Why You Need a Transfer Pricing Advisor — Not Just an Accountant

Why This Is Not Only a Foreign-Subsidiary Problem

Mention "transfer pricing" to most Indian business owners and the reaction is predictable: that's for multinational subsidiaries, not for us. It is one of the most consequential misconceptions in Indian corporate tax compliance, and it is wrong on two counts.

First, it understates how many businesses actually qualify as an "Indian subsidiary" in the relevant sense — any Indian company with a foreign parent, foreign shareholding above the threshold that creates associated enterprise status, or any transaction with an overseas group entity, falls squarely within transfer pricing's international provisions, regardless of how small the transaction or how new the entity.

Second — and this is the part almost nobody outside a specialist tax practice appreciates — Indian law also imposes transfer pricing obligations on purely domestic transactions between related Indian entities, with no foreign element whatsoever. A wholly Indian-owned group with two or three companies under common promoters, transacting with each other above the prescribed threshold, is subject to largely the same arm's length pricing discipline, documentation requirements, and penalty exposure as a foreign multinational's Indian arm. Most Indian promoters running a group structure — a manufacturing company and a trading company, an operating company and a holding company, a family business split across two or three entities for legitimate commercial reasons — have never had this explained to them in terms that connect it to their own structure.

International Transfer Pricing — The Cross-Border Trigger

Where an Indian company transacts with a foreign associated enterprise — a parent, subsidiary, or fellow group company anywhere in the world — Sections 92 to 92F of the Income Tax Act 1961 require that every such "international transaction" be priced at arm's length. This covers sale and purchase of goods, provision of services, licensing of intellectual property, cost allocations, intercompany financing, and secondment of personnel. Compliance requires selecting and applying one of the prescribed pricing methods, preparing contemporaneous benchmarking documentation under Rule 10D, and filing an accountant's report in Form 3CEB certifying the arm's length nature of the transactions.

This is the version of transfer pricing most business owners have at least heard of. What they typically have not internalised is how much judgment goes into getting it right — selecting genuinely comparable companies for a benchmarking study, defending a functional and risk analysis that actually reflects how the business operates rather than how a template assumes it operates, and building documentation robust enough to survive a scrutiny assessment rather than merely satisfying a filing checkbox.

Specified Domestic Transactions — The Purely Indian Trigger

This is the section most Indian business owners skip past, assuming it does not apply to them. Section 92BA of the Income Tax Act extends transfer pricing discipline to certain transactions between related Indian entities where no foreign party is involved at all — referred to as "Specified Domestic Transactions" (SDTs).

SDTs include payments to related parties covered under Section 40A(2)(b) that exceed the prescribed aggregate threshold in a financial year, transactions of an undertaking or unit eligible for profit-linked deductions (such as certain SEZ or infrastructure undertakings) with other units of the same taxpayer or with related entities, and specified transactions between entities enjoying deductions under Chapter VI-A or Section 10AA. In practice, the most common trigger for ordinary Indian promoter groups is the Section 40A(2)(b) route — payments to related parties, including group companies under common control, directors, and their relatives, that exceed the prescribed threshold.

The practical effect of Section 92BA is that a meaningful share of family-run and promoter-led Indian corporate groups — the kind with two or three companies under common ownership, which describes an enormous share of mid-sized Indian business — are sitting on undocumented related-party pricing exposure and do not know it, because nobody has connected "we have two companies and they transact with each other" to "we may have a Specified Domestic Transaction compliance obligation."

Why a General CA Firm Approach Falls Short

Most Indian businesses — foreign-owned and purely domestic alike — route their transfer pricing compliance through their existing chartered accountant, alongside statutory audit, tax return filing, and GST work. This is not a criticism of general practice CAs, who are genuinely skilled at what their engagement covers. The problem is structural: transfer pricing is not primarily an accounting exercise. It is a specialised discipline that sits at the intersection of tax law, economic benchmarking methodology, and — increasingly — the ability to anticipate how an assessing officer or tribunal will read the same facts.

What a Dedicated Transfer Pricing Advisor Actually Does

The difference is not that a dedicated advisor works harder on the same task. It is that the task itself is approached differently from the outset — as a defensible position to be built, not a form to be filed.

Genuine Functional and Risk Analysis

Before any pricing method is selected, a proper transfer pricing engagement starts by understanding what each entity in the transaction actually does — what functions it performs, what assets it uses, what risks it bears. This "FAR analysis" (Functions, Assets, Risks) determines which entity should earn the residual profit and which should earn a routine return, and it is the foundation every subsequent pricing decision rests on. A generic engagement frequently skips or abbreviates this step, going straight to a benchmarking database search — which produces a number, but not a defensible one.

Method Selection Grounded in the Actual Transaction

The five prescribed methods — CUP, Resale Price, Cost Plus, TNMM, and Profit Split — are not interchangeable. Selecting the right one, and being able to explain why the others were rejected, is itself a significant part of what makes a transfer pricing position defensible on assessment. Advisors who default to TNMM for every transaction because it is the most commonly used method are optimizing for convenience, not defensibility.

Benchmarking That Survives Scrutiny

A benchmarking study is only as strong as its comparable set. A dedicated TP advisor applies rigorous quantitative and qualitative filters, documents the search process itself (so the methodology, not just the conclusion, is defensible), and updates the analysis as market conditions and the taxpayer's own functional profile evolve — rather than rolling forward the same comparable set year after year regardless of whether it still fits.

Both Layers, Not Just One

Because most general practitioners default to thinking about transfer pricing exclusively in cross-border terms, a dedicated advisor's real value for purely Indian groups is simply asking the right question in the first place — mapping every related-party transaction, foreign and domestic, against the Section 92BA threshold, so that Specified Domestic Transactions are identified before an assessing officer identifies them first.

Dispute-Ready From Day One

Documentation built with a scrutiny assessment in mind — not merely a filing deadline — is structured differently. It anticipates the questions a tax officer will ask, addresses them proactively within the study itself, and gives the taxpayer a coherent position to stand on if the matter proceeds to the Dispute Resolution Panel or the Income Tax Appellate Tribunal.

Advance Pricing Agreements & Safe Harbour — The Proactive Options Most Businesses Never Consider

Beyond annual documentation and defence, India's transfer pricing framework offers two proactive routes that a compliance-only relationship rarely surfaces, because neither is necessary to satisfy a basic filing obligation — they exist specifically for taxpayers who want certainty rather than annual risk.

An Advance Pricing Agreement (APA) is a binding agreement between the taxpayer and the Central Board of Direct Taxes fixing the transfer pricing methodology — and in many cases the actual margin or price — for specified international transactions, typically for up to five future years, with the option to roll the same methodology back to cover up to four preceding years through a rollback provision. Once concluded, an APA removes the transaction from annual scrutiny risk entirely for its term, converting an open-ended annual dispute risk into a fixed, known position. The trade-off is time and cost: APAs typically take one to three years to negotiate and require a detailed economic analysis substantial enough to satisfy the tax authority's own scrutiny during negotiation, not merely a taxpayer's filing.

Safe Harbour Rules offer a lighter-weight alternative for specific categories of transactions — certain IT and ITeS services, contract R&D, and specified low-value-adding intra-group services — where a taxpayer can elect to declare a margin at or above a prescribed safe harbour rate and have that transaction accepted without further transfer pricing scrutiny on that specific point. Safe Harbour is faster and cheaper than an APA, but only available for the specific transaction categories the rules cover, and the prescribed margins are not always commercially attractive for every business.

Very few Indian companies — subsidiary or purely domestic — ever evaluate whether an APA or Safe Harbour election would reduce their long-run compliance burden and dispute risk, simply because the question is never raised by an advisor whose engagement is scoped around annual filing rather than strategic tax positioning.

Common Mistakes We See Across Both Categories

Across engagements with foreign-owned subsidiaries and purely Indian promoter groups alike, a small number of mistakes recur far more often than the range of possible errors would suggest.

• Treating the benchmarking study as a formality completed once a year to accompany the return, rather than as the actual evidentiary basis for a pricing decision that will be tested if challenged.
• Assuming domestic group transactions are automatically outside transfer pricing simply because no foreign party is involved — missing Section 92BA exposure that has often existed for several years by the time it is identified.
• Rolling forward the same comparable set year after year without revisiting whether the business's own functional profile, or the comparable companies' circumstances, have materially changed.
• Pricing intercompany transactions based on group-wide policy set outside India, without independently verifying that the resulting margin actually reflects an Indian arm's length outcome for an Indian entity performing Indian functions.
• Waiting for a scrutiny notice before engaging TP-specific expertise, at which point the taxpayer is defending a position built without dispute-readiness in mind, under significantly more time pressure and at higher cost than a proactive engagement would have required.

Generic Compliance vs. Dedicated TP Advisory

What It Costs When This Goes Wrong

The financial exposure from a transfer pricing adjustment is not capped at a modest correction. Where an assessing officer determines that a transaction — international or domestic — was not conducted at arm's length, the taxpayer's income is increased by the shortfall, tax is levied on the enhanced income, and penalty applies on top of that tax: 50% where documentation exists but is deemed inadequate, up to 200% where the authorities conclude income was under-reported through misreporting. Interest accrues from the original due date, frequently across several assessment years reopened together once one year draws scrutiny.

For purely domestic groups, there is an additional dimension that often surprises promoters: because the transaction is between two Indian entities, an adjustment on one side frequently does not create a matching relief on the other — meaning the group can end up paying tax twice on the same underlying value, once via the disallowance on the payer and again via tax on the recipient's actual income, with no automatic mechanism to correct the double charge.

For a promoter-led group without a foreign parent, there is a further complication that is easy to underestimate: because there is no international element, the dispute cannot be escalated through the Mutual Agreement Procedure available under a tax treaty. A purely domestic dispute has no treaty-based relief mechanism at all — it proceeds entirely through the Indian appellate hierarchy, on the Indian tax department's own timeline, with no external forum to appeal to for a faster or more predictable resolution.

How LexWin Can Help

LexWin advises both categories of Indian companies that carry transfer pricing exposure — Indian subsidiaries of foreign parents managing international transactions, and purely Indian corporate groups whose domestic related-party dealings fall within Section 92BA. Our transfer pricing advisory is built as a legal and strategic discipline, not a once-a-year filing exercise, working alongside your existing accountants rather than replacing the parts of the relationship that already work well.

Who Needs This — and When

Transfer pricing advisory is relevant to a far wider set of businesses than the phrase "multinational subsidiary" suggests.

Transfer Pricing Readiness Checklist — 10 Questions to Ask

Run this quick diagnostic against your group's current related-party transactions — foreign or purely domestic. If you answer "no" or "unsure" to more than three, your current position carries meaningful risk.

• Have you mapped every transaction between your company and any related Indian entity against the Section 92BA threshold — not just transactions with a foreign parent?
• Is your transfer pricing documentation prepared contemporaneously, rather than assembled retrospectively for the Form 3CEB deadline?
• Does your benchmarking study include a genuine functional and risk analysis, or does it go straight to a database search?
• Can you explain — in writing — why the pricing method you used was chosen over the other four prescribed methods?
• If you operate more than one Indian company under common promoters, has anyone reviewed whether transactions between them trigger Specified Domestic Transaction obligations?
• Is your comparable set for benchmarking updated each year, or rolled forward unchanged regardless of whether it still reflects your actual business?
• Do your intercompany agreements match what your transfer pricing study says is actually happening?
• If a scrutiny notice arrived tomorrow, does your current advisor have dispute representation capability, or only filing capability?
• Has your group structure changed in the last 12 months — new entity, new transaction type, revised pricing — without a corresponding update to your TP documentation?
• Has your transfer pricing position ever been reviewed by someone whose primary specialization is transfer pricing, rather than as one line item within a broader audit and tax engagement?