Transfer Pricing Audit in India: Introduction
Transfer pricing audit as per the taxation laws in India is an investigation audit by the taxation department to check and verify the compliance of the business entity with the transfer pricing provisions. It is a regular control tool for the taxation authorities to keep a check on the business entity. During a Transfer Pricing Audit the tax department gets access to the details and information regarding the agreements, documents, ledger, books of account, data and transfer pricing details of the business entity. A Transfer Pricing Audit can be done as review by a single auditor based on a particular detail of transaction or on a very large scale with a proper team of auditors for better reviewing.
Transfer Pricing Audit Process in India:
The Transfer Pricing Audit is a process with proper management. It includes five broadly categorized steps. These are:
- The process of transfer pricing starts with the auditors gathering the background information about the business entity.
- In the second step a proper analysis of the functional areas of the entity is done.
- Next the benchmarking study is done in the organization.
- Documentation work and verification is done.
- Accountant’s report is summarized.
Also read: Overview of Transfer Pricing Audit in India
Documentation for Transfer Pricing Audit Process in India:
Rule 10 D of Income Tax rules, 1962 mandated documents required during a Transfer Pricing Audit Pricing are as below:
- Description of ownership structure.
- Description of the business.
- Description of functions undertaken, risk involved and the assets of the business entity.
- Detailed profile of the multinational group.
- Details of nature and terms and conditions of the International Transactions.
- Records of any economic and market research and analysis.
- Details of methods considered.
- Records of all the working of the organization.
- Records of transactions that are uncontrolled and analysis of comparability.
- Price negotiations done, policies and assumptions made by the business organization.
- Specific information of the company along with the records, data and documents.
How to deal with Transfer Pricing Audit in India:
While dealing with the Transfer Pricing Audit the taxpayer must remember the following points-
- Before the commencement of the audit always ask the auditors about the scope of the audit. If required ask them to give time to contact your tax or legal advisor. Make sure that the tax or the legal advisor is present at the time of the audit.
- Inform the stakeholders and the management about the Transfer Pricing Audit beforehand in order to avoid any leakage of information that can put the company at risk and threats.
- Prepare the records methodically to avoid any last minute changes or misinformation provided in the books.
- Cooperate with auditors always and do not panic or argue with the auditors. The more composed you are data wise and mind wise the sooner the audit will be over.
How to minimize the risk of Transfer Pricing Audit in India:
In India any business entity cannot avoid Transfer Pricing Audit but certain measures can be taken by them to avoid the risk of having one. These measures are:
- Proper maintenance of documentation – Documents that are substantial with the transfer pricing will always make the audit easier for the entity.
- Well behaved and non aggressive position with the tax authorities – If the entity has always been compliant and cooperative authority it makes decreases the risk of an audit at the entity.
- Compliance with the Transfer Pricing laws – If you have been always following the law and provisions as a taxpayer, it lessens the risk of having a Transfer Pricing Audit in the organization.