Guide To Transfer Pricing

GUIDE
TO
TRANSFER PRICING
BACKGROUNDER
(i)
First Edition : November 2016
Price : Rs. 120/-- (Excluding postage)
© THE INSTITUTE OF COMPANY SECRETARIES OF INDIA
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Company Secretaries of India.
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ISBN : 97-89-382207849
Printed at Samrat Offset Works/500/November 2016

(ii)
PREFACE
The era of globalization has witnessed a significant increase in the

foreign institutional investments along with the huge opening of the
production, sale, distribution and exchange of goods and services
beyond borders. This has resultant to the multiplicity of international
transactions. The amplification in Cross Border transactions, especially
among the Associated Enterprises, has enforced the substantial value
of the applicability and enforcement of the provisions related to transfer
pricing under the Income Tax Act, 1961 and other specified statutes in
India.
It is noteworthy that owing to proportional relation with the

transactions at global market, the law relating to transfer pricing is
dynamic and smooth with trending changes in the cross border
transactions. Company Secretaries as the qualified professionals in
ensuring compliances to sanction the authenticity and legitimacy of
the cross border transactions plays pivotal role in implementing the
provisions of Transfer Pricing. In short, they ensure the practical
implications of the law and the rules relating to transfer pricing.
With a view to guide the businesses for cross border transactions

and to act and operate as Principal Officer for governance and
compliance, it is imperative for professionals to advance expertise on
various dimensions of Transfer Pricing.
With the substantial amendments in Transfer Pricing Regulation over

a period of time, this “Guide to Transfer Pricing” will help the
professionals to augment their skills and expertise in Transfer Pricing
Regulation. The Guide deals with concept of Transfer Pricing, Methods
of Computing Arm’s Length Price, Applicability of Transfer Pricing
Provision to Domestic Transaction, Documentation, Consequences of
non compliances, Advance Pricing Agreement ‘APA’, Safe Harbour Rules
etc.
I appreciate the efforts of Mr. Govind Krishna Agarwal, Assistant

Director in bringing out this publication under the guidance of Ms. Sonia
Baijal, Director (Professional Development, Perspective Planning &
(iii)
Studies). I am also thankful to Mr.Vishwanath Kane, Deloitte Haskins &
Sells for his value addition made to the publication.
I am sure this Guide will be of immense practical value to

professionals and corporate executives.
I would personally be grateful to users and readers for offering their

suggestions for further improvement of this Guide.
CS Mamta Binani
President
The Institute of Company Secretaries of India
Place : New Delhi

Date : November 04, 2016
(iv)
CONTEN TS
Introduction 1
Need of Transfer Pricing Regulations 2
Transfer Pricing Regulations in India 2
Applicability of the Transfer Pricing Regulation 3
What is Arm’s Length Price? 3
Conclusion 5
Transfer Pricing Concept
Objective of Transfer Pricing Provisions 6
Associated Enterprises 6
Deemed Associated Enterprises 7
Meaning of International Transaction 9
Deemed International Transaction 10
Specified Domestic Transaction 13
Transfer Pricing - Methods
Introduction 15
Comparable Uncontrollable Method (CUP Method) 16
Applicability of CUP Method 18
Resale Price Method 18
Cost Plus Method 20
Profit Split Method 22
Transaction Net Margin Method (TNMM Method) 26
Applicability of TNMM Method 28
Comparability as per Income Tax Act 28
Multiple Year Data and Range Concept 29
(v)
Application of Range Concept 31
Selection of Transfer Pricing Methods 33
Reference to Transfer Pricing officer 35
Who is Transfer Pricing Officer ? 36
Determination of Arm’s Length price by Transfer 37
Pricing Officer
Rectification of Arm’s Length Price order by Transfer 37
Pricing Officer
Powers of Transfer pricing officer 37
Transfer Pricing – Documentation
Burden of Proof 43
Submission of documents with the Tax Authorities 43
Non Applicability of Documentation Requirement 44
Retention period of documents kept under Rule 10D 44
Country by Country Reporting (CbCR) 45
Transfer Pricing – Penalty for Contravention
Penalty for concealment of income or for
furnishing inaccurate particular of Income
[Section 271(1)(C)] 48
Penalty for failure to furnish information or

document [Section 271G] 49
Penalty for failure to keep and maintain records
and documents in respect of International Transaction
or specified domestic transactions [Section 271AA] 49
Penalty for failure to furnish report under
section 92 [Section 271BA] 49
Penalty for failure to answer questions, sign statements,
furnish information, return statements etc.
[Section 272A] 50
(vi)
Transfer Pricing – Applicability to Domestic Transactions
Misuse of tax incentives by Corporate 51
Examples on misuse of tax incentive by corporate 51
Facts and Ruling of Supreme Court in CIT vs. Glaxo
Smith Kline Asia (P) Ltd. 52
Specified Domestic Transaction 54
Advance Pricing Agreement 54
Determination of Arm’s Length Price under Advance
Pricing Agreement 54
Validity of Advance Pricing Agreement 55
Bindingness of Advance Pricing Agreement 55
Procedure and scheme of Advance Pricing Agreement 56
Filling of Modified Return for any Assessment years
relevant to previous year to which APA applies 56
Roll back provision in Advance Pricing Agreement
‘APA’ 58
Power of Board to make Safe Harbour Rules
[Section 92CB] 59
Filing of form 3CEFA/3CEFB 59
Abbreviations 74
Glossary 75
(vii)
Introduction
The globalization of the Indian economy has resulted in considerable

increase in foreign institutional investments, a huge expansion in the
production and service base and also a multiplicity of international
transactions across the globe between related parties. In cases, wherein
the transactions are entered into between independent enterprises, the
price therefore is determined by market forces. However, when a
transaction is entered into between the associated enterprises, the
commercial and financial aspects of the transactions may not be
influenced by external market forces but may be determined based on
internal factors. In such cases, the transfer price agreed between the
associated enterprises does not reflect arm’s length price and therefore
the income arising from such transactions and the consequent tax
liabilities of the associated enterprises could be distorted.
The existence of different tax rates and rules in different countries
offers a potential incentive to multinational enterprises to manipulate
their transfer prices to recognise lower profit in countries with higher
tax rates and vice versa. This can reduce the aggregate tax payable by
the multinational groups / companies and increase the after tax returns
available for distribution to shareholders.
Suppose a company X purchases goods for 100 rupees and sells it
to its associated company Y in another country for 200 rupees, who in
turn sells in the open market for 400 rupees. Had X sold it direct, it
would have made a profit of 300 rupees. But by routing it through Y, it
restricted it to 100 rupees, permitting Y to appropriate the balance.
The transaction between X and Y is arranged and not governed by market
forces. The profit of 200 rupees is, thereby, shifted to the country of Y.
The goods is transferred on a price (transfer price) which is arbitrary i.e.
Rs. 200, but not on the market price i.e. 400.
Transfer pricing is the setting of the price for goods and services sold
1
2 Guide to Transfer Pricing
between controlled (or related) entities within an enterprise. For

example, if a subsidiary company sells goods to a parent company, the
cost of those goods paid by the parent to the subsidiary is the transfer
price.
Need for Transfer Pricing Regulation
In an economy where multinational enterprises/big diversified

business groups play a prominent role in the development of the country,
the governments need to ensure that the taxable profits are not artificially
shifted out of their jurisdiction and that the tax base reported in their
country reflects the economic activity undertaken therein. To ensure
the fair valuation of economic activity (Production of goods/services,
other transactions) in their jurisdiction, about 70 countries such as US,
China, Brazil, Indonesia, Germany, England have issued transfer pricing
guidelines and rules.
Transfer Pricing Regulation in India
Increasing participation of multi-national groups in economic

activities in India has given rise to new and complex issues emerging
from transactions entered into between two or more enterprises
belonging to the same group. Hence, there was a need to introduce a
uniform and internationally accepted mechanism of determining
reasonable, fair and equitable profits and taxes in India. Accordingly,
the Finance Act, 2001 ushered in India the law of transfer pricing by
virtue of introduction of Sections 92 to 92F of the Income Tax Act,
1961 (the Act) which guides the computation of transfer price and
suggests detailed documentation procedures. Year 2012 brought a big
change in transfer pricing regulations in India whereby government
extended the scope of transfer pricing regulation to specified domestic
transactions which are enumerated in Section 92BA of the Income Tax
Act, 1961. This would help in curbing the practice of transferring profit
from a taxable domestic zone to tax free domestic zone or shifting the
profits from profit making entity to loss making entity within the group
in order to defer the tax payments.
As stated earlier, the fundamental of transfer pricing regulation is

that transfer price should represent the arm’s length price of goods
transferred and services rendered / provided from one unit to another
unit within a group.
Guide to Transfer Pricing 3
Applicability of the Transfer Pricing Regulation

The transfer pricing regulation would apply based upon certain
criteria. Firstly, there must be an international transaction. Secondly,
such international transaction must be between two or more associated
enterprises either or both of whom are non-residents. Further, a specified
domestic transaction, not being an international transaction has to fulfill
the conditions outlined in section 92BA of the Act in order to attract
the transfer pricing provisions.
The international transactions should involve incurring of any cost
or expenses or interest or it should involve in purchase, sale or lease of
tangible or intangible property or in the lending or borrowing of money
or any other transaction having a bearing on the profits and income,
losses or assets of such enterprises.
Further, as per section 92B(2) even if a transaction entered into
between an enterprise with a person other than an associated enterprise,
it shall be deemed to be a transaction between associated enterprises if
there exists a prior agreement in relation to the relevant transaction
between such other person and the associated enterprise or the terms
of the relevant transaction are determined in substance between such
other person and the associated enterprise. Consequently the provisions
of this chapter shall apply even in such cases.
Further also, as per section 92(3), these transfer pricing regulation
are not intended to be applied in cases where the effect of application
of these provisions reduces income chargeable to tax in India or increases
the loss as applicable.
What is Arm’s Length Price?
In general, an arm’s length price is the price at which independent

enterprises deal with each other, where the conditions of their
commercial and financial relations ordinarily are determined by market
forces. In other words, the transfer price should represent the price which
could be charged from an independent party in uncontrolled conditions.
Determining the arm’s length price is very important for an entity. In
case the transfer price is not at arm’s length, it may have following
consequences:
A. Incorrect evaluation of the performance of an entity.
B. Incorrect pricing of the final product (In case where the goods/
services are used in the manufacturing of final product)
C. Non-compliance with applicable laws / regulations and

consequent attraction of penalty provisions.
The same may be explained with the following examples

Company X and Company Y is working under the common umbrella
of Mohan & Company. Company X manufactures a product which is
raw material for Company Y.
Case Criteria X Effect on Company X Effect on Company Y
1 Company X The revenue of The total cost of the

charges price company X will product in case of
more than the increase. Company Y will
Arm’s length increase. This will
price from result into incorrect
Company Y pricing of its product
which may further
lead to the product
becoming incompe-
titive.
2 Company X The revenue of The total cost of
charges price company X will company Y will
less than the decrease. The parent decrease. Therefore,
Arm’s length company may close the company Y may
price from the company X charge lower price
Company Y treating it as loss which may lead to
making entity. loss at an entity level.
3 Company X The revenue of Company Y will be
charges at Company X will be paying the price as
Arm’s length representing true and equivalent to market
price from fair view of its price of Company’s X
Company Y operation. product and its cost
will be correct. On
the basis of the cost
arrived after
considering the arm’s
Case Criteria X Effect on Company X Effect on Company Y

length price of
company’s X
product, company Y
will be able to take
correct pricing
decision.
Conclusion
Transfer pricing has a direct bearing on the company’s profitability/
revenue. Importance of transfer pricing may be understood by the fact
that in financial year 2014-2015, the tax authorities in India have made
an adjustment of exceeding Rs. 46,000 crores in the taxable income of
companies on account of alleged non-adherence to the arm’s length
price in case of covered transactions. Since Company Secretary is the
principal officer of the company, he / she must guide the transfer pricing
practices in his / her company. He / she should ensure that the transfer
price declared for the product/services or other transactions of the
company has been calculated as per the Transfer Pricing regulation and
the transfer price represent the arm’s length price.
***
Transfer Pricing - Concepts
The Finance Act, 2001 introduced the transfer pricing concept in

India vide insertion of Section 92 to Section 92F of the Act, which can
also be called the Transfer Pricing Code of India. Subsequently, the
Finance Act, 2012, has made many changes in Transfer Pricing
Regulation to broaden the tax base and accordingly expanded the scope
of the transfer pricing provisions to cover certain “specified domestic
transactions” (not being an international transaction) entered into within
or between two domestic entities within India.
Objective of Transfer Pricing Regulation
1. To regulate the International transaction or SDT between two
associated enterprises.
2. To ensure that transaction entered between two associated
enterprises or specified domestic transaction is carried out at an
arm’s length price.
3. Transfer Pricing Codeis enacted to curb the arrangement which
is mainly entered into between the entities to shift the profit from
higher tax jurisdiction to lower tax jurisdiction. The shifting of
profit is often done with an overall objective of lowering the tax
base of the group entities.
4. To prevent the misuse of incentive given by Indian Government
for developing some specific areas/sectors.
“The concept of associated enterprises and International transaction
are very important for applying the transfer pricing regulation. Section
92A and Section 92B deal with these two important concepts of chapter
X of Income Tax Act, 1961.”
Associated Enterprises (AE)
Associated Enterprises has been defined in Section 92A of the Act.
6
It prescribes that “associated enterprise”, in relation to another enterprise,

means an enterprise—
(a) Which participates, directly or indirectly, or through one or more
intermediaries, in the management or control or capital of the
other enterprise; or
(b) In respect of which one or more persons who participate, directly
or indirectly, or through one or more intermediaries, in its
management or control or capital, are the same persons who
participate, directly or indirectly, or through one or more
intermediaries, in the management or control or capital of the
other enterprise.
The basic criterion to determine an AE is the participation in
management, control or capital (ownership) of one enterprise by
another enterprise whereby the participation may be direct or indirect
or through one or more intermediaries, control may be direct or indirect.
Deemed Associated Enterprises
The Finance Act, 2002 has amended sub-section (2) of section 92A
to the effect that for the purposes of sub-section (1), two enterprises
shall be deemed to be associated enterprises if, at any time during the
previous year any of the conditions mentioned in clauses (a) to (m) are
satisfied. For the purposes of these clauses, two enterprises would be
deemed to be an associated enterprise if the conditions stipulated therein
are fulfilled at any time during the previous year. Further, the words
‘directly’ or ‘indirectly’ have not been used in clauses (c) to (m), and
therefore, direct relationship between two enterprises is relevant for
the purposes of clauses (c) to (m) in order to determine whether they
are associated enterprises.
As per Section 92A(2), two enterprises shall be deemed to be
associated enterprises if, at any time during the previous year,—
(a) one enterprise holds, directly or indirectly, shares carrying not
less than twenty-six per cent 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 fifty-one 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
(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
(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, licences, 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
(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
(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
In summary, two enterprises will be deemed as Associated
Enterprises if
Quantum of Interest Criteria applied for Associated Enterprises
26% or more Shareholding with voting power – either direct

or indirect
51% or more Advancement of loan by one entity to other
constituting 51% or more of the book value of
the total assets of the other entity
51% or more Based on the board of directors appointed by
the governing board of the entity in the other
90% or more Based on the quantum of supply of raw
materials and consumables by one entity to the
other
10% or more Total Borrowing Guarantee by one enterprises
for other
10% or more Interest by a firm or association of Person (AOP)
or by a body of Individual (BOI) in other firm
AOP or firm or BOI
Meaning of International Transaction

International Transaction have been defined vide Section 92B of
Income Tax Act. It provides that “International Transaction” means a
transaction between two or more associated enterprises, either or both
of whom are non-residents, in the nature of purchase, sale or lease of
tangible or intangible property, or provision of services, or lending or
borrowing money, or any other transaction having a bearing on the
profits, income, losses or assets of such enterprises, and shall include a

mutual agreement or arrangement between two or more associated
enterprises for the allocation or apportionment of, or any contribution
to, any cost or expense incurred or to be incurred in connection with a
benefit, service or facility provided or to be provided to any one or
more of such enterprises.
Deemed International Transaction
As per Section 92B(2) of Income Tax Act, A transaction entered
into by an enterprise with a person other than an associated enterprise
shall, for the purposes of sub-section (1), be deemed to be an
international transaction entered into between two associated
enterprises, if there exists a prior agreement in relation to the relevant
transaction between such other person and the associated enterprise,
or the terms of the relevant transaction are determined in substance
between such other person and the associated enterprise.
Finance Act, 2012 has added an explanation for the purpose
of Definition 92B and it provides that the expression
“international transaction” shall include —
(a) the purchase, sale, transfer, lease or use of tangible property
including building, transportation vehicle, machinery, equipment,
tools, plant, furniture, commodity or any other article, product
or thing;
(b) the purchase, sale, transfer, lease or use of intangible property,
including the transfer of ownership or the provision of use of
rights regarding land use, copyrights, patents, trademarks,
licences, franchises, customer list, marketing channel, brand,
commercial secret, know-how, industrial property right, exterior
design or practical and new design or any other business or
commercial rights of similar nature;
(c) capital financing, including any type of long-term or short-term
borrowing, lending or guarantee, purchase or sale of marketable
securities or any type of advance, payments or deferred payment
or receivable or any other debt arising during the course of
business;
(d) Provision of services, including provision of market research,
market development, marketing management, administration,
technical service, repairs, design, consultation, agency, scientific

research, legal or accounting service;
(e) A transaction of business restructuring or reorganization, entered
into by an enterprise with an associated enterprise, irrespective
of the fact that it has bearing on the profit, income, losses or
assets of such enterprises at the time of the transaction or at any
future date.
The term Intangible assets have also been elaborated and explanation
to Section 92B provides that the expression Intangible shall include:
(a) Marketing related intangible assets, such as, trademarks, trade
names, brand names, logos;
(b) Technology related intangible assets, such as, process patents,
patent applications, technical documentation such as laboratory
notebooks, technical know-how;
(c) Artistic related intangible assets, such as, literary works and
copyrights, musical compositions, copyrights, maps, engravings;
(d) Data processing related intangible assets, such as, proprietary
computer software, software copyrights, automated databases,
and integrated circuit masks and masters;
(e) Engineering related intangible assets, such as, industrial design,
product patents, trade secrets, engineering drawing and
schematics, blueprints, proprietary documentation;
(f) Customer related intangible assets, such as, customer lists,
customer contracts, customer relationship, open purchase
orders;
(g) Contract related intangible assets, such as, favourable supplier,
contracts, licence agreements, franchise agreements, non-
compete agreements;
(h) Human capital related intangible assets, such as, trained and
organized work force, employment agreements, and union
contracts;
(i) Location related intangible assets, such as, leasehold interest,
mineral exploitation rights, easements, air rights, water rights;
(j) Goodwill related intangible assets, such as, institutional goodwill,
professional practice goodwill, personal goodwill of professional,

celebrity goodwill, general business going concern value;
(k) Methods, programmes, systems, procedures, campaigns, surveys,
studies, forecasts, estimates, customer lists, or technical data;
(l) Any other similar item that derives its value from its intellectual
content rather than its physical attributes.’
The above explanation has added a wide range of Intangibles and
other transactions and the purpose of the explanation is to extend the
applicability of Transfer pricing code to all International transaction
involving the exchange of Intangibles which are not expressly available
for trade.
Services, finances and costs etc.
The two main issues while analysing intra-group services are:
(i) Whether an intra-group service has been provided; and
(ii) What’s the consideration should be in accordance with the arm’s
length principle.
The test whether a service has been provided to associated enterprises
is at arm’s length price or not, is ‘whether an independent enterprise in
comparable circumstances would have been willing to pay for the
activity if performed for it by an independent enterprise or would have
performed the activity in-house for itself. If the activity is not one for
which the independent enterprise would have been willing to pay or
perform for itself, the activity ordinarily should not be considered as an
intra-group service meeting the arm’s length principle’. Services
benefiting a group of enterprises as a whole should be allocated amongst
the group in a way that matches the benefit received.
The enterprises usually enter into a capital financing including
borrowing, lending, guarantee arrangements, etc. with its associated
enterprises. The pricing of these arrangements will have a bearing on
the profits or losses of the associated enterprises. The Finance Act,
2012 expressly covers the transactions of capital financing including
any type of long-term or short-term borrowing, lending or guarantee,
purchase or sale of marketable securities or any type of advance,
payments or deferred payment or receivable or any other debt arising
during the course of business are expressly covered as international
transactions.
The cost contribution arrangements are arrangements between

business enterprises to share the costs and risks of developing, producing,
or obtaining assets, services or rights. When an enterprise enters into a
cost contribution arrangement with its associated enterprise, the
conditions of the arrangements should be in conformity with arm’s
length principle and accordingly, a participant's contributions must be
consistent with what an independent enterprise would have agreed to
contribute under comparable circumstances given the benefits it
reasonably expects to derive from the arrangement.
Specified Domestic Transactions
Finance Act, 2012 has made a very important change and it has
extended the scope of the applicability of Transfer Pricing Regulation to
specified domestic transactions w.e.f. 1st April, 2012. As per Section
92BA of the Act, “Specified domestic transaction” in case of an assessee
means any of the following transactions, not being an international
transaction, namely:
(i) Any expenditure in respect of which payment has been made or

is to be made to a person referred to in clause (b) of sub-
section (2) of section 40A;
(ii) Any transaction referred to in section 80A;
(iii) Any transfer of goods or services referred to in sub-section (8) of

section 80-IA;
(iv) Any business transacted between the assessee and other person
as referred to in sub-section (10) of section 80-IA;
(v) Any transaction, referred to in any other section under Chapter

VI-A or section 10AA, to which provisions of sub-section (8) or
sub-section (10) of section 80-IA are applicable; or
(vi) Any other transaction as may be prescribed,
And where the aggregate of such transactions entered into by the

assessee in the previous year exceeds a sum of Rs. 20 crores.’ All the
transactions covered under the six limbs as mentioned above will be
regarded as SDT only if the aggregate value of all transactions exceeds
threshold of Rs. 20 crores.
Accordingly, all of the compliance requirements relating to transfer

pricing documentation, accountant’s report, etc. shall equally apply to
specified domestic transactions as they do for international transactions
amongst associated enterprises.
***
Transfer Pricing - Methods
Introduction
Transfer Pricing in India is dealt in Section 92 to 92F of Income Tax
Act, 1961. As per Section 92 of the Act, any income arising from an
international transaction or specified domestic transaction shall be
computed having regard to the arm's length price. In computing income
under sub-section (1), the allowance for any expense or interest shall
also be determined having regard to the arm's length price. Where in
an international transaction, two or more associated enterprises enter
into a mutual agreement or arrangement for the allocation or
apportionment of, or any contribution to, any cost or expense incurred
or to be incurred in connection with a benefit, service or facility provided
or to be provided to any one or more of such enterprises, the cost or
expense allocated or apportioned to, or, as the case may be, contributed
by, any such enterprise shall be determined having regard to the arm's
length price of such benefit, service or facility, as the case may be.
However, the provision of Transfer Pricing shall not apply in a case
where the computation of income or the determination of the allowance
for any expenses or interest or the determination of any cost or expenses
allocated or apportioned under this Section, has the effect of reducing
the income chargeable to tax or increasing the loss. In such cases, the
computation of income will be done on the basis of entries made in the
books of accounts in respect of the previous year in which the
international transaction or specified domestic transaction was entered
into.
Section 92C of Income Tax Act defines the methods which are to be
used in determination of Arm's Length prices for International
Transaction or specified domestic transaction. The arm's length price in
relation to an international transaction or specified domestic transaction
shall be determined by any of the following methods, being the most
15
appropriate method, having regard to the nature of transaction or class

of transaction or class of associated persons or functions performed by
such persons or such other relevant factors as the Board may prescribe,
namely:--
(a) Comparable Uncontrolled Price Method (CUP)
(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 may be prescribed by the Board and provided

in Rule 10AB.
A. Comparable Uncontrolled Price Method
Comparable Uncontrolled Price (“CUP”) method compares the

price charged or paid for property transferred or services provided in a
controlled transaction to the price charged or paid for property
transferred or services provided in a comparable uncontrolled
transaction in comparable circumstances.
An Uncontrolled price is the price agreed between the unrelated

parties for the transfer of goods or providing of services. If this
uncontrolled price is comparable with the price charged for transfer of
goods or services between the associated enterprises, then that price is
Comparable Uncontrolled Price (CUP). This is the most direct method
for the determination of the Arms’ length price.
The application of this method involves:
(i) Identify the price charged or paid in comparable uncontrolled

transactions;
(ii) The above price should be adjusted at a transaction level for the
differences on the basis of functions performed, assets employed
and risks undertaken (i.e. FAR analysis) and enterprise level
differences if any;
(iii) The adjusted price is the arm’s length price;
Methods of CUP
CUP can be either
(a) Internal CUP or
(b) External CUP
Internal CUP is available, when the tax payer enters into a similar
transaction with unrelated parties, as is done with a related party as
well. This is considered a very good comparable, as the functions
performed, processes involved, risks undertaken and assets employed
are all easily comparable – more so, on “an apple to apple basis”.
The external CUP is available if a transaction between two

independent enterprises takes place under comparable conditions
involving comparable goods or services. For example an independent
enterprise buys or sells a similar product, in similar quantities under
similar term from / to another independent enterprise in a similar market
will be termed as external CUP.
Assume that A and B are two associated company and C and D are
two independent companies. The concept of Internal CUP and External
CUP can be understood with the help of the following chart.
Uncontrolled Transaction
Internal External
Related party to an unrelated Transactions between two

party transaction (transaction unrelated parties
between A & C or B & C) (Transaction between C & D)
Provision of Income Tax Act, 1961 about CUP Method

Rule 10B(1)(a) of Income Tax Rules, 1962 prescribes that
Comparable Uncontrolled Price is the price charged for property
transferred or services provided in a comparable uncontrolled
transaction in comparable circumstances. If there is any difference
between the two prices, this may indicate that the conditions of the
commercial and financial relations of the associated enterprises are not
at arm's length, and that the price in the uncontrolled transaction may
need to be substituted for the price in the controlled transaction.”
Such price is adjusted for any differences (on the basis of functions
performed, assets used and risks undertaken i.e. FAR analysis and
enterprise level differences if any between the uncontrolled transaction
and the international transaction or specified domestic transaction of
the enterprise. The adjusted price arrived at, is taken to be the “arm’s
length price” for the property transferred or services provided with
respect to the international transaction or specified domestic transaction.
Applicability of the CUP Method
Comparable Uncontrolled Price method is treated as most reliable
method of determining the transfer price but it is not easy to find out
the controllable price easily. The CUP is believed to be the most reliable
or best method, if one could identify and map it. Typical transactions in
respect of which the comparable uncontrolled price method may be
adopted are:
(a) Transfer of goods;
(b) Provision of services;
(c) Interest on loans;
(d) Intangibles
Resale Price Method
Rule 10B(1)(b) of Income Tax Rules, 1962 prescribes Resale Price
method by which,
A. The price at which property purchased or services obtained by
the enterprise from an associated enterprise is resold or are
provided to an unrelated enterprise is identified;
B. Such resale price is reduced by the amount of a normal gross
profit margin accruing to the enterprise or to an unrelated
enterprise from the purchase and resale of the same or similar
property or from obtaining and providing the same or similar
services, in a comparable uncontrolled transaction, or a number
of such transactions;
C. The price so arrived at is further reduced by the expenses incurred
by the enterprise in connection with the purchase of property or
obtaining of services;
D. The price so arrived at is adjusted to take into account the
functional and other differences, including differences in

accounting practices, if any, between the international
transaction or specified domestic transaction and the comparable
uncontrolled transactions, or between the enterprises entering
into such transactions, which could materially affect the amount
of gross profit margin in the open market;
E. The adjusted price arrived at under sub-clause (iv) is taken to be
an arm’s length price in respect of the purchase of the property
or obtaining of the services by the enterprise from the associated
enterprise.
The resale price method may be adopted where the goods are
purchased and then sold with little or no value addition i.e. trading of
goods.
Example:
1. A sold a machine to B (Associated enterprise) and in turn B sold
the same machinery to C (an independent party) at sale margin
of 30% for Rs 2,10,000 but without making any additional
expenses and change. Here Arm’s length price would be
calculated as
Sales price to B = Rs. 2,10,000
Gross Margin = Rs. 2,10,000 * 30% = Rs. 63,000
Transfer price = Rs. 1,47,000
2. A sold a machine to B (Associated enterprise) and in turn B sold
the same machinery to C (an independent party) at sale margin
of 30% for Rs 4,00,000 but B has incurred Rs. 4000 in sending
the machine to C. Here Arm’s length price would be calculated
as
Sales price to B = Rs. 4, 00,000
Gross Margin = Rs. 4,00,000*30%= Rs. 1, 20,000
Balance = Rs. 2, 80,000
Less : Expenses incurred by B = Rs. 4,000
Arm’s length price = Rs. 2,76,000
The formula for the transfer price in inter-company transactions

of products is as follows:
TP = RSP x (1-GPM), where:
• TP = Transfer Price of a product sold between seller company
and a related company;
• RSP = Resale Price at which a product is sold by seller
company to unrelated customers; and
• GPM = Gross Profit Margin that a specific seller company
should earn, defined as the ratio of gross profit to net sales.
Gross profit is defined as Net Sales minus Cost of Goods Sold
The OECD in its Transfer Pricing Guidelines has observed that “An
appropriate resale price margin is easiest to determine where the reseller
does not add substantially to the value of the product. In contrast, it may
be more difficult to use the resale price method to arrive at an arm’s length
price where, before resale, the goods are further processed or incorporated
into a more complicated product so that their identity is lost or transformed.
A resale price margin is more accurate where it is realised within a
short time of the reseller’s purchase of the goods. The more time that elapses
between the original purchase and resale the more likely it is that other
factors – changes in the market, in rates of exchange, in costs, etc. – will
need to be taken into account in any comparison.”
C. Cost Plus Method
Rule 10B (1)(c) of Income tax Rules, 1962 prescribes Cost Plus
Method, by which,
(i) The direct and indirect costs of production incurred by the
enterprise in respect of property transferred or services provided
to an associated enterprise, are determined;
(ii) The amount of a normal gross profit mark-up to such costs
(computed according to the same accounting norms) arising
from the transfer or provision of the same or similar property or
services by the enterprise, or by an unrelated enterprise, in a
comparable uncontrolled transaction, or a number of such
transactions, is determined;
(iii) The normal gross profit mark-up so determined is adjusted to
take into account the functional and other differences, if any,

between the international transaction or specified domestic
transaction and the comparable uncontrolled transactions, or
between the enterprises entering into such transactions, which
could materially affect such profit mark-up in the open market;
(iv) The costs referred to in sub-clause (i) are increased by the adjusted
profit mark-up arrived at under sub-clause (iii);
(v) The sum so arrived at is taken to be an arm’s length price in
relation to the supply of the property or provision of services by
the enterprise.
Under the Cost Plus Method, an arm’s-length price equals the
controlled party’s cost of producing the tangible property plus an
appropriate gross profit mark-up, defined as the ratio of gross profit to
cost of goods sold (excluding operating expenses) for a comparable
uncontrolled transaction.
The formulas for the transfer price in inter-company transactions of
products are as follows:
TP = COGS x (1 + mark-up), where:
• TP = Transfer Price of a product sold between a manufacturing
company and a related company;
• COGS = Cost of goods sold of the manufacturing company
• Cost plus mark-up = gross profit mark-up defined as the ratio of
gross profit to cost of goods sold
Gross profit is defined as sales minus cost of goods sold.
The OECD in its Transfer Pricing Guidelines states that “This method
probably is most useful where semi finished goods are sold between
associated parties, where associated parties have concluded joint facility
agreements or long-term buy-and-supply arrangements, or where the
controlled transaction is the provision of services.”
As an example, let us assume that the COGS in a transaction between
two associated enterprises is Rs. 5,000. Assume that an arm’s length
gross profit mark-up that Associated Enterprise 1 should earn is 50%.
The resulting transfer price between Associated Enterprise 1 and
Associated Enterprise 2 is Rs. 7,500 [i.e. Rs. 5,000 x (1 + 0.50)].
In this method, calculation of cost of goods sold and gross margin are
the most important factor.
D. Profit Split Method
Rule 10B(1)(d) of Income tax Rules, 1962 prescribes Profit Split
Method, which may be applicable mainly in international transactions
or specified domestic transaction involving transfer of unique intangibles
or in multiple international transactions or specified domestic transaction
which are so interrelated that they cannot be evaluated separately for
the purpose of determining the arm's length price of any one transaction,
by which:
(i) The combined net profit of the associated enterprises arising from
the international transaction or specified domestic transaction
in which they are engaged, is determined;
(ii) The relative contribution made by each of the associated
enterprises to the earning of such combined net profit, is then
evaluated on the basis of the functions performed, assets
employed or to be employed and risks assumed by each
enterprise and on the basis of reliable external market data which
indicates how such contribution would be evaluated by unrelated
enterprises performing comparable functions in similar
circumstances;
(iii) The combined net profit is then split amongst the enterprises in
proportion to their relative contributions, as computed above;
(iv) The profit thus apportioned to the assessee is taken into account
to arrive at an arm’s length price in relation to the international
transaction or the specified domestic transaction.
However, the combined net profit as determined in sub-clause (i)
may, in the first instance, be partially allocated to each enterprise so as
to provide it with a basic return appropriate for the type of international
transaction or specified domestic transaction in which it is engaged,
with reference to market returns achieved for similar types of
transactions by independent enterprises, and thereafter, the residual
net profit remaining after such allocation may be split amongst the
enterprises in proportion to their relative contribution in the manner
specified under sub-clauses (ii) and (iii), and in such a case the aggregate
of the net profit allocated to the enterprise in the first instance together
with the residual net profit apportioned to that enterprise on the basis
of its relative contribution shall be taken to be the net profit arising to
that enterprise from the international transaction or specified domestic
transaction.
Two step Approach of Profit Spilt Method
Step 1: Allocation of sufficient profit to each enterprise to provide a

basic compensation for routine contributions. This basic
compensation does not include a return for possible valuable
intangible assets owned by the associated enterprises. The basic
compensation is determined based on the returns earned by
comparable independent enterprises for comparable transactions
or, more frequently, functions.
Step 2 : Allocation of residual profit (i.e. profit remaining after step

1) between the associated enterprises based on the facts and
circumstances. If the residual profit is attributable to intangible
property, then the allocation of this profit should be based on the
relative value of each enterprise’s contributions of intangible
property.
Example on the Profit Split Method (Residual Analysis

Approach)
Company A is an Indian Company and deals in telecommunication

products. It has developed a Microprocessor and it holds the patent for
manufacturing of the microprocessor. Company B which is an overseas
subsidiary of Company A is engaged in manufacturing of Mobile
equipment at Australia. Company A supplies the microprocessor to
company B for using it in Mobile equipment and company B in turn
after manufacturing the mobile, sends the mobile to company “A” in
India. Company A sells all the mobile in India.
Both companies contribute to the success of the mobile equipment

through their design of the microprocessor and the equipment. As the
nature of the products is very advanced and unique, the group is unable
to locate any comparable with similar intangible assets. Therefore,
neither the traditional methods i.e. CUP Method, RSP Method nor the
TNMM is appropriate in this case.
Nevertheless, the group is able to obtain reliable data on hand phone
contract manufacturers and equipment wholesalers without unique

intangible property in the telecommunication industry. The
manufacturers earn a mark-up of 10% while the wholesalers derive a
25% margin on sales.
Company A’s and Company B’s respective share of profit is

determined in 2 steps using the profit split method (residual analysis
approach).
Step 1 – Determining the basic return
The simplified accounts of Company A and Company B are shown

below:
Company B Company A
(Rs. in Lakhs) (Rs. in Lakhs)
Sales 100 125

Cost of Goods Sold (60) (100)
Gross Margin 40 25
Sales, General & Administration
Expenses (5) (15)
Operating Margin 35 10
The total operating profit for the group is Rs. 45 Lakhs.
Company B
Particulars Amount (Rs. in Lakhs)
Cost of goods sold 60
Margin @10% 6
Transfer price based on Comparable

(without considering Intangibles) 66
Company A
Particulars Amount (Rs. in Lakhs)
Sales to third party customers 125

Resale margin of wholesalers
comparables (without intangibles)
@25% 31.25
Gross Margin 31.25
Company B Company A
Sales 66
Cost of Goods Sold (60)
Gross Margin 6 31.25
Sales, General & Admin
Expenses (5) (15)
Routine operating margin 1 16.25
The total operating margin of the group is Rs. 17.25 Lakhs.
Step 2 : Dividing the residual profit
The residual profit of the group is = Rs. 45 Lakhs - Rs. 17.25 Lakhs
= Rs. 27.75 Lakhs
On further study of the two companies, two particular expense items,
R&D expenses and marketing expenses, are identified as the key
intangibles critical to the success of the mobile equipment. The R&D
expenses and marketing expenses incurred by each company are:
Company A 12 Lakhs (80%)
Company B 3 Lakhs (20%)
Assuming that the R&D and marketing expenses are equally
significant in contributing to the residual profits, based on the

proportionate expenses incurred:
Company A’s share of residual profit (80% x 27.75)
= Rs. 22.20 Lakhs
Company B’s share of residual profit (20% x 27.75)
= Rs. 5.55 Lakhs
Therefore, the adjusted operating profit of
Company A is = Rs. 22.20 L + Rs. 16.25 L = Rs. 38.45 Lakhs
Company B is = Rs. 5.55 + Rs. 1 = Rs. 6.55 Lakhs.
The adjusted tax accounts are as follows:
Company B Company A
Sales 71.55 125

Cost of Goods Sold (60) (71.55)
Gross Margin 11.55 53.45
Sales, General & Admin
Expenses (5) (15)
Operating Margin 6.55 38.45
Hence, the transfer price determined using the profit split method
(residual analysis approach) should be Rs. 71.55 Lakhs
E. Transactional Net Margin Method (TNMM)
Rule 10B (1)(e) of Income Tax Rules, 1962 prescribes, Transactional
net margin method, by which,
(i) The net profit margin realized by the enterprise from an
international transaction or specified domestic transaction
entered into with an associated enterprise is computed in
relation to costs incurred or sales effected or assets employed or
to be employed by the enterprise or having regard to any other
relevant base;
(ii) The net profit margin realized by the enterprise or by an unrelated

enterprise from a comparable uncontrolled transaction or a
number of such transactions is computed having regard to the
same base;
(iii) The net profit margin referred to in (ii) arising in comparable

uncontrolled transactions is adjusted to take into account the
differences, if any, between the international transaction or
specified domestic transaction and the comparable uncontrolled
transactions, or between the enterprises entering into such
transactions, which could materially affect the amount of net
profit margin in the open market;
(iv) the net profit margin realized by the enterprise and referred to in
(i) is established to be the same as the net profit margin referred
to in (iii);
(v) The net profit margin thus established is then taken into account
to arrive at an arm’s length price in relation to the international
transaction or specified domestic transaction.
Example
Nikhil & Co is an India manufacturer of dishwashers. All Nikhil &
Co.’s dishwashers are sold to an overseas associated enterprise,
Company G, and bears Company G’s brand. Company G, a household
electrical appliances brand name, sells only dishwashers manufactured
by Nikhil & Co.
The CUP method is not applied in this case because no reliable
adjustments can be made to account for differences with similar products
in the market. After the appropriate functional analysis, Nikhil & Co
was able to identify an Indian manufacturer of home electrical appliances,
Company H, as a suitable comparable company. However, Company
H performs warranty functions for its independent wholesalers, whereas
Nikhil & Co does not. Company H realizes a net mark up (i.e. operating
margin) of 10%.
As the costs pertaining to the warranty functions cannot be separately
identified in Company H’s accounts and no reliable adjustments can be
made to account for the difference in the functions, it may be more
reliable to examine the net margins in this case. The transfer price for
Nikhil & Co.’s sale of dishwashers to Company G is computed using the

TNMM as follows:
Nikhil & Co.’s cost of goods sold Rs. 5,000
Nikhil & Co.’s operating expenses Rs. 1,500
Total costs Rs. 6,500
Add : Net mark-up @ 10% (10% x 6,500) Rs. 650
Transfer price based on TNMM Rs. 7,150
Applicability of TNMM
The TNMM is used to analyze transfer pricing issues involving tangible

property, intangible property or services. However, it is more typically
applied when one of the associated enterprises employs intangible assets,
the appropriate return to which cannot be determined directly. In such
a case, the arm’s length compensation of the associated enterprise(s)
not employing the intangible asset is determined by determining the
margin realized by enterprises engaged in a like function with unrelated
parties. The remaining return is consequently left to the associated
enterprise controlling the intangible asset; the return to the intangible
asset is, in practice, a “residual category” being the return left over after
other functions have been appropriately compensated at arm’s length.
This implies that the TNMM is applied to the least complex of the related
parties involved in the controlled transaction. The tested party should
not own valuable intangible property. This approach has the added
benefit of resulting in, because generally more comparable data will
then in existence and fewer adjustments will required to account for
differences in functions and risks between the controlled and
uncontrolled transactions. In addition, the tested party should not own
valuable intangible property. This is also the reason why it is
recommended to select the least complex entity for the application of
the cost plus method or resale price method. The application of the
TNMM is similar to the application of the cost plus method or the resale
price method, but the TNMM involves comparison of net profit margins.
Comparability as per Income Tax Act
As per Rule 10B(2) of Income Tax Rules, 1962, the comparability of

an international transaction or specified domestic transaction with an
uncontrolled transaction shall be judged with reference to the following,

namely:
(a) The specific characteristics of the property transferred or services
provided in either transaction;
(b) The functions performed, taking into account assets employed
or to be employed and the risks assumed, by the respective parties
to the transactions;
(c) The contractual terms (whether or not such terms are formal or
in writing) of the transactions which lay down explicitly or
implicitly how the responsibilities, risks and benefits are to be
divided between the respective parties to the transactions;
(d) Conditions prevailing in the markets in which the respective
parties to the transactions operate, including the geographical
location and size of the markets, the laws and Government orders
in force, costs of labour and capital in the markets, overall
economic development and level of competition and whether
the markets are wholesale or retail.
An uncontrolled transaction shall be comparable to an international
transaction or specified domestic transaction if
(i) none of the differences, if any, between the transactions being
compared, or between the enterprises entering into such
transactions are likely to materially affect the price or cost
charged or paid in, or the profit arising from, such transactions
in the open market; or
(ii) Reasonably accurate adjustments can be made to eliminate the
material effects of such differences.
“Multiple Year Data” and Range Concept (vide Amendment
to Rule 10B of Income-tax Rules, 1962)
With an intent to align the Indian Transfer Pricing regulations with
international best practices, the Central Board of Direct Taxes (CBDT)
on October 19, 2015 has prescribed rules for applicability of range
concept and multiple year data. The rules would be applicable to
international transaction or specified domestic transaction entered into
by taxpayers on or after April 1, 2014.
• The rules specify the use of current year data i.e. the year in
which taxpayer has undertaken the international transactions or

SDT as the case may be has been entered into, for the purpose
of comparability analysis. However, in cases wherein current year
data is not available at the time of furnishing the return of income,
data pertaining to up to two preceding financial years may be
used for comparability analysis.
• This would be applicable only in cases where Resale Price Method
(“RPM”), Cost Plus Method (“CPLM”) or Transactional Net
Margin Method (“TNMM”) has been used as the most appropriate
method for computation of ALP.
• If at the time of audit proceedings, the data for the Current Year
of the comparable transactions / enterprises becomes available,
then such data for the Current Year shall be used for determining
the comparability of an uncontrolled transaction(s) with the
international transaction(s) or the SDT(s), even if the Current
Year data was not available at the time of filing of the return of
income by the taxpayer.
Determination of Arm’s Length Price (“ALP”) where application of
the most appropriate method result in more than one price, the ALP
shall be computed as follows:
• A dataset shall be constructed by placing the prices/data in an
ascending order.
• If a comparable has been identified on the basis of data relating
to:
(A)Current Year, then the data for the immediately preceding
two financial year can be considered, provided the
comparables has undertaken the same or similar comparable
uncontrolled transaction in those preceding two years.
(B) Financial year immediately preceding the current year, then
the data for the immediately preceding two financial years
can be considered, provided the comparables has undertaken
the same or similar comparable uncontrolled transaction in
those preceding year.
• The price in respect of comparable uncontrolled transaction shall
be determined using the weighted average of the prices/data for”
1. The current year and preceding two financial years or
2. Two financial years immediately preceding the current year

• In accordance to the following:
(i) Where the prices have been determined using RPM, the
weighted average of the prices shall be computed with weights
being assigned to the quantum of sales.
(ii) Where the prices have been determined using CUP, the
being assigned to the quantum of costs.
(iii) Where the prices have been determined using TNMM, the
being assigned to the quantum of costs incurred or sales
effected or assets employed or as the case may be.
Application of the Range Concept
If the price at which the international transaction or specified
domestic transaction is undertaken is within the (thirty-fifth percentile
to sixty-fifth percentile of the dataset), the transaction shall be deemed
to be at the ALP. However, if it is outside the range (mentioned above),
the ALP of the transaction shall be taken to be the median of the dataset.
• A minimum of six comparables would be required in the dataset
for applying the concept of range.
• An arm’s length range beginning from the thirty-fifth percentile
of the dataset (arranged in ascending order) and ending on the
sixty-fifth percentile will be considered.
The range concept would not be applied in cases where the most
appropriate method selected for determining the ALP is ‘profit split
method’ or ‘Other Method.’ Also, where the range concept is applied,
the benefit of three percent variation (one percent for wholesalers as
prescribed) shall not be available.
Further, if the dataset consists of less than six comparables, or the
most appropriate method selected for determining the ALP is profit
split method or other method, the ALP will be determined based on the
arithmetical mean of all the prices / data included in the dataset. Further,
the benefits of three percent variation (one percent for wholesalers as
prescribed) which was earlier permissible while adopting the arithmetic
mean continues to be available.
Where during the course of any proceeding for the assessment of

income, the Assessing Officer , on the basis of material or information
or document in his possession, is of the opinion that—
1. The price charged or paid in an international transaction or
specified domestic transaction has not been determined in
accordance with Section 92C(1)/92C(2); or
2. Any information and document relating to an international
transaction or specified domestic transaction have not been kept
and maintained by the assessee in accordance with the provisions
contained in sub-section (1) of section 92D and the rules made
in this behalf; or
3. The information or data used in computation of the arm's length
price is not reliable or correct; or
4. The assessee has failed to furnish, within the specified time, any
information or document which he was required to furnish by a
notice issued under sub-section (3) of Section 92D.
In all such cases, the Assessing Officer may proceed to determine
the arm's length price in relation to the said international transaction or
specified domestic transaction in accordance with sub-sections (1) and
(2), on the basis of such material or information or document available
with him. Provided that an opportunity of being heard is to be given by
assessing officer to Assessee by serving a notice calling upon him to
show cause, on a date and time to be specified in the notice, why the
arm's length price should not be so determined on the basis of material
or information or document in the possession of the Assessing Officer.
Where an arm’s length price is determined by assessing Officer under
this Section, the Assessing Officer may re-compute the total Income of
the Assessee having regard to the arm’s length price so determined.
If Arm’s length price is determined by Assessing officer under this
provision no deduction under section 10A or section 10AA or section
10B or under Chapter VI-A shall be allowed in respect of the amount of
income by which the total income of the assessee is enhanced after
computation of Income under this Section.
In this case, the income of other associated enterprises from which
tax was deducted or deductible, shall not be recomputed by reason of
such determination of arm's length price in the case of the first mentioned
enterprise.
Selection of Transfer Pricing Method

Rule 10C of the Indian Income Tax Rules, 1962 states that:
In selecting a most appropriate method, the following factors shall
be taken into account namely,
(a) The nature and class of the international transaction or specified
domestic transaction.
(b) The class or classes of Associated Enterprises entering into the
transaction and the functions performed by them taking into
account assets employed or to be employed and risks assumed
by such enterprises.
(c) The availability, coverage and reliability of data necessary for
application of the method.
(d) The degree of comparability existing between the international
transaction or specified domestic transaction and the
uncontrolled transaction and between the enterprises entering
into such transactions.
(e) The extent to which reliable and accurate adjustments can be
made to account for differences, if any, between the international
transaction or specified domestic transaction and the comparable
uncontrolled transactions or between the enterprises entering
into such transactions.
(f) The nature, extent and reliability of assumptions required to be
made in the application of a method.
The starting point to select the most appropriate method is the
functional analysis which is necessary regardless of what transfer pricing
method is selected. Each method may require a deeper analysis focusing
on aspects relating to various methods. The functional analysis helps to:
• Identify and understand the intra-group transactions;
• Have a basis for comparability;
• Determine any necessary adjustments to the comparables;
• Check the accuracy of the method selected; and
• Over time, to consider adaptation of the policy if the functions,
risks or assets have been modified.
Functional analysis also forms part of the documentation. The major

components of a functional analysis are:
1. Identification of Functions Performed : for the purpose of
determining comparability, functions of the entities play an
important role.
2. Identification of Risk Undertaken : A risk-bearing party should
have a chance of higher earnings than a non-risk bearing party,
and will incur the expenses and perhaps related loss if and when
risk materializes.
3. Identification of Assets used or contributed : The functional analysis
must identify and distinguish tangible assets and intangible assets
as this is very important for functional analysis.
The functional analysis provides answers to identify which functions
risks and assets are attributable to the various related parties. In some
cases one company may perform one function but the cost thereof is
incurred/ paid by the other party to the transaction. The functional
analysis could emphasize that situation. The functional analysis includes
reference to the industry specifics, the contractual terms of the
transaction, the economics circumstances and the business strategies.
A checklist with columns for each related party and if needed for the
comparable parties could be used to summarize the functional analysis
and give a quick idea of which party performs each relevant function,
uses what assets and bears which risk. But this short-cut overview should
not be used by tax auditors to count the number of enumerated
functions, risks and assets in order to determine the arm’s length
compensation. It should be used to consider the relative importance of
each function, risk and asset. Once the functional analysis is performed
and the functionality of the entity as regards the transactions subject to
review (or the entity as a whole) has been completed, it can be
determined what transfer pricing method is most suitable to determine
the arm’s length price for the transactions under the review (or the
operating margin for the entity under review).
There is no universally accepted method or model which describes
the technique for choosing a transfer pricing method. Traditionally the
Comparable Uncontrolled Pricing Method, Profit Split Method, Resale
Price Methods are being used in transfer pricing. Other methods such
as TNMM may also be used after the analysis of the functional profile
and global practices.
Reference to Transfer Pricing Officer

Section 92CA of the Income tax Act provides that the Assessing
Officer with prior approval of Commissioner may refer the computation
of Arm’s Length Price in an International Transaction or specified
domestic transaction to transfer pricing officer if he considers it necessary
or expedient to do so. On reference by Assessing officer, Transfer Pricing
Officer (TPO) shall serve a notice to the Assessee requiring him to
produce the evidence in support of computation made by him of Arm’s
Length Price in relation to an International transaction or specified
domestic transaction.
As per instruction no. 3/ 2016 (guidelines) issued by the Central
Board of Direct Taxes (“CBDT”) on 10 March 2016, it has been provided
that the AO can refer the international transactions and the specified
domestic transactions to the TPO only in the following circumstances:
(a) Cases where the AO notices transfer pricing transactions during
the course of assessment and the taxpayer has either not filed
any Form No. 3CEB or has filed Form No. 3CEB but has not
reported such transactions;
(b) Where there is a transfer pricing adjustment of INR 10 crore or
more in case of a taxpayer in any earlier assessment and the
same has been pending in appeal or has been upheld by the
judicial authority;
(c) In case search and seizure or survey operations of a taxpayer
where transfer pricing issues are reported by the investigating
officer or the AO.
In all the above situations, the AO must provide an opportunity of
being heard to the taxpayer before recording his satisfaction or otherwise.
The CBDT has decided that the AO shall henceforth make a
mandatory reference to the TPO only under the following
circumstances:
1. All cases selected for scrutiny on the basis of TP risk parameters;
• Computer assisted scrutiny selection system; or
• Compulsory manual selection system in accordance with the
CBDT’s annual instruction.
2. Cases selected for scrutiny on non-TP risk parameters shall be

referred to TPO’s only in the following circumstances:
• Where Accountant’s report has not been filed or has not
disclosed the international transaction or SDTs;
• Where there has been a TP adjustment of more than INR 10
crore or more in an earlier assessment year and such an
adjustment has been upheld by the judicial authorities or is
pending appeal;
• Where either search and seizure or survey operations have
been carried out and findings regarding the issues in respect
of the international transaction and SDT or both have been
recorded by the Investigation wing or the AO.
• Cases involving a TP adjustment in earlier assessment year
that has been fully or partially set-aside by the ITAT, High
Court or Supreme Court on the issue of the said adjustment;
• The AO as a jurisdictional requirement record the satisfaction
that there is an income or potential of an income arising and/
or being effected from an international transaction and SDT,
where the taxpayer has either not filed the Accountant’s report
or has not disclosed a transaction or has reported a
transaction with a qualifying remark;
• It is imperative for the AO to ensure that all international
transactions or SDTs are explicitly mentioned in the letter
through which the reference is made to the TPO;
• It is clarified that the determination of the ALP should not be
done by the office of the AO, wherein the reference is not made
to the TPO at all. However, in such cases the AO must record
in the body of the assessment order that due to the CBDT’s
instruction, the TP issue has not been examined at all.
Who is Transfer Pricing Officer (TPO)
For the purpose of Section 92CA “Transfer Pricing Officer” means a
Joint Commissioner or Deputy Commissioner or Assistant
Commissioner authorized by the Board to perform all or any of the
functions of an Assessing Officer specified in sections 92C and 92D in
respect of any person or class of persons.
Determination of Arm’s Length Price by Transfer Pricing

Officer
Transfer Pricing Officer after hearing the evidences, information or
documents as produced by assessee and after considering such evidence
as he may require on any specified points and after taking into account
all relevant materials which he has gathered during the course of
proceeding, shall, by order in writing, determine the arm’s length price
in relation to the international transaction/specified domestic transaction
and send a copy of his order to the Assessing Officer and to the assessee.
On receipt of the order from Transfer Pricing officer, the Assessing Officer
shall proceed to compute the total income of the assessee in conformity
with the arm’s length price as determined by the Transfer Pricing Officer.
Rectification of Arm’s Length Price Order by Transfer Pricing
Officer
If any mistake is observed which is apparent from record, the
Transfer Pricing Officer may as per the provisions of section 92CA(5)
amend any order passed by him and the provisions of Section 154 w.r.t.
rectification of mistake shall apply accordingly. Where any amendment
is made by the Transfer Pricing Officer, he shall send a copy of his order
to the Assessing Officer who shall thereafter proceed to amend the order
of assessment in conformity with such order of the Transfer Pricing
Officer.
Powers of Transfer Pricing Officer
1. Power to call evidences/Information from Assessee
As per Section 92CA(2), the Transfer Pricing Officer may issue a
notice to the Assessee and ask him to furnish records, evidences,
information in support of the computation of Arm’s Length Price
relating to the International Transaction or specified domestic
transaction.
2. Power to amend the Order made in regard to computation of Arm’s
length price for the transaction referred to him
As stated earlier, if any mistake is observed which is apparent
from record, the Transfer Pricing Officer may as per the provisions
of section 92CA(5) amend any order passed by him and the
provisions of section 154 w.r.t. rectification of mistake shall apply
accordingly
3. Power to proceed if the report under Section 92E is not furnished

for some International transactions or Specified domestic transaction
Section 92CA(2B) has been inserted vide Finance Act which
provides that w.e.f. 1st June, 2002 if the assessee has not furnished
return u/s 92E and the transfer pricing officer observe
International transaction or specified domestic transactions
during the course of the proceedings before him, he may proceed
with deeming that such transaction has been referred to him
under this section 92CA provided that the provision of this section
shall not empower the Assessing Officer either to assess or
reassess under section 147 or pass an order enhancing the
assessment or reducing a refund already made or otherwise
increasing the liability of the assessee under section 154, for any
assessment year, proceedings for which have been completed
before the 1st day of July, 2012
4. Power to proceed into the cases not referred to him
As per amendment made by Finance Act, 2011 the jurisdiction
of the Transfer Pricing Officer shall extend to the determination
of the Arm’s Length Price (ALP) in respect of other international
transactions or specified domestic transaction which are noticed
by him subsequently, in the course of proceedings before him.
These international transactions would be in addition to the
international transactions referred to the TPO by the Assessing
Officer
5. Power to exercise all of the following powers specified in Sections
131(1)(a) to 131(1)(d) or 133(6) or 133A of Income Tax Act:
Power u/s 131(1)(a) to 131(1)(d)
TPO have the same powers as are vested in a Court under the
Code of Civil Procedure, 1908 (5 of 1908), when trying a suit in
respect of the following matters, namely:—
(a) discovery and inspection;
(b) enforcing the attendance of any person, including any officer
of a banking company and examining him on oath;
(c) compelling the production of books of account and other
documents; and
(d) Issuing commissions.

6. Power u/s 133(6)
Under Section 133(6), TPO may require any person, including
a banking company or any officer thereof, to furnish information
in relation to such points or matters, or to furnish statements of
accounts and affairs verified in the manner specified by him giving
information in relation to such points or matters as his opinion
will be useful for, or relevant to, any enquiry or proceeding under
this Act.
7. Power u/s 133A - Power of Survey
Finance Act, 2011 has made an amendment which provides for
the power of Survey to TPO through introduction of Section
133A. In course of the proceedings, a TPO may carry out the
survey as per section 133A of Income Tax Act.
***
Transfer Pricing - Documentation
The legal framework for maintenance of information and

documentation by a taxpayer is provided in Section 92D of Income Tax
Act, 1961 which lays down that every person who enters into an
international transaction or specified domestic transaction during a
previous years shall maintain such information and documents ,
prescribed by the Board, as will assist the Assessing Officer/ Transfer
Pricing Officer to compute the income arising from that transaction,
having regard to the arm’s length price.
OECD in its transfer pricing guidelines stated that "Taxpayers should
make reasonable efforts at the time the transfer pricing is established to
determine whether the transfer pricing is appropriate for tax purposes in
accordance with the arm's length principle. Tax administrations should
have the right to obtain the documentation prepared or referred to in this
process as means of verifying compliance with the arm's length principle.
Moreover, the need for the documents should be balanced by the costs
and the administrative burdens, particularly where this process suggests
the creation of documents that would not otherwise be prepared or referred
to in the absence of tax considerations.
Rule 10D(1) lays down thirteen different types of information and
documents that a person has to keep and maintain. Broadly, these
information and documents may be classified into three types:
(i) Enterprise-wise documents – These are documents that describe
the enterprise, the relationships with other associated enterprise,
the nature of business carried out, etc. This information is, largely,
descriptive [clauses (a) to (c)].
(ii) Transaction-specific documents – These are documents that
explain the international transaction in greater detail. It includes
information with regard to each transaction (nature and terms
of the contract, etc.), description of the functions performed,
assets employed and risks assumed by each party to the
40
transaction, economic and market analyses, etc. This

information is both descriptive and quantitative in nature [clauses
(d) to (h)].
(iii) Computation related documents – These are documents which
describe and detail the methods considered, actual working
assumptions, policies etc., adjustments made to transfer prices
and any other relevant information, data, document relied for
determination of arm’s length price [clause (i) to (m)].
(a) A description of the ownership structure of the enterprise
and details of shares or other ownership interest held therein
by other enterprises;
(b) A profile of the multinational group of which the assessee
enterprises i.e. taxpayer is a part and the name, address, legal
status and country of tax residence of each of the enterprises
comprised in the group with whom international transactions
have been made by the taxpayer and the ownership linkages
among them;
(c) A broad description of the business of the taxpayer and the
industry in which it operates and the business of the associated
enterprises;
(d) The nature, terms and prices of international transaction
entered into with each associated enterprise, details of
property transferred or services provided and the quantum
and the value of each such transaction or class of such
transaction;
(e) A description of the functions performed, risks assumed and
assets employed or to be employed by the taxpayer and by
the associated enterprise involved in the international
transaction;
(f) A record of the economic and market analysis, forecasts,
budgets or any other financial estimates prepared by the
taxpayer for its business as a whole or separately for each
division or product which may have a bearing on the
international transaction entered into by the taxpayer;
(g) A record of uncontrolled transactions taken into account for
analysing their comparability with the international
transaction entered into, including a record of the nature,

terms and conditions relating to any uncontrolled transaction
with third parties which may be relevant to the pricing of the
international transactions;
(h) A record of the analysis performed to evaluate comparability
of uncontrolled transactions with the relevant international
transaction*;
(i) A description of the methods considered for determining the
arm's length price in relation to each international transaction
or class of transaction, the method selected as the most
appropriate method along with explanations as to why such
method was so selected, and how such method was applied
in each case;
(j) A record of the actual working carried out for determining
the arm's length price, including details of the comparable
data and financial information used in applying the most
appropriate method and adjustments, if any, which were made
to account for differences between the international
transaction and the comparable uncontrolled transactions
or between the enterprises entering into such transaction;
(k) The assumptions, policies and price negotiations if any which
have critically affected the determination of the arm's length
price;
(l) Details of the adjustments, if any made to the transfer price
to align it with arm's length price determined under these
rules and consequent adjustment made to the total income
for tax purposes;
(m)Any other information, data or document, including
information or data relating to the associated enterprise,
which may be relevant for determination of the arm's length
price.
Rule 10D also prescribes that the above information is to be
supported by authentic documents which may include the following:
(a) Official publications, reports, studies and data bases of the
government of the country of residence of the associated
enterprise or of any other country;
(b) Reports of market research studies carried out and technical

publications of institutions of national or international repute;
(c) Publications relating to prices including stock exchange and
commodity market quotations;
(d) Published accounts and financial statements relating to the
business of the associated enterprises;
(e) Agreements and contracts entered into with associated
enterprises or with unrelated enterprises in respect of transaction
similar to the international transactions;
(f) Letters and other correspondence documenting terms
negotiated between the taxpayer and associated enterprise;
(g) Documents normally issued in connection with various
transaction under the accounting practices followed.
Burden of Proof
It is noteworthy that the information and documentation
requirements referred to above are linked to the burden of proof laid
on the taxpayer to prove that the transfer price adopted is in accordance
with the arm's length principle. One of the conditions to be fulfilled for
discharging this burden by the taxpayer is maintenance of prescribed
information and documents in respect of an international transaction
entered into with an associated enterprise or specified domestic
transaction. A default in maintaining information and documents in
accordance with the rules is one of the conditions which may trigger a
transfer pricing audit under Section 92C(3). Any default in respect of
the documentation requirement may also attract penalty of a sum equal
to two percent of the value of the international transaction or specified
domestic transaction (Sec 271AA).
Submission of Documents with the Tax Authorities
There is no reference in the provisions included either in the Income
Tax Act or the Income Tax Rules about any requirement to submit the
prescribed information and documents at the stage of initial compliance
in the form of submission of report under Section 92E. All that Section
92E requires is that the concerned taxpayer shall obtain a report from
an Accountant in the prescribed form (i.e. Form 3CEB) and submit the
report by the specified date.
Form 3CEB contains a certificate from the Accountant that in his

opinion proper information and documents as prescribed have been
maintained by the taxpayer. Rule 10D requires that the information
and document maintained should be contemporaneous as far as possible
and should exist latest by the specified date for filing the report under
Section 92E. Section 92D also provides that information and
documentation may be requisitioned by the Assessing Officer or the
Appellate Commissioner on a notice of thirty days which may be
extended by another period of 30 days.
Non Applicability of Documentation Requirement
As per Rule 10D(2) of the Income tax rules, 1962 waived off the
requirement of maintenance of information and document in case of
those person who has entered into an international transactions the
aggregate value of which, as recorded in the books of account does not
exceed Rs. 1 crore. However, the concerned taxpayer may be required
to substantiate on the basis of available material that the income arising
from the international transaction is computed in accordance with the
arm's length rule. Further, there is no exemption for such assessees in
obtaining and furnishing audit report under section 92E of the Act i.e.
even if the aggregate value of the international transaction during the
previous year is not exceeding 1 crore, the assesse is required to obtain
and furnish audit report.
Retention Period of Documents kept under Rule 10D
Rule 10D of the Income tax rules, 1962 states that the prescribed
information and documents are required to be maintained for a period
of eight years from the end of the relevant Assessment years.
Section 92D(3) of the Act provides that the Assessing Officer or the
Commissioner (Appeals) during the course of any proceeding under
the Act may require a person who has entered into an international
transaction or specified domestic transaction to furnish any information
or document, which he was expected to maintain under section 92D
(1) and the person shall furnish such information or document called
for within thirty days from the date of receipt of a notice issued in this
regard. However, if, for any reason, the person is unable to produce the
information or documents called for within the stipulated period of thirty
days, the Assessing Officer or Commissioner (Appeals) may, on an
application made by the person, extend the period by a further period

or periods not exceeding, in all, thirty days.
Section 92E of the Act stated that every person who has entered
into an international transaction or specified domestic transaction during
a previous year 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.
“Specified date” shall have the same meaning as assigned to due
date in Explanation 2 below subsection (1) of section 139 as per which,
“In case of an assessee being a company, which is required to furnish a
report referred to in section 92E, the due date means the 30th day of
November of the assessment year.”
As per section 92F(i) “accountant” shall have the same meaning as
in the Explanation below sub-section (2) of section 288 as per which
“Accountant means a chartered accountant within the meaning of
Chartered Accountants Act, 1949 (38 of 1949) and includes, in relation
to any State, any person, who by virtue of the provisions of sub-section
(2) of section 226 of the Companies Act, 1956 (1 of 1956), is entitled to
be appointed to act as an Accountant of companies registered in that
State.".
Country by Country Reporting (CbCR) introduced vide the
Finance Act, 2016
The OECD in its report on Base Erosion and Profit Shifting “BEPS”
with respect to action plan 13 provides for revised standards for transfer
pricing documentation and a template for country-by-country reporting
of income, earnings, taxes paid and certain measure of economic activity
and recommended that the countries should adopt a standardised
approach to transfer pricing documentation. As India has been one of
the active members of BEPS initiative and part of international consensus,
the new provisions introduced in the Act vide the Finance Act, 2016
has prescribed a three-layered transfer pricing documentation
requirement consisting of:-
(i) A master file containing standardized information relevant for
all multinational enterprises (MNE) group members;
(ii) A local file referring specifically to material transactions of the
local taxpayer; and
(iii) A country-by-country report containing certain information

relating to the global allocation of the MNE's income and taxes
paid together with certain indicators of the location of economic
activity within the MNE group.
The report mentions that taken together, these three documents

(country-by-country report, master file and local file) will require
taxpayers to articulate consistent transfer pricing positions and will
provide tax administrations with useful information to assess transfer
pricing risks. It will facilitate tax administrations to make determinations
about where their resources can most effectively be deployed, and, in
the event audits are called for, provide information to commence and
target audit enquiries.
The country-by-country report requires multinational enterprises

(MNEs) to report annually and for each tax jurisdiction in which they
do business; the amount of revenue, profit before income tax and income
tax paid and accrued. It also requires MNEs to report their total
employment, capital, accumulated earnings and tangible assets in each
tax jurisdiction. The Country-by-Country (CbC) report has to be
submitted by parent entity of an international group to the prescribed
authority in its country of residence. This report is to be based on
consolidated financial statement of the group.
The master file is intended to provide an overview of the MNE groups

business, including the nature of its global business operations, its overall
transfer pricing policies, and its global allocation of income and
economic activity in order to assist tax administrations in evaluating
the presence of significant transfer pricing risk. The master file shall be
furnished by each entity to the tax authority of the country in which it
operates.
It may be noted that detailed rules in regard to the Master File and
the Local File maintenance requirements are awaited,
The prescribed authority may call for such document and

information from the entity furnishing the report for the purpose of
verifying the accuracy as it may specify in notice. The entity shall be
required to make submission within thirty days of receipt of notice or
further period if extended by the prescribed authority, but extension
shall not be beyond 30 days;
Penalties for non-compliance with new documentation requirements:

• Penalty for failure to furnish Master file: INR 5,00,000
• Penalty for failure to furnish CbCR or further information (called
for) in respect of CbCR: INR 5,000 – INR 50,000 per day,
depending upon period of delay.
• Penalty for proving inaccurate information in CbCR: INR
500,000
The CbC reporting requirement will apply only to large taxpayers
i.e. taxpayers having an annual consolidated group turnover over € 750
million (equivalent in local currency) in the preceding financial year.
Further, the new documentation regime will apply for the Financial
Year (FY) 2016-17 (i.e. April 1, 2016 to March 31, 2017), and the first
filing will be due by November 30, 2017.
***
Transfer Pricing – Penalty for Contravention
Contravention of Transfer Pricing Regulation as contained in Chapter

X of the Income tax Act, 1961 may invite hefty penalties. The details of
penalties under different sections of Income tax Act, 1961 are as follows:-
A. Penalty for concealment of income or for furnishing
inaccurate particulars of such income under Section
271(1)(c)
If the Assessing Officer or Commissioner (Appeals) or the
Commissioner in the course of any proceedings under this Act,
is satisfied that any person has concealed the particulars of his
income or furnished inaccurate particulars of such income, he
may direct that such person shall pay by way of penalty in
addition to tax, if any, payable by him, a sum which shall not be
less than, but which shall not exceed three times, the amount of
tax sought to be evaded by reason of the concealment of
particulars of his income or the furnishing of inaccurate
particulars of such income.
Explanation 7 to Section 271(1)(c) - Where in the case of an
assessee who has entered into an international transaction*
defined in section 92B, any amount is added or disallowed in
computing the total income under sub-section (4) of section 92C,
then, the amount so added or disallowed shall, for the purposes
of clause (c) of this sub-section, be deemed to represent the
income in respect of which particulars have been concealed or
inaccurate particulars have been furnished, unless the assessee
proves to the satisfaction of the Assessing Officer or the
Commissioner (Appeals) or the Commissioner that the price
charged or paid in such transaction was computed in accordance
with the provisions contained in section 92C and in the manner
prescribed under that Section, in good faith and with due
diligence.
48
B. Penalty for failure to furnish information or document-

Section 271G
As per Section 271G of Income Tax Act, If any person who has
entered into an international transaction or specified domestic
transaction fails to furnish any such information or document as
required by sub-section (3) of section 92D, the Assessing Officer
or the Commissioner (Appeals) may direct that such person shall
pay, by way of penalty, a sum equal to two per cent of the value
of the international transaction for each such failure.
C. Penalty for failure to keep and maintain information
and document in respect of International transaction
or specified domestic transaction- Section 271AA
• Without prejudice to the provisions of Section 271 or Section
271BA, if any person in respect of an International transaction
or specified domestic transaction fails to keep and maintain
any such information and document as required by sub-
section (1) or sub-section (2) of Section 92D,
• fails to report any international transaction or specified
domestic transaction which is required to be reported; or
• maintains or furnishes any incorrect information or
documents
The Assessing Officer or Commissioner (Appeals) may direct that
such person shall pay, by way of penalty, a sum equal to two per
cent of the value of each international transaction or specified
domestic transaction entered into by such person.
Further, in light of section 270A, in a case of under-reporting of
income penalty shall be 50% of the tax payable. The amendment
also prescribes that in cases where under-reporting of income
results from misreporting of income by the assesse, the person
shall be liable for penalty @ 200% of the tax payable on such
misreported income.
D. Penalty for failure to furnish report under Section 92E–
Section 271BA
If any person fails to furnish a report from an accountant as
required by Section 92E, the Assessing Officer may direct that
such person shall pay, by way of penalty, a sum of one hundred

thousand rupees.
E. Penalty for failure to answer questions, sign statements,
furnish information, returns or statements etc. - Section
272A
If any person,—
(a) being legally bound to state the truth of any matter touching
the subject of his assessment, refuses to answer any question put
to him by an income-tax authority in the exercise of its powers
under this Act; or
(b) refuses to sign any statement made by him in the course of
any proceedings under this Act, which an income-tax authority
may legally require him to sign; or
(c) to whom a summons is issued under sub-section (1) of
Section 131 either to attend to give evidence or produce books
of account or other documents at a certain place and time omits
to attend or produce books of account or documents at the place
or time, he shall pay, by way of penalty, a sum of ten thousand
rupees for each such default or failure.
***
Transfer Pricing – Applicability to Domestic

Transactions
Misuse of Tax Incentives by Corporates

With an objective of developing specific sectors/areas Indian
government has given various tax incentives in form of Tax holiday,
deduction from Income etc. The details of some of such Tax Incentives
are as given below:
Tax incentive under Section 80 IA : Deductions in respect of profits
and gains from industrial undertakings or enterprises engaged in
infrastructure development etc.
Tax incentive under Section 80 IC : Deduction in respect of profit and
gains from certain undertakings or enterprises in certain special
category states – notified industrial areas
Tax incentive under Section 10AA : a unit operating in an SEZ is
eligible to claim 100% tax holiday for the first five years and a 50%
tax holiday for the subsequent 10 years subject to some conditions.
However the drawback of above such incentives is that they are
sometimes been used to avoid taxes.
Example of Misuse of Tax Incentive by Corporates
Company A is located in SEZ area where Income tax holiday for 5
years is available. Company A has got its associated company B in Delhi.
Company B is producing raw material for company A. In order to avoid
Income tax payment, company B sells the goods to company A at a
price much lower than the market price. In this case company A’s profit
is enhanced by the difference of market price and price charged by B.
Since company A need not require to pay any Income Tax for first five
years, company A will be getting tax free profit while company B will
not require to pay any tax on the difference of market price of goods
supplied to A and price charged from A for supply of goods resulting
51
into the increase in overall post tax profits and decrease the overall tax
of the group
Extension of Transfer Pricing Regulation to Specified
Domestic Transaction
Honourable Supreme court in the case of [CIT v. Glaxo SmithKline
Asia (P) Ltd., 2010-TII-02-SC-LB-T] has advised that it needs to be
considered whether the regulations should be applied to domestic
transactions in cases where such transactions are not revenue-neutral.
The facts and ruling of Honourable Supreme Court is following:
CIT v. Glaxo SmithKline Asia (P) Ltd., 2010-TII-02-SC-LB-T
Facts
1. Glaxo SmithKline Asia (P) Ltd (GSK) entered into an agreement
with Glaxo Smith Kline Consumer Healthcare Ltd (“GSKCH”)
whereby GSKCH would provide all administrative services
relating to marketing, finance, Human Resource (HR) to GSK
for cost +5% markup.
2. The AO disallowed a part of the charges reimbursed on the
ground that they were excessive and not for business purposes.
On appeal by GSK, CIT (Appeals) upheld the decision of AO.
3. GSK appeal to Income Tax Appellate Tribunal (ITAT) and ITAT
ruled that AO has no power to disallow any expenditure as
excessive or unreasonable unless the case falls within the scope
of Section 40A(2). The department appeal to high court and
appeal was dismissed by High court.
4. For subsequent years, the AO continued to follow the same
approach and GSK continued to get relief from ITAT. Having
regard to the delay on the part of department to give effect to
ITAT order, GSK filled a writ petition before the High Court and
High court issued direction to the department to issue refund of
taxes along with applicable interest.
Supreme Court Ruling
1. The department filed a Special Leave Petition (SLP) before the
Hon’ble Supreme court and Supreme court held that since the
exercise is revenue neutral and both the parties are not related
parties in terms of Section 40A(2) of Income tax act, no
interference is called for and the SLP filled by the department is

dismissed.
2. The Hon’ble Supreme court further stated that the larger issue is
whether Transfer Pricing provisions should be limited to cross-
border transactions or whether the Transfer Pricing Regulations
be extended to domestic transactions. In domestic transactions,
the under-invoicing of sales and over-invoicing of expenses
ordinarily will be revenue neutral in nature, except in two
circumstances having tax arbitrage such as where one of the
related entities is (i) loss making or (ii) liable to pay tax at a lower
rate and the profits are shifted to such entity;
3. The Supreme court further held that the complications arise in
cases where the fair market value is required to be assigned to
transactions between related parties u/s 40A(2). The Central
Board of Direct taxes (CBDT) should examine whether Transfer
Pricing provisions can be applied to domestic transactions
between related parties u/s 40A(2) by making amendments to
the Act. The AO can be empowered to make adjustments to the
income declared by the assessee having regard to the fair market
value of the transactions between the related parties and can
apply any of the generally accepted methods of determination
of arm’s length price, including the methods provided under
Transfer Pricing provisions. The law can also be amended to make
it compulsory for the taxpayer to maintain Books of Accounts
and other documents on the lines prescribed in Rule 10D and
obtain an audit report from his Chartered Accountant (CA) that
proper documents are maintained;
4. Finally it was held that though the Court normally does not make
recommendations or suggestions, in order to reduce litigation
occurring in complicated matters, the question of extending
Transfer Pricing regulations to domestic transactions require
expeditious consideration by the Ministry of Finance and the
CBDT may also consider issuing appropriate instructions in that
regard.
Thereafter the Finance Act, 2012 has extends the transfer pricing
provisions to specified domestic transaction as well. This requires
domestic transactions involving payments to related persons to be
reckoned with reference to the arm's length price. This would especially
be relevant where losses are sought to be cushioned through expense

allocations. The Government intends to plug these loopholes by bringing
domestic transactions within the ambit of the transfer pricing legislation.
Specified Domestic Transactions
The specified domestic party transactions includes payment made
by a company to a person referred to in Section 40A(2)(b) of the Act
including payment to a director of the company or any person who has
a substantial interest in the company (that is, has a beneficial ownership
of shares carrying not less than 20 per cent of voting power);
transactions referred to in Section 80A(6) of the Act (for example,
transfer of goods or services from a unit/ entity claiming tax-incentives
to another unit/entity that does not get any tax incentives and vice-
versa); and transactions referred to in Section 80IA(8), 80IA(10) and
10AA(9) of the Act (carried out by industrial undertakings, infrastructure
companies and units operating in special economic zones).
Advance Pricing Agreement
As per Section 92CC of Income Tax Act, 1961, w.e.f. 1st July, 2012,
the Central Board of Direct Taxes (Board), with the approval of the
Central Government, may enter into an Advance Price Agreement with
any person, determining the arm’s length price or specifying the manner
in which arm’s length price is to be determined, in relation to an
international transaction to be entered into by that person.
Advance Pricing Agreement (APA) is an agreement between a
taxpayer and a taxing authority (Board) on an appropriate transfer
pricing methodology for fixing the arm’s length price for a set of
transactions over a fixed period of time in future. Importance of APA
may be understood with the fact that as stated earlier, in financial year
2014-2015, addition of about Rs. 46,000 crores in income has been
proposed by Transfer pricing officers.
Determination of Arm’s Length Price under Advance Pricing
Agreement
Arm’s Length Price under Advance Pricing Agreement shall be
determined as per method enumerated in section 92C(1) or any other
method with such adjustment and variation as may be necessary and
expedient so to do.
Section 92C(1) of Income Tax Act prescribes that the arm’s length
price in relation to an international transaction shall be determined by

any of the following methods, being the most appropriate method,
having regard to the nature of transaction or class of transaction or
class of associated persons or functions performed by such persons or
such other relevant factors as the Board may prescribe (see rule 10B)
namely:—
(a) Comparable uncontrolled price method;
(b) Resale price method;
(c) Cost plus method;
(d) Profit split method;
(e) Transactional net margin method;
(f) Such other method as may be prescribed by the Board.
Notwithstanding anything contained in Section 92C or Section
92CA, if the Advance Pricing Agreement has been entered between an
assessee and Board in respect of an international transaction, the arm’s
length price will be calculated as per the provisions of Advance Pricing
Agreement.
Validity of Advance Pricing Agreement
The Advance Pricing Agreement shall be valid for a period as specified
in the Advance Pricing Agreement. However, this period will not be
more than 5 consecutive years.
Binding nature of the Advance Pricing Agreement
Advance Pricing Agreement shall be binding on:
(a) the person in whose case, and in respect of the transaction in
relation to which, the agreement has been entered into; and
(b) on the Commissioner, and the income-tax authorities subordinate
to him, in respect of the said person and the said transaction
However the advance pricing agreement shall not be binding if there
is a change in law or facts having bearing on the agreement so entered.
Declaring an Advance Pricing Agreement void ab initio
The Board may, with the approval of the Central Government, by
an order, declare an agreement to be void ab initio, if it finds that the
agreement has been obtained by the person by fraud or

misrepresentation of facts.
Effect of declaring an Advance Pricing Agreement void ab
initio
If an agreement is declared void ab initio -
(a) All the provisions of the Act shall apply to the person as if such
agreement had never been entered into; and
(b) Notwithstanding anything contained in the Act, for the purpose
of computing any period of limitation under this Act, the period
beginning with the date of such agreement and ending on the
date of order for declaring an Advance Pricing Agreement void
ab initio shall be excluded. Provided that where immediately
after the exclusion of the aforesaid period, the period of limitation,
referred to in any provision of this Act, is less than sixty days,
such remaining period shall be extended to sixty days and the
aforesaid period of limitation shall be deemed to be extended
accordingly.
Procedure and Scheme of Advance Pricing Agreement
The Board may, for the purposes of this section, prescribe a scheme
specifying therein the manner, form, procedure and any other matter
generally in respect of the Advance Pricing Agreement. Where an
application is made by a person for entering into Advance Pricing
Agreement, the proceeding shall be deemed to be pending in the case
of the person for the purposes of the Act.
Filing of Modified return for any assessment year relevant to

a previous year to which APA applies
As per Section 92CD of Income Tax Act, 1961, w.e.f. 1st July, 2012
notwithstanding anything to the contrary contained in Section 139,
where any person has entered into an agreement and prior to the date
of entering into the agreement, any return of income has been furnished
under the provisions of Section 139 for any assessment year relevant to
a previous year to which such agreement applies, such person shall
furnish, within a period of three months from the end of the month in
which the said agreement was entered into, a modified return in
accordance with and limited to the agreement. Save as otherwise
provided in Section 92CD, if modified return is furnished under Section

139, all other provision of the Act shall apply accordingly.
Thus, Section 92CD provides an opportunity to taxpayer to avoid
the litigation even for the years for which return has already been filed.
Reassessment of Total Income in the cases where Modified
return has been filed but the Assessment/Reassessment
proceedings have been completed before the expiry of period
allowed for furnishing of modified return
As per Section 92CD(3), if the assessment or reassessment
proceedings for an assessment year relevant to a previous year to which
the agreement applies have been completed before the expiry of period
allowed for furnishing of modified return under Section 92CD, the
Assessing Officer shall, in a case where modified return is filed under
this Section, proceed to assess or reassess or recompute the total income
of the relevant assessment year having regard to and in accordance
with the agreement.
Application of APA in the pending assessment or reassessment
for an assessment year relevant to the previous year to which
the agreement applies and modified return has been filed
under Section 92 CD
Where the assessment or reassessment proceedings for an assessment
year relevant to the previous year to which the agreement applies are
pending on the date of filing of modified return in accordance with the
provisions of sub-section (1), the Assessing Officer shall proceed to
complete the assessment or reassessment proceedings in accordance
with the agreement taking into consideration the modified return so
furnished.
Extension of Limitation Period in the cases where modified
return is filed under Section 92CD
As per Section 92CD(5), notwithstanding anything contained in
Section 153 or Section 153B or Section 144C—
(a) The order of assessment, reassessment or recomputation of total
income under Section 92CD (3) shall be passed within a period
of one year from the end of the financial year in which the
modified return under sub-section (1) is furnished;
(b) The period of limitation as provided in Section 153 or Section

153B or Section 144C for completion of pending assessment or
reassessment proceedings referred to Section 92CD(4) shall be
extended by a period of twelve months.
This may be observed from above provision that Advance Pricing
Agreement, although styled as "advance" agreements, may be a good
arm in the resolution of transfer pricing issues pending from prior years—
and in some cases it can provide an effective means for resolving existing
transfer pricing audits or adjustments.
By virtue of Advance Pricing Agreement, the taxpayer is assured
about the Tax Liability arising out of International transactions. No
surprises or challenges will arise if the agreement is followed. The scope
of certainty includes tax treatment of covered transactions as to amount
and characterization and elimination of potential penalties for substantial
tax understatement.
Roll back provision in Advance Pricing Agreements (APA)
Provisions relating to Advance Pricing Agreements (APAs) were
introduced in the Indian Income-tax Act, 1961 (the Act) with effect
from 1 July 2012, vide Finance Act, 2012. These provisions did not
then include rollback provisions. The provision to provide for a rollback
mechanism was brought into the Act vides Finance Act 2014 with effect
from 1 October 2014. Thereafter, in March 2015, the Central Board of
Direct Taxes (CBDT) announced detailed rules explaining the rollback
provisions and the procedure for giving effect to them (the Rules).
• Roll back is available for the roll back years, and a ‘roll back
year’ has been defined to mean any previous year falling within
the period of four previous years, preceding the first previous
year covered in the APA (i.e. the regular APA).
For example
If the applicant files an APA application on or before 31 March 2015
covering a period of up to 5 years from financial year (FY) 2015-16 to
FY 2019-20 and applies for a roll back, the roll back years can cover
the period from FY 2011- 12 to FY 2014-15. Similarly, if the applicant
has filed an APA application covering a period of 5 years from FY 2013-
14 to FY 2017-18 and applies for a roll back, the roll back years can
cover the period from FY 2009-10 to FY 2012-13.
Power of Board to make Safe Harbour Rules (Section 92CB)

The determination of arm’s length price under section 92C or section
92CA shall be subject to safe harbour rules as prescribed under section
92CB of the Act. The term “Safe Harbour” means “circumstances under
which the income-tax authorities shall accept the transfer pricing
declared by the assessee.” The Rule provides minimum operating profit
margin in relation to operating expenses a taxpayer is expected to earn
for certain categories of international transactions or specified domestic
transfer pricing , that will acceptable to the income tax authorities as
arm’s length price (ALP) . The rule also provides acceptable norms for
certain categories of financial transactions such as intra-group loans
made or guarantees provided to non-resident affiliates of an Indian tax
payers. The safe harbor rules, optional for a taxpayer, contains the
conditions and circumstances under which norms / margins would be
accepted by the tax authorities and the related compliance obligations.
Safe harbours carry certain benefits which are described below
• Compliance Simplicity : Safe harbours tend to substitute simplified
requirements in place of existing regulations, thereby reducing
compliance burden and associated costs for eligible taxpayers,
who would otherwise be obligated to dedicate resources and
time to collect, analyze and maintain extensive data to support
their inter-company transactions.
• Certainty & Reduce Litigation : Electing safe harbours may grant
a greater sense of assurance to taxpayers regarding acceptability
of their transfer price by the tax authorities without onerous
audits. This conserves administrative and monetary resources
for both the taxpayer and the tax administration.
• Administrative Simplicity : Since tax administrations would be
required to carry out only a minimal examination in respect of
taxpayers opting for safe harbours, they can channelize their
efforts to examine more complex and high-risk transactions and
taxpayers.
Filling of form 3CEFA / 3CEFB
Any taxpayer who has entered into an eligible international
transaction or specified domestic transaction and who wishes to exercise
the option to be governed by the safe harbour rules is required to file a
specified form (Form 3CEFA for International Transaction or Form

3CEFB for SDT). Form 3CEFA / 3CEFB requires the taxpayer to declare
the following:
• Transaction entered with an AE is an eligible international
transaction or specified domestic transaction;
• Quantum of the international transaction specified domestic
transaction;
• Whether the AEs country or territory is a no tax or low tax country
or territory; and
• Operating profit margin/transfer price.
***
FORM NO. 3CEB

[See rule 10E]
Report from an accountant to be furnished under Section

92E relating to international transaction(s) and specified
domestic transaction
If ‘yes’ provide the following details in respect of each associated

enterprise and each category of intangible property: If ‘yes’ provide the
following details in respect of each associated enterprise and each
category of service :
1. *I/We have examined the accounts and records of

______________ (name and address of the assessee with PAN)
relating to the international transactions and specified domestic
transaction entered into by the assessee during the previous year
ending on 31st March, ______________.
2. In *my/our opinion proper information and documents as are

prescribed have been kept by the assessee in respect of the
international transaction(s) and specified domestic transaction
entered into so far as appears from *my/our examination of the
records of the assessee.
3. The particulars required to be furnished under section 92E are

given in the Annexure to this Form. In *my/our opinion and to
the best of my/our information and according to the explanations
given to *me/us, the particulars given in the Annexure are true
and correct.
**Signed
Name :
Address :
Membership No. :
Place : _____________
Date : _____________
Notes:
1. *Delete whichever is not applicable.
2. **This report has to be signed by —

(i) a chartered accountant within the meaning of the Chartered
Accountants Act, 1949 (38 of 1949); or
(ii) any person who, in relation to any State, is, by virtue of the
provisions in sub-section (2) of section 226 of the Companies
Act, 1956 (1 of 1956), entitled to be appointed to act as an
auditor of companies registered in that State.
***
ANNEXURE TO FORM NO. 3CEB

Particulars relating to international transactions or specified
domestic transaction required to be furnished under Section
92E of the Income Tax Act, 1961
PART A
1. Name of the assessee
2. Address
3. Permanent account number
4. Nature of business or activities of the assessee*
5. Status
6. Previous year ended
7. Assessment year
8. Aggregate value of international transactions as per books of
accounts
9. Aggregate value of specified domestic transactions as per books
of accounts
* Code for nature of business to be filled in as per instructions for
filling Form ITR 6
PART B
(International Transactions)
10. List of associated enterprises with whom the assessee has entered
into international transactions, with the following details:
(a) Name of the associated enterprise.
(b) Nature of the relationship with the associated enterprise as
referred to in section 92A(2).
(c) Brief description of the business carried on by the associated
enterprise.
11. Particulars in respect of transactions in tangible property.
A. Has the assessee entered into any international transaction(s)
in respect of purchase/sale of raw material, consumables or
any other supplies for assembling/processing/manufacturing

of goods/articles from/to associated enterprises ? Yes/No
If ‘yes’, provide the following details in respect of each
associated enterprise and each transaction or class of
transaction:
(a) Name and address of the associated enterprise with whom
the international transaction has been entered into.
(b) Description of transaction and quantity purchased/sold.
(c) Total amount paid/received or payable/receivable in the
transaction—
(i) as per books of account.
(ii) as computed by the assessee having regard to the
(d) Method used for determining the arm’s length price [See
section 92C (1)]
B. Has the assessee entered into any international transaction(s)
in respect of purchase/sale of traded/finished goods ? YES /NO
If ‘yes’ provide the following details in respect of each
associated enterprise and each transaction or class of
transaction:
(b) Description of transaction and quantity purchased/sold.
(c) Total amount paid/received or payable/receivable in the
transaction—
(i) As per books of account.
(ii) As computed by the assessee having regard to the
section 92C (1)]
C. Has the assessee entered into any international transaction(s)
in respect of purchase/sale, transfer, lease or use of any other
tangible propertyincluding transactions specified in

Explanation (i)(a) below section 92B(2)? Yes/No
If ‘yes’ provide the following details in respect of each
associatedenterprise and each transaction or class of
transaction:
(b) Description of the property and nature of transaction.
(c) Number of units of each category of tangible property
involved in the transaction.
(d) Amount paid/received or payable/receivable in each
transaction of purchase/sale/transfer/ use, or lease rent
paid/received or payable/receivable in respect of each
lease provided/entered into —
(e) Method used for determining the arm’s length price [See
section 92C(1)]
12. Particulars in respect of transactions in intangible property:
Has the assessee entered into any international transaction(s) in
respect of purchase/sale/lease/use of intangible property, including
transactions specified in Explanation (i)(b) below section 92B(2)?
Yes/No
(b) Description of intangible property and nature of transaction.
(c) Amount paid/received or payable/receivable for purchase/
sale/transfer/use of each category of intangible property—
(ii) as computed by the assessee having regard to the arm’s
length price.
Section 92C(1)]
13. Particulars in respect of providing of services:
respect of services including transactions as specified in
Explanation (i)(d) below section 92B(2)? YES /NO
(b) Description of services provided/availed to/from the
associated enterprise.
(c) Amount paid/received or payable/receivable for the services
provided/taken—
length price.
Section 92C(1)]
14. Particulars in respect of lending or borrowing money:
respect of lending or borrowing of money including any type of
advance, payments, deferred payments, receivable, non-
convertible preference shares/ debentures or any other debt
arising during the course of business as specified in Explanation
(i)(c) below section 92B (2)? YES /NO
(c) Currency in which transaction has taken place.
(d) Interest rate charged/paid in respect of each lending/
borrowing.
(e) Amount paid/received or payable/receivable in the
transaction —
length price.
(f) Method used for determining the arm’s length price [See
Section 92C(1)]
15. Particulars in respect of transactions in the nature of guarantee:
the nature of guarantee ? YES /NO
If ‘yes’ provide the following details in respect of each guarantee:
(b) Nature of guarantee agreement
(c) Currency in which the guarantee transaction was undertaken
(d) Compensation/ fees charged/ paid in respect of the transaction
Section 92C(1)].
16. Particulars in respect of international transactions of purchase
or sale of marketable securities, issue and buyback of equity
shares, optionally convertible/ partially convertible/ compulsorily
convertible debentures/ preference shares:
respect of purchase or sale of marketable securities or issue of
equity shares including transactions specified in Explanation (i)(c)
below section 92B(2)? YES /NO
If yes, provide the following details:
(b) Nature of transaction
(c) Currency in which the transaction was undertaken
(d) Consideration charged/ paid in respect of the transaction.
section 92C(1)]
17. Particulars in respect of mutual agreement or arrangement :
Has the assessee entered into any international transaction with
an associated enterprise or enterprises by way of a mutual

agreement or arrangement for the allocation or apportionment
of, or any contribution to, any cost or expense incurred or to be
incurred in connection with a benefit, service or facility provided
or to be provided to any one or more of such enterprises?
YES /NO
If ‘yes’ provide the following details in respect of each agreement/
arrangement:
(b) Description of such mutual agreement or arrangement.
(c) Amount paid/received or payable/receivable in each such
transaction—
(i) as per books of account;
length price.
section 92C(1)].
18. Particulars in respect of international transactions arising out/
being part of business restructuring or reorganizations:
Has the assessee entered into any international transaction(s)
arising out/being part of any business restructuring or
reorganization entered into by it with the associated enterprise
or enterprises as specified in Explanation (i) (e) below section
92B (2) and which has not been specifically referred to above?
YES / NO
If ‘yes’, provide the following details:
(b) Nature of transaction
(c) Agreement in relation to such business restructuring/
reorganization.
(d) Terms of business restructuring/ reorganization.
section 92C(1)].
19. Particulars in respect of any other transaction including the
transaction having a bearing on the profits, income, losses or
assets of the assessee:
Has the assessee entered into any other international
transaction(s)If ‘yes’ provide the following details in respect of
each associated enterprise and each loan/advance :
(b) Nature of financing agreement.
including a transaction having a bearing on the profits, income,
losses or asset, but not specifically referred to above, with
associated enterprise? YES / NO
enterprise and each transaction:
(b) Description of the transaction.
(c) Amount paid/received or payable/receivable in the
transaction—
length price.
section 92C(1)].
20. Particulars of deemed international transactions:
Has the assessee entered into any transaction with a person other
than an AE in pursuance of a prior agreement in relation to the
relevant transaction between such other person and the
associated enterprise? YES / NO
If yes, provide the following details in respect of each of such

agreement
(a) Name and address of the person other than the associated
enterprise with whom the deemed international transaction
has been entered into.
transaction—
length price.
section 92C(1)].
PART C (Specified domestic transaction)
21. List of associated enterprises with whom the assessee has entered
into specified domestic transactions, with the following details:
(a) Name, address and PAN of the associated enterprise.
(b) Nature of the relationship with the associated enterprise
(c) Brief description of the business carried on by the said
associated enterprise.
22. Particulars in respect of transactions in the nature of any
expenditure:
Has the assessee entered into any specified domestic transaction
(s) being any expenditure in respect of which payment has been
made or is to be made to any person referred to in section
40A(2)(b)? YES/NO
If “yes”, provide the following details in respect of each of such
person and each transaction or class of transaction:
(a) Name of person with whom the specified domestic
transaction has been entered into.
(b) Description of transaction along with quantitative details, if
any.
(c) Total amount paid or payable in the transaction—

length price.
section 92C(1)]
23. Particulars in respect of transactions in the nature of transfer or
acquisition of any goods or services:
A. Has any undertaking or unit or enterprise or eligible business
of the assessee [as referred to in section 80A(6), 80IA(8) or
section 10AA)] transferred any goods or services to any other
business carried on by the assessee?
If yes, provide the following details in respect of each unit or
enterprise or eligible business:
(a) Name and details of business to which goods or services
have been transferred
(b) Description of goods or services transferred
(c) Amount received/receivable for transferring of such goods
or services –
(i) as per the books of account;
section 92C(1)].
B. Has any undertaking or unit or enterprise or eligible business
of the assessee [as referred to in section 80A(6), 80IA(8) or
section 10AA] acquired any goods or services from another
business of the assessee? YES / NO
If yes, provide the following details in respect of each unit or
enterprise or eligible business:
(a) Name and details of business from which goods or services
have been acquired
(b) Description of goods or services acquired

(c) Amount paid/payable for acquiring of such goods or
services–
(i) as per the books of account;
section 92C(1)].
24. Particulars in respect of specified domestic transaction in the
nature of any business transacted: Has the assessee entered into
any specified domestic transaction(s) with any associated
enterprise which has resulted in more than ordinary profits to
an eligible business to which section 80IA(10) or section 10AA
applies? YES / NO
If “yes”, provide the following details:
(a) Name of the person with whom the specified domestic
transaction has been entered into
(b) Description of the transaction including quantitative details,
if any.
(c) Total amount received/receivable or paid/ payable in the
transaction –
length price.
section 92C(1)].
25. Particulars in respect of any other transaction:
Has the assessee entered into any other specified domestic
transaction(s) not specifically referred to above, with an
associated enterprise? YES /NO
enterprise and each transaction:

the specified domestic transaction has been entered into.
transaction—
length price.
Section 92C(1)].
**Signed
Name :
Address :
Place : ______________
Date : ______________
Notes :
**This annexure has to be signed by __
(i) a chartered accountant within the meaning of the Chartered
Accountants Act, 1949 (38 of 1949); or
(ii) any person who, in relation to any State, is, by virtue of the
provisions in sub-section (2) of Section 226 of the Companies
Act, 1956 (1 of 1956), entitled to be appointed to act as an
auditor of companies registered in that State.
Abbreviations
APA Advance Pricing Agreement
AE Associated Enterprises
ALP Arm’s Length price
AO Assessing Officer
CUP Comparable Uncontrolled Price
COGS Cost of Goods Sold
CBDT Central Board of Direct taxes
CPM Cost Plus Method
CIT Commissioner of Income Tax
CbCR Country by Country Reporting
GPM Gross Profit Margin
HR Human Resources
ITAT Income Tax Appellate tribunal
MNE Multinational Enterprises
OECD Organisation for Economic Co-operation and
Development
PE Permanent Establishment
PSM Profit Split Method
R&D Research & Development
RSP Resale Price
SEZ Special Economic Zone
SLP Special Leave Petition
SC Supreme Court
SHR Safe Harbour Rules
SDT Specified Domestic Transaction
TNMM Transaction Net Margin Method
TPO Transfer Pricing officer
TP Transfer Price
Glossary of Terms
Act
Act means Income Tax Act, 1961 unless otherwise stated.
Advance Pricing Agreements (“APA”)
As per Section 92CC of Income Tax Act, 1961, the Central Board of
Direct Taxes (Board), with the approval of the Central Government,
may enter into an Advance Price Agreement with any person,
determining the arm’s length price or specifying the manner in which
arm’s length price is to be determined, in relation to an international
transaction or specified domestic transaction to be entered into by that
person. Advance pricing agreement is very useful in minimizing transfer
pricing litigation. These agreements are binding to Taxpayer and tax
authority for the specified period.
Arm's Length Price
Arm’s Length Price has not been defined anywhere in the Act. In general,
Arm’s Length Price means the price which has been calculated in
accordance with the method specified in Rule 10 B i.e. Comparable
Unit Price Method (CUP), Resale Price Method (RSP), Profit Spilt
Method (PS), Cost Plus Method (CP), Transaction Net Margin Method
(TNMM) or such other method as may be prescribed by the board.
Associated/Related Enterprises, Companies, or Parties
Section 92A of Income Tax Act, 1961 provides meaning of the expression
associated enterprises. The enterprises will be taken to be associated
enterprises if one enterprise is controlled by the other, or both enterprises
are controlled by a common third person. The concept of control
adopted in the legislation 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.
Board
Board means Central Board of Direct Taxes (CBDT). The CBDT is a part
of Department of Revenue in the Ministry of Finance. CBDT provides
essential inputs for policy and planning of direct taxes in India and it is
also responsible for administration of direct tax laws through the Income
Tax Department. The Central Board of Direct Taxes is a statutory authority

functioning under the Central Board of Revenue Act, 1963.
Comparability Analysis
It refers to a comparison of a controlled transaction with an uncontrolled
transaction or transactions. Controlled and uncontrolled transactions
are comparable if none of the differences between the transactions could
materially affect the factor being examined in the methodology (e.g.
price or margin), or if reasonably accurate adjustments can be made to
eliminate the material effects of any such differences.
Compensating Adjustment
An adjustment in which the taxpayer reports a transfer price for tax
purposes that is, in the taxpayer's opinion, an arm's length price for a
controlled transaction, even though this price differs from the amount
actually charged between the associated enterprises. This adjustment
would be made before the tax return is filed.
Comparable Uncontrolled Price (CUP) Method
A transfer pricing method that compares the price for property
transferred or services rendered in a controlled transaction to the price
charged for property transferred or services rendered in a comparable
uncontrolled transaction in comparable circumstances is termed as CUP
method.
Cost Plus Mark up
A mark up that is measured by reference to margins computed after the
direct and indirect costs incurred by a supplier of property or services
in a transaction.
Cost Plus Method
A Transfer Pricing Method which uses the cost incurred by supplier of
goods or services in a controlled transaction. An appropriate cost plus
mark up is added to this cost, to make an appropriate profit in light of
the functions performed.
Independent Enterprises
Two enterprises are independent enterprises with respect to each other
if they are not associated enterprises with respect to each other.
International Transaction
An international transaction is essentially a cross border transaction
between associated enterprises 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. The
definition also covers a transaction between two non-residents where
for example, one of them has a permanent establishment whose income
is taxable in India.
Multinational enterprise (MNE)
A company that is part of an MNE group.
Multinational Enterprise Group (MNE Group)
A group of associated companies with business establishments in two
or more countries is called as MNE.
Permanent Establishment
Section 92F of the Indian Income Tax Act, 1961 explains the term
“Permanent Establishment (PE)” as a fixed place of business through
which the business of the enterprise is wholly or partly carried out.
Profit Split Method
Profit Spilt Method is applicable mainly in international transaction or
specified domestic transaction involving transfer of unique intangibles
or in multiple international transactions or specified domestic
transactions which are so interrelated that they cannot be evaluated
separately for the purpose of determining the arm’s length. This method
identifies the combined profit to be split for the associated enterprises
from a controlled transaction and then splits those profits between the
associated enterprises proportion to their relative contributions. The
relative contribution made by each of the associated enterprises to the
earning of such combined net profit, is evaluated on the basis of the
functions performed, assets employed or to be employed and risks
assumed by each enterprise and on the basis of reliable external market
data which indicates how such contribution would be evaluated by
unrelated enterprises performing comparable functions in similar
circumstances
Resale Price Method
A transfer pricing method based on the price at which a product that
has been purchased from an associated enterprise is resold to an

independent enterprise. The resale price is reduced by the resale price
margin. What is left after subtracting the resale price margin can be
regarded, after adjustment for other costs associated with the purchase
of the product (e.g. customs duties), as an arm's length price of the
original transfer of property between the associated enterprises.
Transfer Pricing Adjustment
An adjustment to the tax liability of an enterprise when a tax jurisdiction
applies the arm's length principle to transactions between associated
enterprises in a transfer pricing case.
Traditional Transaction Methods
The comparable uncontrolled price method, the resale price method,
and the cost plus method.
Transactional Net Margin Method
A transactional profit method that examines the net profit margin relative
to an appropriate base (e.g. costs, sales, assets) that a taxpayer realizes
from a controlled transaction.
Transactional Profit Method
A transfer pricing method that examines the profits that arise from
particular controlled transactions of one or more of the associated
enterprises participating in those transactions.
Transfer Pricing Officer (TPO)
Transfer Pricing Officer” means a Joint Commissioner or Deputy
Commissioner or Assistant Commissioner authorized by the Board to
perform all or any of the functions of an Assessing Officer specified in
Sections 92C and 92D in respect of any person or class of persons.
Uncontrolled Transactions
A transfer pricing term for transactions between enterprises that are
independent enterprises (that is, that are not "associated enterprises")
with respect to each other.
***

Guide To Transfer Pricing

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Guide To Transfer Pricing

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Guide To Transfer Pricing

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GUIDE

Price : Rs. 120/-- (Excluding postage)

© THE INSTITUTE OF COMPANY SECRETARIES OF INDIA

Printed at Samrat Offset Works/500/November 2016

The era of globalization has witnessed a significant increase in the

It is noteworthy that owing to proportional relation with the

With a view to guide the businesses for cross border transactions

With the substantial amendments in Transfer Pricing Regulation over

I appreciate the efforts of Mr. Govind Krishna Agarwal, Assistant

I am sure this Guide will be of immense practical value to

I would personally be grateful to users and readers for offering their

Place : New Delhi

Penalty for failure to furnish information or

The globalization of the Indian economy has resulted in considerable

between controlled (or related) entities within an enterprise. For

Need for Transfer Pricing Regulation

In an economy where multinational enterprises/big diversified

Transfer Pricing Regulation in India

Increasing participation of multi-national groups in economic

As stated earlier, the fundamental of transfer pricing regulation is

Applicability of the Transfer Pricing Regulation

What is Arm’s Length Price?

In general, an arm’s length price is the price at which independent

C. Non-compliance with applicable laws / regulations and

The same may be explained with the following examples

Case Criteria X Effect on Company X Effect on Company Y

1 Company X The revenue of The total cost of the

Case Criteria X Effect on Company X Effect on Company Y

Transfer Pricing - Concepts

The Finance Act, 2001 introduced the transfer pricing concept in

It prescribes that “associated enterprise”, in relation to another enterprise,

(c) a loan advanced by one enterprise to the other enterprise

undivided family or by a relative of a member of such Hindu

Quantum of Interest Criteria applied for Associated Enterprises

26% or more Shareholding with voting power – either direct

Meaning of International Transaction

profits, income, losses or assets of such enterprises, and shall include a

technical service, repairs, design, consultation, agency, scientific

professional practice goodwill, personal goodwill of professional,

The cost contribution arrangements are arrangements between

Specified Domestic Transactions

(i) Any expenditure in respect of which payment has been made or

(ii) Any transaction referred to in section 80A;

(iii) Any transfer of goods or services referred to in sub-section (8) of

(v) Any transaction, referred to in any other section under Chapter

(vi) Any other transaction as may be prescribed,

And where the aggregate of such transactions entered into by the

Accordingly, all of the compliance requirements relating to transfer

Transfer Pricing - Methods

appropriate method, having regard to the nature of transaction or class

(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 may be prescribed by the Board and provided

A. Comparable Uncontrolled Price Method

Comparable Uncontrolled Price (“CUP”) method compares the

An Uncontrolled price is the price agreed between the unrelated

The application of this method involves: