Transfer Pricing (TP) law in India is around 15 years old. Industry has experienced major challenges in tackling this law which is still evolving! I recollect the times when the industry used to grapple with various complex corporate tax issues till Fiscal Year 2000-01.

Since the TP law was introduced, there was a gradual shift towards focus on understanding TP provisions. This resulted in complete reliance on tax consultants to take care of the then so-called alien law for industry colleagues and to some extent even for the officials of the tax department.


Since then the companies have seen such major adjustments which resulted in no choice but to shift the Tax (TP) discussions in the Company’s Board Rooms!

Industry faced a tough time understanding the provisions, change in the manner business was done, change in pricing, processes, policies, etc.

Similar challenge was faced by the revenue officials which, coupled with the pressure of revenue collections, resulted in huge and some times unwarranted TP adjustments.

As the law evolved, there was a dire need to change the point of view to look, interpret and implement the TP provisions. Various representations were made by many industry forums coupled with serious discussions with in CDBT and top Government officials to rationalize the draconian TP provisions.

In this connection, we can see a gradual change in the outlook and conscious focus of the Indian Government to effectively rationalize the provisions. Some of the relevant amendments brought in this regard are as follows:

• Introduction of Advance Pricing Agreement (APA) provisions - one of the very strong & effective changes to address the industry concern of tax being totally unpredictable and full of adverse surprises. APA certainly helps in having certain, well thought and mutually agreed approach on business model followed by the companies having international group company transactions for practically 9 fiscal years!

•Safe Harbour Rules have been further rationalized. I believe that the revised safe harbor rules will now attract many companies to opt for it, especially small companies having international transactions who find extremely challenging to comply with TP provisions and may run up-to a significant litigation zone which may eventually result in endangering their entire existence.

• Domestic TP compliances (except for tax holiday units)removed – this is yet another welcome amendment by the Indian Government basis continuous representations by various industry forums.

• Use of multiple year data and range concept – the Indian Government has taken one more step to rationalize the TP provisions to avoid unwarranted litigation arising on account of data of comparable companies being restricted to single year and use of arithmetic mean for comparing the margins.

Industry professionals should set up a robust and concrete process of identifying such transactions especially due to the fact that such transactions are not readily available in related party schedule forming part of financial statements or any other place

Having discussed about the favourable changes brought in by the tax department, one needs to also be aware of certain provisions which, if missed/not complied with,can result in huge adjustments/litigations:

• Reporting of deemed international transactions– transactions with overseas non-group companies where the pricing or terms are mandated by overseas associated enterprises (group companies) need to be mandatorily reported while filing Form 3CEB – TP report. Any non-reporting of such transactions could result in huge penalties and adjustments. Industry professionals should set up a robust and concrete process of identifying such transactions especially due to the fact that such transactions are not readily available in related party schedule forming part of financial statements or any other place.

• Secondary adjustments – adjustments made by the TP officer once confirmed, would result in amount of adjustment being treated as deemed loan to the overseas parent with an expectation of receipt of interest on the said amount by the relevant Indian company from its overseas group company till the time such adjusted amount is physically received by the relevant Indian company. Industry professionals need to be extra cautious of this draconian provision and should keep the Board members along-with overseas counterparts aware of it to avoid any unpleasant surprises in future. One should specifically note that considering the fact that India is moving towards BEPS approach, expecting the deletion of this provision in future may not hold good.

Having discussed the welcome changes and the existing challenges in Transfer Pricing, companies should also be aware of the red flags which attract immediate attention of TP officers. Some of them are listed below:

• Differentiation between intragroup services v/s. shareholder services;
• Incurrence of Advertisement, Marketing & Promotion (AMP) expenses by an Indian subsidiary of overseas parent entity;
• Loss making companies – practical challenge to prove the business rationale of losses incurred;
• Interestfree financing arrangements, etc.

In view of the above, it becomes all the more important for the tax team of the relevant companies to:

• have a close watch on the day to day international transactions and ensure the compliance from TP perspective;
• personal representation before the TP authorities during TP audits, DRP hearings, APA meetings, etc. This is also in view of the fact that TP is purely based on facts and purely commercial business rationales which can best be understood and explained by the industry in-house business units / employees;
• be aware of the recent developments in global transfer pricing arena (especially relating to Base Erosion Profit Shifting [BEPS] provisions, where India is an active participant) to be compliant in all manner.