As we move through 2025, multinational enterprises (MNEs) operating in India continue to navigate an ever-evolving transfer pricing (TP) environment. The government is under pressure to balance revenue interests with the need to maintain a competitive, stable, and business-friendly tax regime. In this context, the upcoming Union Budget on 1 Feb 2025—along with potential legislative and administrative changes—represents a pivotal moment for advancing India’s transfer pricing framework.

This article examines eight key areas where reforms or clarifications would significantly improve TP policy. These suggestions aim to reduce litigation, enhance compliance simplicity, and align India’s rules with global best practices, ultimately making the Indian tax landscape more predictable and investor-friendly.

1. Refining Safe Harbour Provisions for Greater Adoption

Current Challenges

• Mismatch with Commercial Realities: The existing safe harbour margins and thresholds under the Safe Harbour regime often do not reflect real-world profitability or industry benchmarks.
• Limited Coverage: Not all industries or transaction types can avail of Safe Harbour, leading to uneven benefits across sectors.

Why It Matters Safe Harbour provisions simplify TP compliance by allowing taxpayers to apply pre-agreed mark-ups or pricing margins, subject to specific eligibility conditions. This reduces administrative costs for both the taxpayer and the tax authority.

What Could Be Done

• Revised Margins: Update margins and thresholds to align with market data and post-pandemic economic realities, encouraging more taxpayers to opt in.
• Broader Scope: Expand coverage to include more sectors, especially new-age and service-oriented industries.
• Streamlined Procedures: Implement an online application and approval process for Safe Harbour, shortening response times and minimizing paperwork.

2. Accelerating the Advance Pricing Agreement (APA) Process

Current Challenges

• Backlogs and Delays: The APA program has proven popular among MNEs, but lengthy waiting periods undermine its effectiveness.
• Resource Constraints: APA authorities may be short-staffed or lack specialized expertise to evaluate complex transactions swiftly.

Why It Matters APAs offer certainty and preempt disputes by locking in a mutually agreed transfer pricing methodology. This fosters a collaborative environment between taxpayers and tax authorities.

What Could Be Done

• Dedicated APA Cells: Establish specialized teams with robust industry and technical expertise to expedite APA processing.
• Defined Timelines: Introduce statutory timelines for different stages (e.g., pre-filing consultation, submission review, final agreement), incentivizing both parties to adhere to deadlines.
• Regular Status Updates: Implement a transparent, perhaps online, tracking system for applicants to monitor the progress of their APA.
• Develop a specialised APA dashboard, record all proceedings, and allow online representations.

3. Aligning the 35-65 Percentile Arm’s Length Range to Global Standards

Current Challenges

• Inconsistent Benchmarking: India’s 35th-65th percentile requirement clash with the interquartile range (IQR) often used in other jurisdictions.
• Risk of Adjustments: The narrower, fixed percentile band may increase the likelihood of disagreements with global affiliates where different ranges apply.

Why It Matters Consistency with widely accepted international norms like the IQR can reduce cross-border mismatches and prevent double taxation scenarios.

What Could Be Done

• Introduce Flexibility: Allow the use of IQR (25th-75th percentile) or other credible ranges if robust justification is provided.
• Closer Global Alignment: Issue guidance reflecting international best practices, facilitating smoother coordination with foreign tax authorities.

4. Clarifying the Comparable Search Process and Filter Applications

Current Challenges

• Lack of Standardized Guidelines: Variations in search methodologies and filter applications (e.g., turnover, functional profile, Related party) often lead to rejections of comparables.
• Assessing Officer Discretion: In the absence of uniform benchmarks, assessing officers have broad latitude in rejecting comparables, fueling disputes.

Why It Matters The comparable company search is the foundation of any benchmarking analysis. Clear guidelines help ensure transparency and consistency in audit proceedings.

What Could Be Done

• Broad Guidelines: The Central Board of Direct Taxes (CBDT) could issue uniform instructions on acceptable financial filters, data sources, and industry-specific factors.
• Year-by-Year Clarity: Spell out how prior-year data should be treated when current data is unavailable or incomplete.
• Review Mechanism: Introduce a fast-track review procedure to handle disagreements over the choice of comparables before the matter escalates to protracted litigation.

5. Elaboration of DEMPE Functions in Transfer Pricing Regulations

Current Challenges

• Limited Guidance: Although India aligns with many OECD principles, the guidance around DEMPE (Development, Enhancement, Maintenance, Protection, and Exploitation) of intangibles is still evolving.

Why It Matters As intangible assets, such as intellectual property and brand value, become central to MNEs’ profitability, correctly identifying and attributing returns to DEMPE functions is crucial.

What Could Be Done

• Specific Regulations: Incorporate explicit DEMPE-based assessment principles into Indian TP regulations.
• Guidance on Cost Allocation: Offer clarity on the allocation of R&D costs and how to determine the “significant economic activity” behind intangible value creation.
• Reporting Requirements: Mandate more detailed disclosures for transactions involving intangibles, consistent with global documentation standards.

6. Setting Minimum Standards for Intra-Group Services

Current Challenges

• Subjective Benefit Test: Tax authorities frequently dispute whether the Indian entity truly benefits from global service charges—especially for head-office functions.
• Cost Allocation Variances: Lack of standardized approaches to cost allocation often leads to inflated or ambiguous service charges.

Why It Matters Intra-group services can be a contentious area, especially when their necessity and benefit are not well-documented. Clear rules reduce the scope for disagreements and ensure that only genuine service transactions are billed.

What Could Be Done

• Benefit Test Guidelines: Provide standardized criteria for demonstrating benefit, including the nature and frequency of the service.
• Documentation Templates: Mandate basic templates illustrating how costs are allocated and what cost drivers are relevant for different service categories.
• Industry-Specific Guidance: Recognize unique cost structures in specialized sectors like IT, pharma, or R&D to avoid one-size-fits-all complications.

7. Strengthening the Dispute Resolution Panel (DRP)

Current Challenges

• Delay and Limited Bandwidth: The DRP is sometimes bogged down by the volume of cases, resulting in delayed outcomes. Most often it acts as a pass through and concludes only on arithmetic errors.
• Scope and Transparency: The DRP’s processes, while more efficient than traditional litigation, could benefit from wider coverage and clearer procedural rules.

Why It Matters A robust dispute resolution mechanism reduces judicial backlogs and fosters investor confidence. The DRP has been effective in some cases, but there is room for improvement.

What Could Be Done

• Expanded Jurisdiction: Let the DRP cover a broader range of issues, including intricate intangible valuation, permanent establishment disputes, etc.
• Procedural Clarity: Publish timelines for each stage of the dispute resolution process, ensuring predictable progress.
• Enhance Expertise: Equip panels with specialized TP experts to handle complex technical cases, improving the speed and quality of outcomes.
• Independent views and disposal: Revenue should not be one of the targets for the DRP. They should have independent judicial powers, similar to ITAT.

8. Increasing the GAAR Threshold of tax benefit from INR 3 Crore to INR 10 Crore

Current Challenges

• Low Threshold, High Compliance: GAAR is intended to target aggressive tax avoidance. However, the current threshold of tax benefit of INR 3 crore can subject even moderate transactions to intense scrutiny.
• Strained Resources: Authorities may spend inordinate time examining smaller deals not necessarily indicative of complex avoidance strategies.

Why It Matters Raising the threshold would allow the government to focus on high-value transactions where the likelihood of aggressive avoidance is higher, relieving smaller taxpayers of disproportionate compliance burdens.

What Could Be Done

• Legislative Amendment: Increase the threshold to INR 10 crore, aligning GAAR scrutiny with transactions that truly warrant a closer look.
• Targeted Enforcement: Combine the higher threshold with refined enforcement guidelines, ensuring that resources are channeled effectively to detect genuine cases of tax avoidance.

Conclusion

In 2025, India stands at an inflection point regarding its transfer pricing framework. While strides have been made to streamline and modernize TP regulations, significant gaps remain. By addressing the above eight areas—ranging from refining Safe Harbour and APAs to strengthening dispute resolution and clarifying GAAR thresholds—the government can achieve a robust, forward-looking transfer pricing environment.

Such reforms would bolster investor confidence, attract foreign investment, and reduce litigation. For taxpayers, greater alignment with global standards and clearer guidance on contentious issues like intangibles and intra-group services would enhance predictability, reduce compliance costs, and foster more meaningful dialogues with tax authorities. Ultimately, this evolution in India’s TP landscape will serve both the country’s economic interests and the legitimate business aspirations of multinational enterprises operating within its borders.