Transfer Pricing Applicability in India: A Startup Guide

You raised from a US fund, set up a Delaware parent, and your Indian company now bills that parent for engineering work. The day that first invoice went out, transfer pricing applicability switched on, whether or not anyone told you.

Transfer pricing is not just a big-MNC problem. The moment your Indian company transacts with a foreign group entity, the arm’s length rules apply and a Form 3CEB falls due, with no minimum value. This guide covers the two tests that matter first: what makes two entities Associated Enterprises, and what counts as an international transaction. Get those right and the rest of the compliance follows logically.

1 When does transfer pricing applicability kick in?

Transfer pricing applicability rests on a simple two-part test. If both parts are true, the rules apply to you:

1. The two parties to the transaction are Associated Enterprises (Section 162, old Section 92A), and
2. The dealing between them is an international transaction (Section 163, old Section 92B), meaning at least one of them is a non-resident.

When both are met, every such transaction must be priced at arm’s length: the price and terms that independent, unrelated parties would have agreed in a comparable deal. The idea is to stop a group from shifting profit out of India (or into it) by charging its own entities a price that suits the group’s tax position rather than the market.

2 What makes two entities Associated Enterprises?

Section 162 (old Section 92A) defines an Associated Enterprise (AE). The umbrella idea is that one enterprise participates in the management, control or capital of the other, or the same persons participate in both. Because “control” is vague on its own, the law then lists specific, objective tests. Meeting any one of them makes the two enterprises associated.

The takeaway for founders: an AE relationship is about influence and dependence, not just an equity stake. A venture debt line or a parent guarantee can create the link even where shareholding does not. And “indirectly” matters, so a holding through an intermediate entity still counts toward the 26%.

3 What counts as an international transaction?

Section 163 (old Section 92B) defines the international transaction. It is a transaction between two or more Associated Enterprises, at least one of which is a non-resident, that involves any of a broad list of dealings. It is deliberately wide:

• Purchase, sale, transfer, lease or use of tangible property (goods, equipment).
• Purchase, sale, transfer, lease or use of intangible property (software, IP, know-how, brand).
• Provision of services (the classic captive dev-centre or ITeS billing).
• Lending or borrowing money (intercompany loans, advances).
• Any other transaction that has a bearing on the profits, income, losses or assets of the enterprises.
• Cost-sharing and cost-contribution arrangements, including cross-charges for shared management, and ESOP recharges.

That last catch-all is the one founders underrate. A management fee, an interest-free loan, a shared-services allocation, or an ESOP cross-charge from the parent all sit squarely inside the definition, even though no “product” changes hands.

4 The arm’s length principle, and why one rupee matters

Once a transaction is caught, its price must equal the arm’s length price (ALP): what unrelated parties would have charged in a comparable situation. You establish the ALP using one of five prescribed methods under Section 165 (old Section 92C), chosen by a FAR analysis (functions performed, assets used, risks assumed). For most Indian startups running a captive dev-centre, the answer is TNMM on a cost-plus basis, but the method choice is a topic in its own right.

There is no minimum value

This is the single fact founders most often get wrong. Form 3CEB, the accountant’s report under Section 172 (old Section 92E), has no monetary threshold. If you have even one international transaction with an AE during the year, a chartered accountant must certify Form 3CEB, and it is due by 31 October. One rupee of billing is enough to make the filing mandatory.

What scales with value is the documentation, not the filing:

5 Specified Domestic Transactions, the domestic cousin

Transfer pricing is not only cross-border. Section 164 (old Section 92BA) extends arm’s length testing to certain purely domestic related-party dealings, called Specified Domestic Transactions (SDTs). These include transactions with a related unit that claims a profit-linked tax holiday, and certain payments to related persons where profit could be shifted between two Indian entities.

The important relief for early-stage companies: SDT rules apply only when the aggregate of such transactions exceeds ₹20 crore in the year. Below that, they simply do not bite. So a typical startup with two Indian group companies is usually outside SDT, while its cross-border dealings with a foreign parent are caught from the first rupee.

6 The four mistakes we see most

Across startup engagements, the same four errors come up again and again. Each is cheap to avoid up front and expensive to fix in an assessment.

• No intercompany agreement. Billing the parent with nothing in writing. The agreement is what defines the service, the method and the markup, and it is the first document an officer asks for.
• Markup set too low. Charging the parent cost, or cost plus a token 5%, when comparable captive centres earn far more. Under the Safe Harbour rules from TY 2026-27, software development, ITeS, KPO and contract R&D are set at a unified 15.5% cost-plus markup, which is a useful sense-check on what “arm’s length” looks like.
• Interest-free intercompany loan. Lending to or from the parent at 0%. The officer imputes market interest and can add a secondary adjustment requiring repatriation.
• ESOP cross-charge mishandled. The parent grants options to Indian employees and recharges the cost, or fails to, without treating it as the international transaction it is. See ESOP cross-charge and transfer pricing.

7 Your applicability checklist

1. Map your group: list every entity, its residency, and who holds what percentage.
2. Run the Section 162 tests: shareholding (26%), loans (51% of assets), guarantees (10%), board control, dependence. Any one makes an AE.
3. Identify every dealing with a foreign AE: services, goods, loans, guarantees, cross-charges, ESOP recharges.
4. Confirm at least one party is a non-resident, so it is an international transaction under Section 163.
5. Accept that Form 3CEB is due (31 October, CA-certified) if even one such transaction exists.
6. Check whether aggregate international transactions exceed ₹1 crore, triggering a Rule 10D TP study.
7. Check Specified Domestic Transactions only if related-party domestic dealings exceed ₹20 crore.
8. Sign an intercompany agreement and set the method and markup before the first invoice, not after.

8 FAQs

Disclaimer: This article is general information as of August 2026 and is not tax or legal advice. India’s transfer pricing law, section numbers under the Income-tax Act, 2025, thresholds and Safe Harbour rates can change. Confirm your specific obligations with a qualified professional before acting.