Transfer Pricing Reporting by Foreign Companies: What Documents Should be Maintained?

The government has placed transfer pricing regulations in India to ensure transparency and avoid profit shifting. The idea behind this is simple – certain categories of taxpayers operating in multiple nations might engage in certain transactions whereby the profits generated and taxable in high-taxation countries are shifted to low-taxation countries. To avoid this, taxpayers engaging in international transactions are required to abide by the transfer pricing regulations. One of the most important aspects of these regulations is the maintenance of proper transfer pricing documentation and adequate disclosures. What is the transfer pricing documents taxpayers are required to maintain? Find out here!

Who is Responsible for Maintaining Transfer Pricing Documentation?

As per section 92D of the Income Tax Act, 1961 transfer pricing documents include all the documents maintained to review the transfer pricing arrangements for the transactions that take place between the entities in the same group. The purpose of maintaining the transfer pricing documents is to determine whether the transactions took place at arm’s length price or not.

Before you understand which documents are required to be maintained, you need to check out who is responsible for maintaining transfer pricing documentation. Here are the persons responsible for maintaining transfer pricing documents required in India:

• Every person who enters into an international transaction shall maintain such documents and information in relation to such transaction
• The constituent entity of an international group shall maintain prescribed documents and information in relation to the international group. The constituent entity should maintain the prescribed documents irrespective of whether any international transaction has been undertaken by the constituent entity or not.

Transfer Pricing Documents Required to be Maintained

Following are the transfer pricing documents required to be maintained as per Rule 10(D)(1):

• Details of the ownership structure of the assessee along with the details of shares and other beneficial ownership interest held by other enterprise.
• Profile of the multinational enterprise of which the assessee is a part of. This includes name, legal status, address, ownership linkages and country of tax residence of each enterprise that is a part of the international group with whom international transactions have been entered into by the assessee.
• Details of the business of the assessee and the industry in which the assessee operates and the business of the associated enterprise with whom the assessee has transacted.
• Nature, terms and price at which the international transactions were entered into with each associated enterprise, details of property transferred and services rendered, quantum and value of each such transaction.
• Details of the functions performed, assets employed and risks assumed (FAR analysis) by the assessee and associated enterprises that are involved in the international transaction.
• Record of the economic and market analysis, budgets, forecasts and estimates prepared by the assessee for the entire business and for each separate division.
• Record of the uncontrolled transactions considered for analysing their comparability with the international transactions entered into. This includes details regarding the nature, terms and conditions in relation to uncontrolled transactions with third parties that may be relevant in deciding the price of international transactions.
• Record of analysis performed to evaluate the comparability of uncontrolled transactions with relevant international transactions.
• Details of methods used to determine the arms-length price for each international transaction. It also includes the method selected as the most appropriate, the reason for the same and how such method was implemented in each case.
• Details of actual working carried out to determine the arms-length price. This includes the details of the comparable data and financial information that is used to apply the most appropriate method.
• The policies, assumptions and price negotiations that significantly affected the determination of the arms-length price.
• Details regarding the adjustments made to the transfer price to align it with arm’s length price determined as per the income tax rules and consequent adjustments made to the total income for taxation purposes.
• Any other information as may be relevant or required.

Case Law for Transfer Pricing Documents

The importance of maintaining the transfer pricing documentation was highlighted in the case of Convergys Customer Management Group Plc. It is a non-resident company in the USA (herein referred to as the taxpayer) that had a subsidiary company in India, Convergys India Services Private Limited (herein referred to as associated enterprise). The taxpayer availed of IT-enabled services from the associated enterprise and earned the following two types of income from it i.e., interest on loan and receipt of fees for technical service.

As per the Indian tax authorities, the taxpayer had a permanent establishment in India and therefore, attributed a portion of the taxpayer’s profits to such establishment. Further, the first-level tax authority levied a penalty under section 271AA equivalent to 2% of the value of international transactions.

As per the contentions of the revenue department, Section 92D states that every person engaging in international transactions is required to maintain transfer pricing documentation. The taxpayer in the present case did not maintain the TP Study Report and placed its reliance on the Indian-associated enterprise’s study report.

The Income Tax Appellate Tribunal (ITAT) heard arguments from both sides and stated that Section 92 requires all taxpayers to maintain the transfer pricing documentation, including non-resident taxpayers. Further, it is mandatory for non-resident taxpayers to obtain an independent accountant’s report in Form No. 3CEB. Merely relying on the transfer pricing documentation of the Indian-associated enterprises cannot be regarded as sufficient compliance with Indian transfer pricing regulations in India and transfer pricing documents need to be separately maintained by the non-resident taxpayers. Accordingly, the penalty imposed by the income tax authorities was upheld.

Above are the complete details relating to the maintenance of the transfer pricing documentation by the entities engaging in international transactions. In case you need any assistance and support in relation to transfer pricing regulations and compliances in India, feel free to contact the ASC Group.

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