Transfer Pricing Documentation for SMEs: Five Mistakes That Invite Scrutiny

Transfer pricing compliance is no longer a large multinational concern. Mid-sized Indian companies with a related-party transaction abroad - a subsidiary, a common promoter entity, or even a single cross-border service arrangement - fall squarely within Section 92 (international transactions between associated enterprises) once the transaction value crosses the prescribed limits. In practice, most first-time non-compliance among SMEs traces back to a small set of repeated mistakes.

1. Treating the Local File as a Year-End Formality

Local File and Master File documentation (mandated once turnover and transaction-value thresholds are crossed) is meant to be contemporaneous - prepared as transactions happen, not reconstructed after the fact for a Form 3CEB filing deadline. Reconstructed documentation is exactly what a transfer pricing officer probes first, since it tends to show benchmarking chosen to fit a conclusion rather than the other way round.

2. Confusing Section 271BA and 271AA Penalty Triggers

These are frequently conflated. Failure to furnish the accountant's report (Form 3CEB) attracts a fixed penalty under Section 271BA, while failure to maintain or furnish the prescribed documentation itself (Local File/Master File) is penalised separately and more heavily under Section 271AA, including a percentage-of-transaction-value penalty in serious cases. SMEs that file Form 3CEB on time but skip the underlying documentation are still exposed.

3. Picking the Wrong Comparables

A common shortcut is reusing last year's comparable set without re-screening for functional changes, mergers, or comparables that have exited the relevant business line. Benchmarking studies need annual refresh, not annual copy-paste.

4. Ignoring the Safe Harbour Rules When They Actually Apply

Many eligible SMEs - particularly in IT-enabled services and low-value-adding intra-group services - never evaluate whether they qualify for Safe Harbour Rules, which remove the transaction from full-scale scrutiny if the declared margin meets the prescribed threshold. Where eligible, this is often simpler and more certain than a full benchmarking exercise.

5. No Documented Rationale for the Method Selected

Choosing between CUP, Resale Price, Cost Plus, TNMM or Profit Split without a documented "most appropriate method" rationale is one of the fastest ways to lose an assessment. The method itself matters less to an assessing officer than evidence that it was chosen deliberately, against the facts of that specific transaction.

Practical Takeaway

Transfer pricing risk for SMEs is rarely about aggressive positions - it is almost always about documentation discipline. Building the Local File as transactions occur, re-benchmarking annually, and evaluating Safe Harbour eligibility before defaulting to a full study closes most of the exposure at a fraction of the cost of defending it later.

The author is a Partner at Agrawal Khandelwal & Associates LLP, Chartered Accountants in Nashik and Sillod, Maharashtra, advising on transfer pricing, international taxation and cross-border structuring.