Transfer Pricing Audit Support: Where It Goes Wrong
The failures on Transfer Pricing Audit Support repeat, which means they are avoidable if you know what to watch. The questions below are the ones raised most often in practice; the full scope of the service is on the Transfer Pricing Audit Support page.
What is the Safe Harbour Rules regime, and should we consider it?
The Safe Harbour Rules (Rules 10TA to 10TG of the Income-tax Rules 1962 for periods up to 31 March 2026, and the corresponding provisions of the Income-tax Rules 2026 thereafter) allow eligible taxpayers, for specified categories of transactions — including information technology services (software development, IT-enabled services, knowledge process outsourcing and software-related contract R&D, consolidated into a single category from tax year 2026-27), intra-group loans, corporate guarantees, and a few other categories — to declare a prescribed minimum operating margin (or specified rate) and have that pricing accepted by the tax department without a full TNMM benchmarking dispute, in exchange for electing into the regime for the specified years. The safe harbour margin is often set somewhat above what a competitive open-market benchmarking exercise might independently justify, so the trade-off is paying slightly more tax in exchange for materially reduced TP audit and litigation risk on that transaction category.
In practice: Safe harbour is not automatically the better choice — for a company confident in a lower, well-benchmarked margin, opting into safe harbour can mean paying tax on a higher deemed margin than necessary. We run the comparison numerically each year for eligible clients rather than defaulting either way.
Our Indian entity is a captive software development centre for our overseas parent. What TP issues are most relevant to us?
Captive IT/software development and ITeS/BPO service arrangements are among the most heavily scrutinised transaction categories in Indian TP audit history. Key issues typically include: correctly characterising the Indian entity as a limited-risk service provider (versus one that actually bears meaningful entrepreneurial or market risk, which would justify a different, typically higher, return); building a comparable set of genuinely comparable Indian captive/contract service providers rather than diversified, high-margin, or IP-owning software companies; correctly excluding or adjusting for extraordinary items and working capital differences between the tested party and comparables; and, where eligible, evaluating the Safe Harbour Rules option for IT/ITeS services as an alternative to full TNMM benchmarking.
In practice: Comparable selection for captive software and ITeS entities has produced some of the most litigated TP disputes in India over the past decade — cases turning on whether a particular comparable company is a genuine cost-plus service provider or actually owns valuable IP and bears different risk. We build the comparable set with this specific litigation history in mind, not just a mechanical database filter.
What is the tested party concept in transfer pricing, and why does it matter?
The tested party is the entity in the controlled (related-party) transaction whose profitability or pricing is actually tested against the arm's length benchmark — generally selected as the party that performs the less complex functions, bears fewer risks, and does not own valuable, unique intangibles, because a less complex entity is easier to find genuinely comparable independent companies for. In most Indian outbound structures where the Indian entity is a limited-risk captive service provider or distributor, the Indian entity itself is the natural tested party. Selecting the wrong tested party — or the tax authority disputing your tested party selection — changes the entire benchmarking exercise and the resulting arm's length conclusion.
In practice: We confirm tested party selection explicitly as part of the FAR analysis, with documented reasoning for why the Indian entity (or, in less common cases, the overseas counterparty) is the appropriate tested party — this is a frequent point of TPO challenge, particularly where the FAR characterisation itself is contestable.
How does transfer pricing interact with our GST and customs compliance for the same intercompany transactions?
Transfer pricing under the Income-tax Act and valuation for GST/customs purposes are governed by separate statutory frameworks with related but not identical arm's length concepts — GST valuation for related-party transactions under Section 15 of the CGST Act and the corresponding Valuation Rules, and customs valuation for imported goods between related parties under the Customs Valuation Rules, both apply their own tests. In practice, the same intercompany price is scrutinised from multiple angles by different authorities, and inconsistency between the price used for income-tax TP purposes, GST invoicing, and customs declared value on the same transaction is a real and recurring risk area, even though a 'correct' TP price for income-tax purposes does not automatically satisfy GST or customs valuation requirements.
In practice: We flag this interaction specifically for clients importing goods from or exporting to an overseas related party — the customs valuation authority and the income-tax TPO can each independently query the same transaction price from a different statutory angle, and we coordinate the pricing position across both rather than letting the two teams work in isolation.
What documentation should we start preparing from Day 1 of a new India-UAE intercompany arrangement?
From the outset: a properly signed intercompany agreement clearly setting out the scope, pricing basis, and risk allocation; a documented FAR analysis supporting why the Indian entity is characterised the way it is (limited-risk service provider, full-fledged distributor, or otherwise); an initial benchmarking exercise supporting the proposed pricing before the first invoice is raised, not after several months of transactions at an unbenchmarked rate; and a clear internal process for maintaining transaction-level records that will support the annual Form 3CEB and Rule 10D study. Building this discipline from the first transaction avoids the far more expensive exercise of reconstructing multiple years of unsupported pricing history later.
In practice: For new India-UAE structures we help set up, we build the TP-defensible pricing policy into the intercompany agreement itself at incorporation stage — treating transfer pricing as a Day 1 structuring question rather than a Year 2 compliance afterthought consistently produces a cleaner, cheaper compliance history.
What does PNPC's transfer pricing audit support engagement actually include?
Depending on scope agreed: Section 92A associated enterprise mapping and international transaction identification; FAR analysis; most-appropriate-method selection with documented reasoning; comparable company database search with documented inclusion/exclusion criteria; arm's length range computation and testing; Rule 10D-compliant transfer pricing study report drafting; Form 3CEB certification and electronic filing; Master File (Form 3CEAA) and Country-by-Country Reporting (Form 3CEAD) applicability assessment and filing where triggered; Safe Harbour Rules evaluation for eligible categories; and, where needed, TP audit notice response, TPO hearing representation, DRP objection support, and APA feasibility assessment. Every engagement begins with a written scope and fee agreed before work starts.
In practice: Ask us for the written scope letter before engagement begins, as we provide for every client. TP work in particular benefits from a clearly defined scope upfront, since the difference between 'Form 3CEB certification only' and 'full TP study plus audit-ready documentation' is a meaningful difference in depth, cost, and — most importantly — audit defensibility.
Where this sits in the wider engagement
Transfer Pricing Audit Support rarely arrives on its own. The statutory basis and the current requirements are set out on the Transfer Pricing Audit Support service page, and the related services are grouped under Audit Assurance.
What PNPC does
PNPC Global has practised since 1986 across India and the UAE. On Transfer Pricing Audit Support we take the work end to end — reviewing the facts, preparing and filing what is required, and dealing with the authority through to closure.