India’s Transfer Pricing Landscape in 2025: Key Updates and Strategic Implications for Multinationals

India’s transfer pricing (TP) regime continues to evolve as authorities balance dispute reduction with stronger compliance oversight. The latest developments, spanning legislative amendments, administrative notifications, and programmatic momentum, indicate a renewed focus on certainty mechanisms, alongside heightened expectations for governance and strategic planning.

This article outlines the major transfer pricing updates and their implications for taxpayers.

Introduction of a multi-year Arm’s Length Price (ALP) option for repeat transactions

The Finance Act, 2025, amends Section 92CA of the Income-tax Act, 1961, to introduce a new “repeat-transaction” mechanism. Under this framework, taxpayers may opt to apply the ALP determined for a particular year to “similar” international or specified domestic transactions for the two immediately succeeding years. The provision is effective from April 1, 2026, and applies from Assessment Year (AY) 2026-27 onwards.

How the mechanism operates

The assessee (taxpayer) may exercise an option, within the prescribed form, manner, and timeline, to extend the ALP to the next two consecutive years. The Transfer Pricing Officer (TPO) must validate the option by a written order within one month from the end of the month in which the option is exercised, subject to prescribed conditions.

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Once the option is declared valid:

• No separate TP reference will be made for the covered transactions for those years, and
• Any existing reference will be treated as if it were not made.

The TPO will also examine and determine the ALP for the two subsequent years, and the Assessing Officer will recompute the total income for those years through a specific statutory recomputation mechanism.

Strategic significance for taxpayers

The measure is designed to reduce repetitive transfer pricing audits for transactions with stable facts and pricing models. At the same time, it introduces a strategic “lock-in” decision, particularly around the ability to establish and defend the “similarity” of transactions over a three-year window.

Taxpayers, such as a domestic company, permanent establishment (PE), or liable taxpayer, should carefully assess whether expected business model changes, functional shifts, pricing adjustments, or market volatility could weaken the suitability of this option. As part of FY 2025-26 planning, businesses should identify recurring related-party transactions, such as routine services, distribution arrangements, or contract research and development (R&D), that may qualify, and establish internal governance to support an informed election once detailed rules are notified.

Expansion and extension of Safe Harbor Rules (SHR)

Through notification No. 21/2025 dated March 25, 2025, the Central Board of Direct Taxes (CBDT) amended India’s SHR, with applicability covering AY 2025-26 and AY 2026-27 (i.e., FY 2025-26).

Notable changes include:

• An increase in the transaction value threshold from INR 2 billion (US$22.27 million) to INR 3 billion (US$33.41 million) for eligibility.
• Expansion of the definition of “core auto components” to include lithium-ion batteries for electric and hybrid vehicles, reflecting evolving EV supply chains.

Why It matters

Safe harbor provisions provide certainty by deeming transactions at arm’s length if prescribed margins and conditions are met. The expanded thresholds and sectoral coverage may allow more taxpayers, particularly in services, automotive, and electric vehicle (EV)-linked manufacturing, to reduce audit exposure. However, opting into safe harbor remains a commercial decision, as it requires acceptance of fixed margins that may exceed actual profitability.

Tolerance range (Safe Band) notification: Limited to AY 2025–26

CBDT notification No. 157/2025, dated November 6, 2025, prescribes arm’s length tolerance ranges of 1 percent for wholesale trading transactions and 3 percent for all other cases. These safe-band margins apply exclusively to AY 2025–26.

Key caution for taxpayers

As of late December 2025, no corresponding tolerance range notification has been issued for AY 2026-27. Taxpayers should therefore not assume automatic carry-over of the safe band for FY 2025-26 and should closely track further CBDT announcements when finalizing benchmarking positions.

Ongoing TP compliance obligations

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Despite policy refinements, core statutory obligations for transfer pricing remain unchanged. Taxpayers with international transactions or specified domestic transactions must:

• Maintain contemporaneous TP documentation, including the local file and supporting analyses.
• File the accountant’s report in Form 3CEB under Section 92E by the applicable due date.

While filing deadlines may be extended by CBDT in certain years, such extensions do not always apply uniformly to TP filings. Businesses should therefore track TP-specific relief notifications rather than relying on general deadline extensions.

ALSO READ: Effectiveness of Advance Pricing Agreements in India’s Complex Transfer Pricing Environment

India’s Advance Pricing Agreement (APA) program

India’s Advance Pricing Agreement (APA) program continues to demonstrate strong momentum, reinforcing its role as a cornerstone of the country’s transfer pricing dispute-prevention framework. According to the CBDT, a record 174 APAs were signed in FY 2024-25.

As of March 31, 2025, India has entered into a cumulative 815 APAs, comprising 615 unilateral APAs (UAPAs) and 200 bilateral APAs (BAPAs), including one multilateral APA (MAPA). This growing mix reflects both sustained domestic uptake and deepening cooperation with treaty partners.

Source: Advance Pricing Agreement (APA), Annual Report 2024-25

*FY 2024-25 bilateral APA figures include one MAPA.

The Seventh Annual Report on the APA Programme highlights that FY 2024–25 also marked a milestone for bilateral engagement. CBDT signed 65 BAPAs, the highest number in any financial year to date. These agreements were concluded following Mutual Agreement Procedures with treaty partners including Australia, Japan, New Zealand, Singapore, South Korea, the Netherlands, the United Kingdom (UK), and the United States (US). The increase in bilateral and multilateral APAs underscores India’s emphasis on eliminating double taxation and providing cross-border certainty.

For taxpayers, the continued expansion of the APA program signals a clear policy intent: encouraging upfront resolution of transfer pricing issues rather than prolonged litigation. APAs are particularly valuable for businesses with complex or high-risk value chains, such as those involving intangibles, large captive service centers, marketing-intensive distribution models, or contract manufacturing arrangements with volatile margins.

As part of FY 2025-26 transfer pricing planning, multinationals may find it timely to reassess the suitability of APAs as a long-term risk-management and certainty tool, especially in light of increasing scrutiny, evolving business models, and India’s demonstrated administrative capacity to conclude agreements efficiently.

Executive watchlist for FY 2025-26

Decision-makers should closely monitor the following:

1. Rules and guidance for the multi-year ALP option, particularly on the definition and administration of “similar transactions.”
2. Reassessment of safe harbor eligibility following threshold increases and sectoral expansions.
3. Issuance of tolerance range notifications for AY 2026-27, which will directly affect FY 2025-26 benchmarking outcomes.

Conclusion

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India’s 2025 transfer pricing updates reflect a dual objective: reducing friction for compliant taxpayers while reinforcing structured, rule-based certainty mechanisms. For multinationals, the emphasis has shifted from reactive audit defense to proactive TP strategy, integrating governance, forward planning, and informed use of tools such as safe harbors, APAs, and the new multi-year ALP option.

(US$1 = INR 89.77)

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