Domestic Transfer Pricing Basics for Indian Groups

What Domestic Transfer Pricing Means for Group Companies

When companies in the same business group buy from, sell to, lend to or share staff with each other, the price they agree on matters to more than the two entities involved. Tax authorities, lenders, auditors and minority shareholders all want to know that intra-group prices are fair. This guide explains domestic transfer pricing basics for Indian business groups in plain language: what the arm's length concept means, which transactions deserve attention, and how a holding company can build simple documentation habits across its entities.

Transfer pricing is the price charged between related parties for goods, services, loans, assets or intangibles. In a multi-entity group, one company may manufacture, another may distribute, and a third may provide shared services. Each of those flows has a price, and that price shifts profit from one entity to another.

Indian income tax law contains transfer pricing provisions that can apply to certain domestic transactions between related parties, not only to cross-border ones. Whether a particular transaction is covered depends on the nature of the parties, the tax position of the entities and the value involved. Thresholds and coverage have changed over the years, so check the current rule on the Income Tax Department portal or with your tax adviser before concluding that a transaction is in or out of scope.

The Arm's Length Principle in Simple Terms

The arm's length principle asks a simple question: would two unrelated, independent businesses have agreed to the same price and terms under similar conditions? If a group company sells raw material to a sister concern at a price well below what an outside buyer would pay, the arrangement may not be at arm's length.

Indian rules recognise several methods for testing this, including:

• Comparable uncontrolled price method, which compares the price directly with similar independent transactions
• Resale price and cost plus methods, which look at gross margins
• Transactional net margin method, which compares net profit indicators
• Profit split and other prescribed methods for more integrated arrangements

The right method depends on the facts, the data available and the functions each entity performs.

Common Intra-Group Transactions to Review

Most business groups have more related-party flows than they realise. A useful first step is to list them entity by entity. Typical items include:

• Sale or purchase of goods and materials between group entities
• Shared services such as accounting, HR, IT and legal support
• Intra-group loans, guarantees and inter-corporate deposits
• Rent for premises, machinery or vehicles owned by one entity and used by another
• Use of brand names, software or other intangibles

Our guide on governance of related-party transactions in group companies explains how these flows also connect with company law approvals and disclosures. Intra-group funding deserves special care, and the factors banks consider in a working capital loan for a small business are a helpful reference point when setting interest and repayment terms between entities.

Transfer Pricing Documentation Every Group Should Keep

Good documentation is the backbone of defensible transfer pricing. Even where formal reports are not mandatory, maintaining records helps during audits, due diligence and lender reviews. A practical documentation file can contain:

• A group structure chart showing ownership and related parties
• Written intra-group agreements with pricing terms
• A functional analysis of who performs which activities, owns which assets and bears which risks
• Benchmarking or comparable data supporting the chosen price
• Invoices, reconciliations and board or committee approvals

Where the law requires an accountant's report, the format and due dates are notified by the tax authorities, so confirm the current requirements each year. Qualified support with CA and accounting services can help each entity keep its books and reports aligned.

Role of the Holding Company in Transfer Pricing Governance

A holding company is well placed to set one consistent policy for all entities rather than leaving each subsidiary to decide prices on its own. That policy can define approved pricing methods, approval limits for new related-party contracts and a calendar for annual review.

Legal agreements should match how the business actually operates. Working with corporate legal services to draft intra-group service and loan agreements reduces gaps between paperwork and practice. Periodic testing by the internal audit team, as described in our practical guide to internal audit for group companies, helps catch pricing drift early.

Practical Steps to Get Started

• Map every related party and intra-group transaction for the current year
• Identify which transactions may fall under transfer pricing provisions, with professional advice
• Choose and document a pricing method for each transaction type
• Put written agreements in place and review them annually
• Keep supporting data ready before tax filing deadlines

If you want help designing a group-wide related-party pricing policy and review process, contact the ATTPL HOLDCO team to discuss how we can support your group's finance and governance function.

Key takeaway: Domestic transfer pricing is about proving that intra-group prices are fair. A clear group policy, written agreements and organised documentation make that much easier.

Frequently asked questions

Sources and further reading

• Income Tax Department, Government of India
• Ministry of Corporate Affairs