Transfer Pricing Compliance for Indian Companies in FY 2025-26: A Practical Documentation Checklist
Transfer pricing (TP) remains one of the most audit-prone areas of Indian corporate taxation. The Income Tax Department has consistently expanded its scrutiny over international related-party transactions, and with the OECD’s BEPS project fully embedded in Indian law, the documentation expectations have never been higher. Yet many Indian companies – including listed entities – still treat TP documentation as an afterthought, assembled hurriedly before the October 31 filing deadline.
This article provides a practical checklist for CFOs, finance controllers, and the CAs advising them on getting TP documentation right for FY 2025-26.
Who is Required to Maintain Transfer Pricing Documentation?
The obligation to maintain TP documentation arises under Section 92D of the Income Tax Act, read with Rule 10D. It applies to any taxpayer who has entered into an “international transaction” with an “associated enterprise” (AE) during the previous year. Broadly:
– International transactions include sale/purchase of goods, services, loans, guarantees, cost-sharing arrangements, and intangibles between Indian entities and their overseas AEs.
– Specified domestic transactions (SDT) between related domestic parties are also covered if the aggregate value exceeds INR 20 crore.
– Threshold for Form 3CEB: Any taxpayer with international transactions or SDTs must file Form 3CEB (the Accountant’s Report) by October 31, regardless of transaction value.
– Threshold for Local File: Required when the aggregate value of international transactions exceeds INR 100 crore in the relevant year.
– Threshold for Master File: Required when the Indian entity is part of a multinational group with consolidated global revenue exceeding INR 500 crore and either: (a) the Indian entity’s aggregate international transactions exceed INR 50 crore, or (b) aggregate international transactions involving intangibles exceed INR 10 crore.
– Country-by-Country Report (CbCR): Required for the ultimate parent entity in India if consolidated group revenue exceeds INR 5,500 crore (approximately EUR 750 million).
The Documentation Trinity
Indian TP documentation broadly consists of three linked documents:
1. Master File (Form 3CEAA)
The Master File provides a high-level overview of the MNC group: its global business structure, value chain, intangibles, intercompany financing, and the group’s overall TP policies. It is filed by the Indian entity (or designated entity) and must be submitted to the Director General of Income Tax (Risk Assessment) by November 30.
Key content:
– Organogram of the group showing ownership structure
– Geographic breakdown of group revenue and profits
– Description of each business line and the value drivers
– Identification of all group intangibles, their locations, and ownership
– Description of intercompany financing arrangements
– Copy of existing APAs or rulings that affect Indian operations
2. Local File (Form 3CEAB)
The Local File is the workhorse of TP documentation. It deals specifically with the Indian entity’s transactions with AEs, the arm’s length analysis, and the benchmarking study.
Key content:
– Detailed description of each category of international transaction
– Functional analysis (Functions performed, Assets used, Risks borne – the FAR analysis)
– Selection and justification of the Transfer Pricing Method
– Selection of comparables (comparable uncontrolled companies or transactions)
– Benchmarking study and arm’s length range
– Conclusion on whether the price charged is at arm’s length
3. Form 3CEB – Accountant’s Report
Form 3CEB is the CA’s certification that the taxpayer has maintained the required documentation and that the price of international transactions is at arm’s length. It must be filed on or before October 31 along with the income tax return. The certifying CA takes personal responsibility for the contents of the form and must exercise due professional care in reviewing the underlying transactions and documentation.
The Five Most Common TP Documentation Errors
In practice, the following errors account for the vast majority of TP adjustments and penalties seen in audit:
1. Treating Form 3CEB as the documentation itself
Form 3CEB is the certification, not the documentation. The underlying Local File, benchmarking study, and functional analysis are separate documents that must exist contemporaneously. Assembling them after receiving a notice is too late and exposes the company to penalty.
2.. Using the wrong comparables search database
Indian TPOs expect benchmarking to use Indian databases (Prowess, Capitaline) for domestic-facing transactions. Using only international databases (Bureau van Dijk/Orbis) without a valid reason for excluding Indian comparables is a frequent audit trigger.
3. Applying TNMM to all transactions without checking fit
The Transactional Net Margin Method (TNMM) is the most commonly used method in India because it is flexible. However, applying it uniformly – particularly to transactions involving unique intangibles, IP licences, or financial services – can be challenged. The “Most Appropriate Method” rule requires documenting why TNMM was selected over CUP, RPM, or PSM.
4. Failing to update comparable every year
A benchmarking study prepared for FY 2021-22 cannot be reused for FY 2025-26 without refreshing the comparable set. Financial positions of comparable companies change year to year. TPOs routinely reject outdated studies.
5. Not disclosing Specified Domestic Transactions
Companies that have specified domestic transactions – for example, sales to a related domestic entity at concessional prices, or management fee arrangements between group companies – often overlook the obligation to disclose and document these under Section 92BA. Penalties under Section 271BA apply even to undisclosed SDTs.
A Practical FY 2025-26 Timeline
FY 2025-26 closed on March 31, 2026. For most companies, the compliance work now shifts to the post-year-end window:
1. Finalise list of international transactions and AEs for FY 2025-26 – April 30, 2026
2. Complete FAR analysis for each transaction – May 31, 2026
3. Run comparables search and prepare benchmarking study – June 30, 2026
4. Prepare Local File (draft) – July 31, 2026
5. CA review of Form 3CEB and Local File – September 30, 2026
6. File Form 3CEB –October 31, 2026
7. Income Tax return – November 30, 2026
8. File Master File (Form 3CEAA) – November 30, 2026
9. File CbCR (if applicable) – November 30, 2026
Advance Pricing Agreements: The Long-Term Fix
For companies with recurring intercompany transactions – royalties, management fees, back-office services – an Advance Pricing Agreement (APA) with the CBDT eliminates annual benchmarking uncertainty for up to five years (extendable). Bilateral APAs also prevent double taxation in the counterpart country. The pre-filing meeting process is free, and most mid-sized Indian companies do not realise they are eligible.
Conclusion
Transfer pricing compliance is not a year-end exercise. The best documentation is prepared contemporaneously – as transactions happen – because it reflects actual economic substance rather than a post-hoc rationalisation. The penalty for non-maintenance of TP documentation is 2% of the value of international transactions under Section 271AA, with additional penalties for concealment. For a company with INR 50 crore in intercompany transactions, that is INR 1 crore in penalty risk alone.
If your company has international related-party transactions and has not yet started its FY 2025-26 TP documentation, now is the time.
******
CA Mehul Agrawal is a Chartered Accountant and Partner at Agrawal Khandelwal & Associates LLP, Nashik. He is certified in UAE Corporate Taxation and advises Indian companies and multinational subsidiaries on transfer pricing documentation, Form 3CEB, APA applications, and international tax structuring. Connect at [agrawalkhandelwal.com/transfer-pricing](https://agrawalkhandelwal.com/transfer-pricing).
Author Bio
