Transfer Pricing Audit
Are you in search of a Chartered Accountant (CPA/Consultant) for Transfer Pricing Audit? If so, you’ve come to the right place. We offer a comprehensive solution for International Transaction Taxation, including transactions with Associate Enterprises (Related Parties). According to the Income Tax Rules, Transfer Pricing Law applies to both domestic and international transactions. If you require consultancy for intricate international transactions involving associate enterprises, Vakil Adda is the optimal consultancy for you. Additionally, you can explore Transfer Pricing Transactions, Safe Harbour Rules, Audit requirements, Taxation, Documentation processes, and Fees for Transfer Pricing Audit here.
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Transfer Pricing & Safe Harbour Rules
The Finance Act of 2001 brings the Transfer Pricing Rules. Basically, Transfer Pricing is introduced to prevent manipulation of tax between two related party/company transactions. It is meant to regulate intra-group company/enterprise transactions where a fair pricing policy is not followed and the motive of the price arrangement is to reduce tax or avoid tax. The preamble of the Transfer Pricing rules in The Income Tax Act is to protect the interest of Revenue, which can be disturbed by the controlling interest governed by a person who is from another country with different taxation rules. There are two types of transfer pricing regulation: Domestic Transfer Pricing and International Transfer Pricing Regulation.
International Transfer Pricing Rules are applicable when Two Associate Enterprises (Commonly Known as Related Party or Controlling Stakeholder) enter into a transaction and one of the parties is located outside India. Basically, Two Associate enterprises can arrange a pricing model which is more beneficial to them. To restrict that, the Government has regulated international transactions via transfer pricing.
Section 92 of The Income Tax Act governs the Rules of Applicability, Definition of Associate Enterprise, Arm’s Length Price, Arm’s Length Methods, Safe Harbour Rule, and the Process of Transfer Pricing Audit under Section 92E. We Provide Complete Consultancy and Transfer Pricing Audit Services for Multinational Companies (MNCs) Across the Globe and in India.
Who can be called an Associate Enterprise?
An enterprise that holds the following interests directly or indirectly, or through an intercompany/intermediate party:
- Management (Board/Director/Partner)
- Control (Power of Voting Rights or Decision Power)
- Capital of the other enterprise (Ownership)
An associate enterprise means transactions between two enterprises, one of which holds the management, control, or capital of another enterprise directly or indirectly. Generally, enterprises located outside India hold the controlling power of Indian units.
Furthermore, under the 12 situations, a deemed enterprise is defined with a broad definition of enterprise, where one enterprise holds:
- Ownership: 26% or more voting power
- Mutual holding: 26% or more voting power in two or more enterprises
- Substantial lender: Loan advances are more than 51% or more of the total assets of the borrower
- Minority holding in firm/AOP: 10% or more holding in firm, AOP, or BOI
- Guarantee or borrowing: More than 10% of the total borrowing of the enterprise
- Dependency on intangible assets: Wholly dependent on the intellectual property rights (IPR) of another enterprise
- Supply dependency: 90% of raw material supply
- Sale dependency: Exclusively selling to only related enterprises
- Individual control: Person or relative controlling another enterprise
- HUF control: Person of Hindu Undivided Family (HUF) controlling another enterprise
- Appointment of board: Power of more than half of the board of directors or power to one executive director
- Appointment of BOD of two or more enterprises: One person has the power of appointment of the board in two companies, then both companies are considered “AE” (Associated Enterprises).
Types of Transactions Covered Transfer Pricing
As per Section 92B, The following types of International transactions fall within the ambit of transfer pricing, subject to the transaction being between two associated enterprises:
- Export of Goods
- Export of Services
- Import of Goods or Services
- Cost Centre Company
- Business Processing Units
- Knowledge Process Units
- Borrowing/Loan Transactions
- Intellectual Property Transactions
- Capital Expenditure Transactions
- Sale/Lease of Tangible or Intangible Assets
- Any other transactions involving sales, purchases, income, expenses, profits, or assets.
- Deemed International Transactions
Applicability of Transfer Pricing
Transfer pricing is applied to companies dealing with associated enterprises. When the associated enterprise is located outside India, it falls under international transfer pricing. However, when the associated enterprise is located in India, it is referred to as domestic transfer pricing. Domestic transfer pricing is aimed at preventing taxation manipulation between non-tax holiday companies and tax holiday companies (under Section 80-IA Deduction, 115BAB, 10AA, 35AD, 80A).
Method of Transfer Pricing Price Discovery (Arm's Length Price)
As per Section 92F(ii), the Arm’s Length Price (ALP) is defined as the price at which a transaction is executed or would be executed under uncontrolled conditions with a person other than an associated enterprise. Furthermore, Section 92(1) stipulates that transactions with international associated enterprises shall be computed using the Arm’s Length Price Method.
Now, the question arises: What is the Arm’s Length Price (ALP)? According to Section 92C, the ALP shall be determined using the following methods:
- Comparable Uncontrolled Price (CUP) Method
- Resale Price Method (RPM)
- Cost Plus Method (CPM)
- Transaction Net Margin Method (TNMM)
- Profit Split Method (PSM)
- Any other method which justifies the Arm’s Length Price.
Safe Harbour Rules
The circumstances in which the tax authority accepts the transfer price determined by the taxpayer are referred to as the Safe Harbour Rule. However, the Safe Harbour Rule is not applicable if the associated enterprise is located in a territory notified under section 94A.
Advance Pricing Agreement (APA) is an agreement reached in advance between the taxpayer and the tax authority regarding the Arm’s Length Price (ALP). APA provisions override normal provisions. Only international transactions are covered in APA, and the period of coverage extends to five consecutive years. APAs are binding on both the taxpayer and the tax authority, including the Commissioner of Appeal and the Income Tax Appellate Tribunal (ITAT). However, it’s important to note that Advance Pricing Agreements are not binding on the High Court.
What Are the Documents Required for Transfer Pricing Audit?
Following Documents are mandatory for conducting transfer pricing audit.
- Financial Statement of Company
- Bank Statements
- Ledgers, Voucher, Bills, Register
- GST Data
- TDS Data
- List of International Transactions
- List of Associate Enterprise and related parties
- Legal Agreement between two enterprise
- ALP Method Study Report and Supportive
- Any Other Data as per Auditor Requirement
Transfer Pricing Audit & Safe Harbour Consultancy
Fees for Transfer Pricing (TP) Audit Depends on the complexity of Transaction, ALP Method, and Audit Volume. Starting Price of Transfer Pricing Audit is Rs. 75000/-.
Process of Transfer Pricing Audit (92E) Reporting
Connect with Our Transfer Pricing Expert Chartered Accountant, and Send us relevant documents as per checklist for Audit.
Our CA Will perform Audit Procedure, May ask for more documents as per requirement.
After that, We will file Transfer Pricing Audit Report (3CEB) as per 92E audit requirement.
Penalty In case of failure to comply with Transfer Pricing
There are many penalty provisions, Let’s check important penalty provision of transfer pricing audit.
- Failure in report of any International Transaction: 50% Amount of tax payable.
- Fail to maintain documents: 2% of Value of International transactions.
- Failure to furnish Audit Report u/s 92E: 1 Lakh
FAQ's on Transfer Pricing Audit
Yes, as Company Located in USA, Canada and UK is owned by you is Associate enterprise. Any International Transaction between Indian Company and Your Foreign Company attracts the Transfer Pricing.
Yes, Transfer Pricing Applicable to Service Rendering Company, Cost Centre Company etc.
Yes, We provide Our Comprehensive Transfer Pricing and Safe Harbour Consultancy Service to MNC’s of Various Countries Including Based at USA, UK (England), Canada, Dubai, Australia, Germany, China, Japan, African Countries, European Countries, American Countries etc.
