Transfer Pricing Rule 10D: Documentation, Penalties & Best Practices

• Taxation
• ||
• July 23, 2025

Are you also a company that is trying to establish a subsidiary company in a foreign country, or have you already established such companies? Then you must have heard the term ‘transfer pricing‘—an essential concept for cross-border transactions.

So, if your company is operating in India, you must comply with transfer pricing regulations. For this, Rule 10D outlines the documentation you need to maintain to support your international or specified domestic transactions with related parties.

So, before entering into any transactions within your company, you must thoroughly understand the Rule 10D guidelines and compliance requirements.

What is Rule 10D?

Rule 10D is a provision of the Income Tax Act, 1961, in India, which is associated with the transfer pricing documentation for international or specified domestic transactions between associated enterprises.

What is an associated enterprise here?

An Associated Enterprise (AE) is a company that is related to another company through ownership, control, or influence, and it engages in international or specified domestic transactions.

Let’s understand in simple terms.

Suppose you have a company in India and do business with a related company abroad (such as your parent company abroad). In this case, you must maintain detailed records and documents that show how you determined the prices used in that transaction.

It is about maintaining proof that your transactions with related companies are conducted at fair market prices and not in a manner that results in tax avoidance.

Purpose of Rule 10 D

Rule 10D is like a secret map for your business whose proper understanding and implementation will ensure that it provides a fair, transparent, and above-board basis for your international transactions.

It’s not only a compliance requirement but also a foundation that will provide guidance to your business for potential tax adjustments and protect your business from penalties. It will be the basis to justify your business’s arm’s length nature of transactions.

Who needs to adhere to Rule 10D?

Suppose your income arising from an international transaction exceeds Rs 1 crore. Then, you must comply with the specified documentation mentioned in Rule 10D and be able to prove that the calculations are in accordance with Section 92.

Documents Required under Rule 10D

According to the compliance, here are the detailed list of specified documentation to be maintained by the companies entering an international or specified domestic transaction.

1. Details of the ownership structure, shares, and ownership interests held by other enterprises in the company
2. Summary of the multinational group of which the assessed company is a part, and also all the detailed information, including the name, legal status, address, and tax residence of the companies in the group, and also describe the ownership structure of these companies among each other with whom the assessed company has entered into the transaction, whether it’s an international or domestic transaction.
3. The business and the industry in which the company is involved, and the business of the associated enterprises in which the company transacts.
4. Details about the nature and type of international and specified domestic transactions made by the company, along with the names of goods and services exchanged and their value.
5. Comprehensive information about the functions performed, assets employed or to be employed, and risks assumed by the assesses and the associated companies that are involved in the international transaction or specified domestic transactions.
6. A record of business forecasts, budgets, and market analyses prepared by the company that has a bearing on these international and specified domestic transactions.
7. A record of the nature, terms, and conditions of uncontrolled transactions for comparison with the international or specified domestic transactions made.
8. A record of analysis done for the comparison of the uncontrolled transactions and the international or specified domestic transactions.
9. A clear description regarding which arm length price is selected, explaining the reason for selection and the method of implementing it.
10. A record of actual work done for the calculation of arm’s length price showing the details of data and financial information used and any adjustments made to account for the differences between international or specified domestic transactions and uncontrolled transactions or between the enterprises entering such types of transactions.
11. Any other documents related to the associated enterprises that are relevant for determining the arm’s length price.

All this documentation needs to be supported by authentic documentation, which may include reports, agreements, contracts, documents issued under accounting practices, financial statements, reports on market research studies, and databases from the country’s government.

Note: Even if the transactions remain constant, you must maintain fresh documentation for each year.

Importance of Rule 10D in Transfer Pricing Compliance

Rule 10D ensured that Indian entities maintain transparency, and the price charged in international and specified domestic transactions should be at arm’s length. The following are some points that state the importance of Rule 10D:

• Mandatory Legal Requirement: Businesses that are eligible to comply with it may face penalties if they are unable to demonstrate compliance. It is not a formality but a mandatory legal obligation that needs to be fulfilled by compulsion
• Evidence for Transfer Pricing Audits: Documents maintained under Rule 10D provide the rationale for values and pricing policies of business and serve as the first line of defense in transfer pricing audits
• Risk Mitigation: Transfer pricing is of a subjective nature and thus a high-risk area. Maintenance of comprehensive documents under this rule helps stakeholders and regulators to be assured of reliability
• Helps in Strategic Decision Making: Documentation helps in understanding the pricing structures between intra-businesses and thus provides a basis to improve efficiency by strategic planning and aligning business goals with transfer pricing policies
• Provides Credibility: Adhering to Rule 10D will add a reputation and trustworthiness for your business in the global market as it demonstrates a strong commitment of your business towards aligning with compliance

Penalties for Non-Compliance with Rule 10D

If the required documents are not maintained, the taxpayer must pay a penalty of 2% of the value of each international or specified domestic transaction. Additionally, the transfer prices declared can be rejected by the tax authorities, resulting in an assessment that may lead to serious consequences, including an addition to income, increased tax liability, interest, and penalties for under-reporting of income.

Today, the business environment is becoming increasingly transparent on a daily basis. Any such non-compliance or disputes with tax authorities can cost the public image of your business and lead to serious consequences, such as investors losing interest, the media targeting you negatively, and hurdles being faced in regulatory approval for cross-border transactions.

Best Practices for Complying with Rule 10D

Businesses must adopt a structured and proactive approach to remain compliant and audit-ready. Let’s talk about some of the best practices that they can follow to stay compliant with Rule 10D-

• Maintain Documentation Regularly: Rather than waiting until year-end, be sure to maintain and update your transfer pricing documents at regular intervals, ideally as soon as the transaction is completed. This will ensure consistency and accuracy in the preparation of documents
• Ensure a thorough FAR Analysis: FAR is a methodology in transfer pricing that examines functions performed, assets employed, and risks assumed when two entities engage in a transaction. These transactions are conducted at arm’s length. Every business needs to ensure that this is tailored according to its organization
• Inter Transfer Pricing Audits: Businesses should conduct periodic internal reviews (with registered CAs), which will help to improve documentation practices and raise any concerning areas if there are any gaps or inconsistencies
• Train your team: Implement a proper coordination channel between accounting, tax, and legal departments, and arrange for learning sessions to train your internal team on the basic requirements of complying with Rule 10D

Conclusion

Rule 10D is not just another tick-box compliant formality; instead, it requires a clear and in-depth understanding of your business to address effectively. It is a story that explains how transparent and fair you are in your transactions with the tax authorities. It builds the foundation of your credibility, trust, and resilience.

If you fail to meet the standards, this story of proving your transparency and fairness can be a red flag for you and your business, and that’s why you need assistance.

At Mercurius, our team is dedicated to guiding you at every step and helping you build your business as a leading entity in a compliant world. Assigning this type of important responsibility to someone who is professional and experienced can help you avoid a lot of chaos and confusion, creating a clear path for fulfilling your regulatory compliance.

For a more detailed discussion of specific transfer pricing rules or to obtain personalized assistance in domestic transfer pricing compliance, transfer pricing study, planning activities, and addressing and resolving intercompany transfer pricing issues, please contact us.