Transfer pricing regulations in India apply to cross-border transactions between associated enterprises and certain domestic transactions. The goal is to determine an arm's length price that an unrelated party would pay in an open market. Associated enterprises include those with common ownership or control, as well as relationships defined in the law. International transactions include cross-border trade, services, lending and other activities. Taxpayers must document their transfer prices and obtain an accountant's report. If adjustments are made, the taxpayer's income may increase and penalties could apply.

1. Transfer Pricing
By SGR & Associates
Chartered Accountants

2. Transfer Pricing – Scope &
Applicability?

3. Transfer Pricing Regulations ("TPR") are
applicable to:
• All cross border transactions entered into between
associated enterprises.
• Specified domestic transaction, not being an
international transaction fulfilling the conditions
outlined in section 92BA of the Act
The aim is to arrive at the comparable price as
available to any unrelated party in open market
conditions and is known as the Arm's Length Price
('ALP').

4. Associated Enterprises
('AEs')– How Identified?

5. The basic criteria to determine an AE is the
participation in management, control or capital
(ownership) of one enterprise by another enterprise.
The participation may be direct or indirect or through
one or more intermediaries.
The concept of control extends not only to control
through holding shares or voting power or the power to
appoint the management of an enterprise, but also
through debt, blood relationships, and control over
various components of the business activity performed
by the taxpayer such as control over raw materials,
sales and intangibles.

6. For instance, following are deemed to be considered as
AEs:
a. one enterprise holds, directly or indirectly, shares carrying not
less than twenty-six percent of the voting power in the other
enterprise; or
b. any person or enterprise holds, directly or indirectly, shares
carrying not less than twenty-six per cent of the voting power in
each of such enterprises; or
c. a loan advanced by one enterprise to the other enterprise
constitutes not less than fiftyone per cent of the book value of the
total assets of the other enterprise; or
d. one enterprise guarantees not less than ten per cent of the total
borrowings of the other enterprise; or

7. For instance, following are deemed to be considered
as AEs:
e. more than half of the board of directors or members of the
governing board, or one or more executive directors or executive
members of the governing board of one enterprise, are appointed
by the other enterprise; or
f. more than half of the directors or members of the governing
board, or one or more of the executive directors or members of
the governing board, of each of the two enterprises are
appointed by the same person or persons; or

8. For instance, following are deemed to be considered as
AEs:
g. the manufacture or processing of goods or articles or business
carried out by one enterprise is wholly dependent on the use of
know-how, patents, copyrights, trade-marks, licenses, franchises
or any other business or commercial rights of similar nature, or
any data, documentation, drawing or specification relating to any
patent, invention, model, design, secret formula or process, of
which the other enterprise is the owner or in respect of which the
other enterprise has exclusive rights; or
h. ninety per cent or more of the raw materials and consumables
required for the manufacture or processing of goods or articles
carried out by one enterprise, are supplied by the other enterprise,
or by persons specified by the other enterprise, and the prices
and other conditions relating to the supply are influenced by such
other enterprise; or

9. For instance, following are deemed to be considered as
AEs:
i. the goods or articles manufactured or processed by one
enterprise, are sold to the other enterprise or to persons specified
by the other enterprise, and the prices and other conditions
relating thereto are influenced by such other enterprise; or
j. where one enterprise is controlled by an individual, the other
enterprise is also controlled by such individual or his relative or
jointly by such individual and relative of such individual; or
k. where one enterprise is controlled by a Hindu undivided family,
the other enterprise is controlled by a member of such Hindu
undivided family or by a relative of a member of such
Hindu undivided family or jointly by such member and his relative;
or

10. For instance, following are deemed to be considered as
AEs:
l. Where one enterprise is a firm, association of persons or body
of individuals, the other enterprise holds not less than ten per cent
interest in such firm, association of persons or body
of individuals; or
m. there exists between the two enterprises, any relationship of
mutual interest, as may be prescribed

11. What is an International
Transaction?

12. For instance, following are deemed to be considered as
AEs:
An international transaction is essentially a cross border
transaction between AEs in any sort of property, whether tangible
or intangible, or in the provision of services, lending of money etc.
At least one of the parties to the transaction must be a non-
resident entering into one or more of the following transactions
(a) Purchase, sale or lease of Tangible or Intangible Property
(b) Provision of services
(c) Lending or borrowing of money
(d) Any transaction having a bearing on profits, income, losses or
assets
(e) Mutual agreement between AEs for allocation/apportionment
of any cost, contribution or expense.

13. What is Specified
Domestic Transaction?

14. Specified domestic transaction in case of an assessee
means any of the following transactions, not being an
international transaction.
 Any expenditure in respect of which payment has been
made or is to be made to a person referred to in section
40A(2)(b)
Any transaction referred to in section 80A
Any transfer of goods or services referred to in sub-section
(8) of section 80-IA

15. Any business transacted between the assessee and other
person as referred to in section 80-IA (10)
Any transaction, referred to in any other section under
Chapter VIA or section 10AA, to which provisions of section
80-IA(8) or section 80-IA(10) are applicable
Any other transaction as may be prescribed
However, where the aggregate of all such transactions entered
into by the assessee in the previous year exceeds a sum of five
crore rupees the provisions of these sections would be applicable.

16. Methods of determining
Arm Length’s Price?

17. (a) Comparable Uncontrolled Price Method ('CUPM')
(b) Resale Price Method ("RPM')
(c) Cost plus method ('CPM')
(d) Profit Split Method ('PSM')
(e) Transactional Net Margin Method ('TNMM')
(f) Other Method as prescribed by the board

18. What is Most Appropriate
Method?

19. The most appropriate method shall be the one which best suits to
the facts and circumstances of each international transaction or
specified domestic transaction and that provides the most reliable
measure of the arm’s length price.
Following specific factors should be taken into account in the
process of selecting the most appropriate method:
a. Nature and class of international transactions or specified
domestic transactions
b. Class or classes of associated enterprises and the functions
performed by them taking into account the assets employed or to
be employed and risks assumed by such enterprises;

20. c. Availability, coverage and reliability of data. For instance, data
relating to transactions entered into by the enterprise itself would
be more reliable than the data relating to transactions
entered into by third parties;
d. The degree of comparability and
e. The extent to which reliable and accurate adjustments can be
made to account for the difference between the transactions.

21. Documentation?

22. Every Taxpayer who has entered into an international transaction
or specified domestic transaction shall keep and maintain transfer
Pricing document in respect transactions thereof, as prescribed by
the TPR.
The provisions contained in the TPR are exhaustive as far as the
maintenance of documentation is concerned.
This includes background information on the commercial
environment in which the transaction has been entered into,
information regarding the transaction entered into, the analysis
carried out to select the most appropriate method and to identify
comparable transactions, and the actual working out of the ALP of
the transaction.
This also includes report of an accountant certifying that the ALP
has been determined in accordance with the TPR and that
prescribed documentation has been maintained.

23. Accountant’s Report-Form
3CEB?

24. Every Taxpayer who has entered into an international transaction
or specified domestic transaction shall obtain a report from an
accountant and furnish such report on or before the specified date
in the prescribed form duly signed and verified in the prescribed
manner by such accountant and setting forth such particulars as
may be prescribed.
As of now the specified date is November 30th of the relevant
assessment year.

25. Burden of Proof?

26. The primary onus is on the taxpayer to determine an ALP in
accordance with the Transfer Pricing Regulations and to
substantiate the same with the prescribed documentation.
Where such onus is discharged by the taxpayer and the data
used for determining the ALP is reliable and correct there can be
no intervention by the tax officer.

27. Adjustment to ALP-
Effects?

28. (a) Adjustment to reported income of the taxpayer-The tax
officer is bound to adjust the reported income of the taxpayer with
the amount of adjustment proposed by the TPO. This would have
an effect of increasing the assessed income or alternatively
decreasing the assessed loss.
(b) Levy of penalty- To ensure compliance with the arm’s
length principle, penalties has been prescribed for various
defaults as summarised below:
In case of a post-inquiry adjustment, there is deemed to be a
concealment of income - 100-300% of tax on the adjusted
amount
Failure to maintain documents - 2% of the value of each IT/SDT
Failure to furnish documents/report transaction - 2% of the
value of the IT/SDT
Failure to furnish accountant’s report - Rs 100,000

29. SGR & ASSOCIATES
C.A. Sanjeev Kumar & C.A. Ritu Sarin
SGR & ASSOCIATES
CHARTERED ACCOUNTANTS
Head Office: 17A, Highway Apartments, Ghazipur,
New Delhi - 110096.
Branch Office: D-91, First Floor, Kaushambi-201001
Telephone: +91-0120-4561947
Mobile: +91-9212332310, 9212306204
E MAIL: office@casgr.com