The Indian Transfer Pricing (“TP”) landscape is undergoing a significant shift. The transition to a new legislative framework signals a move toward administrative modernization, enhanced compliances, reduced litigation and ease of doing business.

The Indian Transfer Pricing (“TP”) landscape is undergoing a significant shift. The transition to a new legislative framework signals a move toward administrative modernization, enhanced compliances, reduced litigation and ease of doing business. The key legislative pillars driving this change are outlined below:

  • The new Income-tax Act, 2025 (2025 IT Act) - The 2025 IT Act has been already enacted into law and has replaced the current Income-tax Act, 1961 (1961 IT Act) effective from 1st April 2026. The 2025 IT Act introduces a revamped TP regime while preserving the core principles of the previous framework;
  • Union Budget 2026–2027 (Budget 2026) - On 1 February 2026, the Indian Government presented the Budget 2026 introducing key TP proposals to align with rapidly reconfiguring global value chains and dealing with geopolitical uncertainties; and
  • Income-tax Rules, 2026 (2026 IT Rules) - Released in February 2026 and notified on 20 March 2026, these rules provide the operational mechanics for the 2025 IT Act, detailing the updated compliance and documentation requirements.

The Indian TP regime is poised to undergo a wide-ranging change ranging from refining arm’s length price (ALP), strengthening documentation requirements, re-designing safe harbour regime, streamlining Advance Pricing Agreement (APA) program, introducing block/ multi-year TP audits, and shifting from levying penalties to fee-based approach for certain non-compliances. Viewed together, they clearly reflect a direction toward bringing certainty for taxpayers, timely completion of TP proceedings, modernizing TP administration, and enhancing alignment with contemporary global practices.

The new TP regime is likely to effect every sector/ business and will be particularly relevant for India’s IT/ITES sector along with the expanding ecosystem of Global Capability Centers (GCCs), which have consistently sought greater predictability on tax outcomes and simplification of operational and compliance requirements. We have discussed below some of the key updates in the India TP regime:

Amended Safe Harbour Framework

Historically, India’s Safe Harbour Rules have allowed taxpayers to adopt pre-defined TP margins for specified international transactions with AE --- not defined – defined below? , subject to eligibility conditions. The intention has been to provide upfront certainty and reduce the risk of disputes, especially in areas such as software development, IT-enabled services, R&D support, and intra-group financing.

In practice, the relatively high margins and the existence of multiple, overlapping service classifications have limited the attractiveness of the regime for many taxpayers. Building on India’s positioning as a global hub for cloud infrastructure, artificial intelligence and large-scale data centre operations, the new TP regime proposed under the new legislation – is it still proposed or is it already in force amended the safe harbour rates and brought beneficial tax regime for emerging business modelsas follows:

Information Technology (IT) Services

Reduction in safe harbour rate from the range of 17%-24% to 15.5% for IT services which now include software development services, Information Technology enabled Services (ITeS), Knowledge Process Outsourcing (KPO) services and Contract Research & Development services. Further, the revenue eligibility cap is proposed to be raised from INR 3 billion to INR 20 billion (~US$33 million to US$218 million). The higher threshold is intended to open the safe harbour route to a wider set of multinational groups with sizeable Indian operations.

Date centre services

A 15% cost-plus safe harbour margin for AE data centre services. Further, to incentivize investment in data centre infrastructure, it is proposed to provide tax exemption for 20 years (until 2047) to foreign company in respect of any income from procurement of data centre services from a “specified data centre.” – not clear. Do you mean – foreign company outside or inside India ? Can you elaborate on who are these specified data centers?

Bonded warehouse operations

A 2% margin for bonded warehousing operations undertaken by a non-resident in connection with just-in-time logistics for electronic manufacturing.

Automated approvals and longer-term certainty

It is contemplated to be a more technology-driven, standardized approach to safe harbour administration. The approval process is proposed to move to a fully automated, rules-based system. Once the option of safe harbour is validly exercised, the approval would continue to remain valid for 5 years, thereby reducing repeat filings and providing a longer horizon of certainty for eligible taxpayers.

Redefining Associated Enterprise

TP provisions apply on particular international transactions if such transaction is between two or more Associated Enterprises (AE).

The 1961 IT Act[1] defines AE in the following two separate categories:

  • General category wherein the enterprises are treated as AEs, if such enterprises directly or indirectly participate in the management, control, or capital or are under common control;
  • Specific category which deems the enterprises as AEs in certain scenarios -  such as significant shareholding, financial arrangements, common directors, key decision-makers, or economic dependency on aspects like intellectual property, raw materials, or sales.

The Indian Supreme Court[2] has held that the enterprises should fall within the ambit of Specific category along with General category to be regarded as AEs.

Taking this into account, the 2025 IT Act, while defining AE[3], combines the General category with the Specific category implying that  satisfaction of any one of the categories would be sufficient for the enterprises to be considered as AE unlike the earlier scenario.

Refining ALP

The 1961 IT Act[4] lays down the framework for determining the ALP (as defined above) for international transactions between AE and prescribed various methods for computing ALP.

Where multiple ALPs are determined, the 1961 IT Act along with rules framed thereunder[5] provided a mechanism for deriving ALP range, along with a tolerance band of ±3% (±1% for wholesale traders) of the transaction value. However, the 1961 IT Act contained interpretational ambiguities on whether this tolerance range applies only when multiple prices are determined or also when the ALP is a single price.

The 2025 IT Act resolves this ambiguity by explicitly confirming that the tolerance range applies even when the ALP is a single price. This amendment will provide clarity and addresses a frequent area of dispute between taxpayers and the tax authorities.

Multi-year/ block TP audit/ assessment

A new 3-year block TP audit/ assessment mechanism has been introduced as a part of 2026 IT Rules[6].

Under this scheme, the ALP would be determined for two consecutive tax years[7] (ie the 2nd tax year and the 3rd tax year respectively) immediately following the tax year (ie the 1st tax year). The key points of the block TP assessment are outlined below:

  • Application for the block assessment to be made by filing a form[8] for the 2nd and 3rd tax year on or before the date specified under the 2026 IT Rules[9];
  • The relevant transactions in the 2nd and 3rd tax year must be similar in nature to transactions in the 1st year. The relevant transaction may be regarded similar if following conditions are satisfied:
    • No change in method to determine ALP;
    • No change in functions performed, assets employed and risk assumed (FAR Analysis);
    • In respect of the relevant transactions, the business activities, the relevant financial, tax, and accounting methods; and classification of the taxpayer, remains materially the same;
    • A change in the business result or holding structure of the associated enterprise, or change in associated enterprise is not a material change with respect to the relevant transaction and there is no change in the FAR analysis; and
    • No change in the contractual terms
  • The above form shall be supported by an accountant’s certificate which[10] will certify that there is no change in the nature of relevant international transactions and business conditions for the 2nd and 3rd tax years and that they will remain broadly same as the 1st tax year;

This framework is designed to reduce repetitive TP audits in situations where the nature of international transactions and business conditions remain broadly consistent over time.

Changes in TP documentation

The 2026 IT Rules have replaced the form for transfer pricing audit report under the 2025 IT Act[11]. The replaced form now requires various additional details and disclosures, as compared to the previous form as provided below:

  • Separate disclosure of total amounts transacted in respect of international, deemed international and specified domestic transactions;
  • Confirmation of maintenance of documentation prescribed under the 2025 IT Act;
  • Additional transaction level details such as details of royalty agreement, financing agreements, guarantee agreements (if applicable), agreements leading to business restructuring, etc.
  • Details of APAs entered by the taxpayers, if any;
  • Details of ALP computation methodologies including benchmarking details and computation of ALP;
  • Additional disclosures regarding expenses incurred by AE towards the taxpayer; etc.

Fast tracking of Advance Pricing Agreements (APA)

Further, the 2026 IT Rules outlined changes to the APA program for fast tracking the Unilateral APAs as set out below:

  • APA filing fee has been standardized to INR 2 million (~USD 22K) irrespective of the transaction value;
  • For withdrawing an APA, a notification to the appropriate authority is deemed to be adequate;
  • If no agreement is entered into within 3 years from the end of the financial year in which the application is filed, the APA proceedings may be closed. Further, if the agreement is not concluded within 2 years from the end of the quarter in which application is filed, the proceedings will be deemed to be closed, where the taxpayer may request for additional 6 months extension;
  • Meetings, submissions and site visits are required to be completed within 1 year from the end of the financial year of application;
  • A year can be covered under rollback provisions even if the return is filed after the prescribed due date but within the extended timeline provided under the 2025 IT Act;
  • Taxpayers are now required to provide a detailed computation of any adjustments offered in the prescribed form.

Additionally, it is also proposed to extend the option to file a modified return to AE covered by such APAs reinforcing the broader certainty objective and introduces additional administrative flexibility.

Conversion of certain penalties into fees

It is proposed to convert penalties for a range of technical and procedural defaults including non-furnishing of a TP audit report – into quasi-compensatory fees. The fee for non-furnishing of TP audit report is proposed to range from INR 50K to INR 100k (~USD 550 to 1100)[12] which under the current law[13] is a fixed sum of INR 100K (~USD 1100).

The shift from levying penalties to fees represents a fundamental shift in the philosophy of compliance enforcement. A penalty is generally punitive in character and presumes wrongdoing or failure. Consequently, its imposition must adhere to the principles of natural justice, necessitating issuance of show cause notice, opportunity of being heard, consideration of reasonable cause and order passed by the tax authority imposing penalty. On the other hand, a fee is generally compensatory or regulatory. It is usually automatic, fixed in nature, and system driven and does not necessarily involve adjudication or discretionary evaluation.

Concluding remarks – implications for multinationals and key watchpoints

For multinational enterprises (MNEs) with operations in India, the 2025 IT Act amendments and Budget 2026 proposals could materially change the TP risk and compliance landscape, particularly for IT/ITES and GCC structures. We have outlined below key considerations for MNEs -

  • Given the interplay between safe harbour, unilateral APAs and traditional benchmarking, MNEs should revisit their India TP strategy. Certain taxpayers may consider transitioning from routine benchmarking to safe harbour, while others may find a combination of safe harbour for some entities and APAs for others optimal;
  • The 2025 IT Act’s consolidation of the General and Specific category of AE has broadened the definition of AE. The taxpayers will need to re-evaluate the transactions to determine whether they fall within the ambit of AE or not. In this regard, a proper review of inter-company agreements, FAR, etc. must be undertaken;
  • Block TP assessment may reduce TP audits where international transactions and business models are stable. MNE’s must ensure consistent FAR analysis, and maintain robust TP documentation in order to be eligible to opt in;
  • The revised TP reporting model has increased the disclosure and compliance for improving transparency regarding transactions within group structures. MNE’s should proactively strengthen transaction-level documentation, ensure completeness and accuracy of disclosures, and align benchmarking and ALP computations. Maintaining such documentation along with periodic review may be a key to mitigating risk of non-compliance under the new TP regime;
  • The proposed APA changes may expedite unilateral APA resolutions and provide certainty through specified timelines and procedural simplification. MNE’s must ensure readiness and maintenance of proper documentation for timely submissions to avoid deemed closure of APA proceedings and fully fast-track APA proceedings; and
  • The focus on substance is heightened and hence, documentation for any international transaction must be aligned with actual conduct/transaction, and explicit about risk control and cost appropriation (if any).

Looking ahead, multinationals should closely monitor and take steps:

    • To implement robust systems for collecting and maintaining new information disclosures required under the TP regime;
    • To strengthen the documentation in relation to any inter-company transactions;
    • Keep uptodate with the practical uptake of the new safe harbour margins and whether any future adjustments are contemplated based on industry feedback

Early impact assessments, scenario modelling (safe harbour vs APA vs standard TP), and alignment of internal policies with the evolving Indian framework will be critical for corporates  seeking to leverage the opportunities created by Budget 2026 and 2025 IT Act while managing their overall TP risk profile in India.

[1] Section 92A of the 1961 IT Act

[2] CIT v. Veer Gems [2018] 95 taxmann.com 16 (SC)

[3] Section 162 of the 2025 IT Act

[4] Section 92C of the 1961 IT Act

[5] Section 92C of the 1961 IT Act read with Rule 10CA of the Income-tax Rules, 1962 (IT Rules)

[6] Rules 82 of the 2026 IT Rules

[7] Tax years under the 2025 IT Act mean 1st April to 31st March

[8] Form 46

[9] The Form No. 46 in respect of international transactions or specified domestic transactions shall be furnished, within the period, beginning from the end of the third tax year and ending on the 30th day of June succeeding the 3rd tax year.

[10] Form 47

[11] Form 3CEB replaced with Form 48

[12] Section 428 of the 2025 IT Act

[13] Section 271BA of the 1961 IT Act

Disclaimer:

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.