Get clarity on transfer pricing and withholding tax scrutiny for cross-border payments, including compliance requirements, defence strategies, and dispute resolution options.
A transfer pricing dispute usually starts with a simple question from the tax officer: why did you pay this foreign group company this much, and why did you deduct no tax, or too little? When payments to related parties and non-residents are examined together, the same invoice can create both a transfer pricing adjustment and a withholding tax demand. This guide explains how the two issues connect, the defence options at each stage, and how to prepare before the first notice arrives.
A note on the law: this guide uses the Income-tax Act, 1961 for assessment years up to 2025-26. The Income-tax Act, 2025 applies from tax year 2026-27 and renumbers many sections and forms. For example, the old Section 195 obligation to deduct tax on payments to non-residents now sits in Section 393(2). Confirm the section and form numbers for your year.
You can defend a cross-border payment by proving four things: that the service was actually received, that the price is at arm’s length, that tax was correctly treated at the time of payment, and that treaty relief applies. Procedurally, you can reply to the Transfer Pricing Officer (TPO), object before the Dispute Resolution Panel (DRP) or appeal to the Commissioner (Appeals), go to the ITAT and High Court, seek relief under a tax treaty through the mutual agreement procedure (MAP), or avoid future disputes through an advance pricing agreement (APA).
Tax authorities look at cross-border payments for three reasons. First, money leaves India and reduces taxable profit. Second, related parties can set prices to suit themselves. Third, the tax cost of getting it wrong is high: an adjustment, interest, penalty and a withholding default can all follow the same payment.
Typical flashpoints are:
The practical lesson: one set of facts is being tested by two parts of the department. Your documents and your classification must tell the same story in both.
When international transactions cross the reference limits, the Assessing Officer refers the case to the TPO under Section 92CA. The TPO issues a show cause notice, asks for documents and may propose an adjustment. This is the best time to win on facts. File a complete reply with the TP study, the agreements, evidence of services and a clear functional analysis. Our guides on the transfer pricing study report and its applicability cover what to keep ready.
After the TPO adjustment, a draft assessment order may be passed for eligible assessees, typically a foreign company or a person with a TP variation. You can object to the DRP within 30 days instead of waiting for the final order. If you choose not to use the DRP, the route is an appeal to the CIT(A). Compare time, cost and cash flow before you decide. Read our guides on the DRP and choosing between DRP and CIT(A) for a TPO adjustment.
The ITAT is the last forum that fully examines facts and comparables. An appeal is generally due within 60 days of the order. The High Court hears appeals only on a substantial question of law. For practical steps and timing, see how to file an ITAT appeal online and how long an ITAT appeal really takes and what it costs.
If a TP adjustment leads to double taxation, the MAP lets the tax authorities of the two countries discuss the case and avoid taxing the same income twice. The request is usually due within a fixed period from the first notice of the action, often three years, so check the treaty. MAP runs alongside domestic appeals, and the rules on how the two interact depend on the treaty and the notified guidelines, so take advice before you choose.
An APA agrees the pricing method with the tax authorities in advance for a set period. It takes time and cost to obtain, but it can remove recurring disputes on intra-group royalty, services or financing. It suits large, long-term arrangements.
While you dispute a demand, apply for a stay and prepare for part payment. Our guide to stay of demand under Section 220(6) explains what to include. For a broader view of related cases, see transfer pricing litigation.
If the officer says you should have deducted tax on a cross-border payment, check these points in order:
Further reading: withholding tax on cross-border payments and royalty and FTS under DTAA.
A transfer pricing dispute can bring penalties on top of the adjustment. These include penalties for failing to keep or furnish documents, for under-reporting income, and for failing to file the accountant’s report. A TP adjustment may also require repatriation of the excess money from the associated enterprise, or interest on the amount not repatriated. Raise reasonable cause, good-faith documentation and consistent practice as defences, and treat penalty proceedings as a separate fight from the main addition. See penalty proceedings under the Income Tax Act.
Build this folder before the notice arrives.
A transfer pricing dispute over cross-border payments is won through preparation: contracts that match reality, proof of services, a reliable benchmarking study and a withholding position that agrees with your TP position. If a notice has already arrived, respond with complete evidence, pick the right forum, protect your cash flow and consider treaty relief where double tax is possible. For a broader view of international tax risks, read our overview of cross-border taxation and our note on independent tax opinions.
Facing a TPO notice or a withholding tax demand? DSRV & Co. LLP is a peer-reviewed chartered accountancy firm in Gurugram that has advised on transfer pricing and cross-border tax disputes since 1987. Contact our team or call +91 981 011 6321 to have your case reviewed.
Disclaimer: This article is general information, not legal advice. Rates, limits, forms and treaty terms change, and the Income-tax Act, 2025 renumbered many provisions. Confirm current rules against your own notice before acting.
Each is tested separately, so you must defend both. A win on one does not automatically end the other, but a consistent record helps in both.
For eligible assessees, objections to the DRP are generally due within 30 days of receiving the draft order. Check your own order for the exact date.
Not automatically. You may need to apply for a stay of the demand, and the rules differ by case, so seek advice before filing.
Documentation requirements apply once international transactions cross the limits set in the rules, and the accountant’s report is required for any international transaction with associated enterprises. Read our applicability guide to confirm.
No. It is allowed if the service was received, benefited the payer, was needed commercially and is priced at arm’s length.
A chartered accountant or an advocate can usually appear. See CA, advocate or authorised representative.
Understand how transfer pricing (TP) and withholding tax rules affect cross-border payments, and learn the key steps to address tax notices, defend your position, and manage potential disputes.
GST litigation in Gurgaon: what to do while your GSTAT appeal is pending, how to protect your bank account, handle hearings and plan for the High Court.
Facing a transfer pricing dispute or withholding tax scrutiny on cross-border payments? See the defence options at each stage, from TPO to DRP, ITAT and MAP.
Got a Section 148 or 148A notice? Learn when reassessment can be stopped, how to reply, when to go to the High Court and what to do in the first 7 days.
