Transfer Pricing Agreement

Transfer Pricing Agreement

Ensure Compliance and Minimize Audit Risks

At Tax Pal Solutions, we help businesses comply with transfer pricing regulations and reduce the risk of tax audits. Our services cover intercompany agreement drafting, method selection, documentation, and regulatory filing for both domestic and international transactions.

What is Transfer Pricing in India?

Transfer pricing refers to the prices charged when related companies exchange goods, services, or intangible assets, either across countries or within India.

Example: Cipla Ltd. in India exports drugs to its subsidiary Cipla USA Inc. The price set internally is the transfer price, which must comply with the Arm's Length Principle (ALP).

Purpose:

• Ensure fair pricing between related companies
• Prevent profit shifting to low-tax jurisdictions
• Align with OECD-approved methods for compliance

How Transfer Pricing Works

• Identify associated enterprises (AEs)
• Determine prices for internal transactions
• Apply arm’s length pricing
• Document and file regulatory forms

Arm's Length Principle (ALP):
The price for transactions between related companies must be equivalent to what unrelated parties would charge in a comparable situation.

Approved Transfer Pricing Methods in India:

Who Needs Transfer Pricing Compliance?

Applicable to businesses with associated enterprises, including:

• Foreign parent companies with Indian subsidiaries
• Two subsidiaries under the same foreign parent
• Companies owning 26%+ in other companies
• Entities sharing common management or control

Transactions Covered:

• International Transactions: Cross-border transfer of goods, services, intangibles, loans, or technical services
• Specified Domestic Transactions (SDTs): Domestic related-party transactions exceeding ₹20 crore

Types of Transfer Pricing Agreements

Intercompany Agreements

• Define terms, pricing, and responsibilities
• Demonstrate compliance to tax authorities
• Prevent disputes between related companies

Advance Pricing Agreements (APAs)

• Pre-approved agreement with tax authorities
• Duration: up to 9 years (5 prospective + 4 rollback)
• Provides certainty, reduces dispute risk, and speeds up assessment

Safe Harbour Rules

• Pre-set margins for certain transactions
• Automatically considered arm’s length
• Simplifies compliance and reduces audit risk

Key Elements of a Transfer Pricing Agreement

1. Identification of Controlled Transactions

   • Buying/selling goods or services

   • Lending/borrowing money

   • Sharing intellectual property

   • Includes parties, scope, volume, and timing

2. Transfer Pricing Methodology

   • Selection of CUP, RPM, CPM, PSM, TNMM, or Other Method

   • Justification of chosen method

3. Arm’s Length Range

   • Acceptable price range based on market conditions

   • India: 35th to 65th percentile (Rule 10CA)

4. Benchmarking Data

   • Data sources: Prowess, Capitaline, ACE TP

   • Comparison with third-party market prices

5. Adjustment Mechanisms

   • Describes corrections if prices fall outside arm’s length range

6. Documentation Requirements

   • Contracts, invoices, FAR analysis, benchmarking studies

   • Records maintained for 8+ years

7. Dispute Resolution Mechanisms

   • Negotiation, arbitration, or legal proceedings

8. Compliance Monitoring

   • Periodic review for adherence to ALP and tax laws

9. Annual Reporting

   • Filing Form 3CEB, Master File (3CEAA & 3CEAB)

Records Required for Transfer Pricing

Key Forms and Reporting

Transfer Pricing Compliance and Penalties

• Maintain proper documentation for all transactions
• File Form 3CEB annually; non-filing attracts ₹1,00,000 penalty
• Adjustments may incur interest under Sections 234B/C
• Penalty under Section 270A for misreporting
• Poor documentation increases audit and penalty risk