Transfer Pricing Disputes in India: 7 Warning Signs You Need a Specialist Before the AO Knocks

Filing Form 3CEB on time does not necessarily mean an Indian subsidiary is prepared for a transfer pricing challenge. A recurring margin shortfall, an adjustment still under appeal or a new royalty arrangement can each raise questions about how the group prices its related-party transactions.

For a finance director or head of tax at an Indian subsidiary, the question is whether the existing adviser can defend the company’s transfer pricing position if the tax department challenges it. 

Some warning signs call for a closer look at the company’s documentation and pricing policies. Others may require a formal response or specialist representation, depending on the stage of the proceedings.

TL;DRWatch for recurring margin shortfalls, repeated transfer pricing adjustments, challenges to the pricing method, questions about royalties or cost sharing, and disagreements over the company’s functional and risk profile.An unresolved APA or MAP process, a draft assessment order or an appeal can require a different level of support from your tax adviser.If you receive a draft assessment order and intend to approach the DRP, check the applicable deadline immediately. The statutory period is generally 30 days from receipt of the draft order.The need for a specialist depends on the technical complexity of the issue, the evidence available and the stage of the proceedings, not simply the number of warning signs.

How TP Disputes Escalate in India

The Assessing Officer (AO) handles the assessment, but the Transfer Pricing Officer (TPO) examines the arm’s-length price of the relevant international transactions when the case is referred for transfer pricing examination. 

The TPO’s findings then become part of the assessment process.

Under Section 92CA of the Income-tax Act, 1961, the AO can refer the relevant international transactions to the TPO for determining the arm’s-length price. The TPO’s order and the AO’s subsequent assessment are separate steps in the process.

The Income-tax Act, 2025 came into effect on 1 April 2026, changing the statutory references used for transfer pricing. The corresponding provisions are now found in Sections 161 to 173. For earlier tax periods, the relevant provisions of the Income-tax Act, 1961 may still apply, so it is important to identify which Act governs the transaction and assessment in question.

CBDT Instruction No. 3/2016 governs when the AO refers cases to the TPO. As reported by Taxmann and ITAT Online, cases selected for scrutiny on transfer pricing risk parameters must be referred, with approval and the AO should not determine the arm’s length price without a reference. 

CBDT’s compulsory scrutiny guidelines for FY 2026-27 (F.No.225/56/2026/ITA-II, 4 June 2026) add that recurring disputes, including transfer pricing adjustments that became final or were confirmed on appeal, can trigger mandatory scrutiny.

From that point the path has fixed windows.

Stage	What Happens	Your Window
TPO order	The TPO proposes an adjustment	The order must be passed at least 60 days before the assessment time limit ends
Draft assessment order	The AO issues a draft order based on the TPO order	30 days from receipt to object before the DRP
DRP	A panel of three Commissioners can confirm, reduce, or enhance the variation	Directions within nine months of the end of the month in which the draft order was forwarded
Final order	The AO follows the DRP directions	Within one month of the end of the month in which directions are received
ITAT	You appeal the final order to the Tribunal	The DRP route bypasses the CIT(A) appeal

Two points follow from the table. If you file no objections within 30 days, the AO completes the assessment on the draft order. And the DRP can enhance an adjustment, so objecting is a decision to weigh, not a free option.

Warning Sign 1: Repeated Margin Deviation from the Industry Range

The TPO compares your Indian entity’s operating margin with the margins earned by comparable independent companies. 

Under India’s transfer pricing rules, where the prescribed conditions are met, the arm’s length range runs from the 35th to the 65th percentile. If your margin falls outside that range, the median generally becomes the arm’s length price.

A margin below the range in one year may have a reasonable business explanation. A similar result over 3 consecutive years raises questions about whether your intercompany pricing reflects the functions performed, assets used and risks assumed by the Indian entity.

Why Its Important

Repeated deviations can increase the risk of further scrutiny, particularly when an earlier transfer pricing adjustment has become final or has been confirmed on appeal. 

Your pricing policy may face renewed examination, and explanations based on changing business conditions carry less weight without supporting evidence.

What To Do

Review your operating margins for the last 3-5 years against the relevant comparable range. Check whether your benchmarking method and comparable companies remain appropriate for each year. Document significant changes in business conditions, functions, assets or risks.

If margins fell because of a plant shutdown, a new product launch or additional responsibilities taken on by the Indian entity, retain evidence showing how these factors affected profitability.

If the deviation persists, discuss the pricing policy with your transfer pricing adviser. Depending on the circumstances, a change in pricing, a year-end adjustment or an Advance Pricing Agreement (APA) may be worth considering. The decision should follow a review of the facts, contractual arrangements and available evidence.

Warning Sign 2: Routine Scrutiny at the Assessment Stage

A notice under Section 143(2) of the Income-tax Act, 1961, means your return has been selected for scrutiny. If the notice requests Form 3CEB, your transfer pricing study or comparable-company data, the AO is examining your international transactions and the supporting documentation.

The AO may check whether the transfer pricing study covers all relevant transactions, whether the comparable companies are appropriate for the year under review and whether the agreements reflect what the Indian entity actually does. 

Gaps in these records can lead to further questions or a reference to the Transfer Pricing Officer (TPO), where the applicable conditions are met.

Why It Important

A TPO reference brings your benchmarking analysis, functional profile and intercompany agreements under closer examination. 

Documentation prepared for an earlier year may not reflect changes in the business or current-year data. If the figures and agreements tell different stories, defending the pricing becomes harder.

What To Do

Start by checking the notice’s scope, information requests and response deadline. Assign someone to monitor the income-tax e-filing portal and registered communication channels so that follow-up notices are not missed.

Then review the key records:

• Form 3CEB and the transfer pricing study.
• Intercompany agreements and transaction-wise invoices.
• Comparable-company selection and supporting calculations.
• Changes in functions, assets, risks or business arrangements since the study was prepared.

Update the analysis where necessary and make sure the documentation matches the actual transactions. If an earlier year resulted in a transfer pricing adjustment or the notice questions a specific international transaction, consult a transfer pricing specialist before filing your response.

Warning Sign 3: Risk of Rejection of the Comparable Uncontrolled Price Method

Under Section 92C and Rule 10B of the Income-tax Rules, the arm’s length price must be determined using the most appropriate method for the transaction. 

The Comparable Uncontrolled Price (CUP) method compares the price charged in a controlled transaction with the price in a comparable transaction between independent parties.

The TPO checks how closely the transactions match in contractual terms, functions, risks, market conditions and timing. These differences can affect the price of royalties, intercompany loans and corporate guarantees.

Why It’s Relevant

If the TPO finds that your CUP comparables are unreliable, the officer may reject the method and consider another prescribed method. 

The resulting adjustment can be difficult to challenge if your documentation does not explain why the selected comparables are appropriate.

Disputes over corporate guarantee commissions illustrate how the facts can influence the outcome. In Precision Camshafts Ltd. v. Assessment Unit, the TPO applied a 0.5% commission rate, while the ITAT upheld a nil commission on the facts before it. 

The case highlights the importance of the specific guarantee terms and supporting evidence when determining an arm’s length price.

What To Do

Review the evidence supporting your chosen method. For CUP, retain comparable agreements, published rates or other reliable price data. Document differences in contractual terms, credit risk, timing and market conditions, explaining how you accounted for them.

If you chose another method, record why CUP was less reliable or why suitable uncontrolled transactions were unavailable. 

If the TPO proposes a different method, examine the proposed comparables and prepare a transaction-level analysis before responding.

A transfer pricing specialist can help assess whether the method and comparables are defensible, particularly where the transaction involves complex financing or royalty arrangements.

Warning Sign 4: Queries About Intangibles or Cost Contribution Arrangements

TPO looks for royalty payments, technology licences, brand fees and shared-cost arrangements. They can attract scrutiny when the TPO questions the price or the benefit received by the Indian entity. 

The officer may examine who owns or develops the intangible, who controls and funds its development, how the payment was calculated, and what the Indian business actually receives.

For cost contribution arrangements, the TPO may also examine the agreement, the expected benefit to each participant and the basis used to allocate costs across group companies.

Advertising, marketing and promotion (AMP) expenditure is one recurring area of dispute. When an Indian distributor spends heavily promoting a foreign brand, the TPO may question whether the expenditure creates a benefit for the overseas brand owner and whether the arrangement is appropriately compensated. 

In Sony Ericsson Mobile Communications India v. CIT, the Delhi High Court rejected the use of a bright-line test to determine AMP adjustments. 

However, disputes can still arise over the facts and economic substance of individual arrangements.

What This Means for Your Business

These cases can involve substantial adjustments because the dispute concerns both the nature of the transaction and its valuation. 

Contracts alone may not settle the issue; the tax authorities may also examine the actual activities, commercial benefits and allocation of risks.

What to do

For each royalty or intangible-related payment, keep the agreement, invoices, pricing analysis and evidence of the benefit received by the Indian entity. If the Indian team contributes to developing or marketing an intangible, document those activities and how the arrangement accounts for them.

For cost contribution arrangements, record the participants, expected benefits, contribution criteria and allocation method. Check that the agreement reflects what the group actually does.

If your group plans to introduce a new royalty or cost-sharing arrangement, obtain transfer pricing advice before payments begin. Establishing the commercial rationale and documentation early is generally easier than reconstructing them after a query.

Warning Sign 5: Cash Box or Limited-Risk Distributor Findings

The TPO examines whether your Indian entity’s actual activities match its claimed risk profile. A limited-risk distributor (LRD) generally performs routine distribution functions and earns a return consistent with the risks it assumes. 

If the local team sets prices, negotiates key customer terms or makes significant marketing decisions, the TPO may question whether the entity’s role is genuinely limited-risk.

A “cash box” is an entity that provides funding but lacks the people or decision-making authority needed to control the financial risks associated with that funding. 

Under the OECD framework, its return may therefore be limited to an appropriate risk-adjusted return on the funding provided.

Why It Counts

If the TPO rejects the entity’s characterisation, the choice of comparable companies and the expected operating margin may change significantly. 

In Netflix Entertainment Services India LLP dispute, the Mumbai ITAT examined the characterisation of the Indian entity and its distribution arrangements. 

The dispute illustrates why the functions performed, assets used and risks assumed (FAR) need to support the position taken in the transfer pricing study. 

Verify the ruling’s precise findings and adjustment amount against the original order before citing them in a published article.

What to do

Compare the intercompany agreement with evidence of how decisions are actually made. Review pricing approvals, customer negotiations, inventory decisions, marketing budgets and internal emails to establish who controls the relevant risks.

If the Indian entity performs functions beyond those described in the agreement, assess whether the contractual terms, compensation or functional analysis need to change. Document the commercial rationale and ensure the remuneration reflects the entity’s actual contribution.

Resolve inconsistencies before an assessment begins. Once a dispute arises, reconstructing who made which decisions and who bore the resulting risks can be difficult.

Warning Sign 6: APA or MAP Negotiations Have Stalled

An Advance Pricing Agreement (APA) establishes an agreed transfer pricing approach for specified future years. A Mutual Agreement Procedure (MAP) allows the competent authorities of two countries to work towards resolving cross-border tax disputes and relieving double taxation.

Both processes can take years. Resolving transfer pricing cases through MAP can take several years.

A delay alone does not mean something is wrong. However, repeated requests for information, unresolved disagreements over the pricing method or long periods without progress deserve attention.

Why This Is Relevant

An ongoing APA or MAP does not automatically pause domestic assessment proceedings. If an open-year assessment continues while negotiations are underway, the TPO may propose an adjustment before an agreement is reached. 

This can make the case harder to defend and expose the company to double taxation.

What to do

Ask your adviser for a written status update covering the outstanding issues, the authority or party responsible for each action, and the next expected milestone. 

Confirm that the APA covers the relevant transactions and years and discuss whether rollback provisions may apply to eligible earlier years.

For MAP cases, review domestic assessment and appeal deadlines separately. Ask your adviser whether a protective appeal or another procedural step is needed while negotiations continue.

Finally, make sure the position taken in the APA or MAP process is consistent with the evidence and arguments used in ongoing assessments. A coordinated approach helps prevent one proceeding from undermining another.

Warning Sign 7: DRP or ITAT Proceedings Have Begun

By the time a draft assessment order arrives, the AO has proposed a transfer pricing adjustment. 

You generally have 30 days from receipt of the draft order to file objections before the Dispute Resolution Panel (DRP). The DRP can confirm, reduce or enhance the proposed variation, but it cannot set the order aside.

The DRP must issue its directions within nine months from the end of the month in which the draft order was forwarded to it. 

The AO then passes the final assessment order in accordance with those directions. An appeal to the Income Tax Appellate Tribunal (ITAT) generally has to be filed within 60 days of receiving the relevant order.

Why Its Essential

The dispute has moved beyond routine documentation. Your benchmarking analysis, choice of method, comparable companies and functional analysis now need to withstand formal challenge. 

Meeting procedural deadlines is essential. A poorly prepared response may leave important factual or legal arguments unaddressed.

What To Do

Bring in a transfer pricing dispute specialist as soon as the draft order arrives. The 30-day objection period leaves limited time to assess the adjustment, organise evidence and prepare submissions.

Focus on three priorities:

• Challenge the Adjustment: Identify errors in the TPO’s method, comparable selection, filters or economic analysis.
• Support Each Objection: Link your arguments to the transfer pricing study, intercompany agreements, transaction records and evidence of actual business conduct.
• Plan the Appeal: Agree on who will draft submissions, who will represent the company and how the case will proceed if it reaches the ITAT.

If the case is already before the Tribunal, check whether the grounds of appeal cover the disputed findings and whether additional evidence can be admitted under the applicable rules.

Keep the parent company’s tax team informed, particularly where the Indian dispute could affect corresponding adjustments or proceedings in another jurisdiction. Consistency across the group’s positions can help avoid further complications.

What PKCs Transfer Pricing Team Offers in a Dispute

PKC Management Consulting’s tax advisory services include transfer pricing advisory, compliance, transfer pricing studies, documentation, and defence of positions during tax audits. 

Our transfer pricing team helps you throughout resolving the dispute, step by step: 

Dispute-ready documentation, built before the notice

PKC’s transfer pricing practice starts with string policies, benchmarking and documentation designed to withstand scrutiny, including review of Form 3CEB and TP study reports. We also help evaluate APAs where certainty is commercially worth more than a litigated position.

Representation from assessment through litigation

When a dispute does arise, our experts at PKC develop a clear resolution strategy covering negotiation, appeals and litigation. Our team represents clients before tax authorities, prepares and submits documentation, analyses assessments, proposes appeals and defends the client’s transfer pricing position. Direct tax litigation support extends through scrutiny and appeals up to the CIT stage.

A track record you can interrogate

80%+ of our tax cases are resolved without liability, supported by a proprietary Three-Checkpoint Checklist that it says reduces the probability of scrutiny or assessment by 75%. Our tax team includes CAs with 7-15 years of post-qualification experience in international taxation and transfer pricing, covering cross-border transactions, DTAAs, withholding tax and TP documentation.

Transfer pricing sits within a broader tax advisory practice that also handles corporate tax, TDS, international tax and litigation. That means the TP dispute is not handed off between unrelated teams, the same advisers who built your  documentation can defend it before the AO, the DRP and, if needed, the ITAT.

Engage a TP Dispute Specialist

FAQs

What are the first warning signs of a transfer pricing dispute in India? 

A margin that repeatedly falls outside the benchmark range, a prior-year adjustment still on appeal, and a scrutiny notice that mentions international transactions are the earliest signs. New royalty, cost-sharing, or distribution arrangements add risk because the TPO tests who funds, controls, and benefits from them.

What is the difference between the AO and the TPO in a transfer pricing case? 

The AO assesses your return, the TPO determines whether your related-party prices are at arm’s length, after the AO refers the case under Section 92CA of the 1961 Act. The AO then issues a draft assessment order based on the TPO’s findings.

How long do you have to object to a transfer pricing draft order? 

You have 30 days from receipt of the draft assessment order to file objections before the DRP. If you file none, the AO completes the assessment on the basis of the draft order, and you then appeal the final order in the normal way.

Can a dispute resolution panel increase a transfer pricing adjustment? 

Yes. The DRP can confirm, reduce, or enhance the variation in the draft order, but it cannot set the order aside or send it back for further inquiry. Weigh that before deciding whether to object.

How long does a mutual agreement procedure take in India? 

OECD figures quoted by BMR Legal put India’s average time to close transfer pricing MAP cases started after 1 January 2016 at 35.78 months, as of the end of 2024. Individual cases vary, and domestic appeal deadlines keep running meanwhile.

When should MNCs hire a transfer pricing dispute specialist? 

Consider a specialist firm like PKC Management Consulting when a notice mentions a specific transaction, when an earlier-year adjustment is on appeal, when the TPO challenges your method or risk profile, or when a draft order arrives. Your existing adviser may handle routine queries, but situations like these require experienced expertise.