Why Transfer Pricing Matters: Practical Challenges and Judicial Developments in India

Transfer Pricing (TP) has become one of the most important and complex areas in international taxation. It governs how multinational companies price goods, services, intangibles, and financial transactions between their related entities across borders. Because these transactions influence how profits are distributed among different countries, tax authorities closely monitor them to prevent base erosion and profit shifting.

Under the Income Tax Act, 2025, transfer pricing continues to follow the same principles that were first codified in Chapter X (Sections 92 to 92F) of the old Income Tax Act, 1961. The law requires that all transactions between Associated Enterprises (AEs) be conducted at an Arm’s Length Price (ALP), the price that unrelated parties would have agreed upon in similar circumstances.

Why Transfer Pricing Matters

For multinational corporations, transfer pricing is not just a tax compliance issue. It influences global strategy, cash flow management, and profit allocation. For governments, it determines how much tax revenue can be attributed to local operations. Striking the right balance between commercial reality and fair taxation is important.

In India, transfer pricing disputes often arise because of differing interpretations by taxpayers and the tax department about what constitutes a fair price, or how to benchmark it. Issues such as marketing expenses, intra-group services, and financial transactions have all been sources of litigation. Procedural compliance under Section 144C and documentation under Section 92D have added additional layers of complexity.

Practical Challenges Companies Face

1. Intangibles and Advertising, Marketing, and Promotion (AMP) Expenses

One of the most litigated areas in Indian transfer pricing is AMP expenditure. Tax authorities often argue that when an Indian subsidiary spends heavily on advertising or brand promotion, it is indirectly building the brand owned by its foreign parent and must be compensated for this “service.”

The judiciary has consistently pushed back against this broad assumption. In Sony Ericsson Mobile Communications (2015), the Delhi High Court rejected the Bright Line Test (BLT) as a valid method to benchmark AMP expenses. The trend continued with more recent rulings.

In Casio India Company Pvt. Ltd. (Delhi HC, 2025), the Court reaffirmed that the Bright Line Test is not recognized under Indian law. The Assessing Officer cannot automatically treat AMP spending as an international transaction unless there is clear evidence of an agreement or arrangement with the foreign parent.

Similarly, in L’Oréal India Pvt. Ltd. (ITAT Mumbai, 2025), the Tribunal deleted a ₹184.75 crore adjustment after finding that all AMP expenses were incurred wholly for the Indian business, not for brand building of the foreign associated enterprise.

The ITAT Cochin in Joyalukkas (India) Pvt. Ltd. (2025) reached the same conclusion while remanding the case for fresh benchmarking. It held that the Bright Line Test is not an approved method and that advertisement expenses incurred for domestic operations cannot be presumed to benefit foreign affiliates. Together, these rulings have firmly established that AMP-related transfer pricing adjustments must be grounded in proven international transactions and factual analysis, not assumptions.

2. Intra-Group Services and Management Fees

Another area of frequent dispute involves payments for services such as management support, IT, and back-office assistance. Tax authorities often question whether these services were actually rendered or whether they provided any real benefit to the Indian entity.

The Supreme Court in American Express Banking Corporation (2025) settled an important principle. The Court upheld earlier decisions of the ITAT and the Delhi High Court, holding that the ALP of intra-group services cannot be determined as nil unless the conditions of Section 92C(3) are satisfied. The ruling reinforces the importance of procedural safeguards and prevents arbitrary assessments.

3. Comparability and Product-Mix Issues

Transfer pricing disputes often hinge on whether transactions are comparable. A good example is the Titan Company Ltd. (ITAT Chennai, 2025) case. The Tribunal deleted a ₹63.18 crore adjustment after accepting the company’s detailed product-mix and segmental margin analysis. It found that the TPO had compared tax-holiday units with non-tax-holiday units without considering differences in products, market conditions, and costs. The ruling confirmed that benchmarking must account for commercial realities, not just broad numerical comparisons.

In Toyota Tsusho India Pvt. Ltd. (Karnataka HC, 2025), the issue was classification under CBDT’s notification defining “wholesale traders.” The taxpayer failed to meet one of the two cumulative conditions, its average monthly closing inventory exceeded 10% of sales. The Court held that unless both conditions are satisfied, the taxpayer cannot be treated as a wholesale trader, and the broader ±3% tolerance range under Section 92C(2) would apply. The decision clarified that classification disputes directly impact acceptable profit margins and, consequently, transfer pricing adjustments.

Procedural Safeguards and Compliance

Beyond economic analysis, transfer pricing disputes often involve procedural questions under Section 144C, which governs assessments involving transfer pricing variations.

In Archroma International (India) Pvt. Ltd. (Bombay HC, 2025), the Court ruled that the one-month timeline under Section 144C(13) is mandatory. The Assessing Officer must complete the assessment within that period after receiving directions from the Dispute Resolution Panel (DRP). Delays render the assessment and transfer pricing additions invalid.

Soon after, in Classic Legends Pvt. Ltd. (Bombay HC, 2025), the same High Court clarified that an Assessing Officer cannot issue a draft assessment order under Section 144C(1) when the TPO makes no variation to the ALP. In such cases, the assessee is not an “eligible assessee” under Section 144C(15). This decision ensures that the DRP procedure is invoked only where a variation prejudicial to the taxpayer actually exists.

Conclusion

Recent court rulings show that India’s approach to transfer pricing is becoming more balanced and practical. Judges now focus on real evidence and fair procedures instead of assumptions or rigid formulas. The courts are ensuring that both taxpayers and authorities follow the law carefully and act reasonably. This shift is helping build a tax system that is fair, predictable, and trusted by businesses.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates