CA Rajat Jain


  • Basics about Transfer Pricing
  • Terms and abbreviations used
  • Objective of the Guidance note
  • Applicability of the Provisions
  •  New developments like safe harbors & Advance Pricing Agreement

Responsibility of the Enterprises and Accountant

The obligation of an enterprise to keep and maintain records and documents vis-a-vis the duty of revenue authorities to verify about the compliance with the arm’s length principle has been succinctly stated by the OECD in their Transfer Pricing Guidelines:

       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. However, the extensiveness of this process should be determined in accordance with the same prudent business management principles that would govern the process of evaluating the business decision of a similar level of complexity and importance. 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. Documentation requirements should not impose on tax payers’ costs and burdens disproportionate to the circumstances, taxpayer should nonetheless recognize that adequate record keeping practices and production of documents facilitates examination and resolution of transfer pricing issues that arise”.

 Associated Enterprises

Examples are given of each point covered under the section 92A which is not given under the Income tax act, 1961.

International Transaction

a. Tangible Property defined in detailed manner (Transfer pricing regulation +OECD guidelines)

Tangible property has an existence in physical form. Any property other than tangible is intangible property. OECD guidelines include right to use industrial assets such as patents, trademarks, names, designs or models as intangible properties. It also includes literary and artistic property. OECD guidelines focus on “business rights” associated with commercial activities including marketing activities.

b. Intangible Property defined in detailed manner (Transfer pricing regulation +OECD guidelines)

  • Marketing related – Trademark, tradenames, bradnames, logos
  • Technology related- Process patents, patents applications, technical documentation such as  laboratory notebooks , technical know-how
  • artistic   related   intangible   assets,   such   as,   literary   works   and copyrights, musical compositions, copyrights, maps, engravings
  •  data   processing  related   intangible  assets,   such   as   proprietary computer software, software copyrights, automated databases, and integrated circuit masks and masters
  • engineering  related  intangible  assets,  such  as  industrial  design, product patents, trade secrets, engineering drawing and schema-tics, blueprints, proprietary documentation
  • customer related intangible assets, such as, customer lists, customer contracts, customer relationship, open purchase orders
  • contract  related  intangible  assets,  such  as,  favorable  supplier, contracts, license agreements, franchise agreements, non-compete agreements
  • human  capital  related  intangible  assets,  such  as,   trained  and organized workforce, employment agreements, union contracts;
  • location related intangible assets, such as leasehold interest, mineral exploration rights, easements, air rights, water rights
  • goodwill  related  intangible  assets,  such  as,  institutional  goodwill, professional practice goodwill, personal goodwill of professional, celebrity goodwill, general business going concern value
  • methods,  programmes,  systems,  procedures,  campaigns,  surveys, studies, forecasts, estimates, customer lists, or technical data
  • any  other  similar  item  that  derives  its  value  from  its  intellectual content rather than its physical attributes

c. Service, finance cost etc

d. Cross Border transactions with examples

  Specified Domestic Transactions

a. The threshold limit for SDT can be computed either on net basis (i.e. without including indirect tax levies like service tax, VAT, etc.)  If the assessee is availing credit of those indirect taxes or on gross basis if the assessee is not availing credit, depending upon the method of accounting regularly followed.  An  useful  reference  may  be  made  to  the  paragraph relating to Sales, Turnover, Gross Receipts under Guidance Note on Tax Audit u/s. 44AB issued by the Institute for the purpose of determining the threshold limit.

b. The provisions of Section 40Aoperates only on the expenditure side and would not have any impact in the hands of the recipients of such payments. Thus only the  persons/entities incurring  such  expenditure would  be  subject  to  SDT under  this  provision  and  would  be  required  to  comply  with  the  relevant transfer pricing compliances

c. The persons/entities receiving such income will not be subject to SDT under this provision and would not be required to comply with the relevant transfer pricing compliances.

d. These provisions are applicable to expenditures claimed as deduction under ‘income from other sources’ head on account of specific direction in section 58(2) which states that provisions of section 40A are also applicable for computation of taxable income under “income from other sources”.

e. Provisions of Section 40A are also applicable to the expenditures which are  capital in nature and fully claimed as a deduction under other sections like Sec 35(2AB), 35 or 35AD) since any expenditure is covered under the scope of  sec 40A (2)(b). I.e. we have to comply with the Transfer pricing provisions in case Research and development. (Important to note that R&D is also covered under OECD guidelines and United Nations Guidelines)

f. The transactions included in the ambit of this section would include expenditure transactions like (illustrative only):

•  Expenditure on buying goods

•  Expenditure on procurement of services

•  Expenditure on interest payments

•  Expenditure on salary, training services, marketing expenses

•  Expenditure on purchase of tangible and intangible property

•  Director’s remuneration, commission, sitting fees

•  Group charges

•  Reimbursement expenditure

•  Guarantee fee expenditure

g. Relationship chart is given to explain the persons who are covered under section 40A.

h. Transactions in other provisions to which section 80-IA (8)/ (10) apply

Specified domestic transactions as defined in section 92BA also refer to any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which provisions of section 80-IA(8) and section 80-IA(10) are applicable.

The following profit linked incentive provisions under Chapter VI-A are also governed by provisions of section 80-IA(8) and section 80-IA(10) and hence will be subject to Domestic TP:-

  • Section 80-IAB, Section 80-IB, Section 80-IC, Section 80-ID, Section 80-IE

 Arm’s Length Price

a. The steps involved in the determination of the arm’s length price can be summarized as follows:

(i)       Identification of the “international transaction” or specified domestic transaction;

(ii)       Identification of an “uncontrolled transaction” – Rule 10A (a);

(iii)      Identification and comparison of specific characteristics embodied in international transactions or specified domestic transactions and uncontrolled transactions – Rule 10B (2);

(iv)     finding   out   whether   uncontrolled   transactions   and   international transactions or specified domestic transactions can be compared by reconciling/resolving differences, if any – Rule 10B (3);

(v)      ascertaining the most appropriate method by applying the tests laid down – Rule 10C;

(vi)     determination  of  the  arm’s  length  price  by  applying  the  method chosen – Rule 10B (1)

b. The factors given under Rule 10C are to be applied cumulatively in selecting the most appropriate method. The reference therein to the terms ‘best suited’ and ‘most reliable measure’ indicates that the most appropriate method will have to be selected after a meticulous appraisal of the facts and circumstances of the international transaction or specified domestic transaction. Further, the selection of the most appropriate method shall be for each particular international transaction or specified domestic transaction. The term ‘transaction’ itself is defined in rule 10A (d) to include a number of closely linked transactions. Therefore, though the reference is to apply the most appropriate method to each particular transaction, keeping in view, the definition of the term ‘transaction’, the most appropriate method may be chosen for a group of closely linked transactions. Two or more transactions can be said to be linked when these transactions emanate from a common source being an order or a contract or an agreement or an arrangement and the nature, characteristics and terms of these transactions are substantially flowing from the said common source. For example, a master purchase order is issued stating the various terms and conditions and subsequently, individuals orders are released for specific quantities. The various purchase transactions are closely linked transactions.

c.  Examples are given where variation of 3% in TP is explained.

d. The following are some of the characteristics to be assessed vis-à-vis the property transferred or service provided:

•           Quality of product/services;

•           Quantity and value of the transactions;

•           Presence of intangibles like brand name, trademarks etc.;

•           Material/physical features.

e. Analysis of functions performed like design & development of product, manufacturing, warehousing, sales and distribution, technical services, conceptualization and specification of services performed etc

f.  Analysis of Assets employed like whether assets are owned or leased, whether activity is capital or labour intensive Presence or absence of intangibles

g. Analysis of Market Conditions like geographical location and size, regulatory laws, govt orders, cost of labour, cost of capital, Nature of Market, level of Competition

h. Examination of Important contractual terms like Terms of Delivery, FOB, CIF, terms of payment, discount, rebate, taxes etc

i. Analysis of Risk Assumed

Nature of risks


1.      Financial risk a.      Capital contributionb.      Method of funding

c.      Funding of losses

d.      Bad debts

2.      Product risk a.      Design and development of productb.      Up-gradation of product

c.      After Sales Service

d.      Risks associated with R & D

e.      Product liability risk f

.       Intellectual property risk if any

3.      Market risk a.      Development of market including advertisement and product promotion etc.b.      Business volume risk

c.      Assured sales risk

d.      Fluctuations in demand and prices.

e.      Credit and collection risk

j. It is important to note that the transactions entered into by associated enterprises with unrelated party (“internal comparables”) would provide more reliable and accurate data as compared to transactions by and between third parties (“external comparables”). OECD’s Guidelines on Transfer Pricing recognize the fact that external comparables are difficult to obtain and, also, it may be incomplete and difficult to interpret.  Hence for these reasons, internal comparables are preferred to external comparables.

k. All above analysis given under Rule 10 d – information and documents to be kept but examples are not mentioned in income tax rule, examples covered by ICAI guidelines (above)

Methods of Arm’s Length Price

a. Comparable uncontrolled transaction Method

Price Charged in a comparable uncontrolled  transaction + Adjustment which could materially affect the price in open market

OECD Guidelines

Typical transactions in which CUP Method May be used

  • Transfer of Goods
  • Provision of Services
  • Intangibles
  • Interest on Loans

The OECD in its Transfer Pricing Guidelines observes as under:

“The CUP method is a particularly reliable method where an independent enterprise sells the same product as is sold between two associated enterprises.”

“The CUP method compares the price charged for property or services transferred in a controlled transaction to the price charged for property or services transferred 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 arm’s length, and that the price in the uncontrolled transaction may need to be substituted for the price in the controlled transaction.”

  The steps involved in the application of this method are:

 (i)  Identify  the   price   charged  or   paid  in   comparable  uncontrolled transactions;

(ii)  The  above  price  should  be  adjusted  for  transaction  level  the differences on  the  basis  of  functions performed, assets  used  and risks taken (FAR) analysis and enterprise level differences if any;

   (iii)The adjusted price is the arm’s length price

b.  Collective Materiality and Open Market

Only differences that would materially affect the price in the open market are required to be adjusted. Two points may be noted. Firstly, materiality would have to be judged in the light of various circumstances. If there are numerous adjustments, which are individually not material but collectively material, the necessary adjustments are required to be made.

Secondly, the term ‘open market’, though not defined, would mean a transaction between a knowledgeable and a willing purchaser and a knowledgeable and willing seller where neither of them is influenced or compelled to act in a particular manner.

Explanation to the section 80IA not defined the term open market.

c. Resale Price Method

Typical transactions where the resale price method may be adopted are distribution of goods involving little or no value addition

OECD guideline:-

An Appropriate resale price Margin is easiest to determine where the reseller does not add substantially to the value of the product.

It may be more difficult to use the RSM to arrive at an arm’s length price where before re-sale the goods are further processed or incorporated in more complicated product so that their identity is lost or transformed.

A resale price margin is more accurate where it is realized 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.”

d. Cost plus Method

Cost plus Method includes Direct plus indirect costs

Typical transactions in which Cost plus Method May be used

  • Joint facility arrangements
  • Provision of Services
  • Transfer of Semi-finished goods
  • Long term buying & selling arrangements

The OECD in its Transfer Pricing Guidelines states as follows:

“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.”

e. Profit Split Method

Rule 10B(1) profit  split  method,  which  may  be  applicable mainly in international transactions involving transfer of unique intangibles or in multiple international transactions which are so inter- related that they cannot be evaluated separately for the purpose of determining the arm’s length price of any one transaction, by which…….

f. Transactional Net margin Method

Typical transactions where the transactional net margin method may be adopted are:

(a)      Provision of services;

(b)      Distribution of finished products where resale price method cannot be applied;

(c)      Transfer of semi finished goods where cost plus method cannot be applied;

(d)      Transactions involving intangibles where profit split method cannot be applied

g. Other Method is used in case of International Transactions.







Very High

Price Benchmarking


(Very important for us )

Where goods or service under consideration is sold widely among unrelated parties. Transfer of Tangibles,Intangibles,Royalty, Loans



GP based Price Benchmarking




Raw materials or semi- finished goods are sold; where joint facility agreements or long-term buy-and-supply arrangements, or the provision of services are involved;



GP based Price Benchmarking

Manufacturer / Service


It is applied when a property purchased or services obtained from associated enterprises are resold to unrelated parties.



NP based Price Benchmarking

Manufacturer / Service


where the transactions involve provision of integrated services by more than one enterprise



NP based Price Benchmarking

Manufacturer / Service


Universally applied but used as a method of last resort, where RPM cannot be used.



(Rule 10AB)

New method according to Situation but the applicability according to my understanding in case of Director’s remuneration, cost allocations , allocations between group entities, Intangibles etc.

                         Documentation and Verification

a. Following is the illustrative checklist to carry out business analysis of the assessee:

(a)      year of establishment/incorporation;

(b)      Name and residence of the parent company (holding company);

(c)      details  of  the  place/s  (units)  from  where  services  are  rendered

(Including area occupied, infrastructure, etc.);

(d)      Activity in brief (if there is more than one unit, details of activities in each unit);

(e)      stake-holding of the parent company;

 (f)      Legal environment of the industry;

(g)      Key value drivers of the industry;

(h)          major players in the industry;

(i)       share of business in the industry;

(j)       Trends in profitability, turnover, market share etc.

b. A similar description of the business of the associated enterprises with whom the  assessee  has  undertaken  international  transactions,  is  also  to  be prepared by the assessee. The accountant shall verify if such description is also maintained.

c. 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,

d. The   regulations   require   the   assessee   to   maintain   information regarding the shareholding pattern

e. Ownership interest held by enterprises in the assessee enterprise, directly or indirectly through intermediaries, also needs to be maintained by the assessee.

f. Summarized global financials and other details such as capital invested, assets employed, turnovers achieved, incomes earned, profits made / losses incurred, etc.

g. Sometimes, the establishment of ownership linkages between the assessee and other associated enterprises is a problem for the reason that sufficient reportable information is not available. In such cases, the assessee will have to provide only the information that is available with him.

h. Remark of OECD: – “Tax   administrators   further   should   not   require   taxpayers   to   produce documents that are not in the actual possession or control of the taxpayer or otherwise reasonably available, e.g., information that cannot be legally obtained, or that is not actually available to the taxpayer because it is confidential to the taxpayer’s competitor or because it is unpublished and cannot be obtained by normal enquiry or market data.”

i. The assessee is not required to maintain this information in respect of other associated enterprises i.e. enterprises that are not its group entities but are deemed to be associated enterprises by virtue of provisions of clauses (c) to (m) of section 92A(2).

Indian Regulation Vs OECD Regulations


Indian Regulation

OECD Regulation

Associated Enterprises

Very wide definition

Restricted to controlled entities

Comparable range

(FY 2013)Allows 3% range band on avg. results of comparables

Allows for range of Comparable Data

Multiple year data

Only allows data for current year (and earlier 2 years under limited circumstances)


Foreign comparables

Not permitted in practice


Priority of methods

Most appropriate method rule

Originally preference for Traditional Methods

Use of unspecified method

Now specified




Prudent business principle


definition vague and unclear No guidelines

Defined & described but progress still not full achieved.

(Author can be reached at rajat18121990 @ )

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  1. Rikhab Jain says:

    The language used in this article is very simple and very easy to understand. the summarized detail of transfer pricing is very good. than you so much for sharing such type of information… I wish all the best for your bright future….

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October 2020