Startups with offshore holding companies face significant transfer pricing compliance obligations under the Direct Tax Code (DTC) 2025. Transactions between the Indian startup and its offshore holding company or other group entities must be priced at arm's length and properly documented. This guide analyses the transfer pricing implications and provides practical compliance strategies.
The Transfer Pricing Framework
Section 161 — The Arm's Length Principle
Section 161(1) requires that "Any income arising from an international transaction or a specified domestic transaction shall be determined having regard to the arm's length price". Section 161(2) extends this to "Any allowance for any expense or interest".
Section 162 — Associated Enterprise
An offshore holding company becomes an associated enterprise (AE) of the Indian startup under Section 162 when:
- The holding company holds, directly or indirectly, shares carrying not less than 26% of the voting power in the Indian startup
- The holding company participates in the management or control or capital of the Indian startup
- Any person or enterprise holds shares carrying not less than 26% of the voting power in both the holding company and the Indian startup
Section 163 — International Transaction
Transactions between the Indian startup and its offshore holding company constitute international transactions under Section 163 if the two enterprises are associated enterprises.
Common International Transactions
1. Equity Investments
- Issue of shares to the offshore holding company
- Issue of CCPS or other instruments
- Share premium received
2. Debt Transactions
- Loans from the offshore holding company
- Interest payments on loans
- Guarantee fees
3. Service Transactions
- Management services from the offshore holding company
- Technical services from the offshore holding company
- Administrative services from the offshore holding company
4. Intellectual Property
- Licensing of IP from the offshore holding company
- Royalty payments
- Development of IP for the offshore holding company
5. Cost-Sharing
- Shared costs between the startup and the offshore holding company
- Allocation of expenses
Determination of Arm's Length Price
Applicable Methods
Section 165(1) prescribes six methods for determining the ALP:
- Comparable Uncontrolled Price Method (CUP)
- Resale Price Method
- Cost Plus Method
- Profit Split Method
- Transactional Net Margin Method (TNMM)
- Such other method as may be prescribed
Benchmarking Considerations for Startups
Startups often face challenges in benchmarking due to:
- Lack of historical data
- Unique business models
- Rapidly changing circumstances
- Limited comparable data
Common Transfer Pricing Methods for Startups
- TNMM: Often the most practical method for service and routine transactions
- CUP: Where there are comparable uncontrolled transactions (e.g., market rates for services)
- Profit Split: Where there are unique and valuable contributions by each party
Documentation Requirements
Section 171 — Maintenance of Information and Documents
Every person who has entered into an international transaction or specified domestic transaction shall keep and maintain prescribed information and documents. For startups, this includes:
- Description of the ownership structure
- Profile of the multinational group
- Description of the business and industry
- Nature and terms of the international transaction
- Functional analysis
- Method selection and application
Section 172 — Report from an Accountant
Every person who has entered into an international transaction or specified domestic transaction shall obtain a report from an accountant and furnish it on or before the specified date.
Rule 84 — Information and Documents
Rule 84(1) prescribes the information and documents to be maintained. However, Rule 84(2) provides a threshold of ₹1 crore — if the aggregate value of international transactions does not exceed ₹1 crore, the documentation requirements shall not apply.
Rule 84(4) — Documents for Eligible Specified Domestic Transactions
The eligible assessee, referred to in Rule 95(a), shall keep and maintain the following information and documents:
- Description of the ownership structure of the assessee enterprise
- Broad description of the business of the assessee and the industry
- Nature and terms of specified domestic transactions
- Record of proceedings before a regulatory commission
- Record of the actual working carried out for determining the transfer price
- Assumptions, policies and price negotiations
- Any other relevant information, data or document
For Rule 95(b), the eligible assessee shall keep and maintain:
- Description of the ownership structure of the assessee co-operative society
- Description of members including their addresses and period of membership
- Nature and terms of specified domestic transactions with each member
- Record of the actual working carried out for determining the transfer price
- Assumptions, policies and price negotiations
- Documentation regarding price being routinely declared in transparent manner
- Any other relevant information, data or document
Special Considerations for Startups
1. ESOP Transactions
ESOPs involving the offshore holding company may raise transfer pricing issues:
- Is the exercise price at arm's length?
- Is the valuation of the ESOP at arm's length?
2. CCPS Transactions
CCPS issued to the offshore holding company must be at arm's length:
- Is the valuation of the CCPS at arm's length?
- Is the conversion price at arm's length?
3. Valuation Issues
Startups often face challenges with valuation due to lack of comparables. Key considerations:
- Use of appropriate valuation methods
- Consideration of growth prospects
- Consideration of risk factors
4. Safe Harbour Rules
The safe harbour rules under Rules 86–102 primarily cover IT services, manufacturing, loans, guarantees, and R&D. Startups involved in these activities may be eligible for safe harbour.
5. Advance Pricing Agreement
Consider an APA under Sections 168–169 for certainty on the arm's length price of key transactions.
Penalties for Non-Compliance
Section 442 — Penalty for Failure to Maintain Documentation
Section 442 provides for a penalty of 2% of the value of each international transaction or specified domestic transaction for:
- Failure to keep and maintain information and document
- Failure to report such transaction
- Maintaining or furnishing incorrect information or document
Section 457 — Penalty for Failure to Furnish Information
Section 457 provides for a penalty of 2% of the value of the transaction for failure to furnish any information or document as required under Section 171(2).
Practical Compliance Strategies
1. Assess Applicability
- Determine whether the startup has any international transactions
- Identify all related-party transactions
- Determine the value of these transactions
2. Conduct Transfer Pricing Study
- Conduct a functional analysis
- Identify comparables
- Determine the arm's length price
- Document the analysis
3. Maintain Documentation
- Maintain contemporaneous documentation
- Ensure documentation is complete and accurate
- Retain documentation for the prescribed period (nine years)
4. File Report
- Obtain a report from an accountant
- File the report on or before the specified date
5. Consider Safe Harbour or APA
- If eligible, consider safe harbour rules
- For significant transactions, consider an APA
Expert Legal Guidance
Anuj Desai & Associates provides comprehensive legal advisory services on transfer pricing for startups with offshore holding companies. Our direct tax experts help startups understand their obligations, prepare documentation, and navigate the regulatory framework. We assist in TP study preparation, report filing, and representation before income-tax authorities.
Disclaimer: This article provides general information and does not constitute legal advice. For specific guidance on transfer pricing or any other direct tax matter, please consult qualified legal professionals.
Need Expert Legal Guidance?
Navigating the complex transfer pricing framework for startups with offshore holding companies requires experienced legal counsel. At Anuj Desai & Associates, we provide comprehensive direct tax advisory services, including:
- TP Assessment: Evaluation of transfer pricing obligations
- Documentation: Assistance with TP study and documentation
- Report Filing: Assistance with Form 3CEB filing
- Representation: Representation before Transfer Pricing Officers
Contact us for expert legal guidance on your transfer pricing matters.