Know the Regulatory Requirements in Both Jurisdictions
- Expanding your business across borders demands more than ambition; it requires clarity on regulatory compliance. Whether you’re entering India from the U.S. or vice versa, one of the first steps to secure financial transparency is understanding transfer pricing norms in both jurisdictions. Transfer pricing refers to the pricing of transactions between associated enterprises across borders, and improper documentation can lead to tax disputes and penalties.
- In India, Sections 92 to 92F of the Income Tax Act govern transfer pricing rules, mandating arm’s length pricing for international transactions. In the U.S., the IRS enforces IRC Section 482, with strict documentation requirements and potential penalties for non-compliance. Aligning with the OECD’s BEPS (Base Erosion and Profit Shifting) framework ensures that your business remains globally compliant.
- This is where bookkeeping outsourcing services add significant value. Expert firms ensure your books are accurately maintained across jurisdictions and provide transfer pricing documentation and analysis in line with Indian and U.S. laws. By integrating these services from day one, your India Entry Strategy becomes compliant, efficient, and audit-ready.
Perform a Functional and Risk Analysis
- A critical step in transfer pricing documentation is performing a Functional, Asset, and Risk (FAR) Analysis. This process involves examining each entity involved in international transactions to identify the functions they perform, the assets they utilize, and the risks they bear. The goal is to ensure that the pricing of related-party transactions aligns with the arm’s length principle as required by Indian tax laws under Section 92 of the Income Tax Act.
- The FAR analysis helps categorize international transactions more clearly—whether they involve the sale of goods, the provision of services, licensing of intellectual property, or financial arrangements. Each category has different benchmarks and compliance requirements under Indian transfer pricing rules.
- To maintain accuracy and consistency, many businesses in India now use bookkeeping outsourcing services. These services help track cross-border transactions in real time, ensuring accurate financial records and easy access to supporting documentation during audits or assessments.
- Here’s an example of how a FAR analysis table may look:
| Entity Name | Functions Performed | Assets Used | Risks Assumed |
| IndiaCo | Distribution, Marketing | Warehouses, Inventory | Market risk, Credit risk |
| ParentCo (US) | R&D, Manufacturing | IP, Manufacturing Equipment | IP risk, Operational risk |
Set Up Real-Time Reporting & Documentation Systems
- Real-time reporting systems are essential for businesses managing cross-border operations, particularly under evolving tax regulations like transfer pricing laws. Automating data collection, pricing updates, and margin tracking helps companies ensure transparency, reduce human error, and maintain consistency across jurisdictions.
- Using intelligent dashboards, businesses can monitor intercompany transactions, profit margins, and compliance indicators instantly. Real-time alerts highlight anomalies such as deviations from arm’s length pricing or unusual cost allocations. This not only supports day-to-day decision-making but also ensures readiness for regulatory scrutiny.
- Maintaining contemporaneous documentation is equally critical. Indian tax authorities and global bodies like the OECD require companies to retain proper transfer pricing documentation at the time of transactions, not retrospectively. This includes Master File, Local File, and Country-by-Country Report (CbCR), as applicable.
- Case Study:
A U.S.-based software company operating a subsidiary in Bengaluru integrated a cloud-based ERP and reporting system to track intercompany software licensing fees. The system auto-flagged deviations from approved pricing bands and generated a full audit trail. During a tax audit by Indian authorities, their contemporaneous documentation met all OECD and Indian TP requirements, helping them avoid significant penalties. - Lesson: Automating real-time reporting and documentation reduces risk, improves compliance, and ensures operational transparency across tax jurisdictions.
Benchmark and Draft Your Policy
Drafting a clear and compliant transfer pricing policy starts with benchmarking—comparing the terms of your controlled transactions with those between unrelated parties. This ensures that your pricing aligns with the arm’s length principle, a key requirement under Indian transfer pricing laws.
You must choose the right transfer pricing method based on your transaction type. For example:
- Use the Transactional Net Margin Method (TNMM) for service transactions or when exact comparables aren’t available.
- Apply the Comparable Uncontrolled Price (CUP) method for goods or financial transactions, such as intercompany loans or product sales, where market rates exist.
KNM assists in sourcing reliable data from local (Prowess, Capitaline) and global (Thomson Reuters, Orbis) databases to perform accurate benchmarking. This helps identify appropriate comparables and margins to justify your pricing to tax authorities.
Once benchmarking is complete, KNM helps draft a robust, auditable policy. This includes detailed documentation of methodology, pricing rationale, and supporting evidence, making it easier to handle audits or scrutiny by the Income Tax Department.
✅ Example: An Indian subsidiary providing IT services to its U.S. parent used TNMM to benchmark margins against 10 similar companies in India, achieving compliance and avoiding penalties with KNM’s support.
Monitor Continuously and Adjust When Needed
- Transfer pricing is not a one-time activity. To stay compliant and defend your pricing strategy, you need to monitor your intercompany transactions regularly. Market conditions, exchange rates, tax laws, and business models evolve, and your transfer pricing policy must reflect those changes.
- Start by conducting periodic reviews of your pricing arrangements. Compare your actual results with your original benchmarking study. If profit margins shift or transaction volumes increase, it may be time to adjust your pricing model.
- Integrating bookkeeping outsourcing services can improve accuracy in financial reporting. These services ensure that your intercompany entries are consistently tracked and reconciled, reducing the risk of discrepancies and errors. Reliable data supports better decision-making and smoother audits.
- Also, maintain audit-ready documentation. Tax authorities expect detailed reports that justify your pricing methods. This includes agreements, comparables, and adjustments made throughout the year. Being proactive reduces the chances of transfer pricing disputes and penalties.
- By combining regular monitoring with expert accounting support, you strengthen your compliance and make your transfer pricing model more resilient. It’s not just about meeting regulatory requirements—it’s about building transparency and operational efficiency across your global operations.
Conclusion
A well-structured transfer pricing policy is critical for businesses operating across borders. It not only helps maintain regulatory compliance with Indian tax authorities but also reduces the risk of audits, disputes, and penalties under the Income Tax Act and OECD guidelines. By clearly defining the pricing of goods, services, and intellectual property between related entities, companies ensure transparency, consistency, and tax efficiency.
For US-headquartered firms entering or operating in India, transfer pricing is a core component of a broader India Entry Strategy. It directly impacts corporate tax liability, profit repatriation, and risk exposure. Poor documentation or mispricing can trigger prolonged litigation with Indian tax authorities.
This is where KNM adds value. With extensive experience in India business setup, compliance outsourcing, and bookkeeping services, KNM helps multinational companies establish robust transfer pricing systems. KNM’s team of chartered accountants and tax experts works closely with clients to develop documentation, conduct benchmarking studies, and manage audits effectively.
Summary:
A solid transfer pricing framework is essential for tax compliance and business sustainability in India. KNM empowers global companies to navigate India’s regulatory complexities with ease, allowing them to focus on growth, not compliance headaches. Connect with KNM to build a risk-free and compliant transfer pricing strategy
