Latest Blogs from SBS and Company LLP

    Transfer Pricing Assessment - Practical Views

    Transfer Pricing Assessment - Practical Views

    1. Section 92CA of the Indian Income Tax Act provides that an Assessing Officer may make a reference to a Transfer Pricing Officer (TPO) for computation of arm's length price (ALP). In India, TP audits are conducted by specialist officers notified as Transfer Pricing Officers (‘TPO’) by the CBDT. The DGIT (International Taxation) and DIT(TP) distribute the work among the TPOs stationed at various cities across India.

    TPO has been defined in the said section to mean a Joint Commissioner or Deputy Commissioner or Assistant Commissioner who is authorised by the Board to perform all or any of the functions of an Assessing Officer specified in sections 92C and 92D of the Income-tax Act. The determination of arm's length price in several cases is done by the TPO.

    1. Across the world (mainly in the developed countries), cases are referred for audit after a detailed risk assessment and generally high risk transactions are focussed to ensure effective use of resources at tax office. The commonly risk indicators include:
    2. Consistent and continued losses;
    3. Transactions with related parties in countries with lower effective/marginal tax rates, especially secrecy ju risd iction s;
    4. Local low profit or loss making companies with material cross-border transactions with related parties offshore, where the offshore part of the group is relatively much more profitable;
    5. The existence of centralised supply chain companies in favourable tax jurisdictions i.e. centralised sourcing or marketing companies located in jurisdictions with low or no tax regimes and which are not located in the same country/region as the group’s main customers and/or suppliers.
    6. Material commercial relationships with related parties in jurisdictions with aggressive/strict transfer pricing rules – the corporate group may be more likely to set transfer prices in favour of the more aggressive jurisdiction at the cost of the less aggressive jurisdiction, due to the higher likelihood of intense scrutiny in the first jurisdiction.
    7. Similar considerations apply where there are material commercial relationships with companies in jurisdictions that employ safe harbours or similar rules that do not always align to the arm’s length
    8. Cases for Compulsory TP Scrutiny in India:

    While the above factors are also relevant and considered by the tax authorities during the assessments in India, the selection of cases for TP auditsin India are primarily based on materiality of the value of the international transaction. As per the CBDT instructions, the following categories of cases/returns are compulsorily selected for TP audit:

    Cases where value of the international transactions exceed Rs 15 crores; (From FY 14-15, in the scrutiny guidelines, the CBDT has excluded this criteria and hence only the cases which satisfy the below criteria would only be subjected to compulsory scrutiny from TP perspective)

    Cases involving addition in an earlier year on the issue of TP in excess of Rs 10 Cr, which is confirmed in appeal or pending before an appellate authority.

    Further, the AO scrutinising a return of an Assessee having international transactions with AEs, can refer the case for TP audit, if he considers it necessary or expedient, with the approval of the Jurisdictional Commissioner

    1. Synopsis of TP Audits in India:

    Financial Year

    Number of TP

    Audits Completed

    Number of

    Adjustment Cases

    % of Adjustment


    Amount of


    (in INR crore)



















































    5. Information Request by the TPO:

    The Tax authorities are already in possession of certain information before starting a TP audit. These include (i) tax returns filed; (ii) financial statements attached to the tax returns; (iii) Form 3CEB (‘TP certificate’). These form important basic data for a transfer pricing audit. 

    The first step in a TP audit is the gathering of information that the TPO consider necessary to decide whether to accept tax returns as filed or to propose TP adjustments. The TPO rely primarily on the taxpayer to provide that information. The principal means for the TPO to collect the necessary information is the written information request. A TPO’s initial notice generally includes request for the following information/documents:

    All information and documents request to be maintained as prescribed in Rule 10D (‘TP documentation’ or ‘TP study report’);

    It is important to note that the Indian TP regulations require maintenance of contemporaneous TP documentation. The contemporaneous documentation the taxpayer has prepared will be an important document for the TPO and will be one of the first documents they request. This represents the first opportunity for the taxpayer to persuade the TPO that the transfer pricing is appropriate.

    A reconciliation of the amount of related party transactions disclosed in the financial statements, Form 3CEB and the TP documentation;


    • Annual report (standalone and consolidated) of the Assessee for the relevant year, prior two years and subsequent two years;


    • Annual report (standalone and consolidated) of the AEs for the relevant year, prior two years and subsequent two years;


    • Annual report of all the comparables selected in the TP study;


    • Copies of all Inter-company Agreement with Aes;


    • Other supporting documents of the transactions with AEs viz., invoices, ledger account copies, etc;


    • Details of all international transactions not reported in Form 3CEB, with particular reference to transaction which fall within the amended definition of international transaction;


    • Information of comparable transactions with Non-AEs;


    • Details of top non-AE customers and top non-AE suppliers;


    • Break-up of the receivables outstanding and details of credit period granted to Aes;


    •             Any other evidence or documents, the Assessee may want to rely on to substantiate the arm’s length nature of its transactions with Aes.

    This is particular relevant in the cases relating to payments for intra-group services and intangibles, wherein the TPO expect the Assessee to produce documents to substantial actual receipt of services or intangibles and the benefit therefrom.

    1. The Taxpayer is required to furnish the TP documentation within 30 days from the date of receipt of notice from the TPO. The TPO may on an application made by the Assessee extend the period of 30 days by a further period not exceeding 30 days.
    2. Penalties for not submitting/ not cooperating in the TP Assessments:

    The Act provides for stringent penalty for non-compliance with the TP provisions relating to maintenance of TP documentation. The penal provisions are summarised below:



    Failure to keep and maintain TP documentation

    or failure to report or furnishing of incorrect

    information/document relating to international

    transactions with AEs

    2% of the value of each international transaction

    Failure to furnish TP documentation

    2% of the value of each international transaction

    1. As the TP examination progresses, based on the nature of the international transactions, many more questions will arise in the minds of the TPO, and accordingly supplemental information requests are likely to be issued by the TPO. The time given for responding is usually a few weeks unless the taxpayer is expected to take a longer time to obtain and/or prepare the required information. It should be noted that a problem often seen are the challenges in enforcing an information request, which seeks a document or information not held by the taxpayer but held by a related party outside the country. Hence, it is important all relevant information/document related to pricing of the international transaction be obtained by the Assessee well in advance.

    If the contents of information requested by the TPO are confidential to the business of the Taxpayer, the Taxpayer may take precautions in disclosing such information by appropriately requesting the TPO to maintain confidentiality of such information.

    1. The TPO also collate necessary information from other sources in public domain such as the taxpayer’s website, the taxpayer’s submission of periodic financial data to the securities regulatory agency (if the taxpayer’s shares are listed on a stock exchange), business journals, other tax filings (related and unrelated to the taxpayer), or any other information that is publicly available.
    2. It should be noted that the taxpayer’s cooperation in providing the required data is essential in a TP audit. Taxpayers are expected to cooperate with the TPO in providing the necessary data, and a cooperative atmosphere during transfer pricing audits is desirable. It is necessary to create documents or to put necessary data in an orderly form so as to enable the TPO to understand the business operations and to proceed to the analytical stage.

    11. Powers of TPO to collect information:

    The TPO’s authority for making the information request is based on the general investigation authority provided for in the tax law. Hence, in addition to calling for information by written notice, the TPO’s have the following powers:


    • Powers u/s 131 of the Income-tax Act, of discovery and inspection of taxpayers, enforcing the attendance of any person and examining him on oath, compelling the production of books of account & other documents and issuing commissions;


    •             Power u/s 133(6) of the Act, to call from any person, information in relation to such points or matters, that will be useful or relevant for the TP audit; and

    Power of survey u/s 133A of the Act.

    Tax authorities can also utilize the exchange of information provision in an applicable tax treaty for obtaining information.


    Again, while opinion differ on the use of information not available in public domain for the purpose of determination of the ALP of the Assessee’s international transactions with AEs (referred to as ‘secret comparables’), the Income-tax Appellate Tribunals have upheld the use of such information provided adequate opportunity is provided to the Assessee for cross examination of such information.


    1. While the above powers are sparingly used by the TPO’s, it is important for Assessee to be aware that, in addition to routinely calling for information from third parties, TPO’s have also issued summons to Directors, former employees and also third parties for interviewing and confirming the facts stated in the TP documentation and the Taxpayers records. Hence, it is in the Taxpayers interest that the TP documentation is complete and accurate. In many instances, it may also be in the Taxpayer’s interest to arrange a site visit of the TPO to taxpayer’s facilities to present the factual portions of the taxpayer ’s case.


    1. The TPO’s power of determination of ALP is not restricted to transactions referred to him by the AO or disclosed by the tax payer. He can apply TP provisions to any other international transactions that come to his notice during assessment.


    14. The TPO has to determine the ALP of the international transactions after considering and taking into account all evidence or documents produced by the Assessee in addition to the TP documentation and all relevant material gathered by him. Thereafter the TPO is to pass a speaking order after obtaining approval of the DIT(TP). The order contains details of the data used, reasons for arriving at a certain price and the applicability of methods. The TPO sends a copy of his order to the AO and the Assessee.


    This article is contributed by Partners of SBS and Company LLP - Chartered Accountant Company. You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

    Looking for suggestions?

    Subscribe SBS AND COMPANY LLP updates via Email!