Sweeping New Transfer Pricing Rules in India Mean a Major Reset

India’s transfer pricing regime is undergoing a sweeping reset aimed at modernizing administration, raising compliance, cutting disputes and easing doing business.

The reset is anchored in three instruments that overhaul how India approaches arm’s-length pricing, documentation, safe harbors, advanced pricing agreements, audits and non-compliance.

• Income-tax Act, 2025: Effective April 1, it overhauls the transfer pricing regime while broadly preserving the core architecture of the 1961 Act.
• Union Budget 2026–2027: This includes measures calibrated to shifting global value chains and geopolitical uncertainty.
• Income-tax Rules, 2026: Effective April 1, these set out the operational mechanics of the updated regime, including compliance and documentation standards.

There is a clear move toward greater certainty, more predictable and timely transfer pricing proceedings, and closer alignment with global practice, especially for information technology/IT enabled services players and global capability centers that rely on stable tax outcomes and streamlined compliance.

Important Changes

Safe harbor framework. Safe harbor rules let taxpayers apply prescribed margins to qualifying associated enterprise transactions, delivering upfront certainty and capping disputes. The revamped regime is designed to make safe harbors a genuine alternative to traditional benchmarking and advance pricing agreements. Changes include:

• A simplified, widened IT safe harbor: A single 15.5% margin now covers software development, IT enabled services, knowledge process outsourcing and contract research and development, with the revenue cap lifted from 3 billion Indian rupees ($32 million) to 20 billion rupees.
• A 15% cost-plus safe harbor for data center services to associated enterprises, coupled with a 20-year tax exemption (until 2047) for foreign companies earning income from “specified data centers,” aimed at locking in long-term cloud and artificial intelligence infrastructure.
• A 2% margin for nonresidents running bonded warehouses for just-in-time logistics in electronics manufacturing
• A fully automated, rules-based approval process, with any valid safe harbor option locked in for five years, slashing repeat filings and providing medium-term certainty.

“Associated enterprise” redefined. Transfer pricing rules apply to transactions between associated enterprises, and the boundary of what qualifies as an associated enterprise is being significantly widened. The earlier regime used two layers of test—general and specific—around control, shareholding, financing, common decision-makers and economic dependence. The 2025 Act folds these into a single expanded test where meeting one criterion can create associated enterprise status. This likely will pull many more relationships into the transfer pricing net, causing taxpayers to revisit group structures and intercompany arrangements.

Refining arm’s-length price. Earlier rules allowed a tolerance band around the arm’s-length price but left open whether it applied when there was only a single price. The 2025 Act clarifies that the band also applies to a single-price arm’s-length price, helping to defuse disputes over narrow pricing differences.

Multi-year transfer pricing audits and assessments. The 2026 Rules introduce a three-year block transfer pricing assessment, allowing the arm’s-length price for the second and third years to be benchmarked to the first year where transactions and conditions are broadly unchanged.

Taxpayers can opt in through a prescribed form, provided there is no material change in arm’s-length price method, functional analysis and risk profile, business model, policies, group structure or contractual terms, as certified by an accountant. This framework aims to cut repetitive audits for stable business models and reinforce consistent pricing and documentation.

Enhanced transfer pricing documentation and reporting. The 2026 Rules recast the transfer pricing audit report into a more detailed, disclosure-heavy format, with separate reporting of international, deemed international and specified domestic transactions, and confirmation that prescribed documentation is in place. Greater transparency and tighter alignment between paperwork, numbers and actual conduct is required.

Fast-tracking unilateral advance pricing agreements. Budget 2026 aimed to turbocharge unilateral APAs with a standard filing fee, withdrawal by simple notification, and hard deadlines for every stage. APAs must be wrapped up within three years (with deemed closure after two years from the filing quarter, plus a possible six-month extension), and all meetings, submissions and site visits completed within one year.

The 2026 Rules allow rollback for a year only if the income tax return is filed on or before the original prescribed due date, removing the flexibility for delayed filings within the extended timeline proposed under the draft rules.

Conversion of certain penalties into fees. Budget 2026 proposed replacing punitive transfer pricing penalties with largely automatic, quasi-compensatory fees for technical or procedural non-compliance, aiming to encourage timely compliance while reducing disputes in lower-risk cases.

Implications for Multinationals

For multinational enterprises operating in or with India, these changes may upend the transfer pricing risk and compliance landscape, so taxpayers should consider the following actions:

• Revisit transfer pricing strategy. Reassess the balance between traditional benchmarking, safe harbors and APAs in light of revised margins, thresholds and timelines.
• Re-evaluate associated enterprise relationships. The broadened definition means more counterparties may now fall in scope. Review inter-company agreements, governance and economic dependencies to identify associated enterprise transactions.
• Consider block assessments. Where business models and functional analysis and risk profiles are stable, the three-year block mechanism can reduce recurring audit burdens, provided pricing and documentation are consistent.
• Upgrade documentation and systems. Enhanced reporting requires accurate, detailed data. Invest in systems and processes to capture transaction-level information, align documentation with actual conduct, and periodically refresh benchmarking.
• Prepare for faster APAs. The compressed APA timetable offers earlier certainty but demands readiness. Ensure comprehensive, well-organized documentation and internal coordination, to avoid delays or deemed closure.
• Focus on substance. The updated regime emphasizes substance over form. Documentation must clearly articulate who performs which functions, owns or uses which assets, and bears and controls which risks, and this must match operational reality.

EU Perspective

From an EU perspective, India’s transfer pricing reforms reflect a shift toward simplification, predictability, and investor friendliness. Expanded safe harbor rules, higher thresholds, and a more efficient APA process are welcomed by EU multinationals, as they reduce compliance burdens and long-standing disputes.

However, EU stakeholders remain cautious about deviations from the arm’s-length principle. Fixed-margin safe harbors and retrospective amendments raise concerns around double taxation and legal predictability, particularly where EU tax authorities may not accept India’s unilateral positions.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Rezan Ökten is partner and head of transfer pricing practice in Dentons’ Amsterdam office.

Ritu Bharadwaj is an associate in Dentons’ Amsterdam office and member of the transfer pricing practice.

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