What Is Transfer Pricing Audit?
A Transfer Pricing Audit is an income tax compliance review conducted to verify whether international and specified domestic transactions between related parties are carried out at an Arm’s Length Price (ALP), as required under the Income Tax Act, 1961.
The objective of a transfer pricing audit is to ensure that profits are not shifted outside India by manipulating prices in transactions between associated enterprises (AEs).
In India, transfer pricing provisions are administered by the Income Tax Department.
Who Is Required to Comply with Transfer Pricing Provisions?
Transfer pricing provisions apply to:
- Indian companies dealing with foreign group entities
- Indian entities having international transactions
- Entities with specified domestic transactions exceeding prescribed limits
- Multinational enterprises (MNEs)
- Indian subsidiaries of foreign companies
What Are International Transactions?
International transactions include:
- Purchase or sale of goods
- Provision or receipt of services
- Payment of royalties or fees
- Transfer of intellectual property
- Loan, guarantee, or financing arrangements
- Cost-sharing arrangements
What Is the Purpose of Transfer Pricing Audit?
The audit ensures that:
- Prices charged between related parties are fair
- Transactions follow the Arm’s Length Principle
- Taxable income is correctly reported in India
- Global profits are not artificially shifted
Key Transfer Pricing Compliance Requirements
Entities covered under transfer pricing must comply with:
- Maintenance of transfer pricing documentation
- Filing Form 3CEB (CA-certified report)
- Submission of Local File and Master File
- Filing Country-by-Country Report (CbCR), where applicable
When Is Transfer Pricing Audit Mandatory?
A transfer pricing audit becomes mandatory when:
- International transactions exist with associated enterprises
- Specified domestic transactions exceed statutory thresholds
- Entity is selected for transfer pricing scrutiny
Documents Required for Transfer Pricing Audit
- Details of associated enterprises
- Nature and value of transactions
- Transfer pricing study report
- FAR analysis (Functions, Assets, Risks)
- Benchmarking analysis
- Financial statements
- Agreements and invoices
- Form 3CEB
Role of Form 3CEB in Transfer Pricing Audit
Form 3CEB is a mandatory audit report:
- Certified by a Chartered Accountant
- Filed electronically
- Confirms compliance with transfer pricing provisions
Without Form 3CEB, the income tax return is treated as defective.
Consequences of Non-Compliance
Failure to comply with transfer pricing provisions may result in:
- Adjustment to taxable income
- Additional tax demand
- Penalty up to 2% of transaction value
- Interest and litigation
- Prolonged scrutiny and assessments
Benefits of Proper Transfer Pricing Audit
- Reduced risk of tax disputes
- Strong compliance framework
- Accurate global profit allocation
- Improved credibility with tax authorities
- Smooth assessments and audits
Why Transfer Pricing Is Critical for MNCs
- Cross-border transactions attract close scrutiny
- Regulatory expectations are high
- Documentation standards are strict
- Penalties are significant
Proactive compliance avoids costly disputes.
Why Choose Saving Mantra for Transfer Pricing Audit?
- Expert CA-led transfer pricing audits
- End-to-end documentation support
- Benchmarking & FAR analysis
- Form 3CEB filing assistance
- Representation during assessments
Disclaimer
This blog is intended for informational purposes only and does not constitute legal, tax, or professional advice. Transfer pricing regulations are complex and subject to amendments. Applicability depends on transaction nature, value, and jurisdiction. Saving Mantra recommends consulting a qualified tax or transfer pricing professional before making compliance decisions.