Objectives & Agenda : To understand the rationale behind Transfer Pricing and the need for documentation. To know the contents of Transfer Pricing Report in detail and appendix to Transfer Pricing Report. The webinar would cover a detailed process for preparation of Transfer Pricing Report.

1. Preparation of Transfer Pricing Study
CA. Jugal Gala

2. Credits and Acknowledgments
Bharathi Priya R D

3. Legends used in the Presentation
AE Associated Enterprise
ALP Arm’s Length Price
AO Assessing Officer
APA Advance Pricing Agreement
CbCR Country by Country Report
FDI Foreign Direct Investment
FY Financial Year
MAP Mutual Agreement Procedure
PLI Profit Level Indicator
SDT Specified Domestic Transaction
TP Transfer Pricing

4. Presentation Schema
What is Transfer
Pricing?
Rationale for
Transfer Pricing
Transfer Pricing
Documentation –
Sec 92D
Documentation –
Rule 10D
Applicability and
Non-applicability of
Documentation
Requirements
Contents of
Transfer Pricing
Report
Executive Summary Group Overview Industry Analysis
Intercompany
Transactions
FAR Analysis
Evaluation of
Methods
Economic Analysis
Appendix to the
Report
Caveats

5. What is Transfer Pricing?
Pricing between Associated Enterprise (AEs) or related parties
Special relationship between the parties influencing the price
Controlled transaction and price differs from market rate

6. Rationale for Transfer Pricing
Reduce tax avoidance
Fair share of tax to contributing countries
Evaluation of performance of group entities
Appropriate allocation of resources based on contribution

7. Transfer Pricing Documentation – Sec 92D
Every person who has entered an into an international transaction or specified
domestic transaction
Every person being a constituent entity of an international group
Shall maintain the documents and records as per Rule 10D
For a period of 8 years from the end of the relevant assessment year
AO or the Commissioner (Appeals) may require any person to furnish any information or document within a
period of 30 days from the date of receipt of notice issued
On application made by the assessee, the time limit for furnishing details can be extended for a further
period of 30 days

8. Documentation – Rule 10D
Where the aggregate value, as recorded in the books of account, of international transactions entered into by the assessee
exceeds one crore rupees, the following information must be present in the Transfer Pricing report
• Profile of the company and the Group
• Ownership structure of company and associated enterprises
• Incorporation details like name, address, PAN/TIN, residential status of company and
AE and date of incorporation of company and AE
Overview of the
Company and the
Group
• Description of the assessee’s business with specific information about the products
and services dealt by the assessee
• Description of the business of the AE
Details of the
business
• The management of the assessee needs to be appraised by the accountant on the
possible circumstances when an AE relationship comes into existence and on the
possible transactions which shall fall within the purview of TP
AE Relationship
• The industry in which the assessee operates plays a significant role in the
determination of margins and terms of a commercial transaction
• Industry analysis will include the industry classification and the outlook for the
industry
• Legal environment, Key value drivers, Challenges faced by the industry, SWOT
analysis, etc. will also be analysed
Industry Analysis

9. Contd.
• International transaction and SDT should be mentioned separately
• Details like name of the AE, relationship with AE, nature of the transaction, currency of
the transaction, value in INR, percentage to overall value of transaction should be
mentioned
Details of all
Transactions
• Contractual terms of a commercial transaction are required to facilitate comparability
with comparable companies/ transactions
• Credit period, Volume and frequency of the transaction, terms of discount, Warranty
assurances, etc. are some of the common contractual terms
Terms of the
Transaction
• Detailed analysis of the functions performed, assets employed and the risks assumed by
the assessee and the AE while entering into an international transaction or SDTFAR analysis
• Audited financial information pertaining to the relevant financial year under
consideration together with 2 preceding financial years is generally provided
• It is suggested to provide the financial information of the AE also
Financial
Information

10. Contd.
• The documentation shall clearly elucidate on the process adopted and the rationale
for selection of tested party
Process of
selection of Tested
Party
• Each method shall have to be specifically evaluated and the rationale for accepting
or rejecting each method will have to be elucidated
• Most appropriate method shall be selected
• Any other method can be chosen if other methods are not applicable
Evaluation of
Methods and
selection of the
Most Appropriate
Method
• Economic analysis refers to the activity of comparing financial information/
transactional information of the international transaction or specified domestic
transaction with comparable financial data
• Based on the method adopted the outcome of the economic analysis may vary
Economic Analysis
• The sole purpose of a transfer pricing study is to determine and justify the arm's
length price
Computation of
ALP

11. Applicability & Non Applicability of Rule 10D
Rule 10D does not apply in a case where the aggregate value, as recorded in the books of account, of
international transactions entered into by the assessee does not exceed one crore rupees
However, Assessee shall be required to substantiate, on the basis of material available with him, that income
arising from international transactions entered into by him has been computed in accordance with Sec 92
(Computation of income from international transaction having regard to arm's length price)
Non-Applicability
Applicability
Every person who has entered into an International Transaction or SDT should maintain TP documentation
Sec 92D and Rule 10D is applicable even if assessee applies for Safe harbour or Advance Pricing Agreement
(APA) or Mutual Agreement Procedure (MAP)

12. Contents of Transfer Pricing Report
Executive Summary Group Overview Industry Analysis
Intercompany
Transactions
Function, Asset and Risk
Analysis
Evaluation of Methods Economic Analysis

13. Specimen of a Transfer Pricing Study Report
The specimen TP report is provided assuming TNMM method as the Most Appropriate Method

14. Executive Summary
Introduction and
Scope
• To which FY this TP report applies and other FY data’s which have been used in
the preparation of this TP report to be mentioned
Economic Analysis
• Contains details of nature of transaction and the most appropriate method used
for computing arm’s length price
• Reasons for rejections of other methods of arm’s length price should be
mentioned
Conclusion
• Whether the transaction between assessee and its AE is at arm’s length price or
any transfer pricing adjustment has to be made must be mentioned

15. Group Overview
• This section gives a background to the Group’s structure and operations, particularly where these
relate to assessee’s business
• It enables a framework for analysing assessee’s business transactions with its AE
Objective
• A brief description about the group
• An understanding of the Group’s business operations and the role that Assessee’s company plays in
the total gamut of the transactions
Group
• Organisation profile (Name, Registered office, Constitution, Founded in, Country of tax residence,
etc.)
• Partners / Shareholders along with their profit sharing ratio and shareholding pattern
• Brand of the company and the products/services that are manufactured/provided
Assessee
Company
• Organisation profile (Name, Registered office, Constitution, Founded in, Country of tax residence,
etc.)
• Partners / Shareholders along with their profit sharing ratio and shareholding pattern
• Transactions that are entered with Assessee
AE Company
• Constituent entity is an entity resident in India which is a part of an International group
• Such entities shall maintain documents under Rule 10D and master file under Rule 10DA
Constituent
Entity
• It means any constituent entity of the international group designated by such group, in place of
parent entity, to furnish the report, in its residence country
Alternate
Reporting
Entity

16. Industry Analysis
Objective
• Industry analysis is done to understand the conditions prevailing in the markets in which the respective
parties (Assessee and AE) to the transactions operate
• Industry in which the Assessee company operates (E.g.. Food and Spices Industry, Manufacturing Industry,
etc.)
• Industry analysis is done to appreciate the business risks faced by, operational characteristics of, and
assets employed by Assessee Company in relation to other players in the industry
Industry classification and structure
• Harmonized System Code (HS Code) is a standardized multi-functional system to classify goods which is
universally applied
• HS Code divides the commodities into 21 categories and contains approximately 6100 headings and
subheadings covering all articles in international trade
• HS Code for main products manufactured or services provided by the assessee company has to be
mentioned

17. Contd.
About the Industry
• A brief description about the Industry in India
• Developments in the Industry
• Comparing the Industry operations in India with Global countries
• Growth / Decline in the industry
• Expectations in the future in the Industry
Business environment and Industry trends
• Statistical data pertaining to the Industry in India for the FY
• Major investments and developments in the sector in India
• Total FDI the Industry has attracted in India
• If International Transaction, it is better to give insights about that industry in the country of AE

18. Contd.
Outlook of the Industry
• Exports related statistics
• Sector wise growth and exports
• SWOT (Strength, Weakness, Opportunities and Threats) analysis of the industry
Regulatory Policy
• Details about the apex body appointed by the Government of India to work for the development of the
industry in India (Egg. For spices Industry – Spices Board of India is the Apex body, For Automobile Industry
– Society of Indian Automobile Manufacturers (SIAM) and the Automotive Component Manufacturers
Association of India (ACMA) are the apex body)
• Main functions of that apex body
• Sectors under the purview of the Board

19. Contd.
Market Trends, Growth and Value Drivers
• Factors determining the growth of the industry
• Demand drivers of the industry – Economic conditions, Consumer demand and interests, technological
innovations, Demographic drivers, etc.)
• Key Success factors and risk factors of the Industry
Challenges faced by the Industry
• Challenges like inadequate infrastructure, Labour, Legal restrictions, marketing of products, etc. should be
considered
Market Players in the industry

20. Intercompany Transactions
Nature of
Relationship
1.Nature of
relationship
between assessee
and AE as
mentioned in Sec
92A of Income Tax
Act, 1961
Overview of
Transaction
1.Nature of
Transaction
(International
Transaction and
specified domestic
transaction)
between Assessee
and AE
Imperatives for
the Transaction
1.Importance of
the transaction
between Assessee
and AE (why at
first instance the
transaction is
entered)
Quantum of
Transactions
1.Name of the AE
and related parties
2.Nature of
transactions
between them
3.The value of
transaction for
each nature of
transaction should
be mentioned
Applicability of TP
Legislation
1. Whether
Transfer Pricing
regulations are
applicable for
transactions
between assessee
and AE

21. Function, Asset and Risk Analysis
Objective
• Sec 92D and Rule 10D requires every person who has entered into an international transaction to keep
and maintain a description of the functions performed, risk assumed and assets employed or to be
employed by the AE
• It is done to analyse the minutest detail pertaining to the execution of a transaction
• Enterprise that provides most of the effort, and more particularly, the rare or unique functions, should
earn most of the profit. Therefore, FAR analysis is important to analyse such enterprise
• FAR analysis is prepared entirely based on the information provided by the management
FAR analysis for various transactions
• Functions, assets and risk involved in the transaction must be analysed for each entity
• Entity should be marked based on high activity, moderate activity and low activity for each functions
performed, assets employed and risk assumed
Budgets and Forecasts
• Whether the budgets and forecasts prepared is having an impact on the pricing of the transactions
(International / Specified domestic transaction) must be disclosed
Characterisation – How you characterise assessee and AE – the exposure to risk compare to third party

22. Evaluation of Methods
• The choice of the tested party should be consistent with the functional analysis of the transaction
• As a general rule, the tested party is the one to which a transfer pricing method can be applied in the most
reliable manner and for which the most reliable comparables can be found i.e. it will most often be the one
that has the less complex functional analysis
• Better to choose Indian entity as tested party because of Availability of Relevant Comparable Indicator
Selection of Tested
Party
• Key criteria for determination of the most appropriate method is
• Availability
• Coverage and
• Reliability of data necessary for application of the method
• To determine whether any one of the transfer pricing methods can be reliably applied, relevant data must
be obtained
Relevant data
• Section 92C of the Income Tax Act, 1961 provides the following methods for the purposes of computation
of arms length price
Comparable Uncontrolled Price (CUP) Method
Resale Price Method (RPM)
Cost Plus Method (CPM)
Profit Split Method (PSM)
Transactional Net Margin Method (TNMM)
Any other method
Selection of the
Most Appropriate
Method

23. Contd.
Each method must be analyses based on its appropriate usage
For each nature of transaction entered between AE and Assessee
• Each method must be analysed and
• One method which is the most appropriate method must be selected
• Reasons for rejections of other method must also be specified

24. Economic Analysis
• To provide an economic analysis for various transactions entered by Assessee Company from an
Indian transfer pricing perspective
• It is aimed at the search for comparable data and relevant adjustments, in order to arrive at the
arm’s length price
Objective
• Rule 10B prescribes comparables for the transactions would have to be companies, which are
engaged in similar activities
• And are comparable in terms of functions performed, assets employed and risks assumed
• Such comparable companies should themselves be independent and should not have substantial
controlled transactions, which could affect the arm's length nature of their operating margins
• For companies having substantial controlled transactions, consolidated financial statements,
wherever available, can be considered for analysis if the same satisfied standards of comparability
• The widely recognised corporate databases – Capitaline PlusTM and Prowess IQ can be relied upon to
identify potential uncontrolled comparables
Comparable
Data
• Both in Capitaline PlusTM and Prowess IQ, to identify comparables, relevant population is
determined based on various possible industry classifications
• These are then filtered on the basis of objective quantitative criteria (Year, latest financials, turnover
and related party filter)
• The resultant companies are analysed on the basis of qualitative parameters to ensure
comparability (based on function)
• The Accept / Reject Matrix for the population must be mentioned
Search for
Comparables

25. Contd.
• The Companies accepted as comparable company after applying quantitative and qualitative criteria
must be analysed
• A brief description of the Business of every Comparable companies must be mentioned
Comparable
Companies
• Profit Level Indicators (PLI) are ratios that measure relationships between profits and costs incurred
(full cost or operating costs) or resources employed (a particular balance sheet category like assets,
capital employed etc)
• The use of PLI depends on factors like nature of activities of tested party, the reliability of available
data with respect to uncontrolled comparables and the extent to which the PLI is likely to produce a
reliable measure of the arm’s length price
• If comparable companies are more than 6 range concept must be applied in computing ALP
• If comparable companies is less than 6 arithmetic mean has to be applied in computing ALP
• PLI of comparable companies must be compared with PLI of assessee company , along with working
capital adjustments if required
Financial
Analysis
• The following adjustments may be done to the PLI - entirely based on our subjective estimation
which may or may not be backed by statistical data
• Litigation risks
• Goodwill
• Third party risk
• Forex Risk
• Difference in turnover and business vintage
Adjustments
to PLI
• If PLI of Assessee company is > PLI of comparable companies then no transfer pricing adjustment has to be made and the
Assessee company is carrying out transaction at ALP
• If PLI of Assessee company is < PLI of comparable companies then transfer pricing adjustment has to be made

26. Appendix to the Report
Appendix Name Description
Appendix A Abbreviations Abbreviations used in the report must be mentioned to have better
understanding of the report
Appendix B Scope and Limitations Clearly stating the purpose for which the TP report has been prepared and
limitations such as change in TP law subsequently, reliance upon the
information generated from database, etc. need to be clearly stated
Appendix C Intercompany Agreements For the transaction under consideration, terms of relevant agreement or
contract
Appendix D TP Regulations in India Chapter X (Special provisions relating to avoidance of tax) of Income tax
Act, 1961 contains TP provisions - all the relevant section and rules need to
be mentioned here
Appendix E Documentation Summary Drawing reference to Rule 10D requirements and the information
contained in the report
Appendix F Database and Limitations Capitaline PlusTM and Prowess IQ database have been used for obtaining
Comparable Company data. Limitations such as accuracy in the data must
be mentioned
Appendix G Table for Acceptance /
Rejection – Prowess IQ
Comparable companies accepted / rejected must be mentioned and
reasons for rejecting the same must be mentioned
Appendix H Table for Acceptance /
Rejection – Capitaline PlusTM
Comparable companies accepted / rejected must be mentioned and
reasons for rejecting the same must be mentioned

27. Caveats
Transfer pricing study report – basis of assessment
Levy of penalty shall depend on the authenticity of TP study report
No submission while return filing but sine quo non before filing of Form
3CEB
Assessee responsible for preparation – consultants and accountants can
assist

28. Thank You
DVS Advisors LLP
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