How to conduct Transfer Pricing Audit

What is Transfer Pricing Audit?

Transfer Pricing: With the globalization there has been a steady growth in foreign exchanges and trade all over the world. The global economy has been on a boost and has given rise to liberalization in trade and foreign exchanges. India is no untouched by these developments. India has been integrating its economy with the world economy. Due which there has been an increase in cross border exports and imports of goods and services and exchange of funds. The price paid for transferring of goods and services from one country to other is called as transfer pricing. It is a value attached with the transfer of the goods and services between parties. In India the taxation authorities have set certain rules and procedures for transfer pricing which has to be followed by all the companies or businesses within the Indian territories. One such process is Transfer Pricing Audit.

Transfer Pricing Audit : A transfer pricing audit is an inspection or evaluation by the tax authorities in India to ensure that a business entity is compliant with the mandated transfer pricing laws. During a transfer pricing audit the auditors can assess the ledgers, accounts and books in order to check compliance.  There are different levels at which a Transfer Pricing audit can be conducted. These are:

  • In case of particular transactions that is controlled and is to be done by a single auditor or tax inspector
  • In cases of a large transaction or all the transactions of the business entity the inspection or review may be done by a whole team of tax inspectors or auditors to consider all the transactions involved.

Types of transactions subject to Transfer Pricing Audit in India:

There are certain type international transactions that are considered during a Transfer Pricing Audit, which are:

  • Loan amount received or paid by the firm.
  • Royalty fees paid by the firm.
  • Management fees.
  • Sales of finished goods.
  • Purchase of fixed assets.
  • Information Technology enabled services.
  • Purchase of raw material.
  • Reimbursement of any expense paid or received.
  • Sales of machinery.
  • Purchase of machinery.
  • Fees for technical services.
  • Fees for corporate guarantee.
  • Software development services
  • Support services.
  • Sales of intangibles.
  • Purchase of intangibles.

Process of Transfer Pricing Audit:

The transfer pricing audit has a simple procedure to be followed. The auditor or inspector appointed for the transfer pricing audit beforehand considers and goes through the important details of the business entity. This helps him to understand the business well. Next he checks all the transactions made in the books of accounts, sales and purchases made. Then, he/she checks the amount of transfer pricing applicable on those transactions. He ensures the compliance of transfer pricing rules with the transactions made. After going through the documents he collects evidences and asks the employee and the staff questions for further information. Then he makes a report for the taxation department stating the findings, information, suggestions and whether the business entity is liable to any punishment/fine or not. A copy of this report is also given to the entity as well.

Documents required during Transfer Pricing Audit:

Following is a list of documents to be produced during a transfer pricing audit by a company:

  • Report of last Transfer Pricing Audit.
  • Copy of agreement between the parties regarding transactions.
  • Books of accounts
  • Sales and purchase accounts
  • Records of amounts paid and received by the firm
  • All other documents as may be asked by the auditor or inspector.

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    Author: Anil Agrawal
    EZYBIZ India Consulting LLP, New Delhi. The firm is business and tax consultancy firm providing consultancy in Taxation, Regulatory, Transfer pricing, Valuation, Corporate funding and Business set up matters. He may be reached at 9899217778 or anil@ezybizindia.in.