Transfer Pricing Issues in India

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Jan. 20 – Transfer pricing in India was first implemented beginning 2001 and since then the regulation has served well to lift the quality of audits in the country and become a source of additional revenue for the government.

The following emerged as common adjustment issues for companies undergoing transfer pricing audits:

– tax authorities rejected adjustments on account of risk differentials, differences on account of working capital for software and IT enabled service companies.

– a benchmark of around 35-40 percent on costs was used for investment advisory services and correspondent banking services.

– payments of royalties, management fees, secondment cross-charges were denied in cases where the existence as well as the adequacy of the “benefit test” has not been adequately documented as well as demonstrated before the tax authorities.

– notional guarantee fees were imposed in cases where guarantees/letters of comfort were being issued by Indian entities to lenders of overseas subsidiaries/group companies.

-notional charge were also added for creating marketing intangibles for overseas parent/group company in respect of marketing services rendered by Indian marketing/distribution arm.

– notional interest was charged for delayed receipts during on account of trade transactions from group companies and in cases of interest free loans granted to group companies.

It has been observed that in most cases tax authorities made adjustments because submitted documentation was incomplete or was not properly presented. In other cases wherein authorities ruled in favor of the taxpayer and no adjustments for were made, submitted documents were comprehensive and went beyond minimum requirements.

It is then advised that transfer pricing documentation must be maintained during the instance when the transaction is made.

For more inquiries on transfer pricing issues, email