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24% of Indian TP audits lead to adjustment


Kishore Nair, of TP Week correspondent KPMG, reports that 72% of TNMM cases are selected for audit


With globalisation, cross border inter-company transactions are growing rapidly and are becoming complex. Compliance with the differing requirements of multiple overlapping tax jurisdictions is also complicated and time-consuming task and tax authorities from each country are imposing stricter penalties, new documentation requirements and increased audit activity.

India like any other country does not want to lose its share of revenue from international transactions coming with in the ambit of transfer pricing. India introduced transfer pricing regulations in 2001 and since then has aggressively administered the same.

Transfer pricing law being a new enactment, there has been quite a few subjective matters which have provided the revenue authorities to challenge taxpayer’s methodology. Global experience (India being no different) shows an increase in the number and intensity of audits creating additional cost for multinational companies in the form of taxation adjustments, interest on underpaid taxation, penalties, professional costs, management time, etc.

It would be worthwhile to analyse the statistics of transfer pricing audits for three assessment years that have been completed (AY 2002-03, 2003-04 and 2004-05).

Assessment Year

Number of TP Audits Completed

Number of Adjusted Cases

% of Cases Adjusted

Amount of Adjustments (in million US$)





















It is noteworthy that on an average 24% of the case picked up for transfer pricing audit are subjected to transfer pricing adjustment. This is an alarming number considering the fact that on an average a transfer pricing officer handles 118 cases for the season with in a limited time period (approximately 12 months). This means that the transfer pricing officers do not have adequate time considering the available working days per case and accordingly are not able to spend adequate time in understanding the business and operations of the taxpayer, economic environment in which the taxpayer operates etc.

It is worthwhile to note that Indian transfer pricing regulations were introduced with the objective of protecting its tax base with no specific revenue targets of collections, however, what has been in the past two years is that substantial collections has been made by way of adjustments.

Another set of statistics that’s worth analysing is the methods challenged by the tax authorities.

Method Applied

Number of cases

% of cases

Transactional Net Margin Method



Comparable Uncontrolled Price



Cost Plus Method



Resale Price Method



Profit Split Method






As Transaction Net Margin Method (TNMM equivalent of Comparable Profits Method) has been the method of choice of both the Indian taxpayer as well as the revenue authorities, it is no surprise that around 72% of the cases that were picked up for audit, had used TNMM as the most appropriate method for defending the International transactions. The TNMM has been the preferred method for supporting both goods as well as services.

The primary factors for the TNMM to be more widely applied in India has been due to paucity of publicly available data to support the application of the other methodologies.

The Comparable Uncontrolled Price (CUP) method has been used to support financial transactions and commodities. The Resale Price Method has also been used to defend and support certain distribution functions, but with the growing emphasis by the Indian revenue on net margins and profitability, the same has come under challenge. The other methods namely Profit Split Method and Cost plus Method have been seldom used.

Way forward


The important learning is that taxpayers should lay down well-defined transfer pricing policies and have robust documentation which, inter alia, falls in line with arm’s length principles. The documentation in specific should bring out the business dynamics and should be contemporaneous. The tax authorities, on the other hand, should be sensitive to business dynamics of the taxpayer. Also, sooner rather than later, the need to introduce APAs (advance pricing agreements) in the regulations should be considered. This is the only way by which the disputes can be brought down. Also, given the fact that MAP proceedings are very time consuming with no certainty APA process becomes a necessity.

Considering the number of issues that are arising from the Transfer Pricing audit, it is pertinent for the revenue authorities to come up with measures to ease the pressure of transfer pricing audit procedures. The authorities could look for the measures, such as:

a. Advance pricing agreement (APA)

b. Safe harbour provisions

c. Move to median or inter quartile range

d. CBDT to issue transfer pricing guidelines

It is pertinent for the Indian tax authorities to take relevant measures to ensure the foreign investments and the robust growth in India is not affected due to aggressive positions taken by the revenue.

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