Arm’s Length at Year-End – Aligning

Policy, Practice, and Paperwork

Annual Transfer Pricing Compliance

A. Key Considerations for Audit Finalization

A. Key Considerations for Audit Finalization (Continued)

B. Year-End Transfer Pricing Audit Closure Checklist

1. Documentation Reconciliation

• Match the transactions in TP documentation/Form 3CEB with financial statements and tax audit report (Form 3CD).
• Verify the list of Associated Enterprises (AEs) aligns with disclosures under Section 92A.
• Ensure all international and specified domestic transactions are captured

2. Inter-company agreements

• Maintain agreements for all intercompany transactions.
• Confirm that terms (pricing, services, deliverables) reflect actual conduct and are consistent with contract

3. Supporting Documentation

• Maintain invoices for all related party transactions.
• Maintain detailed related party ledgers with clear narrations to establish audit trail.
• Include email correspondence, contracts, and relevant proofs where relevant.

4. Independent Valuations

• Obtain third-party valuation reports for: Intangibles (IP transfers, brand valuation), Share transfers & Business restructuring arrangements

5. Segment Information

• In certain instances, the company might be required to maintain segmental profit & loss accounts i.e. AE and Non-AE segments or different business segments depending on the substance. In such circumstances, it is important to use appropriate allocation keys to ensure fair allocation of revenues and expenses.

B. Year-End Transfer Pricing Audit Closure Checklist (Continued)

6. Timely Compliance

Ensure that statutory timelines are met.

C. Transfer Pricing Compliance – Best Practices

• Benchmark all related party transactions to ensure pricing policies are consistent with the arm’s length principle, as mandated under Indian TP regulations;
• Apply the most appropriate transfer pricing method based on the nature of the transaction, functional profile, and availability of reliable data to substantiate arm’s length pricing;
• Select suitable comparables and current financial data and perform a robust economic analysis that reflects prevailing market conditions and ensures meaningful comparability with the tested party;
• Undertake appropriate economic adjustments if necessary to ensure better comparability and even out differences;
• Undertake Transaction-by-transaction analysis Apply ALP testing at the transaction level, especially for unique or high-value transactions and transactions with different functional profiles. Avoid entity-level margins unless justified by facts.