Transfer Pricing

Step 1: Prepare in Advance – TP Documentation

• Maintain detailed contemporaneous documentation as per Rule 10D of the Income-tax Rules.
• Ensure the documentation addresses functional analysis, justification of method selection and explanation of the commercial rationale for transactions.
• Keep backup evidence like agreements, invoices, emails and cost allocation workings.
• If possible, perform year-end true-up/true-down adjustments in books to align with ALP.

Step 2: Analyse the Draft TP Order

When the TPO issues a Draft Order or Show Cause Notice:

• Carefully examine the basis of comparables selected/rejected by the TPO.
• Identify factual inaccuracies (e.g., wrong turnover filters, incorrect margins).
• Check whether the TPO followed the same year data and applied multiple year data appropriately.
• Compare the TPO’s FAR profile with your own analysis—differences here often form the basis for rebuttal.

Step 3: File Effective Objections Before the DRP/CIT(A)

• If the adjustment is reflected in a draft assessment order, approach the Dispute Resolution Panel (DRP) within 30 days or directly to CIT(A) in other cases.
• Draft objections should be fact-based and supported with legal precedents.
• Highlight:
  • Incorrect selection/rejection of comparables
  • Non-consideration of adjustments (e.g., working capital, risk, capacity utilisation)
  • Errors in the computation of margins or PLI

Step 4: Use Judicial Precedents and OECD Guidance

• Quote relevant ITAT, High Court and Supreme Court rulings supporting your case.
• Refer to OECD TP Guidelines and Indian safe harbour rules where applicable.
• Cite rulings that deal with specific issues like royalty payments, management fees, cost-plus mark-ups or intra-group services.

Step 5: Explore Alternate Resolution Mechanisms

• Consider an APA (Advance Pricing Agreement) for future years to avoid repeated disputes.
• Explore Mutual Agreement Procedure (MAP) under applicable tax treaties for relief from double taxation.

Step 6: Keep Communication Professional and Transparent

• Maintain a cooperative approach with the AO/TPO but assert your legal rights.
• Respond within timelines and keep detailed records of submissions and hearings.
• Avoid incomplete or vague explanations—clarity and evidence are your strongest defence.

Step 7: Post-Assessment Actions

• If an adverse final order is passed, evaluate the cost-benefit of filing an appeal before ITAT.
• Check if any penalty notice under Section 271(1)(c) or Section 270A has been issued prepare reasonable cause explanations to avoid penalties.
• Assess the impact on MAT (Minimum Alternate Tax) and deferred tax accounting.