Transfer pricing from the UK to India

UK groups frequently run an Indian subsidiary — a captive technology or back-office centre, a services arm, or a distribution company. Because the intercompany price sets how much profit sits in each country, it is a matter for both HMRC and India's tax authorities, and India in particular runs one of the most active transfer pricing enforcement regimes in the world.

1. Why this corridor needs care

The UK and India each apply their own rules, and India's are detailed and heavily audited.

• Dual audits. The same transaction can be examined by HMRC and by India's Transfer Pricing Officers, so your positions on both sides must be consistent.
• Active Indian enforcement. India litigates transfer pricing extensively, especially markups on captive IT/ITES and R&D centres.
• Withholding tax. Indian withholding on royalties and fees for technical services affects the net cost of intercompany charges — the treaty caps the rate, so model it early.
• Currency. GBP/INR movements shift measured margins and can prompt adjustments if your policy is not framed carefully.

2. The arm's-length principle on both sides

Both regimes require related-party transactions to be priced as if between independent parties, and both broadly follow the OECD guidelines. The UK applies the rules in TIOPA 2010; India applies Chapter X (Sections 92 to 92F) of the Income Tax Act 1961 and the associated rules. The recognised methods are the same — comparable uncontrolled price (CUP), resale price, cost plus, the transactional net margin method (TNMM) and profit split — with TNMM the most common for services and distribution.

3. What HMRC expects

UK transfer pricing turns on two questions: whether you are exempt, and, if not, what you must document. Many small and medium-sized enterprises fall within the SME exemption under TIOPA 2010 (subject to conditions and HMRC's power to disapply it), so a smaller UK company may have limited UK obligations even where its Indian counterpart does not. Larger groups — broadly those within Country-by-Country reporting, i.e. consolidated group revenue of at least EUR 750 million — must keep an OECD-style Master File and Local File for accounting periods from April 2023, and provide them to HMRC within 30 days of a request. Benchmarking should use recognised databases and contemporaneous comparables.

4. What India expects

India's regime is prescriptive. Every taxpayer with international related-party transactions must obtain and file Form 3CEB — an independent accountant's report certifying the transactions and methods — by the tax return due date. Contemporaneous documentation must be maintained and kept for eight years from the end of the relevant financial year. Groups above the prescribed size also file a Master File (Form 3CEAA) and, above the group-revenue threshold, Country-by-Country reports (Form 3CEAD). Penalties bite: Section 271AA and 271G for documentation failures (typically 2% of the transaction value), Section 271BA for failing to file Form 3CEB, plus adjustments and interest on under-reported income. India does, however, offer safe-harbour rules for certain routine captive services and a mature Advance Pricing Agreement programme.

5. Common structures and the methods that fit

• Captive R&D or IT/ITES centre in India — usually cost-plus (or TNMM). Markups are the most litigated issue in India; benchmark them well and refresh regularly. India's safe harbour can provide certainty for qualifying centres.
• UK limited-risk distributor — TNMM or resale price against independent distributor comparables; be ready to show the UK entity really bears limited risk.
• Shared services (finance, IT, HR) from India — cost-plus with a clear benefit test and allocation keys, supported by an intercompany services agreement.
• Intercompany financing — CUP-based interest with documented terms and a credit analysis; both authorities scrutinise rates and guarantees.
• IP and royalties — CUP where comparable licences exist, otherwise profit split, with the DEMPE functions documented and Indian withholding modelled.

6. The treaty, MAP and APAs

A key advantage of this corridor is that the UK and India have a comprehensive double taxation convention. If HMRC and the Indian authorities reach conflicting positions and both tax the same profit, you can invoke the Mutual Agreement Procedure to seek relief. For certainty in advance, India's APA programme allows unilateral and bilateral agreements with the UK competent authority, and safe harbours can cover routine captive work. These options exist — but they are slow and evidence-heavy, so strong pricing and documentation remain the first line of defence.

7. A practical checklist

• Confirm whether the UK SME exemption applies before assuming a UK documentation obligation.
• One consistent set of intercompany agreements reflecting the real functions, assets and risks.
• A benchmarking study supporting each method and markup, refreshed for current data.
• Form 3CEB and contemporaneous documentation in India by the deadline; Master/Local File where thresholds are met on either side.
• Withholding tax on royalties and technical fees modelled using the treaty rates.
• Consider a safe harbour or APA in India where the numbers justify the certainty.

Get UK-India transfer pricing help from StartEase.

Official references

• HMRC: International Manual (transfer pricing)
• Income Tax Department, India: Transfer pricing

Important: This is general educational information, not legal, tax, accounting or exchange-control advice. Rules, rates and thresholds change and depend on your circumstances — confirm the current position with a qualified professional before acting.