The last full compliance cycle under the Income-tax Act, 1961 before the Income-tax Act, 2025 takes effect — and the year in which TPO scrutiny of GCC margins, intra-group services and tax-holiday units has become the norm rather than the exception. A jurisdiction briefing by SBC International Tax Practice for ITR World Tax.
31 Oct 2026 FORM 3CEB · S.92E | ₹300 cr SAFE HARBOUR CEILING (FA 2025) | 35th–65th PERCENTILE RANGE · RULE 10CA | 200% MISREPORTING PENALTY · S.270A | 3 years MULTI-YEAR ALP BLOCK |
1. Executive summary
FY 2025-26 is a transition year in three senses. It is the final previous year assessed under the Income-tax Act, 1961, with proceedings for AY 2026-27 preserved by the savings clause of the Income-tax Act, 2025 (effective 1 April 2026). It is the first year in which the Finance Act 2025 reforms — the ₹300 crore safe harbour ceiling and the option to carry a determined arm's length price forward for two further years — are available in practice. And it is the year in which India's Transfer Pricing Officers have visibly moved from volume to depth: fewer, larger adjustments, targeted at Global Capability Centre (GCC) mark-ups, intra-group service charges, financial guarantees, AMP intensity and tax-holiday units.
Our review of FY 2024-25 and FY 2025-26 engagements shows that most adjustments are not lost on the law — they are lost on evidence discipline. The comparable search cannot be reproduced, the Form 3CEB does not reconcile to the audited financials, the intercompany agreement post-dates the transaction, or the Indian Local File and the counterparty's file tell two different functional stories. This article sets out the twelve checkpoints that decide FY 2025-26 outcomes, the industry issues that will shape the audit cycle, the dispute-resolution architecture, the case for automation, and a working compliance calendar for the March 2026 year-end.
THREE POSITIONS SBC IS TAKING INTO FY 2025-26 1. Arm's length is a two-sided obligation. An Indian cost-plus that the counterparty jurisdiction cannot defend is not an arm's length price — it is a MAP case waiting to happen. Section 92(3) prevents India from lowering Indian income, so the only defence to double taxation is symmetric documentation on both sides. 2. Tax-holiday units are not TP-neutral. Section 92C(4) denies any deduction under section 10AA or Chapter VI-A on income enhanced by a TP adjustment, and sections 80-IA(8) and 80-IA(10) apply an arm's length standard to inter-unit transfers and 'more than ordinary profits'. Specified domestic transactions (s.92BA) above ₹20 crore must be benchmarked and reported. 3. Documentation must be restorable, not just filed. A section 271G information notice gives 30 days. If the agreement, the board approval, the cost-base working and the search strategy cannot be produced in that window, the ALP is decided by the TPO's own search. |
2. Regulatory framework at a glance
The Indian transfer pricing code sits in Chapter X (sections 92 to 92F) of the Income-tax Act, 1961, Rules 10A to 10THD of the Income-tax Rules, 1962, and section 286 (CbCR). The table below maps each obligation to its trigger and its FY 2025-26 deadline.
Obligation | Provision | Trigger / threshold | FY 2025-26 deadline |
Arm's length pricing of international transactions and SDTs | s.92, 92B, 92BA, 92C; Rules 10B, 10C, 10CA | Any international transaction with an AE (s.92A); deemed transactions (s.92B(2)); SDTs > ₹20 cr | Contemporaneous — by 31 Oct 2026 |
Accountant's report — Form 3CEB | s.92E; Rule 10E | Every international transaction / SDT, irrespective of value | 31 Oct 2026 |
Local documentation (Rule 10D) | s.92D(1); Rule 10D | Aggregate international transactions > ₹1 cr (below: ALP still required, records sufficient to substantiate) | Maintained by 31 Oct 2026; retained 8 years |
Master File — Forms 3CEAA / 3CEAB | s.92D(4); Rule 10DA | Part A: all constituent entities. Part B: group revenue > ₹500 cr AND international transactions > ₹50 cr (or intangible-related > ₹10 cr) | 3CEAB 31 Oct 2026 (designation); 3CEAA 30 Nov 2026 |
CbCR — Forms 3CEAC / 3CEAD | s.286; Rule 10DB | Group consolidated revenue > ₹6,400 cr | 3CEAC ≥ 2 months before CbCR due; 3CEAD 12 months from reporting year-end |
Safe harbour — Form 3CEFA | s.92CB; Rules 10TA–10TG (as amended 2025) | Eligible transactions up to ₹300 cr (IT/ITeS, KPO, contract R&D, loans, guarantees, auto components) | With / before return — 30 Nov 2026 |
Multi-year ALP option — Form 3CEFC | s.92CA(3B)–(3C) (Finance Act 2025); Rule 10TIA | Election before the TPO for ALP determined for one year to apply to the two following years for similar transactions | During TPO proceedings (per Rule 10TIA) |
Secondary adjustment | s.92CE; Rule 10CB | Primary adjustment > ₹1 cr (suo motu, TPO, APA, MAP, safe harbour) | Repatriation within 90 days; else imputed interest or one-time 18% tax (s.92CE(2A)) |
APA and rollback | s.92CC, 92CD; Rules 10F–10T; Form 3CED / 3CEF | Unilateral / bilateral / multilateral; 5 years + 4-year rollback | Annual compliance report (3CEF) within 30 days of return due date |
Dispute Resolution Panel | s.144C | Eligible assessee receiving a draft order with a TP variation | Objections within 30 days; DRP directions within 9 months |
MAP | Rule 44G; Form 34F; CBDT MAP Guidance | Double taxation under an applicable DTAA | 24-month resolution target |
Penalties | s.271AA (2%), 271BA (₹1 lakh), 271G (2%), 271GB, 270A (50% / 200%) | Failure to maintain / report / furnish; under-reporting and misreporting | Immunity under s.270AA where conditions met |
Table 1 — Indian TP obligations, FY 2025-26 (previous year ending 31 March 2026). Tolerance range for AY 2026-27: 1% (wholesale trading) / 3% (others), per the annual CBDT notification.
3. The twelve checkpoints that decide FY 2025-26
Each checkpoint below is drawn from a live engagement pattern. The 'what good looks like' column is the standard we apply in SBC reviews; the 'lapse' column is what we most often find on inherited files.
# | Checkpoint | What good looks like | The lapse we keep seeing | Consequence |
1 | Transaction inventory & AE map | Every AE identified under the 26% / control / dependency tests of s.92A; deemed international transactions under s.92B(2) captured; capital-account and free-of-cost items listed | ESOP recharges, corporate guarantees, interest-free advances, FOC services and reimbursements omitted from Form 3CEB | s.271AA (2%); adverse inference; TPO benchmarks the omitted flow at its own rate |
2 | Characterisation follows conduct | FAR analysis written from job descriptions, org charts, approvals and board minutes; DEMPE mapped for intangibles | GCC labelled 'routine captive' while its engineers own product roadmaps; risk control functions in India ignored | Re-characterisation to entrepreneur / profit-split; mark-up lift |
3 | Method, tested party, PLI | Most appropriate method reasoned (Rule 10C); tested party is the least complex; PLI matched to cost base | TNMM applied by default; foreign tested party without financials; PLI switched year on year | Rejection of analysis; TPO adopts own PLI |
4 | Comparable search is reproducible | Seven-layer Prowess / NIC categorisation; accept-reject matrix with reasons; filters (RPT ≤ 25%, FY alignment, persistent losses, turnover) documented | Prior-year set rolled forward; no search log; comparables with different year-ends | TPO fresh search; adjustment on the full transaction value |
5 | Range and adjustments | Rule 10CA: multi-year weighted average, 35th–65th percentile when six or more comparables; working-capital adjustment supported | Arithmetic mean used where range applies; adjustments claimed without data | Adjustment to median; loss of tolerance band |
6 | Form 3CEB reconciles to financials | Every clause of 3CEB ties to the audited financials, the IAS 24 / Ind AS 24 note and Form 3CD clauses | Value differences between 3CEB and the related-party note; segmental data unsupported | CASS / faceless selection; s.271BA; credibility loss before the TPO |
7 | Master File / CbCR notifications | Designated entity intimated (3CEAB) 30 days before 3CEAA; 3CEAC filed two months before CbCR | Indian subsidiary assumes parent 'handles it' | s.271AA(2) ₹5 lakh; s.271GB daily penalties |
8 | Safe harbour evaluated, not assumed | ₹300 cr eligibility tested per transaction; operating cost base defined; Form 3CEFA filed on time | Filed after the return due date; ineligible transactions bundled | Option invalid; full TP audit |
9 | Tax-holiday and SDT units | s.10AA / 80-IA(8), (10) / 80-IAC units priced at arm's length; SDTs > ₹20 cr reported in 3CEB | 'No tax impact so no benchmarking'; inter-unit transfers at cost | Deduction denied on enhanced income (s.92C(4)); 80-IA(10) recomputation |
10 | Secondary adjustment tracked | Register of primary adjustments; repatriation evidenced (FIRC) within 90 days or s.92CE(2A) tax paid | APA / MAP-settled adjustments left unrepatriated for years | Imputed interest every year until repatriated |
11 | Both-sides arm's length | India file and counterparty file share the same FAR, cost base, method and PLI; corresponding adjustment path mapped | India charges cost + 15%; overseas file books cost + 8% | Double taxation; MAP with no symmetric evidence |
12 | Documents restorable in 30 days | Signed, dated agreements; board approvals; invoices; FEMA (FIRC / FC-GPR / ODI) trail; digital index | Unsigned or back-dated agreements; approvals in lost mailboxes | s.271G (2%); TPO's search decides the ALP |
Table 2 — The SBC twelve-checkpoint framework for Indian TP compliance, FY 2025-26.
Figure 1 — Where the lapses cluster. Likelihood and impact are SBC's qualitative assessment from review engagements across GCC, pharma, automotive, financial services and infrastructure groups; they are not statistical estimates.
4. Trending and industry-level issues for FY 2025-26
The issues below are the ones we expect to dominate TPO references for AY 2026-27. Each carries our position and the evidence that resolves it.
4.1 Global Capability Centres: from 'cost centre' to 'value creator'
India's GCC population continues to expand, and the TPO narrative has shifted with it. The question is no longer whether cost-plus applies, but what is in the cost base and what the mark-up compensates. Three fault lines recur: (i) engineering teams that own product decisions being documented as 'routine software development'; (ii) ESOP costs of the overseas parent excluded from the cost base while the parent claims a deduction abroad; and (iii) location savings and 'assembled workforce' arguments used to lift mark-ups beyond the safe harbour bands.
SBC position. Segment the GCC functionally before benchmarking — support, delivery and decision-rights are three different tested activities. Define the cost base in the intercompany agreement (pass-through, ESOP, third-party costs) and mirror that definition in the counterparty's Local File. Where the entity is within the ₹300 crore ceiling, model the safe harbour margins (software development and ITeS 17–18%; KPO 18–24% by employee-cost intensity; contract R&D 24%) against the benchmarked range before electing — the safe harbour is a floor for certainty, not necessarily the arm's length outcome.
4.2 Intra-group services and the benefit test
Management fees, shared-service charges and regional head-office allocations remain the most frequently disallowed inbound charges. The TPO's questions are procedural — evidence of receipt, duplication with local functions, shareholder activity, allocation keys — and the answers are documentary. Files that carry timesheets, deliverables, approval workflows and a cost-allocation reconciliation to the group's audited overheads survive; files that carry only an agreement do not.
4.3 Marketing intangibles and AMP
Post Maruti Suzuki (Delhi HC, 2015) and Sony Ericsson (Delhi HC, 2015), AMP adjustments require the existence of an international transaction to be established, not assumed from a 'bright line'. Yet the argument has returned in consumer, pharma and platform businesses through the route of royalty pay-outs: the TPO accepts that the Indian entity is a licensee, then contends the royalty is not arm's length because the Indian entity 'developed' the brand. The defence is a DEMPE analysis with contemporaneous marketing-spend approvals showing who decided, funded and controlled the brand strategy.
4.4 Financial transactions: guarantees, loans and receivables
Following Everest Kanto (Bombay HC, 2015) on guarantee commissions, Cotton Naturals (Delhi HC, 2015) on the currency-of-loan principle, and Kusum Health Care (Delhi HC, 2017) on receivables subsumed in working-capital-adjusted margins, the jurisprudence is stable; the lapses are practical. Guarantees are not reported, outbound loans are priced off benchmarks that no longer exist (LIBOR), and receivables ageing is not analysed. The OECD's Chapter X on financial transactions (2020) is now routinely cited by TPOs on implicit support and credit rating.
4.5 Tax holidays, SEZ units and specified domestic transactions
Units under section 10AA, 80-IA, 80-IAB and 80-IAC are the single most under-documented population in Indian TP. The taxpayer reasons that a 100% deduction makes pricing irrelevant; the statute reasons otherwise. Section 92C(4) proviso denies the deduction on income enhanced by a TP adjustment; section 80-IA(8) requires inter-unit transfers at market value; section 80-IA(10) allows the Assessing Officer to recompute 'more than ordinary profits' arising from a close connection. Transactions between a tax-holiday unit and other units or group entities above ₹20 crore are SDTs under section 92BA and must appear in Form 3CEB with a benchmark.
SBC position. Price the holiday unit as if it were a separate taxpayer with no incentive. The benchmark protects the deduction — it does not threaten it.
4.6 Both-sides arm's length: the international dimension
India's rule that no adjustment can reduce Indian income (s.92(3)) means the Indian file is tested only upward. The counterparty jurisdiction — increasingly the UAE for regional headquarters, the US and UK for parents — tests the same transaction from the other side. If the two Local Files diverge on characterisation, cost base or method, both authorities can be right on their own facts and the group pays twice. Symmetric documentation, built from a single data set, is the only structural defence.
Figure 2 — Both-sides arm's length: the Indian and counterparty files must reconcile on FAR, cost base, method and PLI.
4.7 Business restructuring, exits and the ITA 2025 transition
Conversions of distributors to commissionaires, transfers of IP to hub entities and GCC carve-outs continue under the OECD Chapter IX lens. For FY 2025-26, the practical point is the statutory transition: proceedings for AY 2026-27 continue under the 1961 Act by virtue of the savings provisions of the Income-tax Act, 2025, while FY 2026-27 compliance will follow the renumbered code. Intercompany agreements, APAs and safe harbour elections should be drafted with provision references that survive renumbering.
Pharma & API / CRO Contract manufacturing and contract R&D at cost-plus with s.35(2AB) claims; TPOs test whether the Indian entity bears failure risk. Evidence: batch approval authority, stability-data ownership, regulatory dossier ownership. | Automotive & EMS (PLI-linked) Import prices of components and tooling; capacity-underutilisation adjustments in start-up years; customs SVB alignment. Evidence: capacity study, third-party pricing of comparable components, PLI scheme filings. |
Fintech & platforms Royalty for technology and data; user-data as an intangible; AMP for brand building. Evidence: DEMPE matrix, marketing-approval trail, technology licence scope. | Infrastructure & renewables 80-IA units transacting with group EPC / O&M entities; deemed international transactions where AE terms are dictated (s.92B(2)). Evidence: EPC tender benchmarks, inter-unit transfer pricing, SDT schedule in 3CEB. |
Figure 3 — Industry lenses for FY 2025-26 TPO references.
5. Jurisprudence and administrative signals to price into the file
Authority | Principle | What to do in the FY 2025-26 file |
SAP Labs India (Supreme Court, 2023) | High Courts may examine whether the ALP determination complies with Chapter X and is not perverse — overruling the 'no substantial question of law' line of Softbrands | Write the file for a court, not a tribunal: reasoned method choice, documented filters, contemporaneous data |
Engineering Analysis (Supreme Court, 2021) | Payments for standard software are not royalty; characterisation follows the licence | Align TP characterisation of software flows with the withholding position |
Nestlé SA (Supreme Court, 2023) | MFN clauses require a s.90 notification to take effect | Re-test treaty-rate assumptions used in pricing royalties and FTS |
Vodafone India Services (Bombay HC, 2014) | Issue of shares is not an international transaction generating income | Keep capital-account transactions in the inventory but characterise correctly |
Maruti Suzuki / Sony Ericsson (Delhi HC, 2015) | AMP adjustment requires an international transaction to be shown; bright-line rejected | DEMPE analysis and marketing-approval evidence |
Everest Kanto (Bombay HC, 2015) | Bank guarantee rates are not comparable to corporate guarantees | Price guarantees by expected-loss / interest-saving approach |
Cotton Naturals (Delhi HC, 2015) | Interest benchmark follows the currency of the loan | SOFR / EURIBOR-based benchmarks with credit-spread support |
Kusum Health Care (Delhi HC, 2017) | Receivables can be subsumed in a working-capital-adjusted margin | Perform and document the working-capital adjustment |
Table 3 — Settled principles and the evidence they demand.
6. Dispute resolution and certainty mechanisms
India offers a deeper certainty toolkit than most jurisdictions — and a longer litigation ladder. The choice of route should be made when the file is built, not when the notice arrives.
Figure 4 — The Indian dispute and certainty architecture.
Route | Best suited to | Timeline | Certainty | SBC note |
Safe harbour (s.92CB) | Captive IT / ITeS / KPO / R&D and intra-group loans within ₹300 cr | Elect by return due date | High for eligible transactions | Compare safe harbour margin to benchmarked range; the option binds for the years elected |
Unilateral APA | Recurring, material transactions with stable FAR | Typically 2–4 years to conclude; 5 + 4 years covered | High (India only) | Rollback captures open years; pair with counterparty position |
Bilateral APA | US, UK, Japan, Netherlands, Singapore and other treaty partners with Article 9(2) | 3–5 years | Highest — eliminates double tax | Requires symmetric documentation from day one |
Multi-year ALP block (FA 2025) | Transactions already before a TPO with stable facts | Elected during TPO proceedings (Form 3CEFC) | Medium-high for two further years | New in FY 2025-26; evaluate before the first TPO hearing |
DRP (s.144C) | Draft orders with TP variations | ≈9 months | Medium; no Revenue appeal from DRP directions | Frame objections around evidence gaps in the TPO order |
MAP (Rule 44G) | Double taxation after adjustment or corresponding adjustment abroad | 24-month target | High where the treaty partner engages | File within the treaty time limit; suspend collection where MoU exists |
ITAT → HC → SC | Questions of law and perverse findings (SAP Labs) | 3–8 years | Variable | Build the record at the TPO stage — appellate forums rarely admit new evidence |
Table 4 — Choosing the certainty route.
7. Automation and document restoration: why the Local File is now a data problem
Indian TP compliance has three characteristics that make it a natural automation case: it is annual and repetitive, it is data-heavy (ERP ledgers, Prowess / Capitaline databases, FEMA filings), and it is evidence-scored (the TPO's outcome depends on whether the file can be reproduced and restored on demand). SBC's TP DocGen AI platform, TAIGA, was built around exactly that profile.
Figure 5 — From ledgers to a defensible Indian Local File.
What automation changes in practice. (i) The comparable search is executed as a structured, logged query across the seven Prowess categorisation layers — NIC-2008 industry, product / service group, CMIE product classification, structured product search, product name query, raw-material search and raw-material name query — so that the accept-reject matrix is complete and reproducible on the TPO's screen. (ii) Form 3CEB is generated from the same ledger extract that feeds the Local File, so the two cannot diverge. (iii) The same data set produces the counterparty's Local File in its own jurisdictional format — UAE, US, UK, Netherlands, Germany, Singapore — enforcing both-sides arm's length structurally. (iv) A restoration module reconstructs the document chain — agreements, approvals, invoices, FIRCs, FC-GPR / ODI filings — and indexes it against each 3CEB clause, so a section 271G notice is answered from an index, not a search.
DOCUMENT RESTORATION — THE FY 2025-26 PRIORITY For AY 2024-25 and AY 2025-26 references now under way, most section 271G exposures arise from documents that exist but cannot be found in 30 days. A restoration exercise — agreement register, approval trail, invoicing chain, FEMA trail, benchmarking archive — performed before the 3CEB is signed converts a penalty exposure into an exhibit bundle. SBC's practice is to restore three years backwards (the open assessment window) and to build the FY 2025-26 file forward from the restored index, so that every clause of Form 3CEB is traceable to a signed, dated primary document. |
8. FY 2025-26 transfer pricing compliance calendar
The calendar assumes a 31 March 2026 year-end (AY 2026-27) and a taxpayer subject to transfer pricing audit. Dates for Indian constituent entities of December-year-end groups are shown separately.
Figure 6 — Timeline view of the FY 2025-26 calendar.
Date | Obligation | Provision / form | SBC checkpoint |
Apr–May 2026 | Close the transaction inventory; confirm AE list; identify deemed international transactions and SDTs; agree cost-base definitions with counterparties | s.92A, 92B(2), 92BA | Checkpoints 1, 2, 9, 11 |
Jun–Jul 2026 | Benchmarking cut-off: contemporaneous database extraction; seven-layer search logged; range computed | Rule 10B, 10CA; Rule 10D(4) | Checkpoints 3, 4, 5 |
31 Aug 2026 | Draft Local File; reconcile to audited financials and Ind AS 24 note; evaluate safe harbour and APA options | Rule 10D; s.92CB | Checkpoints 6, 8 |
31 Oct 2026 | Form 3CEB filed; Rule 10D documentation complete; Form 3CD (TP cases); Form 3CEAB intimation of designated entity for Master File | s.92E; s.44AB; Rule 10DA(4) | Checkpoints 6, 7, 12 |
30 Nov 2026 | Return of income (ITR-6); Form 3CEAA (Master File Parts A/B); Form 3CEFA (safe harbour) | s.139(1); Rule 10DA; Rule 10TE | Checkpoints 7, 8 |
30 Dec 2026 | APA annual compliance report | Form 3CEF; Rule 10-O | APA holders |
31 Jan 2027 | Form 3CEAC — CbCR notification (Indian constituent of a foreign parent with March year-end) | s.286(1); Rule 10DB | Checkpoint 7 |
≈ 28 Feb 2027 | 90-day repatriation window for suo motu secondary adjustments made in the return | s.92CE; Rule 10CB | Checkpoint 10 |
31 Mar 2027 | Form 3CEAD — CbCR for Indian-parented groups (March year-end); APA application for PY 2027-28 onwards | s.286(2); s.92CC | Checkpoint 7; certainty planning |
Rolling | s.92CA(2) TPO notices; s.271G information within 30 days; draft order objections within 30 days (s.144C) | s.92CA, 271G, 144C | Checkpoint 12 |
For December year-end groups | Form 3CEAC by 31 Oct 2026 (CbCR for FY 2025 due 31 Dec 2026); Master File 3CEAA by 30 Nov 2026 for the Indian entity's own financial year | Rule 10DB(1), 10DA | Checkpoint 7 |
Table 5 — FY 2025-26 (AY 2026-27) transfer pricing compliance calendar. Verify each date against the current CBDT notifications and any extension circulars before reliance.
9. How SBC resolves these issues
SBC International Tax Practice works across the full Indian TP lifecycle — policy design, benchmarking, documentation, safe harbour and APA strategy, TPO and DRP representation, ITAT litigation support and MAP — from Hyderabad, with the UAE and US entities of the group providing the counterparty side of every cross-border position. The practice is ranked by ITR World TP and, for the 2026 cycle, shortlisted in nine categories at the ITR Middle East Tax Awards, including UAE Transfer Pricing Firm of the Year and Tax Technology awards for the TAIGA platform. SBC is a member of Kreston Global.
Compliance & documentation Form 3CEB, Rule 10D Local File, Master File, CbCR Seven-layer Prowess benchmarking with full reject matrix Tax-holiday and SDT benchmarking | Certainty & disputes Safe harbour and multi-year ALP evaluation Unilateral and bilateral APA, MAP TPO, DRP, ITAT representation and restoration audits |
Tax technology TAIGA TP DocGen AI — India and UAE lanes 3CEB / Local File reconciliation engine Document restoration and 271G response packs | Advisory services VCFO and transaction advisory GCC set-up, structuring and operating-model design UAE corporate tax and GCC compliance for Indian groups |
FACING AN FY 2025-26 ISSUE IN THIS ARTICLE? If any checkpoint, industry issue or calendar item above is live in your group — a GCC mark-up challenge, a tax-holiday unit without a benchmark, an unrepatriated adjustment, a counterparty file that does not match the Indian file, or a section 271G notice with a 30-day clock — SBC International Tax Practice can review the position and propose a resolution route within the compliance window. Contact SBC International Tax Practice through the ITR World Tax firm profile or at www.steadfastconsultants.in. |
Disclaimer. This article is a general jurisdiction briefing prepared for ITR World Tax and does not constitute professional advice. Statutory references are to the Income-tax Act, 1961 and the Income-tax Rules, 1962 as in force for AY 2026-27; thresholds, forms and due dates should be verified against current CBDT notifications before reliance. © SBC International Tax Practice, 2026.
