Is Your Company “Too Small” for a Transfer Pricing Study? Here’s What the Law Actually Says

 By Harshvardhan, Article Assistant | Audit, Tax & Advisory

A question frequently raised by founder-led companies with an overseas parent or subsidiary is: “We’re a small setup, our related-party transactions are minor. Do we really need a full transfer pricing study?”

It’s a fair question with the wrong assumption baked into it. Transfer pricing law in India isn’t triggered by company size. An international transaction with an associated enterprise brings the transaction within the transfer-pricing framework, while transaction value determines the extent of certain documentation requirements. The core reporting obligation has no monetary threshold.

Here’s the law as it stands, not the version that circulates informally between finance desks.

The Threshold Sits on the Transaction, Not the Company

Under Sections 92, 92A and 92B of the Income-tax Act, 1961, an international transaction between “associated enterprises” falls within the transfer-pricing framework. This can include transactions between a parent and subsidiary, entities under common control, and other relationships covered by Section 92A.

There is no general minimum turnover or transaction-value threshold that exempts an international transaction with an associated enterprise from the arm’s-length principle. A ₹2 lakh management fee paid to a foreign parent is as much a “transaction” under the Act as a ₹200 crore one.

The compliance documentation is where the thresholds actually apply:

• Form 3CEB, the accountant’s report prescribed under Section 92E, is required where the taxpayer has entered into an international transaction with an associated enterprise, regardless of transaction value. There is no ₹1 crore threshold for Form 3CEB.
• The detailed documentation prescribed under Rule 10D(1) is not required where the aggregate value of international transactions does not exceed ₹1 crore during the financial year, as provided under Rule 10D(2). Below that threshold, however, the arm’s-length requirement under Section 92 does not disappear, and the taxpayer should still be able to substantiate its pricing.
• Specified Domestic Transactions under Section 92BA carry a separate ₹20 crore aggregate threshold. These provisions apply to specified domestic transactions falling within the statutory categories, including certain transactions involving entities claiming specified profit-linked deductions.

So the answer to “are we too small?” depends on which compliance requirement is being considered. Company size is not the primary test. The nature and value of the transactions determine the applicable documentation and reporting requirements, and even below ₹1 crore, Form 3CEB may still be required where the taxpayer has entered into an international transaction with an associated enterprise.

What “Too Small, So We Skipped It” Actually Costs

Companies that skip transfer-pricing compliance may not appreciate the cost until an assessment arises, sometimes years later. Transfer pricing records have to be retained for eight years from the end of the relevant assessment year under Rule 10D(5) , so the exposure has a long tail.

The cost stacks in layers, not as a single penalty:

• Failure to furnish Form 3CEB can attract a ₹1,00,000 penalty under Section 271BA. The reporting requirement is linked to the existence of the relevant international transaction, not to whether the taxpayer earned a profit or incurred a loss. Relief may be available under Section 273B where the taxpayer can establish reasonable cause, but that is a defence after the default, not a substitute for filing on time.
• Specified failures relating to transfer-pricing documentation or reporting can attract a penalty of 2% of the value of the relevant international transaction under Section 271AA. This is separate from the penalty under Section 271BA, so the two provisions can apply independently.
• Failure to furnish information or documents required under Section 92D(3) can attract a further penalty of 2% of the value of the relevant international transaction under Section 271G, subject to the applicable statutory conditions.
• If a TP adjustment increases assessed income, Section 270A may also become relevant in relation to under-reporting of income. Where the statutory conditions for misreporting are satisfied, the penalty consequences can be substantially higher.

Run the numbers on a modest, realistic case: an Indian subsidiary paying its foreign parent ₹1.5 crore a year for shared services, with no TP documentation and no Form 3CEB filed. On those assumptions, the potential penalties could include ₹1 lakh under Section 271BA plus ₹3 lakh under Section 271AA, calculated at 2% of the ₹1.5 crore transaction value. That is ₹4 lakh in potential penalties before any tax adjustment is considered.

The practical cost can also increase if the company has to reconstruct its transfer-pricing analysis after an assessment, rather than documenting the position contemporaneously.

Where the “Too Small” Instinct Isn’t Entirely Wrong

The instinct isn’t baseless. It’s just aimed at the wrong lever.

• Below ₹1 crore in aggregate international transactions with AEs, the detailed Rule 10D(1) documentation requirements do not apply. The taxpayer must nevertheless be able to substantiate its arm’s-length position, and Form 3CEB remains applicable where the reporting conditions are met.
• Master File obligations under Rule 10DA (Form 3CEAA) apply where the prescribed group-revenue and Indian-transaction thresholds are met, including the ₹500 crore consolidated-group revenue threshold together with the applicable ₹50 crore international-transaction or ₹10 crore intangible-transaction threshold. These requirements are therefore irrelevant for most genuinely small subsidiaries.
• Country-by-Country Reporting generally applies to multinational groups meeting the €750 million consolidated-revenue threshold, subject to the applicable rules.

These are real, size-based reliefs. They govern the depth of documentation and additional reporting required, not whether the arm’s-length principle applies to an international transaction with an associated enterprise.

The Question Worth Asking Instead

Not “are we too small for a TP study,” but “what’s the aggregate value of our international transactions with associated enterprises this year, and have we filed Form 3CEB regardless of that number?”

That’s the question that better identifies the company’s actual compliance exposure. “Too small” may sound like a safe assumption, but it does not by itself remove the transfer-pricing requirements that apply to an international transaction with an associated enterprise.

Quick Answers

Is a transfer pricing study mandatory for small companies in India?

Transfer-pricing rules can apply to an international transaction with an associated enterprise regardless of company size. The ₹1 crore threshold relates to the detailed documentation requirements under Rule 10D(1); it does not create a general exemption from the arm’s-length principle. Form 3CEB is required where the applicable reporting conditions are met, regardless of transaction value.

What is the penalty for not filing Form 3CEB?

Failure to furnish Form 3CEB can attract a ₹1,00,000 penalty under Section 271BA. The requirement is linked to the relevant international transaction, rather than whether the taxpayer made a profit or incurred a loss.

Do specified domestic transactions have a different threshold?

Yes. Section 92BA carries a separate ₹20 crore aggregate threshold, distinct from the ₹1 crore threshold relevant to detailed documentation for international transactions.

How long must transfer pricing documentation be retained?

Eight years from the end of the relevant assessment year, under Rule 10D(5).

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Reflects the law as applicable for FY 2025-26 / AY 2026-27 under the Income-tax Act, 1961. The Income-tax Act, 2025 introduces the new statutory framework for later tax years, with corresponding transfer-pricing provisions and thresholds. The applicable provisions should be verified for the relevant assessment year at the time of filing and publication.

Sources: Income-tax Act, 1961, Sections 92, 92A, 92B, 92BA, 92C, 92D, 92E, 270A, 271AA, 271BA and 271G; Income-tax Rules, 1962, Rules 10D, 10DA and 10DB; Income Tax Department guidance on transfer pricing.

For most founder-led companies, the “too small” question becomes clearer once three things are on the table: aggregate international transaction value, the applicable compliance threshold, and whether Form 3CEB has been filed. That assessment is far easier to make before a scrutiny or assessment than after it.