Transfer Pricing Documentation in India: A Comprehensive Guide

Globalisation has enabled multinational enterprises (MNEs) to operate seamlessly across borders. However, with cross-border transactions comes the risk of profit shifting—a practice where taxpayers deliberately transfer profits from high-tax jurisdictions to low-tax jurisdictions to minimise their global tax burden. To curb such practices and promote tax transparency, the Government of India has implemented a robust framework of transfer pricing regulations under the Income Tax Act, 1961.

One of the most significant components of India’s transfer pricing regime is the requirement to maintain adequate and contemporaneous transfer pricing documentation. These documents serve as the primary evidence for demonstrating that international transactions have been conducted at arm’s length price (ALP)—a price comparable to that charged between unrelated parties under similar circumstances.

This article provides an in-depth understanding of who must maintain transfer pricing documentation, the specific documents prescribed under Rule 10D, and the key judicial precedent emphasising the importance of compliance.

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Who Must Maintain Transfer Pricing Documentation?

Section 92D of the Income Tax Act, 1961 mandates the maintenance of prescribed documentation by:

1. Persons Entering into International Transactions

Every taxpayer—resident or non-resident—who enters into an international transaction (as defined under Section 92B) with an associated enterprise (AE) must maintain detailed transfer pricing records.

2. Constituent Entities of an International Group

Rule 10DA further extends the obligation to constituent entities of an international group. Such entities must maintain the prescribed documentation even if:

• They have not entered into any international transaction, or

• The international transaction does not materially impact their financials.

The rationale is to ensure alignment with global BEPS (Base Erosion and Profit Shifting) standards and enable tax authorities to understand group-level operations.

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Transfer Pricing Documentation Required Under Rule 10D

Rule 10D(1) specifies the detailed set of documents and information that taxpayers must maintain. These documents collectively help the tax authorities evaluate whether the pricing of cross-border transactions is consistent with the arm’s length principle.

Below is a comprehensive breakdown of the required documentation:

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1. Ownership Structure

• Complete description of the shareholding pattern of the assessee.

• Details of shares or beneficial interest held by associated enterprises or other entities.

• Organisational charts, ultimate parent entity details, and holding-subsidiary linkages.

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2. Profile of the Multinational Enterprise (MNE)

• Name, legal status, and registered address of all entities in the group.

• Ownership linkages, control structure, and tax residence of relevant AEs.

• Overview of the international group’s global business operations and inter-company arrangements.

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3. Business Profile of the Assessee and the AE

• Detailed explanation of the nature of business, products/services offered, and industry overview.

• Business model explanation, revenue streams, geographic markets, and key economic drivers.

• Description of the AE’s business with which transactions are undertaken.

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4. Details of International Transactions

For each transaction with an AE:

• Nature of the transaction (sale, purchase, loan, royalty, technical services, cost sharing, etc.)

• Terms and conditions, pricing methodology, payment terms.

• Quantum and monetary value of each transaction.

• Details of property transferred or services rendered.

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5. Functions, Assets, and Risks (FAR Analysis)

A FAR analysis is the backbone of a TP study. It should include:

• Functions performed by both the assessee and the AE.

• Assets employed, tangible and intangible.

• Risks assumed, such as market risk, credit risk, capacity utilisation risk, etc.

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6. Economic and Market Analysis

• Market trends, industry performance, regulatory landscape, and business environment.

• Budgets, forecasts, and estimates prepared by the assessee.

• Economic conditions influencing the pricing of transactions.

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7. Record of Uncontrolled Transactions (Comparables)

• Detailed description of comparable uncontrolled transactions with third parties.

• Terms, conditions, and economic circumstances surrounding such transactions.

• Justification for inclusion or exclusion of comparables.

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8. Comparability Analysis

• Step-by-step process of analysing uncontrolled transactions vis-à-vis controlled transactions.

• Quantitative and qualitative screening criteria used.

• Explanation of comparability adjustments applied, if any.

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9. Method Used to Determine Arm's Length Price (ALP)

• Details of each prescribed method considered (CUP, RPM, CPM, TNMM, PSM, or Other Method).

• Selection of the most appropriate method and justification for such selection.

• Implementation methodology and supporting rationale.

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10. Working Papers for ALP Computation

• Data used for computing the arm’s length margin.

• Financial information of comparables.

• Detailed computation sheets and workings for determining ALP.

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11. Assumptions, Policies, and Price Negotiations

• Pricing assumptions used in inter-company agreements.

• Internal policies affecting the transaction value.

• Documentation of negotiations impacting final pricing.

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12. Details of Transfer Pricing Adjustments

• Adjustments made to align actual transaction price with ALP.

• Consequent adjustment in total income as per tax laws.

• Supporting analysis and reconciliation statements.

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13. Any Other Relevant Information

A catch-all requirement ensures that taxpayers maintain all other documents that may be relevant for demonstrating compliance with the arm’s length principle.

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Judicial Precedent: Convergys Customer Management Group Plc

The significance of maintaining TP documentation was underscored in the landmark case:

Convergys Customer Management Group Plc. vs. CIT

Facts:

• The taxpayer, a USA-based non-resident, received ITES services from its Indian subsidiary.

• The tax department held that the taxpayer had a permanent establishment (PE) in India and attributed profits accordingly.

• Penalty under Section 271AA (2% of value of international transactions) was imposed due to lack of TP documentation.

Taxpayer’s Argument:
It relied on the transfer pricing study report prepared by the Indian subsidiary.

ITAT’s Ruling:

• Section 92D makes it mandatory for every taxpayer, including non-residents, to maintain TP documentation.

• Non-resident taxpayers must also obtain Form 3CEB from an independent accountant.

• Reliance on the Indian AE’s documentation does not amount to compliance.

• Accordingly, the penalty was upheld.

Key Takeaway:
Each taxpayer must independently maintain complete TP documentation; group-level documentation alone is insufficient.

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Conclusion

Transfer pricing documentation is not merely a regulatory formality but a critical compliance requirement under Indian tax law. Proper documentation serves multiple purposes:

• Demonstrates compliance with the arm’s length principle

• Minimises risks of tax adjustments and penalties

• Ensures transparency in cross-border transactions

• Helps tax authorities understand the commercial rationale behind pricing structures

Entities engaged in international transactions should ensure that their transfer pricing documentation is comprehensive, contemporaneous, and aligned with statutory requirements.

If you require assistance in preparing Transfer Pricing Study Reports, Form 3CEB, or advisory on transfer pricing regulations and compliance in India, professional support is available to guide you through the process.

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