Even otherwise, the Indian income tax authorities are gradually becoming more aware on transfer pricing and have begun questioning the transfer pricing policies of multinational companies. Reported cases include the tax authorities rejection of profits reflected by Indian subsidiaries because they did not deal at arm s-length with their parent. Hitherto, exports did not catch the eye of the Indian transfer pricing taxman possibly because exports enjoyed complete tax benefits. However, with many of these being phased out over the next five years, it is expected that the AO will now look closely at the transfer prices involved in exports. The scope of any transfer pricing enquiry by tax authorities will be influenced by the company s contemporaneous documentation of the arm s length nature of its transfer prices.
Many companies have basic documentation available that serves to evidence transactions.
However, from a transfer pricing perspective, this kind of documentation is lowly valued. It is more important, though difficult, to assemble the economic analysis to demonstrate that the terms of the group transaction are at arm s length. The more complex the transaction, the more important documentation will be. This would culminate in a recommendation of a range of arm s length results within which the results of related party transactions undertaken by the assessee should fall. The analysis would look at similar transactions rendered by unrelated parties, at factors that will influence the arm s length prices of the transactions, et al.