"We only bill our own subsidiary, so transfer pricing doesn't apply": What Section 92E actually requires

A Bengaluru SaaS company incorporates a Delaware entity to hold US customer contracts. The Indian Pvt Ltd does all the engineering; the US subsidiary invoices customers and remits a cost-plus-10% payment back to India every quarter. Total: ₹4.2 crore for the year. The founder tells his CA it is "just an internal transfer between our own two companies, not a real sale." The CA files ITR-6, skips Form 3CEB, and nobody thinks about it again — until a Section 92CA(1) reference lands eighteen months later and the Transfer Pricing Officer proposes an upward adjustment of ₹1.1 crore, plus a ₹1 lakh penalty for not filing the accountant's report at all.

The mistake is the belief that transactions inside your own group are not transactions. Under Indian transfer pricing law, a transaction with your own wholly owned subsidiary is precisely the transaction the law is worried about, because you control both sides of the price.

What the law actually requires

Section 92 of the Income-tax Act, 1961 states that any income arising from an international transaction shall be computed having regard to the arm's length price (ALP) — the price that would have been charged between unrelated parties in comparable circumstances.

Section 92A defines an associated enterprise. The two conditions founders most often trip over: direct or indirect holding of 26% or more of voting power, or an advance constituting 51% or more of the book value of the total assets of the other enterprise. A 100%-owned foreign subsidiary is an associated enterprise several times over. So is a foreign parent. So, frequently, is a "sister" company where the same founder holds 26% in both.

Section 92B defines international transaction broadly: purchase, sale or lease of tangible or intangible property; provision of services; lending or borrowing money; and — critically for startups — any transaction having a bearing on profits, income, losses or assets, including cost-sharing arrangements. Software development services, back-office support, management fees, royalty on IP, and interest-free loans to a subsidiary are all covered.

Section 92C prescribes the six permitted methods: Comparable Uncontrolled Price (CUP), Resale Price Method, Cost Plus Method, Profit Split Method, Transactional Net Margin Method (TNMM), and any other method prescribed by the Board. TNMM is by far the most commonly used for Indian captive service providers.

Section 92D read with Rule 10D requires contemporaneous documentation — thirteen categories of records, prepared by the return filing due date, retained for eight years from the end of the relevant assessment year. Rule 10D(2) grants relief only where the aggregate value of international transactions does not exceed ₹1 crore; below that threshold you still must substantiate the ALP, but you are not required to maintain the full Rule 10D set.

Section 92E is the filing obligation, and it has no monetary threshold at all. Every person who has entered into an international transaction (or a specified domestic transaction) during the previous year must obtain a report from an accountant and furnish it by the specified date. One transaction of ₹50,000 with a foreign associated enterprise triggers Form 3CEB. The ₹1 crore figure that founders remember is the Rule 10D documentation threshold, not the filing threshold — conflating the two is the single most expensive misunderstanding in this area.

Specified domestic transactions under Section 92BA bring the ₹20 crore aggregate threshold into play for certain domestic related-party dealings, principally payments covered by Section 40A(2)(b) in the hands of taxpayers claiming specified profit-linked deductions.

The 2026 change you cannot ignore

The Income-tax Act, 2025, effective 1 April 2026, recodifies transfer pricing at Sections 161 to 173, with Section 172 replacing Section 92E as the source of the accountant's report obligation. The CBDT's draft Income-tax Rules, 2026 (released 7 February 2026) propose Form 48 under Rule 85 to replace Form 3CEB from Tax Year 2026-27.

Form 48 is not a renumbering exercise. Form 3CEB is essentially a questionnaire: state the method, state the book value, confirm the ALP. Form 48 moves to a structured, data-rich format requiring the underlying computation to be disclosed in the report itself. Companies that have been signing off on a one-line "TNMM applied, transaction is at arm's length" will find that answer no longer fits in the form. If your TP study exists as a PDF nobody has opened since 2023, Tax Year 2026-27 is when that becomes visible to the department.

For the year currently being filed, Form 3CEB under Section 92E still applies. Plan the transition, do not skip the present obligation.

Multi-tier documentation

Section 286 and Rule 10DA/10DB add two further layers for larger groups. The Master File in Form 3CEAA applies where the international group's consolidated revenue exceeds ₹500 crore and the aggregate value of international transactions exceeds ₹50 crore (or ₹10 crore for intangible property transactions). Country-by-Country Reporting in Form 3CEAD applies to groups with consolidated revenue above ₹6,400 crore. Most Indian startups sit below both, but a company that has raised a large round with an offshore holding structure should check annually rather than assume.

Safe harbour

Rule 10TD offers a safe harbour route: if a captive software development or IT-enabled services provider declares an operating margin at or above the notified rate on operating cost, the TPO accepts the declared price without a benchmarking dispute. The notified rates sit in the 17% to 24% band depending on service category and transaction value. Election is made in Form 3CEFA and holds for up to five years. For a small captive with clean cost accounting, safe harbour trades a slightly higher tax outgo for the elimination of litigation risk — often the correct commercial decision.

Practical implications

The consequences of getting this wrong are not proportionate to the size of the transaction.

Section 271BA — failure to furnish the accountant's report under Section 92E: a flat penalty of ₹1,00,000. This applies regardless of whether your pricing was actually correct.

Section 271AA — failure to keep and maintain Rule 10D documentation, or failure to report a transaction, or maintaining incorrect information: 2% of the value of each international transaction. On a ₹4 crore intercompany billing, that is ₹8 lakh, on top of everything else.

Section 271G — failure to furnish documentation within 30 days when the TPO calls for it: a further 2% of the transaction value.

Section 270A — under-reporting consequent to a transfer pricing adjustment attracts 50% of tax payable on the under-reported income, rising to 200% where the under-reporting is treated as misreporting. Transfer pricing adjustments are frequently treated as misreporting where documentation is absent.

Secondary adjustment under Section 92CE — where a primary adjustment exceeds ₹1 crore and the excess money is not repatriated to India within the prescribed time, the unrepatriated amount is deemed an advance to the associated enterprise and notional interest is imputed and taxed. Founders discover this second bill months after settling the first.

Add to this the practical reality: a transfer pricing adjustment is one of the most reliably litigated items in Indian tax, meaning a defended position takes three to seven years through DRP, ITAT, and beyond. During that period the disputed demand sits on your balance sheet as a contingent liability, and every investor's due diligence team will find it.

There is also a corporate-law overlay. An intercompany transaction with a foreign subsidiary is a related party transaction under Section 188 of the Companies Act, 2013, requiring board approval and disclosure in Form AOC-2 attached to the Board's Report. MCA21 v3 performs cross-form validation, and an AOC-4 filed with an AOC-2 that discloses a ₹4 crore related-party transaction against an ITR-6 with no accompanying Form 3CEB is exactly the kind of inconsistency the system is designed to surface. Compliance data is no longer siloed between MCA and CBDT.

Step-by-step: what to do

• Map every associated enterprise. List every entity where you, your co-founders, or your Indian company hold 26% or more of voting power, directly or indirectly. Include foreign parents, subsidiaries, sister entities, and entities where a common director controls the board. Apply Section 92A mechanically, not by intuition.
• List every transaction with each of those entities for FY 2025-26. Include service fees, management charges, royalty, reimbursements, cost allocations, interest-free loans, guarantees given, and share issuances. Reimbursements at cost and interest-free loans are transactions — the absence of a margin is itself a pricing position that must be defended.
• Determine whether you cross ₹1 crore in aggregate. Above it, full Rule 10D documentation is mandatory. Below it, you still need a defensible ALP position, but the thirteen-category set is relaxed. Either way, Form 3CEB is required if even one international transaction exists.
• Select and document the method. For a captive service provider billing a foreign parent, TNMM with operating profit / operating cost as the profit level indicator is standard. Document why you rejected CUP — this is the single most common gap the TPO exploits.
• Run the benchmarking search. Use a recognised database (Prowess, Capitaline, or equivalent), apply and disclose your filters, and arrive at a comparable set with an arm's length range. Rule 10CA governs the range and the median.
• Evaluate safe harbour under Rule 10TD. If your captive margin already sits near the notified rate, filing Form 3CEFA before the return due date may be the cheapest risk elimination available to you.
• Get the accountant's report signed. A practising Chartered Accountant must certify Form 3CEB. Give the CA the full documentation set, not just a summary ledger — the certification is on the accountant's own liability.
• File by the specified date. For companies subject to transfer pricing, the ITR-6 due date is 30 November of the assessment year, and Form 3CEB is due one month before the return due date — i.e. 31 October. Filing the return on time but the 3CEB late still attracts Section 271BA.
• Pass the board resolution and update AOC-2. Approve the related party transaction under Section 188 and ensure the AOC-2 attached to your Board's Report matches the transaction values in your 3CEB.
• Diarise the Form 48 transition. From Tax Year 2026-27, the report moves to Form 48 under Rule 85 with computation-level disclosure. Ask your CA now whether your current TP study would survive being transcribed into that format.

FAQ

We bill our US subsidiary only ₹15 lakh a year. Do we still need Form 3CEB?
Yes. Section 92E has no monetary threshold. The ₹1 crore figure applies to Rule 10D documentation, not to the filing obligation. Missing the form on a ₹15 lakh transaction costs ₹1 lakh under Section 271BA.

We gave our foreign subsidiary an interest-free loan. Is that a transaction?
Yes, under Section 92B. Charging zero interest is a pricing decision that must be benchmarked against what an unrelated lender would charge — typically referenced to a LIBOR-successor or SOFR-based rate plus a credit spread in the currency of the loan. Indian tribunals have consistently rejected the argument that a nil rate needs no justification.

Can we just use the same TP study we did three years ago?
No. Rule 10D requires contemporaneous documentation, meaning it must be prepared by the return filing due date for that year. A stale study is treated as no study, exposing you to the 2% penalty under Section 271AA.

Does transfer pricing apply if both companies are Indian?
Only through Section 92BA specified domestic transactions, and only where the aggregate exceeds ₹20 crore and the taxpayer is claiming a specified profit-linked deduction. Most domestic Pvt Ltd group transactions fall outside it — but they remain related party transactions under Section 188 of the Companies Act and must still be approved and disclosed in AOC-2.

---

For a compliance audit of your company, visit pvtltd.co