Transfer Pricing Updates

To the Newsletter Overview      Subscribe to the Newsletter

Transfer Pricing Updates

Important Transfer Pricing Amendments

Revised Safe Harbour Rules for IT Service Providers come into force

As highlighted in our previous publication, the Safe Harbour Rules were revised as part of the Union Budget 2026, whereby various IT service categories including software development services, research and development (R&D) services relating to software development, Information Technology Enabled Services (ITES), and Knowledge Process Outsourcing (KPO) services were proposed to be consolidated into a single category of eligible international transactions.

Further, the prescribed safe harbour operating profit margin was also proposed to be revised to 15.50%.

With the Income-tax Rules, 2026 coming into effect from 1 April 2026, the revised Safe Harbour Rules are now applicable and in effect from FY 2026–27 onwards.

Accordingly, eligible taxpayers intending to opt for the revised Safe Harbour regime should evaluate their eligibility and, where necessary, amend their intercompany agreements and remuneration policies to align with the revised rules with effect from 1 April 2026.

Bombay HC: Excess royalty refund not taxable

In a recent judgment in the case of Gemological Institute of America Inc. [TS-473-HC-2026 (BOM)-TP], the Hon’ble Bombay High Court held that excess royalty refunded by the US parent company to its Indian Associated Enterprise (‘AE’) pursuant to a Unilateral Advance Pricing Agreement (‘UAPA’) cannot be treated as taxable income in the hands of the US entity in India.

In the relevant assessment year, GIA US received royalty of INR 68.53 crore from its Indian subsidiary. Subsequently, the Indian AE entered into a UAPA with the Indian tax authorities, under which the arm’s length royalty was determined at INR 49.08 crore. Consequently, GIA US refunded the excess royalty to its Indian AE.

The principal issue before the Court was whether GIA US should be taxed on the entire royalty originally received or only on the amount ultimately retained after the refund.

The Hon’ble Bombay High Court ruled in favour of the taxpayer, holding that income tax is leviable only on the “real income” actually earned and retained by the taxpayer. Since the excess royalty had been genuinely refunded pursuant to the UAPA, it could not be regarded as taxable income.

The Court also rejected the Revenue’s contention that the transfer pricing provisions precluded GIA US from any reduction in its taxable income, observing that the APA itself determined the arm’s length royalty and the excess amount had, in fact, been refunded.

The ruling reaffirms the real income doctrine and recognises that refunds made pursuant to an APA should be given due tax effect where the taxpayer ultimately does not retain the income.

Chennai ITAT upholds idle capacity & customs TP

In a recent ruling in the case of Caterpillar India Pvt. Ltd. [TS-299-ITAT-2026 (CHNY)-TP], the Hon’ble Chennai ITAT held that genuine claims for idle capacity and customs duty adjustments should not be rejected without proper examination, thereby reinforcing the need for a fair and fact-based approach in transfer pricing assessments.

During the relevant assessment year, Caterpillar India, which was engaged in the manufacture of earthmoving equipment, argued that its profitability had declined because its manufacturing facilities operated at significantly lower capacity owing to an industry slowdown and reduced market demand. Accordingly, it claimed idle capacity and customs duty adjustments while benchmarking its international transactions. However, the tax authorities rejected these claims.

The Hon’ble ITAT observed that under-utilisation of manufacturing capacity is not confined to start-up businesses and may also occur in mature businesses due to adverse market conditions. Since the taxpayer had furnished adequate evidence demonstrating reduced capacity utilisation and temporary plant shutdowns, the Tribunal remanded the matter to the Transfer Pricing Officer (‘TPO’) for a fresh examination and directed that appropriate idle capacity and customs duty adjustments be granted, wherever justified.

The ruling reiterates that economically significant differences affecting profitability must be appropriately considered while determining the arm’s length price, particularly where taxpayers can substantiate such differences with reliable evidence.

To the Newsletter