Legal basis: Income-tax Act, 1961 – Sections 92, 92A, 92C, 92D, 92F — Effective: ongoing. Source: https://www.incometaxindia.gov.in/w/rule-10td. Last reviewed by CA Harun Raaj: October 2026.
The decision point most foreign subsidiaries get wrong
A Singapore‑headquartered software firm incorporated a wholly‑owned private limited subsidiary in Bengaluru in April 2025. The founders assumed transfer‑pricing compliance could be postponed to year two and billed the parent at a cost‑plus 8 % markup. Eighteen months later the Indian CA demanded Form 3CEB by the 31 October 2026 deadline. The founders then discovered three issues:
- The 8 % markup fell below the safe‑harbour floor under Rule 10TD.
- No contemporaneous documentation existed as required by Rule 10D.
- A CBDT adjustment for AY 2025‑26 was already within the reassessment window.
Section 92 of the Income‑Tax Act contains no grace period, no “startup” exemption, and no year‑one carve‑out. Every rupee billed between associated enterprises is subject to the arm‑length standard from the first transaction.
What the Income‑Tax Act actually requires
Section 92 – arm‑length mandate – Any income from an international transaction must be computed at arm‑length price. There is no minimum transaction threshold.
Section 92A – definition of associated enterprises – A foreign parent and its Indian subsidiary are associated when the parent holds ≥ 26 % voting power, appoints a majority of directors, or wholly controls the subsidiary. A wholly‑owned subsidiary satisfies the control test from incorporation.
Section 92C – pricing methods – Six prescribed methods are available. For software development services, the Transactional Net Margin Method (TNMM) is most common. The arm‑length range is the 35th‑to‑65th percentile of benchmarked operating profit margins; a markup outside this range triggers a CBDT adjustment.
Section 92D read with Rule 10D – documentation – Every international transaction must be supported by contemporaneous documentation by the return filing due date. The documentation threshold is ₹1 crore of aggregate international transactions in a FY. The Bengaluru subsidiary’s ₹2.5 crore billing exceeds this threshold from year one.
Rule 10TD – safe‑harbour election – An Indian subsidiary can elect a safe‑harbour markup that CBDT accepts without detailed scrutiny. For AY 2026‑27 the margins are:
| Service category | Mark‑up on operating cost |
|---|---|
| Software development services | 17 % (up to ₹200 crore), 18 % (above ₹200 crore) |
| IT‑enabled services (ITES) | 17 % (up to ₹200 crore), 18 % (above ₹200 crore) |
| Knowledge Process Outsourcing (KPO) | 18 % |
| Contract R&D for software | 17 % (up to ₹200 crore), 18 % (above ₹200 crore) |
Safe harbour is optional; if the actual markup is lower, the entity must substantiate the price through arm‑length documentation.
Rule 10DA – Master File (Form 3CEAA) – Required when the international group’s consolidated revenue exceeds ₹500 crore, or when international transactions exceed ₹50 crore or intangibles exceed ₹10 crore. Most new subsidiaries will not meet this threshold in year one, but the test must be repeated annually.
Comparison of compliance routes
| Option | When to use | Key compliance points |
|---|---|---|
| Safe‑harbour election (Rule 10TD) | Mark‑up can meet or exceed the prescribed floor | File Form 3CEB with safe‑harbour declaration; no detailed benchmarking required |
| Arm‑length method (Section 92C) | Actual markup is below safe‑harbour or a different method is more appropriate | Conduct benchmarking, maintain full Rule 10D documentation, file Form 3CEB with detailed TP report |
Practical implications of a low markup
- Tax impact – An 8 % markup versus a 17 % safe‑harbour floor on ₹2.5 crore of costs creates a ₹22.5 lakh shortfall. At the effective corporate tax rate of 25.168 % this equals roughly ₹5.66 lakh additional tax.
- Penalty cascade – Under‑reporting can attract a penalty of 50 %–200 % of the tax (Section 270A). On ₹5.66 lakh tax, the penalty could reach ₹11.3 lakh.
- Form 3CEB penalty – Failure to file incurs a fixed ₹1 lakh penalty (Section 271BA) and flags the return for mandatory CBDT scrutiny.
- Documentation penalty – Non‑maintenance of prescribed documents attracts 2 % of the transaction value (Section 271AA).
- Reassessment window – CBDT can reopen the return up to three years (five years if escaped income > ₹50 lakh) under Section 148.
Key point: India’s transfer‑pricing rules apply from day one; missing safe‑harbour markup or documentation can trigger tax, penalties, and reassessment.
Step‑by‑step actions for year one
Before the first intercompany invoice
- Map all intercompany transactions (services, cost allocations, interest, IP licences, guarantees).
- Conduct a benchmarking analysis to determine the arm‑length markup (Section 92C, Rule 10B/10C/10D).
- Execute intercompany agreements for each transaction type.
During the financial year
- Invoice at or above the arm‑length markup or the safe‑harbour margin, whichever is elected.
- Keep invoices, board resolutions, and TP working papers updated quarterly.
- Compute advance tax on TP income in the March, June, September and December instalments.
At year‑end (AY 2026‑27, FY 2025‑26)
- Finalise accounts and ensure the Rule 10D documentation set is complete and signed.
- File the tax audit report (Form 3CA + Form 3CD) by 30 September 2026.
- Obtain Form 3CEB certification from your CA and file it with the ITR by 31 October 2026.
- If the Master File threshold is met, file Form 3CEAA together with the ITR.
From Tax Year 2026‑27 (Income‑Tax Act 2025)
- The transfer‑pricing framework continues under updated section numbers. Verify safe‑harbour margins, thresholds and form numbers with your CA before filing; do not rely on 1961‑Act form references.
I'm CA Harun Raaj. If you're structuring India operations and this affects your setup, reach out.
Frequently Asked Questions
Do I need to file Form 3CEB in the first assessment year?+
Yes. Section 92D requires contemporaneous documentation, and Form 3CEB is the statutory certification of that documentation. The filing deadline for AY 2026‑27 is 31 October 2026.
What is the safe harbour markup for software development services under Rule 10TD?+
For AY 2026‑27 the safe‑harbour markup is 17 % on operating cost for transactions up to ₹200 crore and 18 % for amounts above ₹200 crore, as prescribed in Rule 10TD.
When does the transfer pricing documentation requirement under Rule 10D kick in?+
Rule 10D applies when aggregate international transactions exceed ₹1 crore in a financial year. The Bengaluru subsidiary’s ₹2.5 crore billing crosses this threshold from year one, triggering the documentation obligation.
How are penalties calculated for under‑reporting TP income?+
Under Section 270A, the penalty ranges from 50 % to 200 % of the tax on the under‑reported amount. Additionally, a missing Form 3CEB incurs a fixed ₹1 lakh penalty under Section 271BA, and lack of documentation attracts 2 % of the transaction value under Section 271AA.
Does a loss‑making Indian subsidiary still have to comply with Section 92?+
Yes. Section 92 applies irrespective of profitability. A TP adjustment in a loss year reduces the loss carry‑forward and can still attract penalties for non‑compliance.
Does FEMA’s FC‑GPR filing interact with TP documentation?+
The two filings are separate. FC‑GPR (RBI FIRMS portal) records the share allotment under FEMA, while TP documentation (Rule 10D) supports arm‑length pricing of current‑account transactions. Inconsistent valuations can raise queries in both CBDT and FEMA proceedings.
Can I elect the safe harbour and still use a different TP method?+
If you elect the safe‑harbour under Rule 10TD, you must rely on the prescribed markup and cannot simultaneously rely on a detailed benchmarking study. Choosing an arm‑length method requires full Rule 10D documentation instead of the safe‑harbour declaration.
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