Smart Transfer Pricing: Strategies for Business Growth

Imagine two entities of the multinational company, one in India which is subsidiary company and the other in Germany which is parent company, negotiating the price of a product sold by Indian Subsidiary to German Parent. If the price is too high, the German parent might struggle with high taxes. Conversely, a low transfer price could lead to questions of shifting profits from the Indian tax authorities. How do they find the right balance? This delicate balancing act is what transfer pricing is all about.

Join us as we delve into the world of Indian transfer pricing, exploring effective strategies that will you’re your business thrives while staying on the right side of the law!

1. Introduction to Transfer Pricing

Think of transfer pricing like setting the price of a family recipe: you want to ensure its fair for everyone involved while covering your costs. Transfer pricing is process of the pricing of inter-company related party transaction i.e., goods, services and intangibles between related entities within a multinational enterprise (MNE).

In India, transfer pricing is governed primarily by the Income Tax Act, 1961 (“the Act”), under Sections 92 to 92F applicable to International Transactions & Specified Domestic Transactions. The arm’s length principle, as endorsed by the Organisation for Economic Co-operation and Development (OECD), requires that transactions between related parties be priced as if they were between unrelated parties in a competitive market.

Transaction Type	Definition	Involves	Threshold
INTERNATIONAL TRANSACTION	A transaction between associated enterprises where one or both are non-residents.	Transactions of tangible/intangible property, services or financial arrangements (Affects profits, income, losses or assets of the enterprises involved)	No
SPECIFIED DOMESTIC TRANSACTION	A specific transaction (not international transactions) between an assessee and other entities, including certain transfers.	Transactions as per Sections 80A, 80-IA, 10AA (Tax Holidays) and paying taxes as per concessional tax rates u/s 115BAE(4), 115BAB(6)	Surpasses ₹20 Crores in total for the previous year.

2. Transfer Pricing Strategies

In this section, let us discuss some strategies which will serve as transfer pricing guide to optimize tax liabilities while ensuring compliance with regulations. Some commonly used strategies include:

A. BENCHMARKING STUDIES: Benchmarking studies help MNEs find suitable comparables for setting transfer prices that are ideally an arm’s length for inter-company transaction which helps in justifying their policies. By analyzing similar transactions i.e., comparable uncontrolled transaction, within the industry, they ensure prices reflect market conditions. Databases (which includes financial information and comparable agreements) are essential for establishing comparability.

B. DOCUMENTATION: Taxpayers must maintain comprehensive documentation to support their transfer pricing practices, regularly updating it for tax authority scrutiny. including:

#	Compliance	Conditions for applicability	Due date
Local File	TP Study to be maintained u/s 92D	If aggregate value of International Transactions > INR 1 Crore or If Specified Domestic Transactions (SDT) > INR 20 Crores [transactions with entities/units claiming special tax holiday exemptions or deductions u/s 80IA or 80IB or 10AA or with entities claiming concessional tax rates of u/s 115BAB]	31 October 2024 (1 month prior to ITR filing due date)
Master File	Form No. 3CEAA (Part A) – Master File u/s 92D(4) (One Page Form)	Part A is applicable if International Transactions are undertaken during the financial year (Part A is applicable to all MNEs irrespective of threshold)	30 November 2024 (Same as ITR filing due date)
	Form No. 3CEAA (Part B) – Master File u/s 92D(4)  (Detailed Form)	Part B is applicable if below twin conditions are satisfied: –     Consolidated Group Revenue exceeds INR 500 Crores and –     Aggregate value of all International Transactions exceeds INR 50 crores or the Intangible Property related International Transactions exceeds INR 10 Crores
	Form No. 3CEAB Master File Intimation u/s 92D(4) (One Page Form)	It is applicable to MNEs crossing the above Master File filing thresholds and having more than one entity operating in India	31 October 2024 (30 days prior to MF filing due date)
Country-by-Country- Report	Form No. 3CEAD CbC Report u/s 286(2)/(4) (Detailed Form)	If Consolidated Group Revenue for preceding accounting year exceeds INR 6,400 Crores.	31March 2025 * (12 months from the end of group’s accounting year) *assuming group accounting year end is 31 March 2024
	Form No 3CEAC CbCR Notification u/s 286(1) (One Page Form)	CbCR Notification is to be filed when Parent Entity/ ARE is filing CbCR in its respective jurisdiction and there is an automatic exchange of CbCR activated between Parent/AE’s jurisdiction and the jurisdiction of Constituent entity	31 January 2025 (10 months from the end of group’s accounting year)

Failure to maintain proper documentation can result in penalties and adjustments by the tax authorities as summarized below.

Compliance	Penalty for non compliance
Local File (TP Study)	INR 1,00,000
Master File (Form No 3CEAA)	INR 5,00,000
CbCR (Form No 3CEAD)	INR 5,00,000 – Furnishing of inaccurate information in CbCR   INR5,000 or 15,000 or 50,000 per day – Non-furnishing of CbCR – Depending on the days of delay of violation

C. CHOOSING THE RIGHT PRICING METHOD: India allows several methods for determining transfer prices, including:

1. Comparable Uncontrolled Price (CUP) Method: This approach assesses the price applied to comparable transactions involving unrelated parties. CUP method requires high degree of comparability of products, services and functions.
2. Cost Plus Method (CPM): This approach involves adding a suitable profit margin to the direct and indirect cost related to that transaction.
3. Resale Price Method(RPM): This method is based on the resale price of goods, subtracting an appropriate gross margin and the RPM is always applied to tangible property transactions.
4. Transactional Net Margin Method (TNMM): This method emphasizes the net profit margin in relation to a relevant benchmark.
5. Profit Split Method: As the PSM looks at the combined profits of two related parties entering into a transaction with one another, it can be used for determining how profits will be divided in a way that is fair i.e, based on functions performed and risks assumed, both organizations.

Choosing the right method is crucial for compliance and tax efficiency.

3. Best Practices in Transfer Pricing Management

To effectively manage transfer pricing and minimize risks, consider these best practices:

• Regular Reviews and Updates: Continuously evaluate and revise transfer pricing policies to adapt to changes in the business landscape, market conditions, or regulations.

• Cross-Functional Collaboration: Foster collaboration among departments like finance, legal, and operations to strengthen transfer pricing strategies. Diverse insights can ensure policies align with overall business goals.

• Training and Awareness: Provide training for staff on transfer pricing concepts and compliance to enhance their understanding and adherence to relevant regulations.

• Engaging Experts: Bring in transfer pricing consultants to guide the creation and execution of strategies that meet legal standards.

• Leveraging Technology: Implement technology and software solutions to streamline the transfer pricing process, utilizing advanced analytics for benchmarking and management systems for compliance documentation.

4. Transfer Pricing Adjustments and Audits

Adjustments refer to modifications made to the prices charged in transactions between associated enterprises to ensure compliance with the arm’s length principle.

Primary Adjustments

A primary adjustment occurs when the transfer price is adjusted to reflect arm’s length pricing, leading to an increase in the taxpayer’s income or a reduction in losses. This can happen in several situations:

1. Voluntary Adjustment by the Assessee: If the taxpayer makes an adjustment in their income tax return.
2. Adjustment by the Assessing Officer: The officer proposes an adjustment that the taxpayer accepts.
3. Advance Pricing Agreement: If an agreement is made under Section 92CC after April 1, 2017.
4. Safe Harbour Rules: Adjustments made under specific rules established in Section 92CB.
5. Mutual Agreement Procedure: Adjustments arising from international agreements under Section 90 or 90A.

Secondary Adjustment

After a primary adjustment, a secondary adjustment may be required to align the financial records of the taxpayer and its associated enterprises, ensuring consistent profit allocation. A secondary adjustment is necessary unless the primary adjustment is less than ₹1 crore and pertains to an assessment year before April 1, 2016.

1. Excess Money: If a primary adjustment leads to excess funds with the associated enterprise, these must be repatriated to India within 90 days from the due date if return of income.
2. Advance Treatment: If the primary adjustment amount is not recovered within the specified timeline, the primary adjustment is considered a deemed loan and is subject to notional interest
3. Tax Option: The taxpayer can opt to pay an additional tax @ 18% on primary adjustment, which is final and non-deductible.
4. Exemption: Payment of this additional tax exempts the assessee from further secondary adjustments.

In essence, secondary adjustments help ensure compliance with transfer pricing regulations and accurate profit allocation.

Audits

Under Section 92E of the Act, entities involved in international or specified domestic transactions must obtain a report from a chartered accountant. Timely filing is crucial, as failure to do so can lead to significant penalties and increased scrutiny from tax authorities. The expertise of chartered accountant helps ensure accurate reporting and minimizes the risk of disputes.

Compliance	Conditions for applicability	Due date	Penalty for non compliance
Form No. 3CEB Report by an Accountant u/s 92E	If International Transactions (irrespective of threshold) are undertaken with foreign Associated Enterprises (AEs) or If SDTs are undertaken with Indian AEs (either of the parties are claiming any tax holiday exemptions or concessional tax rates and the overall transactions value exceeds INR 20 Crores)	31 October 2024 (1 month prior to ITR filing due date)	2% of value of International Transactions or SDT

Dispute Resolution

If disputes arise from transfer pricing adjustments, taxpayers can resolve them in two main ways:

1. Appeals: Taxpayers can appeal to the Dispute Resolution Committee or Commissioner of Income Tax (Appeals) and to Income Tax appellant Tribunal (ITAT) to challenge any transfer pricing adjustments they disagree with. This gives them a chance to explain their side and seek a review.
2. Advance Rulings: Seeking advance rulings from the Authority for Advance Rulings can provide clarity and prevent potential disputes.

Conclusion

The law, documentation and compliance around transfer pricing is like a web. By understanding the rules, implementing effective strategies, and embracing best practices, your business can solve the tax complexities while accomplishing results.

At Master Brains, we believe that proactive management of transfer pricing is key to not only ensuring compliance but also unlocking new avenues for growth. Regular reviews, cross-department collaboration, and leveraging technology will empower your team to make informed decisions.