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Transfer Pricing Audits | SG Legals

Transfer Pricing Audits

Ensuring transactions between related international entities are priced at arm's length - fully compliant with Indian and international transfer pricing regulations.

What is Transfer Pricing Audit?

Transfer Pricing refers to the prices set for transactions between associated enterprises in different tax jurisdictions. Under Sections 92 to 92F of the Income Tax Act, 1961, Indian companies with international transactions or specified domestic transactions must maintain documentation and have their transfer pricing audited.

The transfer pricing audit ensures that the prices charged in controlled transactions (between related parties) are consistent with the arm's length principle - as if the transactions had been conducted between independent parties under comparable circumstances.

Governed by Sections 92-92F of the Income Tax Act, 1961
Transfer Pricing Audit
Transfer Pricing Audit

Who Requires Transfer Pricing Audit?

The following entities are required to obtain a Transfer Pricing Audit Report in Form 3CEB from a Chartered Accountant:

International Transactions

Companies with international transactions with associated enterprises exceeding ₹1 crore in aggregate must file Form 3CEB.

Specified Domestic Transactions

Companies with specified domestic transactions exceeding ₹20 crore in aggregate with associated enterprises in India.

MNE Groups (CbCR)

Multinational enterprise groups with consolidated revenue ≥ ₹5,500 crore must also comply with Country-by-Country Reporting (CbCR) requirements.

Related Party Transactions

Any company entering into transactions with related parties as defined under Section 92A must maintain transfer pricing documentation.

Arm's Length Price Methods

The Income Tax Act prescribes the following methods for determining the Arm's Length Price (ALP) in international or specified domestic transactions:

Comparable Uncontrolled Price (CUP)

Compares the price charged in a controlled transaction to the price charged in a comparable uncontrolled transaction. Most direct and preferred method when comparable data is available.

Resale Price Method (RPM)

Determines ALP based on the resale price to an independent enterprise, reduced by an appropriate gross margin reflecting functions, assets, and risks.

Cost Plus Method (CPM)

Determines ALP by adding an appropriate markup to costs incurred by the supplier. Commonly used in manufacturing and service transactions.

Profit-Based Methods (TNMM/PSM)

Transactional Net Margin Method and Profit Split Method are used when traditional methods cannot be reliably applied, comparing net profit margins or splitting combined profits.

Documentation Required

Companies must maintain contemporaneous documentation as prescribed under Rule 10D of the Income Tax Rules:

01
Description of Ownership Structure
02
Profile of Associated Enterprises
03
Nature of International Transactions
04
Description of Functions Performed
05
Economic & Market Analysis
06
Comparability Analysis
07
Selected Transfer Pricing Method
08
Form 3CEB (Accountant's Report)
Important Deadline: Form 3CEB must be filed electronically by 31st October of the assessment year. Penalty for non-filing is 2% of the value of each international or domestic transaction.

Transfer Pricing Audit Process

1

Transaction Identification & Benchmarking

Identify all international and domestic related party transactions, and benchmark them against comparable uncontrolled transactions using appropriate databases.

2

Functional Analysis

Analyse functions performed, assets employed, and risks assumed by each party to the transaction to determine the most appropriate transfer pricing method.

3

Documentation Preparation

Prepare comprehensive transfer pricing documentation including the Master File, Local File, and Country-by-Country Report as applicable under Rule 10D.

4

Form 3CEB Filing

Obtain and file the accountant's report in Form 3CEB electronically, certifying that the international and domestic transactions have been undertaken at arm's length price.

Benefits of Transfer Pricing Compliance

Penalty Avoidance

Proper compliance avoids substantial penalties of up to 2% of transaction value for non-maintenance of documents.

Audit Defense

Robust documentation strengthens defense during transfer pricing assessments and appellate proceedings.

Tax Certainty

Advance Pricing Agreements (APAs) secured through proper TP analysis provide long-term tax certainty.

Double Taxation Prevention

Proper TP policies help prevent double taxation on cross-border transactions through MAP and bilateral APAs.

Regulatory Credibility

Demonstrates transparent and compliant business practices to tax authorities across jurisdictions.
 
     
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