Executive Summary
Transfer pricing obligations arrived at a Kerala manufacturer without any change to how it traded. The promoters had incorporated a trading company in the UAE to serve Gulf customers. From that moment the sales the Indian company had always made to those customers became international transactions between associated enterprises. Nobody in the business had noticed. The UAE company was seen as a sales arm rather than as a related party with tax consequences in India. JPKAD & Associates was engaged after the statutory auditor raised a query during the year end audit. The question was simple and the answer was not on file. Work covered four things. Establishing that an associated enterprise relationship existed, identifying every international transaction, selecting and applying a method to test the arm’s length price, and preparing documentation with the certification in Form 3CEB. The company met its filing obligation for the year and now runs a documentation cycle that begins in the first quarter rather than in the last week before a due date.
- A group company abroad can turn routine export sales into international transactions overnight.
- Sections 92 to 92F apply from the year the associated enterprise relationship arises, not from a turnover threshold.
- Form 3CEB is a certification by an accountant and is due before the return of income.
- Documentation under Rule 10D has to exist contemporaneously, not be assembled during an audit.
- Method selection is a reasoned choice on the facts, and the reasoning matters as much as the method.
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Client Overview
The client manufactures engineered components at a plant in Kerala, supplying industrial customers in India and exporting to the Gulf. It is a closely held private limited company owned by a family and two operating directors. Exports had been direct for several years. Customers in the Gulf placed orders with the Indian company and were invoiced by it. The promoters then incorporated a company in the UAE, intending to hold stock closer to customers, shorten delivery times and bid for contracts that required a local presence — a step also worth reading alongside our corporate tax services guide for UAE investors. Ownership of the UAE company sits with the same family. That common control is what creates the associated enterprise relationship, and it is the fact the business had not connected to Indian tax law. The finance function is a controller and two accounts staff. Statutory work is handled in house with support from professional advisers at year end, which is ordinary for a company of this size.
Business Challenges
The difficulty was not that the company had done anything improper. It was that a set of obligations had attached to ordinary trading, and none of the records had been created with those obligations in mind. Four problems had to be solved before any filing could be made, and the calendar was already short.
Why did transfer pricing apply when nothing about the sales had changed?
Because the rules attach to the relationship between the parties, not to the nature of the trade. Section 92A treats enterprises as associated where one participates in the control, capital or management of the other, directly or indirectly. Common ownership by the same family placed the Indian company and the UAE company within that definition from the date the UAE entity was incorporated. Once that relationship exists, Section 92B treats transactions between them as international transactions. Sale of goods is the obvious one, but the definition is wide. The company had assumed a threshold applied, as it does for tax audit. There is no turnover threshold for the primary obligation, which is the point most closely held groups get wrong.
Which transactions had been missed?
The goods sales were identified immediately. Three further transactions surfaced only when the group structure was mapped properly. The Indian company had allowed the UAE entity to use its brand name on marketing material without any written arrangement or consideration. It had also extended informal credit, letting receivables run well beyond the terms offered to unrelated customers in the same market. Finally, an Indian employee had been working on Gulf accounts for part of the year with no recharge. Each of these is capable of being an international transaction and each had to be examined.
Why was the documentation position difficult?
Because Rule 10D contemplates documentation prepared contemporaneously, describing the group, the transactions, the functions performed, the assets used and the risks assumed. Very little of that existed in writing. The commercial logic was real and well understood inside the business, and it had never been written down. Functions, assets and risks analysis is not a formality. It is the basis on which a method is selected and comparables are accepted, and it cannot be reconstructed convincingly after a dispute begins. Reconstructing it late in the year, from memory and from correspondence, was possible but uncomfortable. Doing it prospectively is considerably cheaper.
What was at stake if the position was left unaddressed?
Separate penalty provisions attach to failure to keep the prescribed documentation, to failure to furnish the report under Section 92E, and to understatement of income. Those exposures are independent of each other, so a company can satisfy one requirement and remain exposed on the others. There is also the practical consequence. A transfer pricing adjustment in one year invites scrutiny of earlier and later years on the same transactions. The company wanted the first year handled properly precisely so that later years would follow a settled pattern rather than a defensive one. Unsure whether a group company creates an associated enterprise? Read more about our taxation work.
Business Objectives
The instruction was to reach a compliant and defensible position for the year in question, and to leave the company able to run the cycle itself in future years.
What did the company need first?
Certainty about whether the obligation applied at all. The directors wanted that question answered plainly before any work was commissioned. A complete list of international transactions, because a report that omits a transaction is a weaker document than one that discloses and explains it. Documentation that would stand up if examined, prepared on the facts rather than assembled to support a conclusion already reached. And a filing made within time, since the report under Section 92E precedes the return of income and a missed date creates its own exposure.
Why was the pricing policy addressed alongside the filing?
Because a report certifies what happened. If the underlying pricing is not defensible, timely filing does not cure the position. The informal credit arrangement was the clearest example. Terms extended to a related party well beyond market practice invite adjustment. Fixing the policy prospectively was cheaper than defending it retrospectively, and it made the following year straightforward. The directors also wanted the UAE entity to operate on terms that would survive scrutiny in its own jurisdiction, which pointed the same way — a governance question that sits close to company law matters and compliances on the Indian side.
What defined success for this engagement?
A complete and accurate report furnished within the statutory time, with documentation supporting each disclosed transaction. A written pricing policy covering goods, brand use, credit terms and personnel recharges, applied prospectively from a stated date. A documentation calendar starting in the first quarter, so the following year would not repeat the year end scramble. And the controller able to maintain the file himself, with professional involvement at method review and certification rather than throughout. Success also meant no surprises in the following year, since a first year handled defensively tends to set the pattern for every year after it. Want the first year handled so later years follow a pattern? Explore our approach through our contact page.
Solution Strategy
Work moved in the order the statute does. Establish the relationship, identify the transactions, analyse functions and risks, then select a method and test the price. Documentation was drafted alongside rather than at the end. Nothing was assumed from the group structure chart. Each relationship was checked against Section 92A rather than accepted as obvious.
How was the associated enterprise relationship established?
By tracing shareholding and control across both entities, using share registers, incorporation documents and board composition rather than the informal understanding inside the business. Section 92A sets out participation in management, control or capital, and includes deemed situations that catch arrangements without direct shareholding. Two of those deemed situations were checked specifically, because family groups often hold interests through individuals rather than through companies. The conclusion was recorded in writing with the underlying documents attached, which is the first section of any transfer pricing file and the one most often left thin.
How were all international transactions identified?
Through a transaction mapping exercise rather than a review of the sales ledger. The ledger shows goods and nothing else. Interviews with the controller, the sales head and one of the directors surfaced the brand use, the credit accommodation and the personnel time. Bank statements and intercompany balances were reviewed for movements that did not correspond to invoices, which is where informal funding shows up. Each identified item was then tested against Section 92B, and the reasoning for including or excluding it was written down rather than decided informally.
How was the functions, assets and risks analysis built?
By describing what each entity actually does. The Indian company manufactures, holds the technical capability and carries production and warranty risk. The UAE entity holds stock, deals with customers locally and carries inventory and local credit risk, with limited capability of its own. That characterisation matters because it points toward which party is the tested party, and toward which method fits the facts. The analysis was reviewed with the directors before any method was chosen, so that the description matched the business rather than the desired conclusion.
How was the method selected and applied?
By working through the prescribed methods against the facts rather than starting from the one most commonly used. Comparable uncontrolled price was considered first, since the company had genuinely sold similar goods to unrelated customers in the same market. Product and volume differences limited how far those internal comparisons could be relied on, so a net margin approach was applied with the UAE entity as the tested party. Both the choice and the rejection of the alternatives were documented. A method chosen without recorded reasoning is difficult to defend later.
How were the non goods transactions priced?
Brand use was addressed by putting a written arrangement in place prospectively and disclosing the earlier position as it stood. Credit terms were reset to the terms offered to unrelated customers in the same market, which gave a straightforward internal comparison. Personnel time was recharged on a cost basis with an appropriate mark up, supported by time records introduced for the purpose. Each of these is small in isolation. Left undisclosed they are exactly the items that turn a routine review into a longer examination. Have intercompany balances nobody has documented? Read more about our corporate finance work.
Records and Tools Used
This was a records exercise before it was an analytical one. Most of what the file needed already existed somewhere in the business and had never been brought together.
Which records supported the analysis?
Sales invoices to both related and unrelated customers, with terms, volumes and product specifications, which enabled internal comparison. Purchase and cost records for the manufacturing operation, needed for any cost based testing and for the personnel recharge. Intercompany ledgers and bank statements, reconciled, which is where the informal credit accommodation became visible. Incorporation and shareholding documents for both entities, along with board minutes, supporting the associated enterprise conclusion. Correspondence with Gulf customers was reviewed as well, since it evidenced who negotiated terms and who carried the customer relationship in practice.
How were comparables researched?
Through a commercial database of company financials, applying selection criteria that were recorded and applied consistently. Screening steps were documented in order, including the filters applied and the number of companies rejected at each step. Rejections were reasoned rather than mechanical. A comparable excluded without an explanation weakens the set that remains. The accepted set and the full search record were retained, because a search that cannot be reproduced is of limited use if it is questioned. The search was run once and then repeated with tightened criteria, and both runs were retained so the effect of each filter can be shown.
How is the documentation file organised?
In the order of Rule 10D, so that each prescribed item has a section rather than being scattered across an unstructured report. Group and ownership structure first, then business description, then the transaction list, then functions, assets and risks. Method selection, comparability analysis and the benchmarking result follow, with the search record as an annexure. Supporting agreements sit at the back. The controller maintains an index so that any item can be produced without reassembling the file. The file is stored in one place rather than across email and personal drives, which is the difference between producing an item in a day and in a fortnight.
Implementation Process
The engagement ran across roughly ten weeks, compressed by the fact that it started after the year had closed. Doing the same work during the year would have taken less effort and produced a stronger file. The first fortnight established whether the obligation applied at all, which the directors had asked to settle before anything else.
How was the applicability question settled?
By examining ownership documents for both entities against Section 92A and recording the conclusion with reasons. The answer was clear once the documents were laid out, though it had not been obvious to the business from the informal description of the UAE company as a sales office. That distinction mattered. A branch or liaison office of the same company raises different questions from a separately incorporated related party. The written conclusion was given to the directors before further work was commissioned, so the scope decision was theirs on the facts.
How was the transaction mapping conducted?
Through structured interviews with the controller, the sales head and one director, using a checklist of transaction types rather than an open question. Open questions produce the goods sales and nothing else. Asking specifically about brand use, guarantees, loans, credit terms and personnel produces the rest. Findings were reconciled against intercompany balances and bank movements, which confirmed the credit accommodation and surfaced its scale. The final transaction list was signed off by a director, since the report discloses those transactions and the responsibility for completeness rests with the company.
How was the benchmarking work reviewed?
The search strategy was agreed before it was run, so that criteria were set on the facts rather than adjusted toward a preferred outcome. Results were reviewed against the functions and risks description, and two accepted comparables were removed on a second reading because their activity profile did not match. The margin analysis was tested for sensitivity to those removals, which is a question that gets asked in any examination. Everything was recorded contemporaneously, including the decisions that were later revisited, because an audit trail that shows judgement is stronger than one that shows none.
How was the filing completed?
The report in Form 3CEB was prepared and certified, disclosing each identified international transaction with the method applied. It was furnished within the time allowed under Section 92E, ahead of the return of income, and the acknowledgement was retained on file. The documentation file was completed and indexed at the same time rather than left to be assembled if a query arrived. The directors received a short written summary of the position, the disclosures made and the items addressed prospectively. Facing a first transfer pricing year with the due date approaching? Explore how we can help through our contact page.
Business Results
Results are described here in direction of change rather than in figures. Tax outcomes depend on the documentation, on the facts and on the view taken by the assessing authority, and figures would suggest a certainty that does not exist. What follows is what the company reported after the filing was completed.
What changed about the compliance position?
The report was furnished within time with each identified international transaction disclosed, including the three that had not been recognised as transactions at all. Documentation exists in the form the rules contemplate, indexed so that any prescribed item can be produced on request. The associated enterprise conclusion is recorded with its supporting documents, which removes the first question any examination opens with. Exposure under the separate penalty provisions was addressed by satisfying each requirement rather than assuming that one covered the others.
What changed about how the group trades?
Credit terms to the UAE entity now match the terms offered to unrelated customers in the same market, which gives a clean internal comparison. Brand use is governed by a written arrangement rather than by an informal understanding between family members. Personnel time on Gulf accounts is recorded and recharged, which also gave the business a clearer view of the true cost of serving that market. None of these changed the commercial logic of the group. They changed whether that logic could be evidenced.
What changed inside the finance function?
The documentation cycle now begins in the first quarter, with the transaction list reviewed as part of the quarterly close. The controller maintains the file through the year, so year end work is review and certification rather than reconstruction. Intercompany balances are reconciled monthly, which is how any new informal arrangement will now be caught early. A short checklist covers what to do when a new group entity is formed, which is the event that created the whole exercise. The controller also now sees the transfer pricing file as part of the statutory calendar rather than as a separate exercise handled by somebody else.
What changed for the directors?
They understand that forming an entity abroad has Indian tax consequences from the date of incorporation, not from a turnover level. Group structure changes are now discussed with advisers before they happen rather than after the statutory auditor raises a query. The board has a written pricing policy it can point to, which is useful in the UAE jurisdiction as well as in India. Confidence about the position replaced an uneasy awareness that something had probably been missed. They also brief their UAE counterparts on the Indian position, since a group policy that is applied on one side only satisfies neither jurisdiction. Want your intercompany position evidenced rather than assumed? Explore our advisory work through our contact page.
Lessons Learned
Nothing here required an unusual reading of the law. It required somebody to connect a commercial decision taken in one country to a compliance obligation in another.
What surprised the company most?
That no turnover threshold applies to the primary obligation. The directors had assumed transfer pricing was a large company matter. That three of the four international transactions were not transactions in the accounting sense at all, and would never have surfaced from the ledger. That the informal credit accommodation, which felt like ordinary family business practice, was the item carrying the clearest exposure. That the functions and risks description, which reads like narrative, is what determines the method and therefore the outcome.
What worked better than expected?
The checklist based interview. Asking specifically about brand use, guarantees and personnel produced three transactions an open question did not. Settling applicability in writing before commissioning further work. It gave the directors a decision point and it framed everything afterwards. Documenting rejected methods and rejected comparables. It felt like extra work and it is the part of the file that answers the hardest questions. Resetting credit terms prospectively. A clean internal comparison is worth more than a well argued external benchmark.
What would be done earlier next time?
The applicability assessment would happen when the foreign entity is incorporated, not when the auditor asks a question a year later. The functions and risks description would be written while the arrangement is being designed, when the commercial reasoning is fresh. Intercompany balances would be reconciled from the first month, since informal funding is easiest to correct before it accumulates. Time records for staff working on group accounts would start on day one rather than being introduced to support a recharge.
What should other Kerala groups check?
Check whether any entity abroad shares ownership or control with the Indian company, however informally it is described internally, and review the group’s position against our FEMA compliance checklist at the same time. Check for transactions that never touch the sales ledger, including brand use, guarantees, loans, credit accommodation and shared staff. Confirm that documentation exists in the form the rules prescribe, rather than a report prepared at year end without an underlying file. Note when the report under Section 92E falls due, since it precedes the return of income and the two dates are often confused.
Frequently Asked Questions
1. When does transfer pricing apply to an Indian company? It applies where the company enters into an international transaction with an associated enterprise. Section 92A sets out when enterprises are associated, based on participation in management, control or capital, and includes deemed situations. There is no turnover threshold for the primary obligation, which is what closely held groups most often misunderstand when they form a company abroad. 2. Does forming a company overseas automatically create transfer pricing obligations? Where the overseas company is under common ownership or control with the Indian company, and the two transact with each other, then yes. The obligation attaches from the relationship rather than from the size of the business. A branch or liaison office of the same company raises different questions, which is why the legal form of the overseas presence matters. 3. What is Form 3CEB and when is it due? It is the report from an accountant required under Section 92E, disclosing the international transactions entered into during the year and the method applied to each. It is furnished before the due date for the return of income. Because the two dates are different, companies sometimes plan for the return date and miss the report date. 4. What documentation is required and when must it be prepared? Rule 10D prescribes the items, including group and ownership structure, business description, the transactions, the functions performed, assets used and risks assumed, the method selected and the comparability analysis. The rule contemplates documentation prepared contemporaneously. Assembling it after a query arrives is possible but it is a materially weaker position. 5. Which transactions are commonly missed? Anything that does not appear in the sales ledger. Use of a brand or trade name without a written arrangement, informal credit extended well beyond market terms, loans and guarantees, and staff time spent on group accounts without a recharge. Each of these can be an international transaction, and each is easiest to identify through a structured interview rather than a ledger review. 6. How is the arm’s length price determined? Using one of the prescribed methods, being comparable uncontrolled price, resale price, cost plus, profit split, transactional net margin, or such other method as prescribed. The choice should follow from the functions and risks analysis rather than from habit, and the reasoning for selecting one method and rejecting the others belongs in the documentation file. 7. Can a company use its own sales to unrelated customers as comparables? Where genuinely comparable, an internal comparison is often the strongest evidence available, because product, market and period are naturally aligned. Differences in volume, specification or contractual terms limit how far it can be relied on. Where those differences are material, a net margin approach with an external comparable set may fit the facts better. 8. What are the consequences of not complying? Separate penalty provisions attach to failure to keep the prescribed documentation, failure to furnish the report, and understatement of income. Because they are independent, satisfying one requirement does not protect against the others. There is also a practical consequence, since an adjustment in one year tends to invite examination of earlier and later years on the same transactions. 9. Do master file and country by country reporting apply to smaller groups? Those obligations under Section 286 and the related rules apply only above prescribed thresholds, which most closely held Indian groups will not reach. The primary obligations under Sections 92 to 92F, including documentation and the accountant’s report, apply regardless of size wherever an international transaction with an associated enterprise exists. 10. How long does a first year transfer pricing exercise take? This one ran about ten weeks and was compressed because it began after the year had closed. Applicability assessment and transaction mapping take days. Functions and risks analysis, benchmarking and documentation take considerably longer. Running the same work during the year rather than after it costs less effort and produces a stronger file.
Conclusion
Transfer pricing reached this Kerala manufacturer because the promoters incorporated a company in the UAE, not because anything about the trade changed. That single fact converted routine export sales into international transactions between associated enterprises, and it brought documentation and certification obligations that no turnover threshold protects a company from. Three of the four transactions eventually disclosed never appeared in the sales ledger at all. Brand use without an arrangement, credit extended far beyond market terms, and staff time never recharged are exactly the items a ledger review will not surface and a structured interview will. The work took about ten weeks because it started after year end. Done during the year, alongside a quarterly close, it is a fraction of that effort and it produces documentation prepared when the commercial reasoning is fresh rather than reconstructed from memory. If your group has formed an entity abroad in the last two years, the question worth answering this week is whether an associated enterprise relationship exists and what has passed between the two companies since. JPKAD & Associates advises closely held groups on cross border tax and compliance, and you can read more through the contact page. See also our case study on corporate tax consultants supporting UAE business expansion. This case study is published for general information only. Client identity and commercially sensitive details have been withheld. Outcomes are described qualitatively, without figures, because tax positions depend on facts, documentation and the view taken by the assessing authority. Nothing here is tax or legal advice on any specific matter.