Most transfer pricing adjustments are reduced on comparables and adjustments, not on advocacy. Here are the grounds that work, in the order we run them, and the evidence each one needs.
A transfer pricing adjustment arrives as a single number. Your margin should have been higher, your royalty lower, your management fee nil, and here is the addition.
What that number hides is a chain of choices the Transfer Pricing Officer made along the way. Which method. Which comparables. Which filters. Whether to adjust for differences. Whether to test each transaction or aggregate them.
Every one of those choices is contestable, and adjustments get reduced or deleted far more often on that chain than on any grand legal argument. This guide sets out the grounds that actually work, roughly in the order we run them, and what evidence each one needs.
Three broad types, and the defence differs completely.
A margin adjustment. The TPO accepts your transaction but says your operating margin should be higher than the comparable set you chose. This is the most common and the most winnable, because it is entirely about comparables and adjustments.
A pricing or rate adjustment. A royalty rate, interest rate or guarantee fee is said to be off market. Winnable with external benchmarking evidence.
A benefit or existence challenge. The TPO says the service was never rendered, or no benefit was received, and determines the arm's length price at nil. This is the hardest, because it is an evidence problem rather than an economics problem. Intra-group management fees and cost allocations attract this most often.
Read your order carefully to identify which one you actually have. Groups routinely spend months arguing comparables when the TPO's real point was that no benefit was demonstrated.
Before economics, procedure. Four checks worth running first.
Did the TPO stay within the transactions actually referred to him? Was the order passed within time? Was the draft order issued at all, since a foreign company or a case with a TPO variation must go through the draft order route? Did the Assessing Officer follow the TPO's determination or depart from it?
These rarely win alone, but they are cheap to run and occasionally decisive. And where directions were already given, note that the Delhi High Court confirmed in 2026 that an Assessing Officer cannot make additions contrary to binding DRP directions. Our guide to the Dispute Resolution Panel in income tax covers that mechanism.
The TPO must select the most appropriate method on the facts, not the most convenient one.
Common failures: applying TNMM where a CUP was available on comparable uncontrolled transactions, rejecting your method without recording reasons, or switching method between years on identical facts without explaining why.
Where the method itself is wrong, everything built on it falls with it, which makes this a higher-leverage argument than fighting individual comparables. Our guide to transfer pricing methods sets out the framework and where each method properly applies.
Evidence needed: your method selection analysis from the study, contemporaneous reasoning for rejecting alternatives, and internal comparable data if any exists.
This is where most adjustments are actually reduced. Six recurring attacks.
Functional dissimilarity. A company doing full-risk distribution is not comparable to your limited-risk distributor. Product similarity is not function similarity, and TPOs frequently conflate the two.
Selective exclusion of loss-makers. Excluding persistent loss-makers can be defensible. Excluding every company that would lower the margin, while retaining every company that raises it, is not. Show the asymmetry expressly.
Inconsistent filters. If the TPO applied a turnover filter, an export earnings filter or a related-party transaction filter, check it was applied evenly to inclusions and exclusions alike. Inconsistency is one of the most persuasive points available because it is arithmetic, not opinion.
Wrong financial data. Segmental versus entity-level figures, or multi-year data where a single year was appropriate.
Companies with different intangibles. A comparable owning valuable brands or technology is not testing the same thing as your routine service provider.
Extraordinary items left in. One-off gains, impairments or restructuring costs distorting the comparable margin.
Evidence needed: the annual reports of each comparable the TPO used, your own search process documentation, and a clean table showing exactly which filter was applied to whom.
Even where comparables are broadly acceptable, differences must be adjusted for. Four that are routinely refused and routinely restored on appeal.
Working capital adjustment, where receivable and payable cycles differ materially from the comparable set.
Capacity utilisation adjustment, where you operated below normal capacity for reasons outside your control.
Start-up or ramp-up adjustment, where the tested entity was in its first years and comparables were mature.
Risk adjustment, where you bore materially less risk than the comparables because the parent absorbed it.
Evidence needed: the computation itself, done properly, with the underlying data. A request for an adjustment without a worked calculation gets refused, and that refusal then looks reasonable on appeal.
Where transactions are closely linked, a manufacturer buying components, paying royalty and receiving technical support under one integrated arrangement, testing them together may be correct.
TPOs often disaggregate to isolate the single transaction that produces an adjustment, while ignoring that the overall arrangement is arm's length. If your operating margin as a whole is within range, lead with that.
For management fees, cost allocations and intra-group services, the TPO's argument is usually not that the price is wrong but that nothing of value was received.
You defeat this with contemporaneous evidence of what was actually delivered. Emails and deliverables, not a services agreement. Time records or headcount allocation from the provider. Minutes or reports showing the service was used. The allocation key and why it is rational. And evidence that you were not charged twice for something already covered elsewhere.
A services agreement plus an invoice, with nothing behind them, loses this argument. Most groups discover this too late, which is why the transfer pricing defence file matters more than any submission you can write afterwards.
Uncomfortable but often true. If the study has defects, the TPO will use them, and pretending otherwise wastes your credibility.
Our note on the most common errors in TP study reports covers what officers look for, and transfer pricing documentation requirements in India sets the baseline the study should have met.
Where the study is genuinely deficient, the better strategy is often to put a fresh economic analysis before the DRP, which can consider material not placed before the TPO. That is the single most underused feature of the whole mechanism, and it is why the choice of forum matters. Whether the entity should even have been within the net in the first place is covered in transfer pricing study report applicability.
Worth pricing before you decide how hard to fight.
The adjustment increases taxable income and the tax follows. No corresponding deduction is available in the other jurisdiction unless you invoke a Mutual Agreement Procedure, so the same profit is taxed twice in the meantime. Penalty exposure arises separately, and the gap between under-reporting and misreporting treatment is large. And a secondary adjustment can apply where the primary adjustment is not repatriated within the prescribed period, which turns a one-off into a recurring interest cost.
The audit exposure that sits behind all of this is set out in our note on the importance of transfer pricing audits.
The same facts feed two other regimes, and groups routinely handle them in separate silos.
GST on the same internal transaction. A management fee tested for arm's length under transfer pricing is also tested for value under GST. See intercompany transactions and dual exposure under TP and GST.
Withholding on the payment. Where the related-party payment goes offshore, characterisation and treaty rate arise alongside quantum, and a permanent establishment argument can follow. See who can advise on permanent establishment and international tax issues.
An adjustment fought in isolation can create an admission that hurts you in the other two.
If the same adjustment recurs every year, you are paying to re-litigate a settled argument annually. Two ways out.
Safe harbour offers certainty at a defined margin, set out in our guide to safe harbour rules for transfer pricing in India.
An advance pricing agreement buys forward certainty and can cover rollback years, which is usually the right answer for a structural, recurring adjustment rather than a one-off.
The wider dispute cycle is mapped in our overview of transfer pricing litigation in India.
An addition to taxable income made where the TPO concludes that a transaction with a related party was not at arm's length, whether on margin, rate, or the existence of a benefit.
Comparability. Functional dissimilarity, inconsistent filters and denied adjustments account for most reductions, because they are demonstrable rather than argumentative.
Before the DRP, yes. The panel may make its own enquiries and consider material not placed before the TPO, which is a strong reason to choose that route.
That is a benefit and evidence challenge, not a pricing one. You need contemporaneous proof of what was delivered and used, not just an agreement and an invoice.
No, but penalty is a separate proceeding with a large gap between under-reporting and misreporting treatment, so the characterisation matters and should be addressed early.
On facts, yes. The High Court hears only substantial questions of law, so every comparable and adjustment must be on the record by then.
Send us the TPO order and your study. We will tell you which of the grounds above your case actually has, what the adjustment is realistically worth fighting, and whether safe harbour or an APA is the better answer for the years ahead. DSRV and Co LLP prepares studies and defence files, and represents clients before the TPO, the DRP and the ITAT as part of our tax litigation and controversy practice.
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