Cost of goods transacted between related entities has become a flashpoint for MNCs. With about 60% of world trade occurring within related networks, invoice pricing is no longer just an accounting entry but a synchronised strategy to avoid multimillion-dollar regulatory mismatches with I-T and customs.
MNCs face an inherent conflict between two regulators with opposing objectives. A high import price potentially shifts profits out of the importing country, reducing I-T liability. But it triggers anti-overpricing alarms for I-T authorities. Simultaneously, the same high price inflates assessable value at the border, increasing customs duty outflow.
Conversely, a low price saves on duties, but invites aggressive tax audits for 'depressed' local profits of the exporting country. This conflict is built into global trade's DNA - one transaction price must satisfy two regulators with opposing objectives.
India has been deepening its integration with global trade by expanding supply chains and through new FTAs, reiterating the importance of consistent valuation outcomes. This is not just a compliance burden but significant financial risk. Lack of coordination between customs and transfer pricing (TP) - for related party transactions - is a 'key structural bottleneck' as acknowledged by Economic Survey 2026.
Friction stems from a philosophical chasm, based on how customs and TP scrutinise the same transaction:
Customs Operates transactionally under a WTO framework, examining individual shipments to ensure the relationship hasn't suppressed prices to evade duties. It prescribes a strict sequential hierarchy of valuation methods, including transaction value of identical or similar goods, deductive and computed value methods, and a residual, where pricing is questioned.
I-T Guided by OECD's arm's-length principle, normally it analyses whether the total profit left in India at year-end is commensurate with functions performed and risks assumed. While TP also prescribes recognised methods, it follows an OECD-recommended 'most appropriate method' approach rather than a rigid hierarchy. While TP utilises flexible methodologies, customs often adheres to rigid valuation hierarchies that rarely account for year-end adjustments.
India's enforcement environment has evolved from manual oversight to a digitalised ecosystem. Special valuation branch (SVB), the traditional watchdog for related party imports, is now bolstered by ADVAIT (advanced analytics in indirect taxation).
This digital integration may allow authorities to cross-reference import declarations with financial statements and TP disclosures in real-time. Any mismatch between the value claimed for duty purposes and value claimed for tax deductions can be flagged for examination.
As scrutiny tightens, MNCs must look beyond simple invoice prices. New battlegrounds are emerging:
Royalties Customs may include royalty payments in assessable value if they are a condition of sale. Even if TP treats them as separate payments for intangibles.
Refund trap If a TP study finds that import prices were too high and require a downward adjustment, an MNC may find itself in a no-man's land. While the tax department welcomes higher local profit, the process to claim refund under customs is difficult.
Globally, this issue is gaining attention. World Customs Organisation (WCO) and OECD have been working on treatment of retroactive TP adjustments. The central question remains: how should year-end pricing corrections be reconciled with customs values determined at the time of import? This remains the holy grail of global trade policy.
The current seesaw approach serves neither exchequer nor taxpayer. Regulatory certainty is as vital as infrastructure. Adopting a standardised disclosure template - where a single economic justification satisfies both transactional and profit-based tests - would eliminate the double jeopardy MNCs currently face. A coordinated framework between tax and customs can reduce litigation and compliance burden. The direction of policy thinking already indicates movement toward such convergence.
While such convergence is reached, businesses must stop managing customs and TP as separate silos. The global pricing strategy must be stress-tested against both lenses simultaneously. In the regulator's eyes, an invoice is no longer just a piece of paper but a statement of intent. MNCs must make sure it tells a consistent story.
