Why Transfer Pricing and ESG Are Linked for Indian Businesses
Introduction to Transfer Pricing and ESG
From 2025 onward, transfer pricing is no longer just about tax compliance—it’s also about sustainability accountability.
Key Drivers:
SEBI’s Business Responsibility and Sustainability Reporting (BRSR): Mandatory ESG reporting for the top 1,000 listed companies.
Investor Demand: Sustainable investment in India has grown from $330 M (2019) to $1.3 B (2023).
Global Supply Chain Pressures: Carbon pricing, fair-trade sourcing, and ESG clauses in intercompany agreements.
Implication: TP teams must align pricing policies with ESG metrics or risk non-compliance and reputational damage.
Core Transfer Pricing Rules in India (Before Adding ESG)
Understanding the basics is essential before layering ESG considerations:
Arm’s Length Principle: Related-party transactions must be priced as if between independent entities.
FAR Analysis: Identify Functions performed, Assets used, and Risks assumed.
Documentation Requirements: Maintain benchmarking studies and contemporaneous records.
Advance Pricing Agreements (APAs): Pre-agree methods with tax authorities to reduce disputes.
Practical Ways to Integrate ESG into Transfer Pricing
A. Carbon Cost Allocation Models
Introduce internal carbon pricing within group entities.
Example: Charge subsidiaries based on emissions, incentivising cleaner operations.
B. Valuing Green Intangibles
Specialised valuation for patents, R&D, and technology that reduce environmental impact.
Higher premiums justified by regulatory incentives and brand reputation gains.
C. ESG in Supply Chain Profit Allocation
Reward sourcing from certified fair-trade suppliers.
Adjust margins for compliance with labour laws and environmental standards.
Link pricing policies to sustainable procurement goals.
Governance & Compliance Risks to Watch
Increased Audit Scrutiny: Tax authorities may question ESG-linked cost allocations and valuations.
Higher Dispute Potential: ESG premiums or carbon charges could face legal challenges.
APA Strategy: Secure tax authority alignment on ESG-driven TP policies in advance.
Best Practices for Indian Companies (2025 and Beyond)
Embed ESG Metrics in TP Policies: Include them in documentation and benchmarking.
Use Technology for Tracking: Combine ESG operational data with financial performance metrics.
Engage Regulators Early: Clarify carbon pricing, green intangible valuation, and ESG-linked margins.
Upskill TP Teams: Ensure understanding of sustainability drivers and regulatory trends.
Real-World Indian Case Studies
Case 1 – Carbon Pricing in Manufacturing:
An Indian auto parts subsidiary pays an internal carbon charge to its EU parent, which is reflected in TP adjustments. This drives local emission reduction.
Case 2 – ESG-Driven R&D Royalties:
An Indian pharma company pays higher royalties for a patented green manufacturing process. The ESG benefits justify the premium over traditional IP.
Conclusion
In 2025, ignoring ESG in transfer pricing is not just a compliance risk—it’s a missed opportunity to enhance brand value, attract sustainable investment, and align with global best practices. Indian businesses that act now will be better positioned for both regulatory and market success.