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2026.03.26
India's transfer pricing (TP) regime is a comprehensive regulatory framework designed to ensure that cross-border transactions between related enterprises are conducted at an arm's length price (ALP). India is known as one of the world's most active countries for TP audits and disputes, and when Japanese companies transact with their India subsidiaries or affiliates, TP documentation and appropriate pricing are among the most critical management issues.
The current transfer pricing regulations are set out in Sections 92A-92F of the Income Tax Act, 1961, but under the new Income Tax Act, 2025, effective April 1, 2026, these provisions will be reorganized and strengthened into Chapter X. This is a comprehensive overhaul of the tax law for the first time in about 60 years, and it includes several important changes in the transfer pricing field as well.
The new Income Tax Act, 2025 modernizes India's transfer pricing system and strengthens its alignment with OECD/BEPS guidance. Here are the practically important changes for Japanese companies.
One of the most notable changes is the introduction of the Multi-Year ALP Determination system. In place of the traditional annual ALP determination, companies will be able to determine the ALP in three-year blocks for similar international transactions or Specified Domestic Transactions (SDTs). Specifically, this is an opt-in system that allows the ALP determined for one year to be applied to "similar" transactions for the following two years. This system will take effect from April 1, 2026.
This change is expected to significantly reduce the administrative burden on taxpayers. In particular, for companies with routine related-party transactions whose terms do not vary greatly from year to year (for example, ongoing raw material supply or IT services), it offers two benefits: lower TP documentation costs and greater predictability. However, the definition of "similar" transactions and the details of the application conditions are expected to be clarified in implementing rules to be issued in the future.
Section 163(b) of the new law substantially strengthens the framework for intangible asset transactions. In addition to the traditional patents, trademarks, and copyrights, digital rights, customer lists, industrial designs, franchise rights, and other business and commercial rights are now explicitly named as subject to transfer pricing regulation. This is intended to ensure appropriate taxation of intangible asset transfers in the digital economy.
The impact on Japanese companies is that stricter ALP calculation and documentation will be required for transfers of software licenses, brand usage rights, know-how, and technical information provided to India subsidiaries. In particular, regarding marketing intangibles, Indian tax authorities tend to actively assert attribution of intangible asset value created through an India subsidiary's advertising and promotional activities, so caution is needed.
The three-tier documentation requirements aligned with OECD/BEPS Action 13 (master file, local file, and country-by-country report) have been further clarified under the new law. The obligation to submit a master file (describing the group's overall business overview, intangible assets, financing activities, etc.) applies to groups with consolidated revenue of 5 billion rupees (about JPY 9 billion) or more. A Country-by-Country Report (CbCR) must be submitted by groups with consolidated revenue of 64 billion rupees (about JPY 111 billion) or more (raised from the previous 55 billion rupees to align with the OECD's EUR 750 million standard).
Safe harbor rules are a system under which transactions meeting certain conditions are excluded from TP audits if the profit margin or price designated by the tax authorities is applied. For taxpayers, this is a practically important option that can substantially reduce the risk of TP disputes.
The application of the safe harbor rules has been confirmed for the two years AY2025-26 and AY2026-27 (i.e., FY2024-25 and FY2025-26). The two consecutive years of extension restore the previous practice, providing greater planning stability for taxpayers using the safe harbor. The transaction value threshold has also been raised from 2 billion to 3 billion rupees, allowing more companies to benefit from the safe harbor.
The main transaction categories covered by the safe harbor are the provision of IT and ITES (IT Enabled Services), KPO (Knowledge Process Outsourcing) services, manufacturing and export of auto parts, intra-group loans, and corporate guarantees. For example, for IT services, the safe harbor applies if the operating profit margin is 17%-18% or more of operating costs. The 2025 amendment expanded the definition of "core auto parts" to include lithium-ion batteries for electric and hybrid vehicles.
The Advance Pricing Agreement (APA) is actively used in India as the most effective means of proactively resolving transfer pricing risk.
In FY2024-25, India's CBDT (Central Board of Direct Taxes) signed a record 174 APAs. This included unilateral APAs (UAPA) and 65 bilateral APAs (BAPA), including India's first multilateral APA. CBDT then signed 219 APAs in FY2025-26, setting a new annual record. For Japanese companies, using BAPAs under the Japan-India tax treaty is especially effective, since agreement between the Indian and Japanese tax authorities can effectively eliminate the risk of double taxation.
APAs are particularly effective for high-TP-risk transactions, such as complex transactions involving intangible assets, large captive service centers, marketing-intensive sales models, and contract manufacturing agreements with large profit margin volatility. India market entry For companies, filing an APA requires upfront cost and time, but the benefit of securing price stability for 5 years (up to 9 years including extensions) is substantial.
It is important to understand the areas that Indian tax authorities pay particular attention to in transactions between a Japanese parent company and its India subsidiary, and to take countermeasures in advance.
Royalties and technical fees charged by a Japanese parent company to its India subsidiary are the transaction types most frequently subject to TP adjustment. Indian tax authorities strictly examine the reasonableness of the royalty rate, the substance of the technology provided, and the subsidiary's contribution to profit. In particular, when a parent company charges a brand usage fee to a subsidiary that has built brand value in the India market through its own marketing activities, the attribution of "marketing intangible" value becomes a point of contention.
Management service fees charged by a Japanese parent company to its India subsidiary are also a priority audit target for Indian tax authorities. Companies are required to prove the substance of the services (a benefit test), exclude duplicate services, and set an appropriate allocation basis. It is not permitted to pass on to the subsidiary the cost of activities the Japanese parent conducts for its own benefit as a "shareholder activity."
Setting the interest rate on parent-subsidiary loans is one of the higher TP risk areas. Indian tax authorities require an arm's length interest rate calculation that considers the borrowing currency, loan term, credit risk, and presence of collateral. Under the safe harbor rules, the SBI base rate plus a certain spread is indicated as the benchmark for rupee-denominated loans, while LIBOR (or its successor, SOFR) plus a spread is the general benchmark for foreign currency loans.
Setting the consideration for the transfer of technology and know-how is also an important risk area. Due to the expanded definition of intangible assets under the new law, digital rights and data access rights, which were not clearly subject to TP regulation before, may also become subject to ALP examination.
India's TP documentation requirements are among the strictest in the world. Preparing and retaining appropriate documentation by the deadline is the best defense against a TP audit.
The local file must include details of related-party transactions (counterparty, transaction content, transaction amount), the reasons for selecting the method used to calculate the ALP, the process and results of selecting comparable transactions, details of the economic analysis (benchmark study), and copies of related-party agreements. The documentation must be prepared by the corporate tax filing deadline, which for a company with international transactions is 8 months after the end of the fiscal year (November 30 for a March fiscal year-end). The accountant's report (Form 3CEB) must be submitted one month earlier, by October 31.
A penalty of 2% of the transaction value is imposed for failing to prepare or maintaining deficient TP documentation. In addition, if a TP adjustment is made, interest is charged in addition to the additional tax. If deemed intentional underreporting, even heavier penalties may apply.
India is known as one of the world's most active countries for transfer pricing audits and disputes. Documentation proving that cross-border transactions between a Japanese parent company and its India subsidiary are conducted at arm's length prices, and setting appropriate prices, become critical management issues. Insufficient preparation raises the risk of adjustments and additional tax assessments.
In a comprehensive overhaul of the tax law for the first time in about 60 years, transfer pricing provisions will be reorganized and strengthened. Notably, a multi-year arm's length price determination system will be introduced, an opt-in system that allows prices to be determined on a multi-year basis for similar transactions. This is expected to give companies with routine related-party transactions lower documentation costs and greater predictability.
In addition to the traditional patents, trademarks, and copyrights, digital rights, customer lists, industrial designs, and franchise rights are now explicitly named as subject to transfer pricing regulation. Stricter price calculation and documentation will be required for transfers of software licenses, brand usage rights, and know-how that Japanese companies provide to their India subsidiaries. Caution is especially needed since the attribution of marketing intangible value is likely to become a point of contention.
Yes. The safe harbor rules are a system under which transactions are excluded from audit if the profit margin or price designated by the tax authorities is applied, substantially reducing dispute risk. Covered transactions include IT and ITES services, contract development, intra-group loans, and guarantees. The application threshold has also been raised, making it easier for more companies to use.
Both are transaction types that Indian tax authorities pay particular attention to and that tend to be subject to adjustment. For royalties, the reasonableness of the royalty rate and the contribution to the subsidiary's profit are strictly examined; for management service fees, proof of the substance of the services and an appropriate allocation basis are strictly examined. It is not permitted to pass on to the subsidiary the cost of shareholder activities that the Japanese parent conducts for its own benefit.
The starting point is to establish a tax strategy from the early stages of entry, including the subsidiary's capital structure, the pricing policy for related-party transactions, and the basis for determining royalty rates. Building on this, companies should consider using advance agreement systems for high-risk transactions and examine the applicability of safe harbors for routine services. Preparing documentation within the filing deadline and establishing a system for dialogue with the authorities through local tax experts forms the foundation.
Where businesses go wrong in India Here is a summary of practical recommendations for avoiding this and minimizing TP dispute risk.
First, formulate a tax strategy including a transfer pricing policy from the early stages of entering India. It is important to prepare in advance the capital structure at the time of subsidiary establishment, the pricing policy for related-party transactions, and the basis for determining royalty rates. Second, actively use the APA system. Companies should consider filing a BAPA in particular for high-risk transactions such as royalties, management service fees, and intra-group financing.
Third, examine the applicability of the safe harbor rules. For IT and ITES services and contract manufacturing transactions, using the safe harbor is the simplest way to reduce risk. Fourth, cultural gaps engage in dialogue with the Indian tax authorities with an understanding of this. India's tax audits are centered on in-person interviews, making appropriate communication through local tax experts essential. localization Formulating a tax strategy along these lines forms the foundation that supports the long-term success of an India business.
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