Export-oriented auto component manufacturers in India operate within a complex web of international transactions that demand rigorous transfer pricing documentation. With the introduction of the Income-tax Act, 2025, the compliance landscape has undergone significant changes, requiring a thorough understanding of the new statutory framework.
The New Statutory Framework Under Income-tax Act, 2025
The Income-tax Act, 2025 has re-codified India's transfer pricing provisions, previously contained under Chapter X of the Income-tax Act, 1961. Section 161 of the new Act establishes the foundational principle that any income arising from an international transaction or a specified domestic transaction shall be determined having regard to the arm's length price. This principle extends to allowances for expenses and interest arising from such transactions, as well as cost allocation and apportionment arrangements between associated enterprises.
Section 162 defines an "associated enterprise" in relation to another enterprise as one which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise. This includes situations where one enterprise holds at least 26% of the voting power in the other, where a loan constitutes at least 51% of the book value of total assets, or where a guarantee covers at least 10% of total borrowings. For auto component manufacturers, this definition captures the intricate relationships with global parent companies, group entities, and joint venture partners.
Section 163 defines an "international transaction" as a transaction between two or more associated enterprises, one of which is necessarily a non-resident. This includes the purchase, sale, transfer, lease or use of tangible property, the purchase, sale, transfer, lease or use of intangible property, capital financing, lending or borrowing of money, provision of services, and business restructuring or reorganisation. For export-oriented units, this encompasses raw material imports, finished goods exports, technology transfer payments, royalty payments, and intra-group service charges.
Section 164 defines a "specified domestic transaction" as any transaction referred to in Section 122 (transfer of goods or services between undertakings or units), Section 140(9) (transfer of goods or services between eligible business and other business), or Section 140(13) (business transacted between assessee and other person), where the aggregate of such transactions exceeds twenty crore rupees. This is particularly relevant for auto component manufacturers operating multiple units within India.
Form 48 Report Requirements
Section 172 read with Rule 85 mandates every person who has entered into an international transaction or specified domestic transaction during a tax year to obtain a report from an accountant and furnish such report on or before the specified date in the prescribed form, duly signed and verified in the manner as may be prescribed. The report must be furnished at least one month prior to the due date of furnishing the return of income under section 263(1)(c). Form No. 48 replaces the erstwhile Form 3CEB under the Income-tax Act, 1961.
The report requires disclosure of transactions under the following heads: international transactions (Section 163), deemed international transactions (Section 163(2)), and specified domestic transactions (Section 164). A material change is that the option for safe harbour is now required to be exercised in Form No. 49, whereas previously an auditor's report could not be filed in respect of a transaction for which a safe harbour was availed.
Documentation Thresholds
Section 171(1) read with Rule 84 requires every person who has entered into an international transaction or specified domestic transaction to keep and maintain prescribed information and documents. The documentation requirements are triggered when the aggregate value of international transactions, as recorded in the books of account, exceeds one crore rupees during the tax year. For specified domestic transactions, the threshold is twenty crore rupees.
Local File Requirements
The Local File is a detailed transfer pricing report covering entity-specific transactions, functional analysis, and comparability analysis. As per Rule 84(1), the documentation must include a description of the ownership structure of the assessee enterprise with details of shares or other ownership interest held therein by other enterprises for the contemporaneous period. A profile of the multinational group of which the assessee enterprise is a part must be maintained along with the name, address, legal status and country of tax residence of each of the enterprises comprised in the group with whom international transactions have been entered into by the assessee, and ownership linkages among them.
A broad description of the business of the assessee and the industry in which the assessee operates, and of the business of the associated enterprises with whom the assessee has transacted must be documented. The nature and terms including prices of international transaction or a specified domestic transaction entered into with each associated enterprise, details of property transferred or services provided and the quantum and the value of each such transaction or class of such transaction must be clearly set out.
A description of the functions performed, risks assumed and assets employed or to be employed by the assessee and by the associated enterprises involved in the international transaction or the specified domestic transaction is essential. This functional analysis forms the backbone of the transfer pricing documentation and must be supported by evidence of actual conduct, not merely contractual terms.
A record of the economic and market analyses, forecasts, budgets or any other financial estimates prepared by the assessee for the business as a whole and for each division or product separately must be maintained. A record of uncontrolled transactions taken into account for analysing their comparability with the international transaction or a specified domestic transaction entered into must be documented, including the nature, terms and conditions relating to any uncontrolled transaction with third parties which may be of relevance to the pricing.
A description of the methods considered for determining the arm's length price in relation to each international transaction or specified domestic transaction or class of transactions, the method selected as the most appropriate method along with explanations as to why such method was so selected, and how such method was applied in each case is required. A record of the actual working carried out for determining the arm's length price must be maintained, including details of the comparable data and financial information used in applying the most appropriate method, and adjustments made to account for differences.
The assumptions, policies and price negotiations, if any, which have critically affected the determination of the arm's length price must be documented. Details of the adjustments, if any, made to transfer prices to align them with arm's length prices determined under these rules and consequent adjustment made to the total income for tax purposes are also required.
Master File Requirements
Rule 123 requires the Master File when the Indian entity is part of a multinational group with consolidated global revenue exceeding ₹500 crore and aggregate international transactions exceeding ₹50 crore, or where international transactions involving intangible property exceed ₹10 crore. Even where these conditions are not satisfied, the constituent entity is still required to furnish Part A of Form No. 56.
The Master File provides a high-level overview of the MNC group including a list of all entities of the international group along with their addresses, a chart depicting the legal status of the constituent entity and ownership structure of the entire international group, and a description of the business of international group during the accounting year. This includes the nature of the business or businesses, the important drivers of profits, and a description of the supply chain for the five largest products or services in terms of revenue.
The Master File must contain a list and brief description of important service arrangements made among members of the international group, other than those for research and development services. A description of the capabilities of the main service providers within the international group and details about the transfer pricing policies for allocating service costs and determining prices to be paid for intra-group services are required.
A list and description of the major geographical markets for the products and services offered by the international group must be provided, along with a description of the functions performed, assets employed and risks assumed by the constituent entities that contribute at least 10% of the revenues or assets or profits of such group. A description of the important business restructuring transactions, acquisitions and divestments is also required.
Safe Harbour Provisions
The Income-tax Rules, 2026 have established comprehensive safe harbour provisions for auto component manufacturers. Under the safe harbour rules, where prescribed conditions are met, the transfer price declared by the assessee must be accepted by the income-tax authorities.
Core Auto Components Safe Harbour
For core auto components, the operating profit margin declared must not be less than 12% in relation to operating expense. Core auto components include engine and engine parts, transmission and steering parts, suspension and braking parts, and lithium-ion batteries for use in electric or hybrid electric vehicles. The safe harbour is available when 90% or more of total turnover during the relevant tax year is in the nature of original equipment manufacturer sales.
Non-Core Auto Components Safe Harbour
For non-core auto components, the operating profit margin declared must not be less than 8.5% in relation to operating expense. Non-core auto components are defined as auto components other than core auto components.
Operating Expense Definition
Operating expense for safe harbour purposes includes the costs incurred in the tax year in relation to the international transaction during the course of normal operations including costs relating to Employee Stock Option Plan or similar stock-based compensation, reimbursement to associated enterprises, amounts recovered from associated enterprises, and depreciation and amortisation expenses. It excludes interest expense, provision for unascertained liabilities, pre-operating expenses, loss arising on account of foreign currency fluctuations, extraordinary expenses, and income-tax expense.
Operating Revenue Definition
Operating revenue means the revenue earned in the tax year in relation to the international transaction during the course of normal operations. It excludes interest income, income arising on account of foreign currency fluctuations, income on transfer of assets or investments, refunds relating to income-tax, provisions written back, extraordinary incomes, and other incomes not relating to normal operations.
Cost Accountants in Transfer Pricing Compliance
Budget 2026 has brought Cost and Management Accountants (CMAs) within the safe harbour certification framework for transfer pricing. This change expands the category of professionals authorised to issue mandatory certifications under the safe harbour rules. For low value-adding intra-group services, the rules impose specific conditions including certification by an accountant for the method of cost pooling, exclusion of shareholder costs and duplicate costs from the cost pool, and reasonableness of allocation keys.
Since the rules require certification by an "accountant", CMAs now fall within the authorised category. An accountant is defined as a chartered accountant as defined in section 2(1)(b) of the Chartered Accountants Act, 1949 who holds a valid certificate of practice. The definition includes specific disqualifications relating to independence and relationship with the assessee.
Contemporaneous Documentation
The information and documents specified under Rule 84 should, as far as possible, be contemporaneous and shall exist on the specified date referred to in section 173(d). Where a relevant transaction continues to have effect beyond one tax year, fresh documentation need not be maintained separately in respect of each tax year unless there is any significant change in the nature or terms of such transaction, underlying assumptions, or any other factor affecting the transfer price. In case of such a change, fresh documentation must be maintained bringing out its impact on pricing.
The information and documents must be kept and maintained for a period of nine years from the end of the relevant tax year. The documentation must be supported by authentic documents including official publications, reports, studies and databases from the Government of the country of residence of the associated enterprise, reports of market research studies carried out and technical publications brought out by institutions of national or international repute, price publications including stock exchange and commodity market quotations, published accounts and financial statements relating to the business affairs of the associated enterprises, agreements and contracts entered into with associated enterprises or with unrelated enterprises in respect of transactions similar to the international transactions or the specified domestic transactions, and letters, e-mails and other correspondence documenting any terms negotiated between the assessee and the associated enterprise.
Transfer Pricing Methods
The arm's length price in relation to an international transaction or specified domestic transaction must be determined by any of the prescribed methods, being the most appropriate method. These include the comparable uncontrolled price method, resale price method, cost plus method, profit split method, transactional net margin method, and such other method as may be prescribed.
The comparable uncontrolled price method compares the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction. The resale price method identifies the price at which property purchased from an associated enterprise is resold to an unrelated enterprise and reduces it by the normal gross profit margin. The cost plus method determines direct and indirect costs of production and adds a normal gross profit mark-up. The transactional net margin method computes the net profit margin realised from the international transaction in relation to costs incurred, sales effected, or assets employed.
Secondary Adjustment Requirements
Section 170 requires an assessee to make a secondary adjustment where primary adjustment of one crore rupees or more to the transfer price has been made by the assessee on his own in his return of income, made by the Assessing Officer and accepted by him, determined by an advance pricing agreement, made as per safe harbour rules, or arising as a result of resolution of an assessment by way of mutual agreement procedure.
The excess money or part thereof available with its associated enterprise shall be deemed to be an advance made by the assessee to such associated enterprise if as a result of primary adjustment there is an increase in total income or reduction in loss and such excess money is not repatriated to India within ninety days from the due date of furnishing of return. The interest on such advance shall be computed at the one-year marginal cost of fund lending rate of the State Bank of India plus 325 basis points in cases where the international transaction is denominated in Indian rupee, or at the reference rate of the relevant foreign currency plus 300 basis points where denominated in foreign currency.
Country-by-Country Reporting
Rule 124 read with Section 511 requires every parent entity or alternate reporting entity resident in India to furnish a report in Form No. 59 for every reporting accounting year. The report must include aggregate information in respect of the amount of revenue, profit or loss before income-tax, amount of income-tax paid, amount of income-tax accrued, stated capital, accumulated earnings, number of employees and tangible assets with regard to each country in which the group operates.
The reporting requirement applies to international groups with total consolidated group revenue exceeding ₹6,400 crore. The report must be furnished within twelve months from the end of the reporting accounting year. The prescribed income-tax authority for this purpose is the Joint Director designated by the Director General of Income-tax (Systems).
Penalties for Non-Compliance
Section 457 provides that if any person who has entered into an international transaction or specified domestic transaction fails to furnish any information or document as required under section 171(2), a penalty equal to 2% of the value of such transaction may be imposed upon him for each such failure by the Assessing Officer or the Transfer Pricing Officer or the Commissioner (Appeals). Section 459 provides for penalties for failure to furnish the country-by-country report, ranging from ₹5,000 per day for failure not exceeding one month to ₹15,000 per day for failure beyond one month.
Best Practices for Compliance
To ensure robust transfer pricing compliance, auto component export-oriented units should maintain contemporaneous documentation ensuring that the Local File is prepared and maintained contemporaneously with the transactions. A thorough functional analysis must be conducted and documented, detailing the Indian entity's role in the global value chain, including the functions performed, assets employed, and risks assumed.
Transactions must be benchmarked appropriately using reliable comparable data, ensuring that the selected comparables are appropriate and adjustments are properly documented. Where applicable, the safe harbour regime should be leveraged to provide certainty and reduce compliance burdens. The option must be exercised by filing Form No. 49 with the Assessing Officer on or before the due date for filing the return of income.
Qualified professionals should be engaged, with CMAs now authorised to certify safe harbour compliance. Regular review and updates of transfer pricing policies should be conducted to ensure they remain aligned with the group's business operations and value chain. A robust documentation retention policy must be maintained for nine years from the end of the relevant tax year.
Disclaimer: This article provides general information and does not constitute legal advice. For specific guidance on transfer pricing documentation and compliance, please consult qualified legal and tax professionals.
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