Transfer Pricing Services

Overview

Transfer Pricing documentation and Form 3CEB filing are mandatory annual compliance requirements under Section 92E of the Income Tax Act. Every taxpayer engaged in international transactions with Associated Enterprises must maintain prescribed documentation and obtain CA certification.

Applicability

• All international transactions with Associated Enterprises (no minimum threshold for Form 3CEB)
• TP documentation required if aggregate international transactions exceed ₹1 crore
• Specified Domestic Transactions exceeding ₹20 crore also covered
• Deemed International Transactions (Section 92B(2)): Transactions with third parties where terms are substantially influenced by an Associated Enterprise are also covered

Form 3CEB Components

Documentation Requirements (Rule 10D)

• Enterprise information and ownership structure
• Description of business and industry analysis
• Transaction-wise details with nature and terms
• Functions performed, assets employed, and risks assumed (FAR analysis)
• Method selection rationale and application
• Comparability analysis and benchmarking study
• Economic analysis and arm's length price determination

Retention & Requisition

• Retention Period: Documentation must be maintained for 8 years from end of relevant Assessment Year (Rule 10D)
• AO/CIT(A) Requisition: Documentation must be furnished within 30 days of notice under Section 92D(3), extendable by another 30 days
• Documentation should be contemporaneous and available before Form 3CEB filing due date

Penalties for Non-Compliance

Overview

In line with OECD BEPS Action 13, India adopted three-tier transfer pricing documentation from 2016. Large multinational enterprise (MNE) groups are required to maintain and file Master File and Country-by-Country Report (CbCR) in addition to local TP documentation.

Master File Applicability (Rule 10DA)

• Part of an international group with consolidated revenue exceeding ₹500 crore
• Aggregate value of international transactions exceeds ₹50 crore
• For intangible-related transactions, threshold is ₹10 crore

Master File Contents

• MNE group organizational structure
• Description of MNE business operations
• Intangibles owned and transfer pricing policies
• Intercompany financial activities
• Financial and tax positions of group entities
• FAR analysis of entities contributing 10%+ to group revenue/assets/profits

CbCR Applicability (Section 286)

• Parent entity resident in India with consolidated group revenue exceeding ₹6,400 crore (equivalent to €750 million)
• Constituent entities may need to file in surrogate parent or secondary filing scenarios
• CbCR intimation required 2 months before the due date

CbCR Contents

• Revenue from related and unrelated parties (by jurisdiction)
• Profit or loss before income tax
• Income tax paid and accrued
• Stated capital and accumulated earnings
• Number of employees and tangible assets
• Main business activities of each entity

Penalties

Overview

Benchmarking is the cornerstone of transfer pricing compliance. It involves economic analysis to determine whether the price charged in international transactions is at arm's length by comparing with comparable uncontrolled transactions.

Transfer Pricing Methods (Section 92C)

Benchmarking Process

Detailed Process Steps

• Functional Analysis: Document functions performed, assets employed, and risks assumed
• Industry Analysis: Understand industry dynamics and economic conditions
• Method Selection: Choose the Most Appropriate Method (MAM) based on transaction nature
• Database Search: Search commercial databases for comparable companies
• Quantitative Screening: Apply financial filters (turnover, years, etc.)
• Qualitative Screening: Verify functional comparability
• Margin Computation: Calculate arm's length range (35th to 65th percentile)
• Adjustments: Apply comparability adjustments if required (working capital, risk, capacity)

Key Databases Used

• Prowess (CMIE) - Indian companies
• Capitaline - Indian financial data
• Oriana (Bureau van Dijk) - Asia-Pacific companies
• Bloomberg - Global financial data

Overview

An Advance Pricing Agreement (APA) is a binding agreement between a taxpayer and the CBDT that pre-determines the transfer pricing methodology for specified international transactions for future years. APAs provide tax certainty and eliminate the risk of TP adjustments and litigation.

Types of APA

Validity Period

• Prospective: Up to 5 consecutive future years
• Rollback: Additional 4 previous years (if conditions met)
• Total Coverage: Up to 9 years of tax certainty

APA Application Process

Key Benefits

• Tax certainty for up to 9 years
• Avoids TP audit and adjustments
• Eliminates double taxation (BAPA)
• Reduces compliance burden
• Better resource allocation

Treaty Partners for BAPA

India has signed BAPAs with USA, UK, Japan, Singapore, Australia, Canada, Denmark, and other treaty partners. In FY 2023-24, India signed a record 174 APAs including 65 bilateral agreements.

Overview

Safe Harbor Rules provide a simplified transfer pricing regime where prescribed operating margins are deemed to be arm's length. By opting for Safe Harbor, taxpayers can avoid detailed benchmarking and TP audit for covered transactions, provided they meet the specified margin thresholds.

Legal Framework

• Section 92CB of the Income Tax Act
• Rules 10TD to 10TG of Income Tax Rules
• Currently applicable for FY 2024-25 and FY 2025-26 (AY 2025-26 & 2026-27)

Eligible Transactions & Margins

Threshold Limit

Aggregate value of eligible international transactions up to ₹300 crore (increased from ₹200 crore as per recent amendments).

Option Process

• Taxpayer opts for Safe Harbor before filing ITR
• Maintain documentation demonstrating margin compliance
• Report in Form 3CEB with Safe Harbor details
• No TP audit on transactions covered under Safe Harbor

Overview

Transfer Pricing policy design involves structuring intercompany transactions to achieve tax efficiency while ensuring arm's length compliance. A well-designed TP policy provides consistency, reduces audit risk, and aligns with global group policies.

Key Planning Areas

Policy Design Elements

• Transaction characterization and economic substance
• Functional and risk allocation documentation
• Method selection and margin determination
• Documentation templates and procedures
• Monitoring and annual adjustment mechanisms
• Intercompany agreement drafting

Compliance Integration

• Align with group global TP policy
• Ensure consistency across jurisdictions
• Document contemporaneously
• Annual review and updates
• Withholding tax considerations

Overview

Transfer Pricing audit is conducted by the Transfer Pricing Officer (TPO) when cases are referred by the Assessing Officer. Effective representation during TP audit is critical to defend the arm's length nature of transactions and minimize adjustments.

TP Scrutiny Process

TPO Powers

• Determine arm's length price of international transactions
• Reject taxpayer's method if not considered appropriate
• Conduct fresh benchmarking analysis
• Make comparability adjustments
• Not bound by AO's reference scope (can examine all international transactions)

Key Defense Strategies

• Robust documentation with detailed FAR analysis
• Strong functional comparability arguments
• Comparability adjustments (working capital, risk, capacity utilization)
• Legal precedents and case law references
• Industry-specific economic analysis
• Contemporaneous documentation emphasis

Overview

Transfer pricing disputes often involve significant tax adjustments requiring multi-level appeals. Understanding the appeal routes and strategic options is crucial for effective dispute resolution.

Appeal Routes After Draft Order

Dispute Resolution Panel (DRP)

• Collegium of 3 Principal Commissioners/Commissioners
• Issues binding directions to Assessing Officer
• 9-month timeline for issuing directions
• No stay required on tax demand during DRP
• Department cannot challenge DRP directions
• Taxpayer can appeal to ITAT if aggrieved

Higher Appeals

Mutual Agreement Procedure (MAP)

• Treaty-based mechanism for resolving double taxation
• Application to Competent Authority of India
• Negotiation between India and treaty partner country
• Can be pursued in parallel with domestic litigation
• Provides relief from double taxation

Block TP Assessment (Finance Act 2025)

New provisions allow ALP determination for a 3-year block period. The ALP determined in a particular year can be applied to similar transactions in the following two years at taxpayer's discretion, reducing repeated litigation.