Transfer Pricing Under the Income-tax Act, 2025: Complete Guide for Tax Year 2026-27

Last Updated: 15 April 2026  |  Applicable From: Tax Year 2026-27 (1 April 2026 onwards)  |  Reference: Income-tax Act, 2025 (30 of 2025), as amended by Finance Act, 2026

Transfer pricing is one of the most audited areas of Indian direct tax, and it is also one of the areas where taxpayers often misread the transition to the Income-tax Act, 2025. The new Act, which was enacted on 21 August 2025 and commenced unconditionally on 1 April 2026, replaces the 1961 Act in its entirety but carries forward the transfer pricing framework almost unchanged in substance. The drafting is simpler, the section numbers are different, and the terminology now centres on the single concept of a “tax year”, but the arm’s length principle, the six prescribed methods, the safe harbour election, the Advance Pricing Agreement programme, and the three-tier documentation framework all continue to apply from tax year 2026-27 onwards. This guide, written for tax directors, CFOs and transfer pricing professionals, walks through the full framework as it applies in the first year under the new Act, highlights the drafting changes and the CBDT safe harbour refresh, and flags the interaction with OECD Pillar Two.

Table of Contents

1. The Transfer Pricing Framework Under the 2025 Act
2. Associated Enterprises and International Transaction
3. The Six ALP Methods
4. Safe Harbour Rules and Revised CBDT Margins
5. Advance Pricing Agreements: Unilateral, Bilateral, Multilateral
6. Documentation: Local File, Master File, Country-by-Country Report
7. Specified Domestic Transactions
8. Penalties for Non-Compliance
9. Interaction with Pillar Two (QDMTT)
10. Compliance Calendar for Tax Year 2026-27
11. Expert Insight
12. Key Takeaways
13. Frequently Asked Questions

1. The Transfer Pricing Framework Under the 2025 Act

The Income-tax Act, 2025 (30 of 2025) received Presidential assent on 21 August 2025 and commenced, in its entirety and unconditionally, on 1 April 2026. There is no chapter-wise phase-in: every substantive provision of the Act applies to the tax year 2026-27 (1 April 2026 to 31 March 2027) and onwards. The Act contains 23 chapters, 536 sections and 16 schedules. Although the section count is larger than the 298 sections of the repealed 1961 Act, the drafting is linguistically simpler, the exceptions and provisos have been re-sequenced, and the provisions governing international transactions between associated enterprises are housed in a single, more navigable block rather than the layered Section 92 to 92F structure of the old Act.

Crucially, the substantive content of transfer pricing under the new Act is almost identical to the repealed framework. The Act preserves the deeming provision that any income arising from an international transaction shall be computed having regard to the arm’s length price. It preserves the six methods of ALP computation. It preserves the Transfer Pricing Officer’s reference mechanism under the old Section 92CA and the one-year extension of limitation where a reference is made. It preserves the safe harbour election, the APA programme, the secondary adjustment rule, the three-tier documentation architecture and the penalty code. What it does not preserve is the terminology of “previous year” and “assessment year” — these are replaced by a single “tax year”, which is a 12-month fiscal period from 1 April to 31 March.

For transfer pricing professionals, this means every internal policy, every inter-company agreement, every benchmarking study and every TP report template must be updated to refer to “tax year” and to use the new section cross-references in place of Section 92 to 92F. But the economic substance of the compliance — the functional analysis, the comparability search, the method selection, the arm’s length range — is unchanged.

2. Associated Enterprises and International Transaction

2.1 Associated enterprise

The Income-tax Act, 2025 carries forward the definition of associated enterprise from Section 92A of the repealed Act. Two enterprises are associated if one participates, directly or indirectly, in the management, control or capital of the other, or if one or more persons participate in the management, control or capital of both. This participation test is supplemented by 13 deeming triggers under which two enterprises are deemed to be associated irrespective of actual participation:

• One enterprise holds, directly or indirectly, 26 percent or more of the voting power of the other.
• Any person or enterprise holds 26 percent or more of the voting power in both.
• A loan advanced by one enterprise constitutes 51 percent or more of the book value of the total assets of the other.
• One enterprise guarantees 10 percent or more of the total borrowings of the other.
• More than half of the directors, members of the governing board, or one or more executive directors or executive members of the governing board of one enterprise are appointed by the other.
• The manufacture or processing of goods, or the business, of one enterprise is wholly dependent on the use of know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of a similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights.
• 90 percent or more of the raw materials and consumables required for the manufacture or processing of goods or articles carried out by one enterprise are supplied by the other enterprise at prices and other conditions influenced by the other enterprise.
• The goods or articles manufactured or processed by one enterprise are sold to the other enterprise or to persons specified by the other enterprise, and the prices and other conditions relating thereto are influenced by the other enterprise.
• Where one enterprise is controlled by an individual, the other is controlled by the same individual or a relative.
• Where one enterprise is controlled by a Hindu Undivided Family, the other is controlled by a member of that HUF or a relative.
• Firm/AOP/BOI participation thresholds.
• Mutual interest relationship as may be prescribed.
• Any other prescribed relationship.

The deeming triggers are a safety net: if any trigger is satisfied, the enterprises are associated enterprises even if the actual level of participation is below the general threshold. A common error in audits is to treat the 26 percent test as the only qualifying test. Loan and guarantee triggers frequently bring enterprises into the net that would otherwise be considered independent, particularly in group treasury and captive finance structures.

2.2 International transaction

An international transaction is a transaction between two or more associated enterprises, at least one of which is a non-resident, involving any of the following: purchase, sale or lease of tangible or intangible property; provision of services; lending or borrowing of money; mutual agreement or arrangement for cost or expense allocation, including cost contribution arrangements for research and development; business restructuring or reorganisation; or any other transaction having a bearing on the profits, income, losses or assets of the enterprises.

Intangible property expressly includes marketing intangibles, technology-related intangibles, artistic intangibles, data-processing intangibles, engineering intangibles, customer intangibles, contract intangibles, human capital intangibles, location-related intangibles, goodwill, and methods, programmes, systems, procedures, campaigns, surveys, studies, forecasts and any other similar item. This expansive definition means that almost any cross-border group transaction has a transfer pricing dimension and must be separately identified and benchmarked in Form 3CEB.

2.3 Deemed international transactions

A transaction entered into by an enterprise with a person other than an associated enterprise is deemed to be an international transaction between associated enterprises if there exists a prior agreement between the other person and the associated enterprise, or the terms of the relevant transaction are in substance determined between the other person and the associated enterprise. This anti-avoidance extension — carried forward from the 1961 Act’s Explanation to Section 92B — is critical for Indian subsidiaries that transact on a back-to-back basis with independent contract counterparties at the direction of the overseas parent.

3. The Six ALP Methods

The Income-tax Act, 2025 preserves the same six methods of ALP computation found in the repealed Section 92C. The taxpayer selects the most appropriate method on a transaction-by-transaction basis, having regard to the nature and class of the transaction, the availability of reliable data, the extent of adjustments required, and the comparability of the tested party. No method is presumptively preferred, though TNMM and CUP dominate practice.

The arm’s length range is determined using the 35th to 65th percentile of the comparable data set where the data set consists of six or more comparables. If the assessee’s price falls within that range, no adjustment is made. If it falls outside, an adjustment is made to the median (50th percentile). For data sets with fewer than six comparables, the arithmetic mean with a tolerance band applies. The tolerance band notified for tax year 2026-27 remains at 1 percent for wholesale trading and 3 percent for other cases.

4. Safe Harbour Rules and Revised CBDT Margins

Safe harbour rules offer a streamlined alternative to the full transfer pricing exercise. If a taxpayer elects safe harbour under the provision corresponding to Section 92CB of the repealed Act and reports a margin at or above the notified floor, the arm’s length price is deemed to have been satisfied and no adjustment is made. The election is exercised by filing Form 3CEFA with the return of income and is valid for up to five tax years.

4.1 Revised margins applicable for tax year 2026-27

The two new categories are the most significant change. The Global Capability Centre category recognises the integrated nature of modern GCC operations in India — combining technology development, analytics, shared services and strategic support — which did not fit cleanly into the earlier IT/ITeS and KPO buckets. The contract manufacturing category is entirely new: manufacturing had no safe harbour protection previously, and the 12 percent OP/TC floor for turnover up to ₹500 crore is a material simplification for mid-sized Indian contract manufacturers serving global supply chains.

5. Advance Pricing Agreements: Unilateral, Bilateral, Multilateral

The Advance Pricing Agreement programme, carried forward from Sections 92CC and 92CD of the repealed Act into the 2025 Act, remains the single most effective mechanism for transfer pricing certainty in India. An APA is an agreement between the taxpayer and the CBDT (with, in bilateral and multilateral cases, one or more foreign competent authorities) fixing the arm’s length price or methodology for specified international transactions for up to five future tax years. The taxpayer may also elect a rollback for up to four preceding tax years, giving an effective horizon of nine years.

5.1 The three APA routes

• Unilateral APA: Only between the taxpayer and the Indian authority. Offers certainty in India but does not bind the foreign tax administration — risk of economic double taxation remains.
• Bilateral APA: Between the taxpayer, the Indian authority and one foreign competent authority under the mutual agreement procedure of the relevant tax treaty. Eliminates economic double taxation for the covered transactions and is the gold standard where a treaty partner cooperates actively.
• Multilateral APA: Involves two or more foreign competent authorities. Used where the same international transaction runs through multiple jurisdictions, such as global trading books, principal-licensee structures, or multi-country contract R&D arrangements.

By early 2026, India had signed over 600 APAs cumulatively (unilateral, bilateral and multilateral combined). Average processing time for unilateral APAs has improved to approximately 18 months and for bilateral APAs to approximately 36 months. Approximately 70 percent of APA applicants opt in for the rollback, which provides retrospective certainty for transactions already under scrutiny.

5.2 Procedural improvements

• End-to-end digital filing on the income tax e-filing portal.
• Formalised pre-filing consultation to agree the scope and methodology before the application.
• Streamlined renewal framework: an APA may be renewed within 12 months of expiry on a simplified review where facts and circumstances are substantially unchanged.
• Expansion of the bilateral APA network: active engagement with the United States, United Kingdom, Japan, Australia, Singapore and Germany.

6. Documentation: Local File, Master File, Country-by-Country Report

The Income-tax Act, 2025 retains the three-tier transfer pricing documentation architecture aligned with OECD BEPS Action 13. The architecture is built around the Local File (every taxpayer with international transactions), the Master File (large international groups) and the Country-by-Country Report (very large international groups).

6.1 Local File (Sec 92D equivalent)

Every person entering into an international transaction or a specified domestic transaction must maintain contemporaneous documentation. The Local File must cover the ownership structure, the profile of the multinational group, the industry description, the nature and terms of each transaction, a functional analysis of functions performed, assets employed and risks assumed (FAR analysis), an economic analysis including selection of the most appropriate method and the comparability search, and a record of budgets, forecasts and financial information. The Local File must be ready by the due date for furnishing Form 3CEB and retained for 8 years from the end of the relevant tax year.

6.2 Master File (Sec 92D equivalent read with CbCR rules)

The Master File threshold is triggered where the consolidated group revenue of the international group exceeds ₹500 crore in the preceding tax year and the aggregate value of international transactions of the Indian constituent entity exceeds ₹50 crore (or ₹10 crore in respect of intangibles). The Master File provides a high-level overview of the group’s global business, including the organisational structure, description of business, intangibles, intercompany financial activities and financial and tax positions. It is filed in Form 3CEAA and is due by 30 November following the close of the tax year.

6.3 Country-by-Country Report (Sec 286 equivalent)

The CbCR threshold is triggered where the consolidated group revenue of the international group exceeds ₹6,400 crore in the preceding accounting year (equivalent to the OECD threshold of EUR 750 million). Every Indian constituent entity of a CbCR-in-scope group must file a notification identifying the reporting entity in Form 3CEAC, regardless of whether it is itself the reporting entity. The CbCR itself, in Form 3CEAD, reports jurisdiction-wise revenue, profit, tax paid, tax accrued, stated capital, accumulated earnings, number of employees and tangible assets. It is due 12 months from the end of the reporting accounting year.

7. Specified Domestic Transactions

Specified domestic transactions (SDT) are carried forward from Section 92BA of the repealed Act but with the significantly reduced scope effected by Finance Act, 2017 and preserved in the 2025 Act. SDT coverage is now limited to transactions that affect profit-linked deductions and concessional regimes where profit shifting within India could erode the base, such as tax holiday units and power-generating units. Transactions referred to in the old Section 40A(2)(b) — essentially related-party expenditure in general — are no longer within the SDT perimeter, a point where articles written before 2017 remain misleading. The SDT threshold continues to be an aggregate of ₹20 crore in the tax year.

8. Penalties for Non-Compliance

9. Interaction with Pillar Two (QDMTT)

India has introduced a Qualified Domestic Minimum Top-up Tax (QDMTT) aligned with OECD Pillar Two GloBE rules for in-scope multinational groups with consolidated group revenue exceeding EUR 750 million. Transfer pricing outcomes must now be modelled against the 15 percent effective tax rate floor on a jurisdictional basis. Groups benefiting from concessional regimes such as the Section 115BAB-equivalent 15 percent manufacturing rate or SEZ tax holidays may find the concession partially neutralised by QDMTT.

From a transfer pricing perspective, the key interactions are: (i) the CbCR data reported under Sec 286-equivalent directly feeds the Transitional CbCR Safe Harbour under Pillar Two; (ii) adjustments made to Indian taxable income through TP assessments change the jurisdictional ETR and may affect top-up tax computations; and (iii) intra-group IP, financing and business restructuring planning must now be tested for both ALP compliance and GloBE rule neutrality.

10. Compliance Calendar for Tax Year 2026-27

Related reading within our Income-tax Act, 2025 series

• Income-tax Act, 2025 — Complete Overview and Transition Guide
• Tax Year Concept Under the Income-tax Act, 2025
• TDS Rates Under the Income-tax Act, 2025 for Tax Year 2026-27
• Corporate Tax Rates and MAT Under the 2025 Act
• International Tax and DTAA Provisions Under the 2025 Act
• GAAR Under the Income-tax Act, 2025
• New Regime vs Old Regime: Tax Year 2026-27 Decision Guide

Expert Insight

Key Takeaways

• The Income-tax Act, 2025 (30 of 2025) received assent on 21 August 2025 and commenced unconditionally on 1 April 2026 — the first tax year is tax year 2026-27.
• The transfer pricing framework is carried forward from the 1961 Act — associated enterprises, international transaction, ALP, six methods, safe harbour, APA and three-tier documentation all continue in substance.
• “Tax year” replaces “previous year” and “assessment year” — every internal TP document must be updated.
• Six ALP methods remain: CUP, RPM, CPM, PSM, TNMM and the Other Method.
• Safe harbour margins have been revised for tax year 2026-27, with reductions for IT/ITeS and KPO and new categories for GCCs (18% OP/OC) and contract manufacturing (12% OP/TC).
• Master File threshold: consolidated group revenue > ₹500 crore with Indian intercompany > ₹50 crore. CbCR threshold: ₹6,400 crore consolidated revenue.
• Form 3CEB for tax year 2026-27 is due 31 October 2027; Master File 30 November 2027; CbCR 31 March 2028.
• Pillar Two QDMTT interacts with TP outcomes — concessional regimes may be neutralised.
• APA remains the most effective certainty tool — unilateral in ~18 months, rollback covers 4 prior years, effective horizon of 9 years.

Frequently Asked Questions