Budget 2026 Transfer Pricing: Unified Safe Harbours, Faster APAs & Ease of Litigation

Introduction

India’s transfer pricing (TP) regime, now over two decades old, has long been characterised by protracted disputes, interpretive uncertainty and an adversarial audit culture. Against this backdrop, the Union Budget 2026 marks a decisive turning point. Finance Minister Nirmala Sitharaman has unveiled a package of reforms that collectively signal a shift from dispute-led enforcement towards predictability, certainty and ease of doing business for multinational enterprises (MNEs) operating in India.

The proposals span four key pillars: a modernised Safe Harbour Regime (SHR) for high-growth sectors; a strengthened and time-bound Advance Pricing Agreement (APA) programme; restored legislative clarity on assessment timelines and judicial precedents; and a rationalised, taxpayer-friendly compliance and penalty framework. Together, these changes address long-standing concerns of both industry and tax practitioners, and lay the groundwork for a more competitive and transparent cross-border tax environment.

This article examines each reform pillar in detail, highlights practical implications for Indian taxpayers and their foreign associated enterprises, and flags key open questions that await clarification through legislative and regulatory guidance.

1. A Transformational Shift in the Safe Harbour Regime

The Safe Harbour Regime was introduced in India in 2013 to provide transfer pricing certainty to eligible taxpayers without requiring a full-blown functional and economic analysis. However, the regime has suffered from structural fragmentation, low eligibility thresholds and a lack of automation — limiting its effectiveness and uptake, particularly among larger businesses. The Budget 2026 proposals seek to remedy these shortcomings comprehensively.

1.1 The Existing Framework and Its Limitations

Under the current SHR, IT services are divided into distinct categories — software development services and IT-enabled services, knowledge process outsourcing, and contract R&D services — each carrying different revenue thresholds and Safe Harbour margins. The table below summarises the existing rate structure:

This fragmented structure has resulted in inconsistent levels of certainty across the sector. Companies straddling multiple categories were often unable to access a single Safe Harbour election, leading to partial coverage and increased compliance burdens. The revenue ceiling of INR 300 crore has further excluded a large segment of the IT sector — particularly mid-to-large service providers — from benefiting from the regime.

1.2 Unification of IT Services: A Single Category with a Common Margin

The Budget 2026 proposals introduce a unified IT services category that consolidates all four sub-categories into a single, coherent framework. The key features of the new unified category are:

• A common Safe Harbour margin of 15.5% applies uniformly across all four previously fragmented sub-categories, eliminating inconsistency in certainty levels across IT and KPO functions.
• An enhanced eligibility threshold of INR 2,000 crore represents a sixfold increase from the current INR 300 crore ceiling, substantially expanding the pool of companies that can access Safe Harbour protection.
• An automated, rule-driven approval process eliminates tax officer intervention, replacing it with a technology-driven system that improves transparency, consistency and turnaround time.
• A five-year Safe Harbour continuity block allows companies, once elected, to remain on the same Safe Harbour for a continuous five-year period — providing medium-term certainty and reducing the administrative burden of annual elections.

It is important to note that the Safe Harbour proposals are currently announcements in the Budget speech. They will require formalisation through notified rules before they become operational. The effective date, detailed eligibility conditions and implementation mechanics will need to be carefully evaluated once these rules are issued.

1.3 Key Open Questions on the New IT Services Safe Harbour

While the direction of reform is unambiguously positive, several important questions remain open:

• Five-year continuity block vs. existing three-year rule: The current regime provides a three-year continuity option. Whether the proposed five-year block replaces this rule entirely, or whether taxpayers may still elect year-on-year, requires clarification.
• Mandatory vs. optional five-year block: Whether the five-year window is mandatory once elected, or whether taxpayers can opt out and re-elect annually, has not been clarified.
• Scope of the unified definition: Given that existing SHR definitions are narrowly framed, the precise ambit of the new unified category will be critical. Taxpayers will need to assess carefully whether their activities fall within the new definition.
• Treatment of closely linked transactions: Whether ancillary transactions such as trade receivables or payables are covered or excluded under the new SHR remains uncertain.
• Effective date: The new SHR is expected to apply from tax year 2026–27. All existing SHR elections, APAs, MAP outcomes and domestic audit results for earlier years should remain unaffected, although this requires statutory confirmation.
• Revenue threshold slabs: Whether the INR 2,000 crore threshold operates as a single ceiling or whether graduated slabs (similar to the current structure) will be introduced is unclear. The absence of slabs could create cliff-edge effects.

1.4 New Safe Harbour for Captive Data Center Services

Reflecting the rapid growth of India’s digital infrastructure sector, the Budget proposes a Safe Harbour of 15% on cost for Indian captive data center service providers. This is a welcome recognition of data centers as a distinct and economically significant service category within the TP framework. As large technology companies and global financial institutions continue to establish data center capacity in India, this measure is expected to provide greater pricing certainty and reduce the risk of TP disputes on an increasingly significant category of intra-group transactions.

1.5 Safe Harbour for Component Warehousing in Bonded Warehouses

In a significant move to strengthen India’s position in global electronics supply chains, the Budget proposes a Safe Harbour regime for non-residents engaged in component warehousing inside bonded warehouses. This measure is aimed at enabling efficient just-in-time logistics, which is critical for modern electronics assembly and high-volume contract manufacturing.

The key financial parameters of the proposal are:

• A Safe Harbour profit margin of 2% of the invoice value applies to non-residents storing components in bonded warehouses.
• This translates to an effective tax burden of approximately 0.7%, making India cost-competitive compared with logistics hubs in alternative jurisdictions.
• The proposal is particularly relevant for large OEMs and component ecosystems that rely on synchronised inventory flows, as it lowers compliance friction and aligns tax outcomes with commercial realities.

As with the IT services SHR, the warehousing Safe Harbour is currently a Budget speech announcement. It will require formalisation through notified rules before becoming operational, and the detailed eligibility conditions and mechanics will need to be evaluated once those rules are published.

2. Re-enforcing the Commitment to the Advance Pricing Agreement Programme

India’s APA programme, launched in 2012, has grown into one of the most active in the Asia-Pacific region, offering both unilateral and bilateral pricing agreements. Despite its success, the programme has been criticised for slow resolution timelines and procedural gaps. The Budget 2026 proposals reinforce India’s commitment to the APA programme by introducing measures that enhance certainty, streamline processes and extend benefits to non-resident associated enterprises (AEs). Together, these steps signal a strong policy intention to make APAs faster, broader and more commercially aligned.

2.1 Fast-Track Unilateral APAs for IT Services

The Budget proposes to fast-track unilateral APAs relating to IT services, with a clear target timeline of two years for conclusion. A further extension of six months may be granted upon the taxpayer’s request.

This time-bound process addresses long-standing delays that have undermined the attractiveness of the APA route for IT sector taxpayers. The reform is particularly significant given that IT services companies often face large transfer pricing adjustments and prolonged litigation. By committing to strict administrative timelines, the APA mechanism becomes a more reliable and attractive route for achieving pricing certainty. The proposal also strengthens the credibility of India’s APA programme by linking administrative capability with definitive turnaround standards — a development that is expected to encourage more taxpayers to prefer APA over post-assessment litigation.

2.2 Modified Return Filing for Non-Resident Associated Enterprises

A notable procedural reform allows non-resident AEs to file a modified tax return in the context of APA proceedings. This is a practical recognition of the fact that APA outcomes often require corresponding adjustments in the AE’s Indian tax return. Importantly, this facility is available exclusively in the APA forum and does not extend to the Mutual Agreement Procedure (MAP). This is a distinction practitioners and taxpayers will need to bear in mind when choosing dispute resolution pathways, as MAP participants will not have access to the modified return mechanism.

3. Ease of Litigation

One of the most taxpayer-friendly aspects of the Budget 2026 TP proposals is the rationalisation of the compliance and penalty framework. The changes reflect a broader philosophy of incentivising voluntary compliance rather than relying on punitive measures, and reduce the financial and procedural burden on taxpayers engaged in genuine cross-border transactions.

3.1 Replacement of Form 3CEB Penalty with a Graded Fee

The existing penalty for non-compliance with Form 3CEB (the TP accountant’s report) is replaced with a graded fee structure. A fee of INR 50,000 applies for initial non-compliance, rising to INR 1,00,000 for continued or aggravated non-compliance. This shift from a penalty to a fee-based framework is a significant philosophical change — treating compliance failures as regulatory infractions rather than penal offences — and is expected to reduce the adversarial nature of TP compliance proceedings.

3.2 Common Order for Assessment and Penalty Proceedings

To streamline adjudication and reduce duplication, the Budget introduces a unified framework under which a common order covers both assessment and penalty proceedings. This is expected to reduce the procedural complexity and cost of running parallel processes. No interest will be charged on penalties during the first-appeal period, alleviating the financial burden on taxpayers who contest adverse orders.

3.3 Reduction in Pre-Payment Requirement for Appeals

The mandatory pre-deposit requirement for filing an appeal has been halved from 20% to 10% of the disputed demand. This is a meaningful reduction that significantly improves access to justice, particularly for smaller entities and those facing large TP adjustments, by reducing the upfront liquidity cost of pursuing an appeal.

5. Conclusion: A Paradigm Shift in India’s Transfer Pricing Architecture

The Union Budget 2026 transfer pricing proposals collectively represent the most significant reform of India’s TP framework in many years. The unified Safe Harbour for IT services — backed by an automated approval process, a 15.5% common margin and a five-year certainty window — is a landmark change for a sector central to India’s economic identity. The recognition of captive data centers at 15% and the introduction of a warehousing Safe Harbour at 2% of invoice value for electronics manufacturers reflect the evolving nature of global value chains and India’s ambition to position itself as a preferred investment destination.

The reinforcement of the APA programme through statutory two-year timelines for IT services and modified return filing rights for non-resident AEs addresses long-standing operational gaps. These changes should accelerate pricing certainty for MNEs with significant Indian operations and encourage a greater proportion of TP disputes to be resolved prospectively through APAs rather than retrospectively through litigation.

The clarification of assessment timelines, insulation of assessments from DIN errors and the shift to a fee-based compliance framework collectively send a clear signal that India is committed to reducing the cost and complexity of TP compliance. The reduction in pre-deposit for appeals further eases access to justice for taxpayers.

That said, several open questions — particularly around the scope of the unified IT services definition, the mechanics of the five-year continuity block, treatment of closely linked transactions and revenue threshold slabs — will need to be resolved through subordinate legislation and CBDT guidance before taxpayers can fully exploit the new framework. Practitioners and taxpayers should closely monitor the Finance Bill provisions, the amended SHR rules and CBDT circulars in the months ahead.

Overall, Budget 2026 charts a credible path towards a transfer pricing environment that is more predictable, less adversarial and better aligned with global best practices. For MNEs and their advisers, now is the time to assess eligibility under the new SHR, revisit APA strategies for IT sector transactions and recalibrate compliance frameworks in light of these far-reaching changes.

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Disclaimer: The above information is intended for academic guidance and is to be used for informative purpose only. The said information is not to be considered as an opinion or advice. The aforesaid information is proprietary and privileged and is not to be used, reproduced and disclosed without consent. It is advisable to check with a subject matter expert before concluding on applicability or non-applicability of any compliance under any legislature. The views expressed are strictly personal. This article is written using assistance of AI tools.

 The above article is written by Sanket Sadashiv Barse and CA Shravan Suratwala. The authors can be reached at  contact@smsuratwala.com or shravan.suratwala@outlook.com. Sanket Sadashiv Barse is currently pursuing Chartered Accountancy course and is currently completing internship with S.M. Suratwala & Co., Chartered Accountants, Pune.

Shravan Suratwala is a Partner at S.M. Suratwala & Co., Chartered Accountants. Shravan has 10+ years of post-qualification professional experience in advisory, litigation and compliance areas of Corporate and International taxation and Assurance. He has also worked three plus years in the field of Internal and Process Audit while pursuing chartered accountancy course.