A transfer pricing notice rarely begins with a tax demand. It usually begins with a request: “Please furnish your documentation for FY 2024-25.” If the file is thin, or doesn’t exist, the penalty can come before any adjustment to your income.
That is the part many businesses miss. Transfer pricing penalties are not only about pricing your related-party deals wrongly. They also apply when you can’t prove how you priced them.
This guide covers what Indian law expects, who must comply, the dates that matter, and what each default costs.
What transfer pricing documentation means
Under sections 92 to 92F of the Income-tax Act, 1961, transactions between related parties must be priced at arm’s length. That means the price should match what independent parties would have agreed in similar conditions.
You don’t prove this by saying so. You prove it with records, which fall into two parts:
- The TP study (Local File). Maintained under section 92D and Rule 10D. You keep it and produce it when asked. It is not filed with the return.
- Form 3CEB. The accountant’s report under section 92E. This one is filed.
The study is your defence. The report is your declaration.
Who needs to comply
| Requirement | Applies when |
|---|---|
| Form 3CEB | Any international transaction with an associated enterprise, with no minimum value. It also applies to specified domestic transactions above ₹20 crore. |
| Rule 10D documentation (Local File) | Aggregate international transactions exceed ₹1 crore. |
| Master File (Form 3CEAA, Rule 10DA) | Group consolidated revenue is ₹500 crore or more, and aggregate international transactions are ₹50 crore or more (₹10 crore for intangibles). |
| Country-by-Country Report (Rule 10DB) | The group is in the prescribed revenue bracket (₹6,400 crore and above) and is required to furnish one. |
One point causes most surprises. The ₹1 crore threshold relaxes the detailed documentation, not Form 3CEB. A company with a ₹40 lakh management fee payable to its foreign parent may not need a full Local File, but it still needs the accountant’s report.
International transactions are broader than most people assume. They include:
- Purchase and sale of goods
- Intra-group services and cost recharges
- Royalties and technical fees
- Loans, guarantees and interest
- Capital financing, including share subscription in some cases
- Reimbursements of expenses
If you are a foreign group setting up an Indian entity, build the transfer pricing file in the first year. Our India Entry Services team treats it as part of entity setup, not an afterthought.
What Rule 10D expects in the file
Rule 10D(1) lists the information to maintain, and Rule 10D(3) lists the supporting documents. In practice, a usable file covers:
- Ownership and group structure. Who holds what, and the relationship that makes the party an associated enterprise.
- Business profile. The group’s operations, the Indian entity’s functions, and the industry it operates in.
- The transaction itself. Nature, terms, contracts, invoices and the value involved.
- Functional analysis. Functions performed, assets used and risks assumed by each party. This is what the method choice rests on.
- Method selection. Which of the prescribed methods you used and why it is the most appropriate. The options are CUP, Resale Price, Cost Plus, TNMM, Profit Split or Other Method.
- Comparability analysis. The comparables, the filters used and any adjustments made.
- Forecasts, budgets and agreements that support the pricing.
- Conclusion. The arm’s length result and how it was reached.
Two practical points often decide how a file holds up:
- Contemporaneous means on time. Under Rule 10D(4), the documents should be in existence by the due date for filing the return, not drafted after a notice arrives.
- Retention is long. Keep the records for eight years from the end of the relevant assessment year.
Deadlines for FY 2025-26
FY 2025-26 is still governed by the 1961 Act. For taxpayers with international transactions:
| Item | Due date |
|---|---|
| Form 3CEB (accountant’s report) | 31 October 2026 |
| Income-tax return | 30 November 2026 |
| Master File (Form 3CEAA), where applicable | 30 November 2026 |
| Local File / TP study | Must be in place by the return due date |
If you are reading this in the last days of October, the Form 3CEB date is close. The accountant needs the transaction list and your final numbers well before the filing day.
The Income-tax Act, 2025 applies from tax year 2026-27. The arm’s length principle, the thresholds and the compliance discipline continue. Section numbers and form names change; for example, Form 3CEB is replaced by Form 48.
What non-compliance costs
| Default | Section (1961 Act) | Consequence |
|---|---|---|
| Not keeping documentation, not reporting a transaction, or maintaining incorrect information | 271AA(1) | 2% of the value of each transaction |
| Not furnishing the Master File | 271AA(2) | ₹5,00,000 |
| Not producing documents when the TPO asks | 271G | 2% of the value of each transaction |
| Not obtaining and filing Form 3CEB | 271BA | ₹1,00,000 |
Under the 2025 Act, the equivalent provisions are renumbered (documentation failures sit under section 442 and the production default under section 457), and the late-filing consequence for Form 48 is dealt with as a fee under section 428.
Here is how this adds up for one ordinary transaction. Suppose an Indian company pays its foreign parent ₹5 crore a year for shared services and has no usable file.
- Section 271AA: 2% of ₹5 crore, which is ₹10 lakh
- Section 271G, if the TPO asks and nothing can be produced: another ₹10 lakh
- Section 271BA, if the report was never filed: another ₹1 lakh
These are separate defaults, and they can apply together. All of this sits on top of any transfer pricing adjustment to income, and the tax and interest that follow it. The penalty for a documentation lapse can exceed the tax at stake.
Where files usually go wrong
A few patterns we see repeatedly in transfer pricing reviews:
- Transactions left out of Form 3CEB. Reimbursements, guarantees and small cost recharges get missed because they don’t feel like “transactions”. A missing line item can trigger 271AA on its own.
- Copy-forward studies. The functional analysis hasn’t changed in three years, but the business has. A TPO will notice.
- Comparables with no logic. A benchmarking set with no stated filters, or one that includes loss-making companies without explanation, invites rejection.
- Agreements signed after the fact. An intra-group service agreement dated months after the services began weakens the whole file.
- Mismatch with the financials. The values in Form 3CEB should reconcile with the audited accounts and related-party disclosures. If your company reports under Ind AS, the related-party note is the first place a reviewer will compare. Our guide on Ind AS vs Indian GAAP explains what changes in reporting when you cross the net worth threshold.
A simple year-round routine
Treating transfer pricing as a once-a-year October scramble is how files go wrong. A lighter routine works better:
- At the start of the year, list every related-party arrangement and confirm the agreements are signed.
- Each quarter, record actual transaction values against the agreed pricing.
- After the year closes, run the benchmarking and test your margins against the range.
- Before October, make any year-end adjustment while it can still be documented properly, then have the accountant finalise Form 3CEB.
- File and archive the study, the report and supporting contracts together for the eight-year retention period.
For a structured review of your current file, you can look at our Transfer Pricing services.
FAQs
Is Form 3CEB mandatory if my related-party transaction is small?
Yes. For international transactions there is no minimum value for Form 3CEB. The ₹1 crore threshold applies to maintaining the detailed Rule 10D documentation.
What is the due date for Form 3CEB for FY 2025-26?
31 October 2026, which is one month before the 30 November return due date for taxpayers with transfer pricing cases.
Do I need transfer pricing documentation in a loss-making year?
Yes. The obligation arises from the transaction, not from profit.
Is the TP study filed with the Income Tax Department?
No. The study is maintained and produced on request. Form 3CEB is the document that is filed.
How long must the records be kept?
Eight years from the end of the relevant assessment year.
What replaces Form 3CEB under the Income-tax Act, 2025?
Form 48, from tax year 2026-27.