, consistency in your pricing policies is more important than ever.

• Penalties Are Real: Non-compliance can mean big fines and a whole lot of headaches.

The Bottom Line

India’s transfer pricing regime isn’t just a box-ticking exercise anymore. With the inclusion of specified domestic transactions, the rules are broader and the expectations are higher. The latest changes—like block assessments and expanded safe harbours—are meant to make life easier, but only if you play by the book.