What Is Transfer Pricing Assessment?
A Transfer Pricing Assessment is a scrutiny process conducted by the Income Tax Department to examine whether international and specified domestic transactions between related parties are conducted at an Arm’s Length Price (ALP) as required under the Income Tax Act, 1961.
During this assessment, the tax authorities evaluate transfer pricing documentation, benchmarking analysis, and transaction pricing to ensure that profits are not shifted out of India through related-party arrangements.
When Does Transfer Pricing Assessment Arise?
A transfer pricing assessment may arise when:
- An entity enters into international transactions with associated enterprises
- Specified domestic transactions exceed prescribed thresholds
- Income tax return is selected for transfer pricing scrutiny
- Transfer Pricing Officer (TPO) is appointed by the Assessing Officer (AO)
Who Conducts Transfer Pricing Assessment?
The assessment is carried out by:
- Assessing Officer (AO) – Initiates assessment
- Transfer Pricing Officer (TPO) – Examines ALP and pricing methodology
The TPO issues a separate order determining whether pricing adjustments are required.
What Transactions Are Examined?
Transfer pricing assessment covers:
- Sale or purchase of goods
- Provision or receipt of services
- Royalty and license fee payments
- Loans, guarantees, and financial transactions
- Cost-sharing and management fee arrangements
- Use or transfer of intellectual property
Objective of Transfer Pricing Assessment
The key objectives are to:
- Verify compliance with Arm’s Length Principle
- Ensure fair pricing between related parties
- Prevent base erosion and profit shifting
- Determine correct taxable income in India
Documents Reviewed During Transfer Pricing Assessment
- Transfer pricing study report
- FAR analysis (Functions, Assets, Risks)
- Benchmarking and comparability analysis
- Agreements with associated enterprises
- Invoices and supporting documents
- Financial statements
- Form 3CEB audit report
Step-by-Step Process of Transfer Pricing Assessment
Step 1: Selection for Scrutiny
- Case selected for transfer pricing scrutiny
- Notice issued under Income Tax Act
Step 2: Reference to TPO
- AO refers the case to the Transfer Pricing Officer
- TPO initiates independent examination
Step 3: Issue of Notices
- TPO issues notices seeking:
- TP documentation
- Transaction details
- Benchmarking justification
Step 4: Submission of Documentation
- Taxpayer submits:
- TP study report
- Agreements and invoices
- Explanatory notes
Step 5: Comparability & ALP Analysis
- TPO examines:
- Pricing method used
- Comparable companies
- Margin or price adjustments
Step 6: Draft TP Order
- TPO passes order proposing:
- No adjustment, or
- Transfer pricing adjustment
Step 7: Assessment Order by AO
- AO incorporates TP order
- Final assessment order issued
- Tax demand raised if adjustment made
Consequences of Transfer Pricing Adjustment
If adjustment is made:
- Increase in taxable income
- Additional tax liability
- Interest and penalties
- Potential litigation and appeals
Remedies Against Transfer Pricing Adjustment
Taxpayer may:
- File objections before Dispute Resolution Panel (DRP)
- File appeal before Commissioner (Appeals)
- Seek rectification where applicable
Importance of Strong Transfer Pricing Documentation
Proper documentation:
- Reduces adjustment risk
- Strengthens defense during scrutiny
- Speeds up assessment proceedings
- Minimizes penalties and disputes
Why Choose Saving Mantra for Transfer Pricing Assessment Support?
- Expert handling of TP scrutiny cases
- Robust documentation and benchmarking
- Representation before TPO and AO
- Adjustment mitigation strategies
- End-to-end compliance and litigation support
Disclaimer
This blog is for informational purposes only and does not constitute legal, tax, or professional advice. Transfer pricing assessment procedures are complex and subject to frequent amendments. Applicability depends on transaction nature, value, and jurisdiction. Saving Mantra recommends consulting a qualified transfer pricing or tax professional before responding to assessment notices.