There is a structural conflict at the heart of every multinational subsidiary's import file, and most finance teams only discover it when both authorities are already looking.
Income tax wants to be sure your import price from the overseas parent is not too high, because an inflated price shifts profit out of India and reduces taxable income.
Customs wants to be sure the same price is not too low, because a deflated price reduces the assessable value and therefore the duty.
Same invoice. Same related party. Two authorities pulling in exactly opposite directions.
For a chartered accountant running an inbound subsidiary, this is one of the few places where two well-run compliance functions can each be individually correct and collectively expose the company. Here is how to hold both positions together.
Why the Two Regimes Diverge
The divergence is not accidental - it flows from what each regime is designed to measure.
| Customs valuation | Transfer pricing | |
|---|---|---|
| Governed by | Customs Valuation Rules | Income tax transfer pricing provisions |
| The concern | Value declared too low | Price paid too high |
| Unit of analysis | The individual consignment, at the moment of import | The entity or transaction set, over a financial year |
| Timing | Fixed at the date of import | Determined and adjusted after year end |
| Tested against | The price for identical or similar goods, and prescribed methods | Arm's length benchmarking of comparable enterprises |
| Adjustments include | Royalties, licence fees, free-issue materials, resale proceeds | Operating margin, cost-plus, resale price, profit split |
Note the third and fourth rows. Customs values a consignment on a specific day and closes the assessment. Transfer pricing evaluates a full year and then adjusts. The two regimes disagree about when the right number is knowable, which is where nearly all the practical problems come from.
The SVB Layer
For related-party imports, the Special Valuation Branch is where these worlds collide in practice. The SVB investigates whether the relationship influenced the price, and it examines your transfer pricing approach as part of doing so.
That is worth stating plainly: your transfer pricing study is customs evidence. It will be read by an officer whose objective is the opposite of the one it was written for.
In our experience, the businesses that clear SVB smoothly are the ones whose customs valuation position and transfer pricing position tell a single coherent story. The ones that struggle have two well-drafted documents, prepared by two teams that never spoke, that describe the same transaction in incompatible terms.
The most common inconsistencies we see:
- A TP study that justifies the price on a transactional net margin basis, submitted to an authority applying prescribed valuation methods, with no bridge between the two.
- Royalties and licence fees treated as a separate operating expense for TP purposes, while the customs rules may require them to be added to the value of the goods.
- Management fees, cost-sharing charges and support-service recoveries described one way for tax and left entirely out of the customs narrative.
- Distinct product lines with genuinely different economics being defended by a single entity-level margin.
The Adjustment Problem
Here is where the real money sits.
Your transfer pricing policy targets an operating margin. At year end, your actual margin comes in outside the range, so you make a transfer pricing adjustment - a true-up or true-down of the intercompany price for the year.
Now consider what that means for customs.
Upward adjustment - the price of imported goods is revised upwards. The assessable value of every consignment that year was understated. Customs duty is payable on the difference, and the exposure is straightforward.
Downward adjustment - the price is revised downwards. The assessable value was overstated. You overpaid duty. Logically, a refund should follow.
In practice, it very often does not. Duty is assessed consignment by consignment, and where an assessment has become final, a refund claim generally cannot be entertained without the underlying assessment itself being modified. A year-end accounting adjustment does not, by itself, reopen assessments that closed months earlier.
The asymmetry is the point. Upward adjustments create liability reliably. Downward adjustments create refunds unreliably. If your TP policy produces adjustments in both directions across years, you are not netting off - you are paying on the ups and absorbing the downs.
Running a subsidiary that imports from its parent? We will read your TP position and your customs position side by side and tell you where they contradict each other before an officer does. Book a free related-party review or ask us on WhatsApp.
The Route That Actually Solves It: Provisional Assessment
If you expect transfer pricing adjustments, the clean answer is to not let the assessment become final in the first place.
Provisional assessment allows the assessment to be finalised later, once the correct value is known. Executed properly, this means:
- Consignments are assessed provisionally against a bond and security.
- The transfer pricing outcome for the year is determined.
- The assessments are finalised on the adjusted value.
- Duty flows in either direction, depending on which way the adjustment went.
It converts a one-way exposure into a two-way settlement. There is an administrative cost - a bond, security, and a finalisation process to see through - but for a subsidiary with meaningful import volumes and a live TP policy, it is materially cheaper than the alternative.
The catch is that this must be set up before the imports, not after the adjustment. Once the assessments are final, the option has gone for that period.
The Royalty Question
The single most common technical fight in this space is royalties and licence fees.
The customs rules require certain royalties and licence fees related to the imported goods, payable as a condition of sale, to be added to the value. Transfer pricing looks at the same payments as an operating charge and asks whether the rate is arm's length.
The trap: a royalty structured for tax efficiency - say, a percentage of net sales, payable under a separate licence agreement - can still be held to be a condition of sale of the goods and therefore addable to customs value. The tax analysis being sound does not settle the customs question, and the two are decided under different tests.
Any royalty or licence arrangement with an overseas group entity should be reviewed by both lenses before it is signed. Restructuring after the SVB has formed a view is far harder than getting the drafting right at the outset.
What Good Practice Looks Like
For an inbound subsidiary, five things:
1. One narrative, two documents. The TP study and the customs valuation submission should describe the same commercial reality in consistent terms, with an explicit bridge where the methodologies differ.
2. Read the TP study as an officer would. Before it is filed anywhere, have someone read it purely for what a customs officer would pick up.
3. Decide the provisional assessment question early. If TP adjustments are part of your policy, set up provisional assessment before the import year, not after.
4. Review royalties, management fees and cost recoveries jointly. Every intercompany charge should be tested against both regimes before the agreement is executed.
5. Consider binding certainty on both sides. An advance pricing agreement on the tax side and a customs advance ruling on the customs side each remove uncertainty from their own regime. They do not bind each other, but between them they narrow the field considerably.
People Also Ask
Does customs accept a transfer pricing study?
It is relevant evidence and the SVB will examine it, but it is not determinative. Customs applies its own valuation rules and methods, so a TP study alone does not settle the customs valuation question.
Why do transfer pricing and customs valuation conflict?
Their incentives are opposite. Income tax is concerned that a related-party import price is too high, shifting profit out of India. Customs is concerned that the same price is too low, reducing duty. Both examine the same invoice.
If I make a downward transfer pricing adjustment, can I claim a customs refund?
Frequently not, in practice. Where assessments have become final, a refund generally cannot be entertained without the underlying assessment being modified. A year-end adjustment does not automatically reopen closed assessments.
What happens on an upward transfer pricing adjustment?
The assessable value of the year's imports was understated, and additional customs duty is payable on the difference. This direction of exposure is far more reliably enforced than the refund direction.
What is provisional assessment and why does it help?
It keeps the assessment open pending determination of the correct value, against a bond and security. Once the transfer pricing outcome is known, the assessments are finalised - allowing duty to move in either direction rather than only upwards.
Are royalties added to customs value?
Certain royalties and licence fees related to the imported goods and payable as a condition of sale must be added to the assessable value. This applies regardless of how the payment is characterised for transfer pricing purposes, and it is the most commonly disputed addition.
Can an APA protect my customs position?
No. An advance pricing agreement binds the tax authority on transfer pricing. It does not bind customs. A customs advance ruling is the equivalent instrument on the customs side, and the two are separate.
Who should own this in the organisation?
It cannot sit only with tax or only with logistics. In our experience, it works when finance owns the joint position, with tax and customs advisers reviewing each other's documents before either is filed.
The Short Version
Transfer pricing and customs valuation look at the same number with opposite objectives, and the timing mismatch between them is where the exposure lives. Upward TP adjustments reliably create customs duty; downward adjustments rarely produce refunds - so the asymmetry runs against you unless you plan for it. The single most effective structural fix is provisional assessment, set up before the import year rather than after the adjustment. Alongside that, make sure your TP study and your customs submission tell one story, and review every intercompany royalty and fee against both regimes before signing. If you are heading into an SVB process, read our SVB guide alongside this, and consider a trade compliance audit that covers both sides of the number.
Want your transfer pricing and customs positions reviewed together, by people who read both? Book a free consultation or use the enquiry form.
