Introduction
As India becomes a key market for global businesses, many multinational enterprises (MNEs) set up foreign subsidiaries in the country. However, when these subsidiaries engage in transactions with their parent company or other related entities abroad, Transfer Pricing (TP) regulations under Indian Income Tax Law come into play.
Failure to comply with TP rules can lead to audits, penalties, and serious reputational damage. In this blog, we explain Transfer Pricing compliance requirements for foreign subsidiaries operating in India, key deadlines, documentation needs, and how to stay audit-ready.
What is Transfer Pricing?
Transfer Pricing refers to the pricing of goods, services, and intangibles between related parties (also called associated enterprises or AEs) across international borders.
The Indian subsidiary and its foreign parent are considered associated enterprises, and any intercompany transaction between them must be conducted at Arm’s Length Price (ALP) — i.e., the price that would be charged if the parties were unrelated.
Who is Covered Under Transfer Pricing Regulations in India?
A foreign subsidiary in India is required to comply with TP regulations if it has international transactions with:
- Its foreign parent company
- Its foreign parent company
- Other group companies or sister concerns abroad
Types of Transactions That Attract TP Rules
Nature of Transaction | Examples |
Sale/Purchase of Goods | Raw materials, finished goods |
Services Rendered | IT, R&D, support services |
Royalty or License Fee | Use of trademarks, patents |
Loans or Guarantees | Intercompany funding |
Cost Sharing | Shared management, admin costs |
Even a single rupee of international transaction can trigger TP compliance.
Transfer Pricing Compliance Checklist for Foreign Subsidiary
✅ 1. Maintain TP Documentation (Rule 10D)
You must prepare three-tier documentation:
- Local File (Indian entity-specific)
- Master File (group-level info, if applicable)
- Local File (Indian entity-specific)
- CBCR (Country-by-Country Report, only if global revenue > ₹6400 crore)
✅ 2. Benchmarking Study
Justify that your intercompany transactions are at ALP using methods like:
- Comparable Uncontrolled Price (CUP)
- Transactional Net Margin Method (TNMM)
- Cost Plus / Resale Price Method, etc.
✅ 3. Form 3CEB Filing
- Mandatory for all entities with international transactions
- Certified by a Chartered Accountant
- Filed on or before 31st October following the end of financial year
✅ 4. Form 3CD Disclosure
- Annexure to Tax Audit Report
Requires disclosures of TP transactions
Penalties for Non-Compliance
Default | Penalty |
Not maintaining documentation | 2% of transaction value |
Not filing Form 3CEB | ₹1,00,000 |
Incorrect ALP reporting | Up to 100%–200% of tax underreported |
Not furnishing CBCR (if applicable) | ₹5,00,000 and more |
Case Study: SaaS Subsidiary in India
A US-based tech company opens an Indian subsidiary to provide software development support. The Indian entity charges a fixed monthly service fee to the parent.
👉 They must benchmark the fee using TNMM and file Form 3CEB with proper documentation to prove it’s at arm’s length. Missing this can trigger TP audit.
Common Mistakes by Foreign Subsidiaries
❌ Treating related party pricing casually
❌ Using generic third-party agreements as proof
❌ Delayed or missed Form 3CEB filings
❌ Ignoring master file or CBCR thresholds
❌ Inadequate documentation in case of scrutiny
How TaxVic Can Help You Stay Compliant
At TaxVic, we help foreign subsidiaries in India by offering:
- Benchmarking study and intercompany agreement drafting
- Form 3CEB filing and documentation under Rule 10D
- Support during TP audit or notice
- Benchmarking study and intercompany agreement drafting
- Strategic planning to reduce TP risk and optimize tax
Conclusion
Transfer Pricing compliance is not just a tax formality — it’s a critical component of risk management for foreign subsidiaries in India. With increasing digitization and AI-driven scrutiny by tax authorities, ensuring accurate reporting and strong documentation is a must.
✅ File smart. Stay compliant. Avoid penalties.
FAQs
- Is TP compliance required if my foreign subsidiary only provides back-office services?
➡️ Yes, if it receives payments from the foreign parent or any AE, compliance is mandatory. - What if I miss the 3CEB deadline?
➡️ A penalty of ₹1,00,000 may apply, and increased scrutiny is likely. - Is TP applicable on loans or capital infusion?
➡️ Yes, especially on interest rate charged or waived.
4. Can I do TP study later if I’m not audited?
➡️ No. TP documentation must be maintained proactively before due date.
