What Is Transfer Pricing Report?
A Transfer Pricing Report is a comprehensive document that outlines the transfer pricing policies adopted by a taxpayer and provides a detailed analysis of the pricing methodology used for related party transactions. It is a legal requirement in India for taxpayers whose total turnover or gross receipts exceed INR 10 crores (approx. USD 1.3 million) to prepare and submit a Transfer Pricing Report in Form 3CEB along with their annual tax return.
The purpose of a Transfer Pricing Report is to demonstrate that the prices charged in related party transactions are at arm’s length or are comparable to those charged in similar transactions with unrelated parties. The report includes a detailed analysis of the financial and operational aspects of the taxpayer’s business, the industry in which it operates, and the economic conditions prevailing in the market.
Penalties for non-compliance
Non-compliance with Transfer Pricing Regulations can attract significant penalties under the Income Tax Act. The Indian tax authorities can initiate penalty proceedings against taxpayers who fail to file the Transfer Pricing Report or provide incorrect or incomplete information in the report. The penalty can be up to 2% of the value of the international or specified domestic transactions, subject to a maximum of INR 10 lakhs (approx. USD 13,500).
Requirements for filing a Transfer Pricing Report (Form 3CEB)
The Indian tax authorities have specified the following requirements for filing a Transfer Pricing Report (Form 3CEB):
Applicability: The Transfer Pricing Report is mandatory for taxpayers who have entered into international transactions or specified domestic transactions with related parties during the financial year. The transactions must exceed a specified monetary threshold, as mentioned above.
Filing Deadline: The Transfer Pricing Report must be filed along with the annual tax return on or before the due date specified under the Income Tax Act.
Contents of the Report: The Transfer Pricing Report must include a detailed analysis of the following aspects:
a. Description of the taxpayer’s business and its related parties
b. Nature and terms of the related party transactions
c. Selection and application of the transfer pricing methodology
d. Benchmarking analysis and comparability factors
e. Supporting data and documents such as agreements, invoices, and financial statements
f. Compliance with Transfer Pricing Regulations
