Transfer pricing compliance is a critical requirement for Indian businesses involved in cross-border related-party transactions.
As scrutiny increases for FY 2024–25, companies must decide between using the Safe-Harbour Rules or opting for a formal Advance Pricing Agreement (APA) to manage risks.
This blog explains the updated transfer-pricing requirements, Safe-Harbour vs APA differences, and how companies should plan their documentation in 2025.
Legal Reference
- Section 92–92F, Income Tax Act, 1961
- Rule 10D, Income Tax Rules, 1962 (Transfer Pricing Documentation)
- CBDT Safe-Harbour Notification No. 46/2023
- APA guidance under Income Tax Rules, Rule 10F to 10T
What is Transfer Pricing?
Transfer pricing refers to the pricing of goods, services, loans, royalties, or intangibles between associated enterprises located in different tax jurisdictions.
Indian law requires that these prices be at arm’s length and properly documented.
Transfer-Pricing Documentation: Key FY 24–25 Requirements
- Local File (Mandatory for all eligible taxpayers)
- Master File (Form 3CEAA) for groups exceeding thresholds
- Country-by-Country Reporting (CbCR) (Form 3CEAD) for very large groups
- Deadline: Along with income tax return or separate filings as per Rule 10D
Failure attracts penalties starting from ₹1 lakh upwards under Section 271BA.
Safe-Harbour Rules for FY 2024–25
The Safe-Harbour Rules offer fixed profit margins for specific sectors, reducing documentation burden if conditions are met.
| Transaction Type | Minimum Margin Prescribed |
|---|---|
| Software Development Services | 17% on total operating cost |
| ITES (BPO services) | 17% on total operating cost |
| Knowledge Process Outsourcing | 18% on total operating cost |
| R&D services (with insignificant risk) | 24% margin |
Eligibility Conditions:
- International transactions must be below ₹200 crore
- No serious transfer pricing disputes or pending cases
- Income tax filings and documentation must be clean
Advance Pricing Agreements (APA)
An APA is a formal agreement between a taxpayer and the Indian tax authorities that predetermines the acceptable transfer pricing method for future years.
Types of APAs:
- Unilateral APA (only India)
- Bilateral/Multilateral APA (India + other countries)
Timeline: 1–2 years to negotiate and conclude an APA.
Validity: Can cover up to 5 years going forward and 4 past years through rollback provisions.
Safe-Harbour vs APA: Key Differences
| Feature | Safe-Harbour | APA |
|---|---|---|
| Nature | Fixed margins announced by CBDT | Negotiated agreement |
| Flexibility | Low | High |
| Risk Protection | Partial | Full |
| Timeline | Immediate | Takes 1–2 years |
| Suitability | Small/mid-size | Mid/large multinationals |
Example: Choosing Between Safe-Harbour and APA
Company A:
- Software service provider to US parent
- ₹15 crore turnover, margin 18%
Eligible for Safe-Harbour. Can declare 17% and avoid full audit.
Company B:
- Multi-country SaaS exporter
- ₹400 crore turnover
- Complex intangibles and IP ownership
Should apply for APA to avoid future multi-country tax disputes.
Best Practices for FY 24–25 Transfer-Pricing
- Start documentation early (before September 2025)
- Evaluate Safe-Harbour eligibility immediately post books closing
- Analyze whether APA can reduce litigation risk
- Ensure inter-company agreements are updated and aligned
- Maintain proper FAR (Functions, Assets, Risks) analysis
Conclusion
Choosing between Safe-Harbour Rules and APA depends on the size, complexity, and future goals of your international operations.
Start-ups, captives, and mid-size companies may prefer Safe-Harbour, while IP-owning, multi-country firms should strongly consider APAs for long-term tax certainty.
Call to Action and Disclaimer
Need help with Transfer Pricing Documentation, Safe-Harbour filing, or APA application?
Schedule a meeting with our Chartered Accountant, Anshul Goyal, by visiting:
Disclaimer: I am Anshul Goyal, a Chartered Accountant licensed with ICAI, India. This blog is for general informational purposes and not a substitute for specific legal advice.
Frequently Asked Questions
1. What is the penalty for missing transfer pricing documentation?
Penalty of ₹1 lakh under Section 271BA.
2. Can I opt for Safe-Harbour after filing the return?
No. It must be exercised while filing return and transfer pricing report.
3. Is APA binding on both taxpayer and tax authorities?
Yes. Once signed, APA terms are binding.
4. Do I need a Master File if I only have one foreign related entity?
Depends on turnover thresholds. Consult a tax expert.
5. Can I apply for both Safe-Harbour and APA together?
No. They are mutually exclusive options.