Transfer Pricing Litigation: Meaning, Process, and Dispute Resolution

Transfer pricing is one of those terms that often makes business owners especially multinational companies sit up straight. In simple words, transfer pricing refers to the price charged for transactions between related entities in different countries for example, when a company’s Indian subsidiary buys or sells goods or services to its parent or sister company abroad.

While these are normal business transactions, tax authorities in India often scrutinize them closely. They want to ensure that the prices reflect “arm’s length” meaning, what independent parties would have charged under similar circumstances. When the prices deviate from this standard, the Transfer Pricing Officer (TPO) may challenge them, leading to transfer pricing litigation.

Over the years, this has become one of the most complex and heavily contested areas of tax law in India. Disputes can run into crores and often take years to resolve. That’s why businesses increasingly rely on professional advisors and chartered accountant firms in Gurgaon to manage these matters smoothly.

At DSRV India, our tax experts assist clients in handling transfer pricing disputes strategically reducing exposure, managing documentation, and representing them at every stage of litigation.

What Is Transfer Pricing Litigation?

In simple terms, transfer pricing litigation begins when the Transfer Pricing Officer (TPO) disagrees with the pricing or documentation submitted by a taxpayer during assessment.

Under Section 92CA of the Income Tax Act, the TPO has the authority to assess whether the transactions between related parties are at arm’s length. If they believe that the pricing is not justified, they propose an adjustment meaning they increase the taxable income.

This adjustment is reflected in the Draft Assessment Order (DAO) issued by the Assessing Officer (AO). From there, the taxpayer can challenge the findings through the Dispute Resolution Panel (DRP), and if necessary, the Income Tax Appellate Tribunal (ITAT), and even the High Court or Supreme Court.

In short, transfer pricing litigation is the dispute resolution process that unfolds between taxpayers and the tax authorities over international transactions and their valuation.

Read More: WHY TRANSFER PRICING IS IMPORTANT & TP REPORT FILING DUE DATE

Common Causes of Transfer Pricing Disputes

Transfer pricing litigation doesn’t happen overnight. It usually stems from one or more of the following reasons:

• Non-compliance with the arm’s length principle — transactions don’t reflect independent market pricing.
• Incorrect comparable selection — taxpayers and TPOs often differ on which companies should be compared for benchmarking.
• Inadequate transfer pricing documentation — missing details or incomplete justification in the TP study.
• Disagreement on method selection — differences over using methods like CUP, TNMM, or RPM.
• Use of multiple-year data vs. single-year data — authorities may prefer current year data, while taxpayers rely on averages.
• Disallowance of management or technical service fees — when the TPO questions the benefit received for payments made to group entities.
• Royalty disputes — often arise when Indian subsidiaries pay royalties to foreign parents and must justify the value and commercial benefit.
• Marketing intangibles — disputes over whether advertising expenses for group brands create intangible assets in India.

For example, an Indian subsidiary paying a 5% royalty to its U.S. parent might face litigation if the tax officer believes the value should have been lower. Such cases are now routine in India’s transfer pricing landscape.

Also Read: Most Common Errors In TP Study Reports In India

Step-by-Step Process of Transfer Pricing Litigation in India

Let’s look at how the litigation process unfolds once a transfer pricing issue is flagged.

Step 1 – Transfer Pricing Assessment / Audit

The process starts with a transfer pricing audit by the Transfer Pricing Officer (TPO) under Section 92CA.

• The TPO issues a notice seeking detailed documentation — Local File, Master File, and the Transfer Pricing Study Report.
• The taxpayer must respond within the given time frame, furnishing all relevant data.
• The TPO then reviews the pricing methodology, comparables, and functional analysis (FAR analysis).

Step 2 – Draft Assessment Order

If the TPO finds inconsistencies or believes that the pricing is not at arm’s length, they propose an adjustment.

• The Assessing Officer (AO) incorporates these findings in a Draft Assessment Order (DAO).
• The taxpayer can either accept the adjustment or challenge it before the Dispute Resolution Panel (DRP) within 30 days.

Step 3 – DRP Proceedings

• The DRP is a three-member panel comprising Commissioners of Income Tax (CITs).
• It reviews the taxpayer’s objections, evaluates documentation, and may seek additional clarifications from both parties.
• The DRP’s directions are binding on the Assessing Officer.

Step 4 – Final Assessment Order

After receiving directions from the DRP, the AO passes the Final Assessment Order, along with a demand notice for any additional tax payable.

• The taxpayer then has the right to appeal before the Income Tax Appellate Tribunal (ITAT) within 60 days.

Step 5 – Further Appeals

If the taxpayer is not satisfied with ITAT’s order, further appeals can be filed:

High Court – for substantial legal questions

Supreme Court – final stage for cases of national importance

Each stage involves detailed documentation, legal drafting, and expert representation — this is where an experienced GST consultant in Gurgaon or tax litigation team becomes invaluable. 

Strategies to Handle Transfer Pricing Litigation

Successfully handling transfer pricing disputes requires preparation and strategy. Here are key steps:

• Maintain robust documentation in line with Rule 10D and OECD guidelines.
• Benchmark transactions using reliable comparables and consistent methods.
• Explain your FAR analysis (Functions, Assets, Risks) clearly. 
• Support your pricing with economic studies or third-party reports. 
• Engage professionals for representation before TPO, DRP, and ITAT. 

At DSRV India, our CA in Gurgaon team provides expert representation at every stage — from the transfer pricing audit to the Income Tax Appellate Tribunal (ITAT), ensuring your case is presented strategically and backed by facts.

Alternative Dispute Resolution Options

Litigation isn’t always the only path. The Indian tax system also provides several mechanisms for resolving transfer pricing disputes without prolonged court battles.

• Advance Pricing Agreement (APA): A proactive agreement between the taxpayer and the tax authorities that pre-defines the transfer pricing method for future transactions. It gives certainty for 5 years (plus rollback for 4 previous years).
• Mutual Agreement Procedure (MAP): A treaty-based resolution process between two countries to avoid double taxation.
• Safe Harbour Rules: Simplified compliance options for eligible taxpayers, where margins are predefined and accepted by the department.

These mechanisms save time, money, and stress — and are particularly useful for multinational companies with recurring intercompany transactions.

How to Avoid Costly Tax Disputes

Transfer pricing disputes can be avoided—or at least minimized—with proactive measures:

• Conduct regular transfer pricing reviews.
• Keep benchmarking studies updated annually.
• Maintain transparency in intercompany agreements.
• Use consistent methodologies and document your reasoning clearly.
• Reconcile financial data with the income tax returns to avoid mismatches.

Most importantly, never treat documentation as a “tick-box exercise.” The more effort you put into building a strong compliance file, the lower your risk of litigation.

Role of a CA Firm in Transfer Pricing Litigation

Transfer pricing is a blend of law, economics, and business strategy — and handling it requires expertise across all three. This is where a chartered accountant firm in Gurgaon can make a real difference.

A professional CA team helps by:

• Understanding OECD guidelines and Indian TP provisions.
• Preparing and reviewing transfer pricing documentation under Rule 10D.
• Representing clients before TPO, DRP, ITAT, and Commissioner of Income Tax (Appeals).
• Advising on APA, MAP, and Safe Harbour applications.
• Supporting clients in planning future transfer pricing strategies to reduce risk.

Having a professional advisor by your side ensures that your case is not just compliant but also strategically defended with solid data and reasoning.

How to Prepare for a Transfer Pricing Audit

Preparation is half the battle won. Before a transfer pricing audit begins, make sure your documentation and processes are airtight.

Here’s a quick checklist:

• ✅ Update and review all intercompany agreements.
• ✅ Ensure benchmarking studies are recent and relevant.
• ✅ Keep invoices and proof of services for management or technical fees.
• ✅ Maintain email trails, reports, and communications that show the substance of cross-border services.
• ✅ Verify that Form 3CEB is filed on time with accurate disclosures.

A proactive internal review—preferably conducted with a GST and international tax consultant in Gurgaon—can help identify gaps before they become audit findings.

Common Mistakes to Avoid

Many taxpayers end up in litigation due to avoidable errors. Here are the common pitfalls:

• Using outdated comparables or not updating the TP study each year.
• Ignoring or under-documenting FAR analysis.
• Failing to justify royalty or management fee payments.
• Late or incomplete filing of Form 3CEB.
• Treating TP compliance as a one-time activity instead of a continuous process.

Avoiding these mistakes keeps you ahead of potential challenges and helps build credibility with tax officers.

Conclusion

Transfer pricing litigation is a complex but manageable part of doing business globally. It’s not just about defending numbers — it’s about telling your business story in a way that aligns with law, economics, and intent.

With global transactions under constant scrutiny, tax authorities are becoming more analytical and data-driven. But so can you — by maintaining strong documentation, adopting the right methodologies, and engaging experts early on.

If you face a dispute, remember that it’s not the end of the road. With the right strategy, most transfer pricing cases can be resolved efficiently, even before reaching higher tribunals.

Facing a transfer pricing dispute?

At DSRV India, our international tax and transfer pricing specialists provide practical, end-to-end support — from TPO assessments to ITAT representation. We combine technical expertise with real-world insight to protect your interests and ensure compliance with Indian and global tax laws.

👉 Talk to a Transfer Pricing Expert Today!