Transfer Pricing in India: 5 Traps That Cost Multinationals Crores

As CFO of a company with multinational operations, transfer pricing is the single largest tax risk we manage. Here are five traps that I have seen companies fall into — some resulting in assessments of Rs 50 crore and above.

TRAP 1: OUTDATED BENCHMARKING STUDIES
Transfer pricing documentation requires benchmarking — comparing your related party prices with what unrelated parties would charge. Companies do the study once and use it for 5-7 years. The OECD databases and comparables change every year. A study from 2019 may not be defensible in 2025. The ITAT has repeatedly held that fresh benchmarking is required for each year.

TRAP 2: TREATING MANAGEMENT FEES AS ROUTINE
Many Indian subsidiaries pay management fees to foreign parent for services (IT support, HR, brand, management oversight). The Tax department scrutinises these heavily. Key issues:
- Can you prove the services were actually rendered? (Need service level agreements, invoices, delivery evidence)
- Is the quantum reasonable? (Benchmarking against independent comparable transactions required)
- Does the Indian entity benefit from the service? (The "benefit test")
Management fee disallowances in excess of Rs 5 crore are not uncommon in TP audits.

TRAP 3: LOAN INTEREST RATE MISPRICING
Related party loans between Indian company and foreign affiliate must be priced at arm's length. Many companies use LIBOR/SOFR + spread, but the spread must be justified. A foreign subsidiary borrowing at 6% from the Indian parent when it could have borrowed at 9% from a bank is an undercharging issue. The parent should charge 9%. Difference is taxable income.

TRAP 4: MISSING THE SPECIFIED DOMESTIC TRANSACTIONS THRESHOLD
Transfer pricing in India is not just for international transactions. Specified Domestic Transactions (SDT) between related parties must also be at arm's length if total value exceeds Rs 20 crore. Many purely domestic groups miss this — payments to related parties, inter-company cost allocation, etc.

TRAP 5: INADEQUATE DOCUMENTATION
Section 92D requires maintaining documentation. The penalty for not maintaining it is 2% of the transaction value — not 2% of the understatement, but 2% of the TOTAL transaction value. For a company with Rs 200 crore in related party transactions, that is Rs 4 crore penalty purely for documentation failure.

RECOMMENDATION
If your international related party transactions exceed Rs 15 crore in a year, engage a proper TP firm for documentation and benchmarking. The cost (Rs 3-10 lakh depending on complexity) is negligible compared to the risk.