A short orientation on why transfer pricing disputes arise in India, the stages they pass through, and the four types of dispute, with links to the detailed guidance for each.
A transfer pricing dispute arises when the Indian tax authorities disagree with the price at which your company transacted with a related party abroad, and propose an adjustment to your taxable income.
The standard applied is the arm's length price: what independent parties would have charged in comparable circumstances. Where the department concludes your pricing fell short of that, the difference is added to your income.
For the full picture of how these disputes arise, run and get resolved, see our detailed guide to transfer pricing litigation in India.
Margin disputes. The Transfer Pricing Officer accepts the transaction but says your operating margin should have been higher than the comparable set you selected. The most common category.
Rate disputes. A royalty, interest rate, guarantee fee or service charge is said to be off market.
Benefit disputes. The department says no service was actually rendered or no benefit received, and values the transaction at nil. Management fees and intra-group cost allocations attract this most often.
Documentation disputes. The study, the Form 3CEB or the underlying records are held to be inadequate, which then weakens every other position you take.
No dispute yet, and you want to reduce the risk — start with documentation requirements in India and how to build a defensible transfer pricing file
Stage one, the transfer pricing audit. The TPO examines your international transactions and issues an order under his reference. What officers look for is set out in our note on the importance of transfer pricing audits.
Stage two, the draft order and the thirty-day election. Because a TPO variation makes you an eligible assessee, the Assessing Officer must issue a draft order first. You then have thirty days to object to the Dispute Resolution Panel or let the final order come and appeal to the CIT(A). The choice is irreversible and it decides everything that follows. See our guide to the Dispute Resolution Panel in income tax.
Stage three, the Tribunal. The ITAT is the last authority that will examine facts, so the full factual and economic record has to be complete before it decides. The mechanics are in our guide on filing an ITAT appeal.
Stage four, the High Court. Only on a substantial question of law. Where the defect is procedural rather than economic, a writ may be the better instrument, as set out in our note on writ versus appeal in tax litigation.
Transfer pricing disputes turn on documents and economics, not advocacy. Adjustments come down on comparability, on adjustments the TPO refused, and on evidence that a service was genuinely delivered.
Which means the work that decides the outcome happens years earlier, in the study and the defence file. Start with transfer pricing study report applicability, documentation requirements in India, the most common errors in TP study reports, and how to build a defensible transfer pricing file.
If the same adjustment recurs annually, litigating it each year is the expensive option. Safe harbour offers certainty at a defined margin, covered in our guide to safe harbour rules in India. An advance pricing agreement buys forward certainty and can cover rollback years.
DSRV and Co LLP prepares transfer pricing studies and defence files, and represents clients before the TPO, the DRP and the ITAT as part of our tax litigation practice.
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