Avoid Costly Mistakes: Transfer Pricing in M&A India (2025 Guide)
Introduction to Transfer Pricing in M&A
When companies merge or acquire others, especially in India, they face a critical tax consideration: transfer pricing (TP). If not handled correctly, TP can delay deals, attract penalties, or even lead to litigation. Whether you’re a CA student or a finance professional, understanding how TP works during mergers and acquisitions (M&A) is key to avoiding costly mistakes.
In this guide, we break it all down—using simple examples, real Indian rules, and practical steps for smooth, tax-compliant deals.
What is Transfer Pricing & Why It Matters in M&A
Transfer pricing refers to the pricing of goods, services, or intangibles exchanged between related entities within a group. In M&A, this becomes crucial when the buyer and the target company are part of the same multinational group or might become one after the deal.
Example:
Imagine Company A (India-based) acquires its related foreign company B. If Company B sells raw materials to A at inflated prices post-acquisition, profits could be shifted abroad—raising red flags for Indian tax authorities.
Risks of incorrect TP:
Disallowance of expenses or adjustments to income
Penalties under Section 271AA/271BA of the Income Tax Act
Delay in deal closure due to pending TP disputes
Post-merger audit scrutiny
Key Things to Check Before a Merger (Due Diligence)
Transfer pricing due diligence in M&A ensures the target company is compliant and free from unresolved TP risks.
Pre-merger TP checklist:
Has the company filed Form 3CEB for all relevant years?
Are TP documentation (Master File, Local File) complete and updated?
Are all intercompany transactions reported and justified with arm’s length pricing?
Any open TP audits, tax notices, or past adjustments?
Have comparable companies and pricing methods been selected properly?
Due diligence not only protects the buyer but also helps in proper deal valuation. For international M&A, TP due diligence becomes even more essential due to cross-border exposure.
Using APA to Avoid Future Tax Disputes
An Advance Pricing Agreement (APA) is a tool provided by Indian tax authorities to pre-decide the pricing method for intercompany transactions.
Why APA matters in M&A:
Locks in transfer pricing methodology for up to 5 years (plus rollback of 4 years)
Provides certainty, especially in cross-border mergers
Reduces litigation and supports smoother integration
When to apply:
If you’re acquiring a company with significant intercompany transactions or history of TP scrutiny, filing an APA before or during the deal can save major tax headaches later.
Case Example: Buying a Manufacturing Company in India
Case:
An Indian MNC planned to acquire a related-party manufacturing unit. The target company had several intercompany transactions but lacked robust documentation.
What went wrong:
No APA or TP documentation in place
Discrepancies in pricing models
Ongoing TP audit with proposed adjustments of ₹10 crore
How it was saved:
Buyer insisted on APA application as a pre-condition
Legal team completed due diligence and revised TP policies
Deal was restructured to include TP indemnities and post-merger controls
Lesson: Pre-emptive TP planning, especially using APA and documentation, can protect valuation and long-term compliance.
Easy Tips for CA Students & Finance Teams
Whether you’re prepping for a case study or handling an actual deal, here’s a practical set of takeaways:
Free TP Checklist for M&A in India:
Review Form 3CEB and past TP orders
Validate all intercompany pricing with benchmarking
Apply for APA if the deal includes major IP or cross-border flows
Align post-deal TP documentation within 90 days
Flag mismatched policies between the buyer and the target
Audit Red Flags:
Inconsistent pricing methods year-to-year
Missing documentation or unsigned intercompany agreements
Transactions with low or no margins
Conclusion
Transfer pricing can be a deal-breaker or a compliance success—depending on how you handle it during M&A. With growing global scrutiny and Indian TP audits becoming sharper, it’s essential to integrate TP into your M&A planning, execution, and post-merger compliance.
By following the right checklist, using tools like APA, and aligning documentation, both CA students and M&A teams can manage risk and deliver value—without tax surprises.