Budget 2026: A Structural Reset of India’s Transfer Pricing Framework

If Budget speeches were films, Budget 20261 would be the director’s cut — fewer special effects, tighter editing, and a clearer narrative. Without resorting to sweeping policy overhauls, it marks a watershed moment for India’s transfer pricing (TP) regime by addressing the framework holistically rather than through isolated amendments. The Budget 2026 doesn’t shout — it whispers. And for transfer pricing professionals, those whispers matter more than the noise due to the notable shift in India’s transfer pricing narrative. For the first time, transfer pricing has been addressed across multiple dimensions in the Budget- spanning Safe Harbour expansion, margin rationalization, assessment facilitation and penalty rationalization- signaling a conscious policy intent to reduce friction rather than merely manage disputes.

In a year where the Finance Bill2 resists the temptation of sweeping policy overhauls, it instead focuses on tightening screws, clarifications have replaced ambiguities, technical defaults have been reframed into predictable outcomes, and long-running fault lines in procedure have been smoothed over. The result is not a new plot, but a sharper screenplay, one that reduces interpretational drama while quietly shifting the balance of risk, compliance, and certainty for multinational groups operating in India. For transfer pricing, the spotlight is not on new methods or rates, but on procedural certainty: time limits, documentation discipline, and the re-characterization of penalties as fees. These may sound like footnotes, but seasoned practitioners know that it is precisely these ‘minor edits’ that determine whether a tax controversy becomes a short film or a long-running franchise.

• https://www.indiabudget.gov.in/doc/budget_speech.pdf
• https://www.indiabudget.gov.in/doc/Finance_Bill.pdf

Safe Harbour Regime: From Exception to Mainstream

Increase in threshold of value of international transactions from INR 3 billion to INR 20 billion with uniform mark-up on cost of 15.5% for different services

The Safe Harbour regime has been recast, not as a niche procedural refuge, but as a mainstay of transfer pricing certainty, particularly for India’s burgeoning technology and service exporters. By consolidating software development, IT-enabled services, knowledge process outsourcing and contract R&D into a unified “Information Technology Services” category with a common Safe Harbour margin of 15.5 percent, the budget recognizes integrated service delivery models that define modern global in-house centres and captives.

Equally noteworthy is the quantum expansion of the eligibility threshold, leaping from INR 3 billion to INR 20 billion — which effectively broadens the safe harbour’s embrace to a significantly larger cohort of mid-tolarge entities. This recalibration reflects a conscious governmental response to industry feedback that the earlier margin norms and thresholds were misaligned with commercial realities, often triggering avoidable compliance friction in the face of competitive cost pressures. These measures are likely to benefit Global Capability Centres (GCCs) and other eligible entities

Automation and Long-Term Certainty

Approval and validity of Safe Harbour provisions

The proposal pushes transfer pricing administration decisively into auto-pilot mode by processing Safe Harbour applications through a fully automated, ruledriven framework—without officer discretion. It marks a structural shift away from subjective review and toward system-led certainty. Equally important is the ability to lock in Safe Harbour outcomes for five consecutive years, materially reducing recurring compliance friction and offering a level of predictability that taxpayers have traditionally pursued through more resource-intensive APA routes. This also realigns the regime with its original design philosophy—where Safe Harbour was envisaged as a multi-year certainty mechanism rather than an exercise in annual revalidation.

Running in parallel, the fast-tracking of Unilateral APAs for IT services, with a targeted two-year resolution timeline, further reinforces this certainty-first narrative. The extension of modified return benefits to associated enterprises adds another layer of administrative efficiency, addressing long-standing asymmetries in post-APA implementation. Taken together, these measures signal India’s intent to move transfer pricing away from prolonged negotiation and toward a regime where outcomes are defined upfront, administered consistently, and sustained over time.

Investment-Linked Transfer Pricing Safe Harbours

Extended applicability of Safe harbour provisions to include data centers and nonresidents for component warehousing in a bonded warehouse

One notable evolution in India’s transfer pricing philosophy is the deployment of safe harbours as an investment-enabling instrument, rather than merely a dispute-containment mechanism. The introduction of targeted margins 15.00% per cent cost-plus for related-party data center services, a 2 per cent margin for bonded warehousing operations by non-residents, and TP-neutral treatment for toll manufacturing arrangements, signals a conscious alignment of TP policy with broader objectives of supply-chain relocation, digital infrastructure build-out, and manufacturing competitiveness. In the context of data centers, the proposals go beyond transfer pricing simplification. Recognizing data centers as critical infrastructure, the Budget extends a tax holiday until 2047 for foreign companies providing services to customers outside India using Indian data centers infrastructure. At the same time, it preserves the domestic tax base by mandating that services rendered to Indian customers be routed through, and taxed in, an Indian reseller entity. Complementing this, a 15 per cent safe harbour mark-up for resident entities providing data center services to related foreign cloud service providers introduces pricing certainty while maintaining a commercially viable return for Indian operations.

Similarly, to support just-in-time logistics in electronic manufacturing, the introduction of a 2 per cent safe harbour margin for non-residents operating component warehouses in bonded facilities reflects a pragmatic appreciation of the low-risk, low-value-add nature of such functions. By removing pricing uncertainty in these narrowly defined activities, the regime facilitates smoother integration of India into global manufacturing supply chains without inviting disproportionate TP scrutiny.

Finally, the clarification and broadening of the definition of “accountant” under the Safe Harbour Rules is a quieter but meaningful reform. It aligns with the broader policy vision of fostering globally competitive, Indian-headquartered accounting and advisory firms, while ensuring adequate professional oversight within an expanding safe harbour ecosystem.

While entities providing data center services may opt for safe harbour provisions, clarifications on the definition of such services to evaluate the coverage of the services and the transaction threshold for such services are still awaited. Until detailed guidance is issued, taxpayers may need to carefully assess functional scope and threshold eligibility.

Assessment and Penalty Rationalization

Clarification on time limit for the completion of assessment under section 144C of the Act

Budget 2026 addresses one of the most persistent sources of technical transfer pricing litigation by clarifying procedural timelines relating to DRP cases, TPO orders, Document Identification Numbers, and reassessment jurisdiction. For years, disputes in this area have revolved less around transfer pricing substance / pricing outcomes and more around process failures of whether assessments were completed within time, leading to avoidable litigation driven by procedural ambiguity rather than tax substance.

A key area of controversy arose in cases where taxpayers opted to approach the Dispute Resolution Panel (DRP). Conflicting interpretations emerged on whether the time consumed in DRP proceedings operated within the overall assessment time limit or in addition to it, particularly due to the interaction between section 153 (general limitation) and section 144C (DRP procedure). Divergent judicial views—and even a split verdict at the Supreme Court level—left the issue unresolved and administratively uncertain.

Controversy: Whether Sec 144C timeline is included in or in addition to 153 timeline

Section of the Act	Timeline to pass order	Deadline final assessment order for AY 23-24 (as an example)
153	1 year + 1 additional year for TP	Inclusive timeline – 31st March 2026
144C	9 months for DRP + 1 month for AO	Additional timeline – 31st January 2027

The Finance Bill 2026 resolves this impasse by legislatively clarifying that section 144C timelines override the general limitation provisions, and by retrospectively amending the law to provide additional time where the DRP route is exercised. This brings procedural certainty, albeit by nullifying contrary judicial precedents, and allows assessments to be concluded without recurring limitation-based challenges. While retrospective clarification may raise concerns from a litigation-finality perspective, it undeniably closes a long-standing procedural fault line.

Complementing this, the conversion of penalties for technical and procedural defaults — including nonfurnishing of transfer pricing audit reports—into fees reflects a clear shift in enforcement philosophy. The emphasis moves from punishment to proportionate compliance, recognizing that such defaults are typically administrative rather than evasive. Together, these measures lower the adversarial tone of TP assessments and reinforce India’s stated policy direction: focus on substantive tax outcomes, reduce form-driven disputes, and align enforcement with global best practices.

Clarification on Timeline for Passing Transfer Pricing Orders (60 or 61 days)

Budget 2026 brings closure to a narrow but recurring technical controversy around the time limit for passing Transfer Pricing Officer (TPO) orders. Section 92CA(3A) requires the TPO to pass its order before sixty days prior to the expiry of the assessment limitation period. Courts, focusing on the word “before”, had interpreted this to mean that the effective deadline was sixty-one days, leading to disputes over whether an order passed exactly sixty days prior was time-barred.

Rather than allowing this issue to evolve into prolonged litigation, the Finance Bill 2026 opts for legislative clarity over interpretational debate. The law is amended retrospectively to specify a clear calendar deadline for passing TPO orders—30 January in a non-leap year and 31 January in a leap year. By replacing relative daycount calculations with a fixed date, the amendment eliminates ambiguity and removes a purely technical ground of challenge.

This change is consistent with the broader Budget 2026 approach: close procedural loopholes, reduce form-driven disputes, and ensure that transfer pricing outcomes are determined on merits rather than on arithmetic or drafting ambiguities.

Fast-Track Unilateral Advance Pricing Agreements for IT Services

To strengthen tax certainty and reduce prolonged transfer pricing disputes, there is an introduction of a fast-track framework for Unilateral Advance Pricing Agreements (UAPAs) for IT service companies. Under this proposal, tax authorities are expected to conclude such APAs within two years from the date of application, providing much-needed predictability on pricing outcomes. Recognizing that certain cases may require additional deliberation, the framework allows a one-time extension of up to six months, subject to a request from the taxpayer. This strikes a balance between expedited resolution and practical flexibility, without diluting the commitment to time-bound closure.

The Budget also extends the facility of filing modified returns following the conclusion of an APA to associated enterprises, enabling aligned and seamless implementation of agreed arm’s length prices across group entities.

• Extension of up to six months, on taxpayer request
• Target to conclude UAPAs within two years
• Facility to file modified returns to AEs covered under APAs
• Fast-track framework for concluding UAPAs for IT service companies
• Reduces uncertainty and litigation; promotes APA adoption for IT service companies

#As per the recent annual report issued by the CBDT for FY 24-25, the average duration of processing of a UAPA is approximately 45.41 months (close to 4 years).

In practice, UAPAs in India have historically involved long gestation periods. As per the Central Board of Direct Taxes’ Annual Report for FY 2024-25, the average time taken to conclude a UAPA is approximately 45 months. The proposed fast-track mechanism has the potential to significantly compress this timeline, reduce litigation exposure, and encourage wider adoption of APAs among IT service companies—reinforcing India’s broader ease-of-doing-business and tax certainty objectives. Together with the expanded Safe Harbour regime, this positions APAs as a strategic choice rather than a last resort.

From Discretionary Penalties to Automatic, Graded Fees for Form 3CEB Defaults

Under the existing regime, failure to furnish the Accountant’s Report in Form 3CEB attracts a flat penalty of INR 9 Million imposed at the discretion of the tax officer. This discretionary framework has often resulted in inconsistent outcomes, even in cases involving minor or inadvertent delays. Finance Bill 2026 replaces this approach with an automatic, time-linked fee structure. Going forward, non-furnishing or delayed furnishing of Form 3CEB will attract:

• INR 0.05 Million for delays of up to one month; and
• INR 9 Million for delays beyond one month.

This shift marks a clear move away from subjective penalty proceedings toward predictable, rules-based compliance enforcement. While the change lowers the adversarial element associated with penalty discretion, it also raises the stakes for timely compliance, as fees will apply mechanically once a delay occurs. For taxpayers, this underscores the need for stronger internal timelines, early data collation, and closer coordination between tax, finance, and audit teams when dealing with transactions involving associated enterprises.

Administrative and Ecosystem Reforms

The proposal to embed Income Computation and Disclosure Standards (ICDS) principles into Ind AS, and thereby eliminate the need for parallel tax accounting from FY 2027-28, addresses a long-standing friction point in transfer pricing compliance. Today, differences between accounting standards and tax computation often require taxpayers to maintain dual books and reconciliations, increasing documentation complexity, audit effort, and the risk of mismatches during TP assessments. By aligning tax computation more closely with financial reporting, the Budget reduces interpretational gaps and shifts the focus of TP reviews from accounting adjustments to economic substance and pricing outcomes.

In parallel, the rationalization of the definition of “accountant” for Safe Harbour purposes supports the Government’s broader objective of nurturing globally competitive, Indian-headquartered accounting and advisory firms. This reform reflects an ecosystem-level approach—recognizing that sustainable tax certainty depends not only on rules and thresholds, but also on the depth, capability, and credibility of the professional institutions that support compliance.





We have covered the previous extension of the applicability of Safe Harbour Rules in an earlier tax alert, which can be found as follows:

• 26 Mar 2025 | CBDT expands Safe Harbour Rules thresholds to INR 300 crores and other clarifications
• 2 Dec 2024 | Extension of Applicability of Safe Harbour Rules to AY 2024-25 and extension of timeline for filing Return of Income, Master File, and Safe Harbour
• 20 Dec 2023 | CBDT amends Safe Harbour Rule 10TA and Rule 10TD effective 1 April 2024
• 10 Aug 2023 | Extension of Applicability of Safe Harbour Rules to AY 2023-24
• 22 May 2020 | Safe Harbour Rules notified by the CBDT, for FY 2019-20 the previous rates to apply
• 9 Jun 2017 | Safe Harbour is more or less safe to sail now