TP Study Report

Local file is commonly known as TP (transfer pricing) study report. TP study report is the primary documentation required as per OECD action plan 13 to be maintained for 8 assessment years from the end of relevant assessment year.

It may be required to be furnished by the TPO.

The International transaction has be to at the arm's length price computed as per the 5 methods prescribed or any other method, which is the base of why the TP study report is being maintained.In other words, through the TP study report we are substantiating how we reached at the most appropriate method of determining arm's length price.

It is to be maintained only if the international transaction exceeds INR 1 Crore. Still, in case it does not exceeds this threshold, we have to justify our arm's length price.

The TP study report has the following elements:

1. Executive summary
2. Group overview
3. Industry analysis
4. Function, Asset and Risk analysis
5. Evaluation of methods
6. Economic analysis

1. Executive summary

• It is basically the summary of the entire report like to which year the TP study report relates to and which years data has been used to compute arm's length price and which method is used, why other methods are rejected.
• It also includes the conclusion as to whether the transfer price is at arm's length price or adjustments are required.

2. Group Overview

• This part first introduces the entire group I.e, what is it into?
• The operations of the group and that part which relates to the assesee.
• Next, the details of the assessee and the associated enterprise in relation to the name, registered office, products or services,shareholders along with PSR, constitution, country of residence etc.
• The assessee has to detail whether it is the alternate reporting entity required to file CBC'R and whether requiredto file master file being Constituent entity.

3. Industry Analysis

• Industry analysis basically includes the nature and present condition of the sector in which the assessee is doing business for example FMCG, software, manufacturing etc.
• It is basically done to assess the risk faced by the industry, the assets employed by the assesee as compared to the industry it is operating in.
• It also includes the HS classification code for articles, which is internationally accepted, the code of the assesee's product or service.
• The current situation of the industry like margins, growth the development of the sector, SWOT etc.
• The situation of the sector in the country of the associated enterprise also needs to be given.
• The Regulations placed on the industry, the challenges the industry is facing requires mention in the TP study report.

4. Functions, Assets and Risk Analysis

• Functions performed means what function is performed like back office support, manufacturing etc.
• Assets employed by the assessee and the associated enterprise.
• Risk undertaken by the assessee and the associated enterprise.
• Based on the above three factors , we can choose the tested party.

5. Evaluation of methods

• The tested party is the one basically which has the least complex functional analysis. Suppose, one AE is involved in back office function and the other in manufacturing , so,the tested party will be least complex functional party I.e, back office support assessee.
• Better to choose the Indian entity as tested party because of availability of sufficient data.
• After selecting the tested party, the most appropriate method of determining arm's length price is to be selected and the reasons of rejecting other methods, how you selected a particular method needs mention.

6. Economic Analysis

• It involves the search of comparable companies and data set to arrive at the arm's length price.
• It involves a brief description of the sector and the companies selected as the comparables.
• The Profit level indicator appropriate as per the transaction needs to be calculated and the appropriate arm's length price is calculated.
• Adjustments needs to done if the transfer price is not within the range of arm's length price, also the range concept is applied if required as per the prescribed rules.