How to Do Transfer Pricing in India
Transfer pricing law in India applies to both domestic and international transactions which fall above a threshold in terms of deal value. Transfer Pricing was introduced through inserting Section(s) 92A-F and relevant Rule(s) 10A-E of the Income Tax Rules 1962.
It ensures that the transaction between ‘related’ parties is at a price that would be comparable if the transaction was occurring between unrelated parties.
The following sections of the Income Tax Act, 1961 apply to international transactions in terms of transfer pricing.
Perform a self-assessment. Assess your transfer pricing structure and risk in advance to ensure that your overall structure is reasonable. Make sure any newly set-up entities are properly compensated, all economic analyses are up-to-date, and the outcomes of your various legal entities are consistent with your expectations (do this routinely and make adjustments to pricing as needed). If using benchmarks, perform a sensitivity analysis (if you removed one company on the upper or lower end, do your results substantially change?). Consider drafting and implementing a transfer policy guide to help ensure local controllers and global entities are on the same page. Last but not least, think about having a transfer pricing advisor review and assess your risk.
Comply with local regulations. Keep all documentation that is required or will protect you from penalties in the event of an audit close at hand. For any disclosure forms, documentation, etc. that get submitted, be sure to file on time.
Put your best foot forward. Your documentation will be one of the first requested items in a transfer pricing audit, so make sure it is a document you are proud of and happy to share. A clear, straightforward presentation of facts and information can go a long way in avoiding basic questions. Ensure the transfer pricing method you’ve used is still the best method and clearly explain why you didn’t choose other methods. Make sure you’ve updated economic analyses and recently reviewed or updated the facts in the functional analysis. Also, remember to create a user-friendly document—use tables and charts or graphics where they will assist the reader.
Make sure intercompany agreements are prepared, unexpired, and accurately reflect the nature of the transactions and the risks borne by the parties.Your internal documents for related party transactions should be up to date and align with your reports. In the case of an audit, these will help support your case.
Offer supporting information for backup. Be prepared to offer supporting documents and financial files to back up statements and financials presented in your transfer reports. Know in advance whether your accounting systems can present information in the manner needed to illustrate financial outcomes for intercompany transactions or whether you can present this information manually. If it’s not possible to provide certain data or test a certain transaction in the manner an auditor might expect, be prepared to explain why.
Pay special attention to intangible property (IP) transfers. Movement of IP between related parties is an audit focus. Ensure you’ve clearly documented any transfers of IP with a valuation performed by a professional and a corresponding planning report outlining the methodology and assumptions.
Created & Posted By Aashima
Accounts Executive at TAXAJ
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