Transfer pricing documentation is the first line of defence in any international tax audit. Hyderabad hosts a large number of global capability centres and Indian subsidiaries of multinational groups, and every one of them must show that its transactions with group companies are priced at arm's length.

Who needs transfer pricing documentation

Any taxpayer that enters into an international transaction with an associated enterprise must file an accountant's report in Form 3CEB. Detailed documentation under section 92D and rule 10D is mandatory where the aggregate value of international transactions exceeds ₹1 crore. Typical transactions include:

  • Software development, IT-enabled and other services provided to a parent company
  • Purchase or sale of goods within the group
  • Royalties, management fees and cost recharges
  • Inter-company loans, guarantees and share issues

Specified domestic transactions above the prescribed limit are also covered.

Key deadlines

  • Form 3CEB must be filed one month before the due date of the income tax return — for most companies, by 31 October.
  • Documentation must be contemporaneous: it must exist by the due date for Form 3CEB, not be prepared after a notice is received.
  • Master file (Form 3CEAA) and country-by-country report (Form 3CEAD) apply to larger multinational groups crossing the prescribed thresholds.

What good documentation contains

  1. Group and business overview: ownership structure, the industry and the business of the Indian entity.
  2. Functional analysis: the functions performed, assets used and risks assumed by each party. This drives everything that follows — a captive software service provider bearing limited risk should earn a stable cost-plus return, not a share of group profit.
  3. Choice of method: the most appropriate of the prescribed methods — comparable uncontrolled price, resale price, cost plus, profit split, transactional net margin (TNMM) or the "other method". TNMM is used most often for services.
  4. Benchmarking study: comparable companies selected from recognised databases with clear, consistently applied filters. Where there are at least six comparables, the arm's length range is the 35th to 65th percentile of their margins, generally using data for the current year and up to two preceding years.
  5. Reconciliation with the books: the transactions in the study must agree with the audited financial statements and Form 3CEB.

Penalties for getting it wrong

Failure to keep or furnish documentation can attract a penalty of 2% of the value of each international transaction, and failure to file Form 3CEB carries a separate penalty. Adjustments made by the Transfer Pricing Officer also lead to additional tax and interest, and can be disputed only through lengthy appeals.

Practical tips

  • Update the functional analysis whenever the business model changes, for example when a centre takes on higher-value work.
  • Monitor margins during the year, not only at year end, so that pricing can be adjusted before the books close.
  • Consider the safe harbour rules for eligible IT and ITeS services, which offer certainty in exchange for a prescribed margin.

Our international tax practice prepares audit-ready transfer pricing documentation and represents clients before the Transfer Pricing Officer and in appeal.

Frequently asked questions

Is transfer pricing documentation mandatory in India?

Detailed documentation is mandatory where the aggregate value of international transactions with associated enterprises exceeds ₹1 crore. Form 3CEB is required for any such international transaction.

What is the due date for filing Form 3CEB?

One month before the due date of the income tax return — for most companies, 31 October.

Which transfer pricing method is used for IT services companies?

Most commonly the transactional net margin method (TNMM), with the Indian company earning a markup on its costs benchmarked against comparable companies.

What is the penalty for not maintaining transfer pricing documentation?

A penalty of 2% of the value of each international transaction, with a separate penalty for failing to file Form 3CEB.

Section references are to the Income-tax Act, 1961. The Income-tax Act, 2025 applies from tax year 2026-27 and contains corresponding provisions.

This article is general information based on the law as at the date shown and is not professional advice. Please consult us before acting on it.