AS | Ankit Sarawagi|Founder, CFOmatrix·August 2026·10 min read | Transfer Pricing |
Your CA signs a one-page Form 3CEB and you assume transfer pricing is handled. It is not. Behind that form sits a much thicker file that Rule 10D says you must have built before you filed, and that is the document a transfer pricing officer actually asks to see.
Transfer pricing documentation is the study, often called the Local File, that proves the price you charged your foreign parent or subsidiary was at arm’s length. Once your international transactions cross a modest threshold, keeping it is not optional. This guide covers the ₹1 crore trigger under Section 171 (old 92D), what the file must contain, when it has to be ready, how long to keep it, and the 2% penalty that lands if it is missing.
- Governing law
- Rule 10D read with Sec 171 of the Income-tax Act, 2025 (old Sec 92D).
- When mandatory
- Aggregate international transactions with an AE exceed ₹1 crore in the year.
- What it is
- A TP study / Local File: ownership, group profile, FAR analysis, method, benchmarking, arm’s length range.
- Deadline
- Contemporaneous: ready by the Form 3CEB and return date, 31 October.
- Penalty if missing
- 2% of the value of the international transaction.
1 When transfer pricing documentation becomes mandatory
Two different obligations get confused here, so separate them cleanly.
Form 3CEB is the accountant’s report under Sec 172 (old 92E). It is required for any international transaction with an associated enterprise, with no minimum value. Even a single ₹5 lakh cross-charge to your US parent means a CA must certify a 3CEB.
The TP study or Local File under Rule 10D and Sec 171 is the detailed backing documentation. It becomes mandatory only once your aggregate international transactions exceed ₹1 crore in the financial year. Below that, you are expected to be able to substantiate the arm’s length price but the prescribed Rule 10D set is not compulsory. For specified domestic transactions the documentation threshold is higher, at over ₹20 crore.
2 What a TP study / Local File must contain
Rule 10D lists the documents in detail. In practice they group into three blocks: who you are, what you did, and why the price was arm’s length. This is the spine of every Local File.
| Rule 10D document | What it covers |
|---|---|
| Ownership structure | Shareholding of the Indian entity, and the AEs it deals with, with the chain up to the ultimate parent. |
| Group profile | Description of the multinational group, each AE involved, and its role and location. |
| Business & industry | Nature of your business, the industry, market conditions and the commercial context of the transactions. |
| Nature & terms of transactions | Each international transaction, its quantum, the terms, and the intercompany agreements behind it. |
| FAR analysis | The functions performed, assets employed and risks assumed by each party. This is what justifies who earns what. |
| Method selection | The most appropriate method (CUP, RPM, CPM, TNMM or PSM) and a reasoned note on why it was chosen and others rejected. |
| Comparables & benchmarking | The comparable companies or transactions, the search process, adjustments, and the resulting arm’s length range. |
| Arm’s length price / range | The determination of the ALP, and where your actual margin sits inside the arm’s length range. |
| Supporting documents | Agreements, invoices, price lists, correspondence, government publications, and any expert or industry reports relied on. |
For a typical Indian captive development centre billing its parent on a cost-plus basis, the heavy lifting is the FAR analysis (you are a low-risk service provider) and the benchmarking that fixes the arm’s length markup. Get those two right and the rest is descriptive.
3 The mistake that guts the whole file: no intercompany agreement
The single most common gap I see in startup Local Files is not a wrong markup. It is a working relationship with a foreign parent that runs for years without a signed intercompany agreement. Money moves, invoices go out, but nothing on paper says what was agreed.
Rule 10D expressly asks for the terms of the transaction and the agreements behind it. When there is no agreement, the FAR analysis has nothing to stand on: the officer cannot see who bears which risk, what the markup is meant to reward, or even that the transaction is what you claim it is. A benchmarking study bolted onto a non-existent contract looks exactly like what it is, a story written after the fact.
4 Contemporaneous: it must exist before you file
Rule 10D documentation has to be contemporaneous. That means the study should be in place by the due date for the accountant’s report in Form 3CEB and the return of income, which is 31 October following the financial year. You cannot wait for a notice and assemble the file then.
When your case is picked for a transfer pricing audit, the officer issues a notice and you must produce the documentation within the time allowed, generally 30 days and extendable by up to a further 30. A file dated after the notice, or visibly written in a hurry, undermines its own credibility even where the pricing is defensible.
5 A worked example: Brewly’s Local File
Numbers make this concrete. Here is how the threshold, the study and the penalty play out for a typical captive.
Brewly Technologies Pvt Ltd is the India entity of Brewly Inc, its US parent. Brewly India runs the product engineering team and bills the parent on a cost-plus basis. For FY 2025-26 its operating cost base is ₹8 crore, and it charges the parent cost plus a 15.5% markup, so its service fee is 8 crore × 1.155 = ₹9.24 crore. That single international transaction is far above ₹1 crore, so Rule 10D documentation is mandatory.
Brewly’s Local File sets out the group ownership, describes Brewly India as a low-risk captive service provider in the FAR analysis, selects TNMM with the profit level indicator as operating profit over operating cost (PLI = OP/OC), and benchmarks against comparable Indian IT service companies. The comparables show an arm’s length range of, say, 12% to 18%, so Brewly’s 15.5% markup sits comfortably inside it. The signed services agreement, the monthly invoices and the cost workings all back the same 15.5% story. Now suppose Brewly had kept no Rule 10D file. The penalty for failure to maintain documentation is 2% of the transaction value: 2% × ₹9.24 crore = ₹18.48 lakh, for a paperwork failure alone, before any adjustment to the margin itself.
6 Penalties and how long to keep the file
The documentation regime has real teeth, and the penalties stack independently of any adjustment to your income.
| Failure | Consequence |
|---|---|
| Not keeping / maintaining Rule 10D documentation | 2% of the value of each international transaction. |
| Not reporting a transaction, or maintaining incorrect information | A further 2% of the value of that transaction. |
| Not furnishing documentation when the officer calls for it | 2% of the transaction value, on top of the maintenance penalty. |
| Not furnishing Form 3CEB | A fixed penalty of ₹1,00,000. |
On retention, Rule 10D requires the documentation to be kept for eight years from the end of the relevant assessment year. For FY 2025-26 (assessment year 2026-27) that means holding the file until roughly 2035. Keep it in a form you can actually produce, agreements, benchmarking database extracts and workings included, not just a signed PDF of the final study.
7 Your documentation checklist
- Add up all international transactions for the year and check whether they cross ₹1 crore in aggregate.
- Put a signed intercompany agreement in place for every AE flow before it starts, stating scope, cost base and markup.
- Build the FAR analysis: functions, assets and risks for each party, matching your captive’s real role.
- Select and justify the method (usually TNMM for a captive) and document why alternatives were rejected.
- Run the benchmarking, record the comparables and search process, and fix the arm’s length range.
- Confirm your actual margin sits inside the range, and reconcile it to your books and invoices.
- Have the full Local File ready by 31 October, before the CA certifies Form 3CEB.
- File Form 3CEB, then retain the whole set for 8 years from the end of the assessment year.
Not sure if Rule 10D documentation applies to you?
Use our free Transfer Pricing Applicability Checker: enter your foreign parent or subsidiary and what flows between you, and see whether you owe Form 3CEB, a Local File, a Master File or CbCR, and at what thresholds.
Check my transfer pricing8 FAQs
When is a transfer pricing study or Local File mandatory in India?
What must Rule 10D transfer pricing documentation contain?
Does transfer pricing documentation have to be ready before filing?
How long must transfer pricing documentation be kept?
What is the penalty for not maintaining transfer pricing documentation?
Related guides & tools
Transfer pricing for startups in India: the complete guide →
Form 3CEB: the accountant’s report explained →
Transfer pricing benchmarking study: comparables & the arm’s length range →
Transfer Pricing Applicability Checker (free tool) →
AS | Founder, CFOmatrix | Finance Strategy & Compliance CFOmatrix helps Indian startups build finance, tax and compliance functions that stand up to investor due diligence, from process and controls to the filings and the numbers behind them. |
Disclaimer: This article is general information as of August 2026 and is not tax or legal advice. Transfer pricing law, rules and thresholds can change, and their application depends on your specific facts. Confirm your obligations with a qualified transfer pricing professional before acting.