In Transfer Pricing, the defense mechanism from the Taxpayer’s perspective is an essential element where the Tax Authorities calls for Transfer Pricing Documentation where an Arm’s Length nature of transaction needs to be proven. Such a defense mechanism could be proactive or reactive.
A proactive mechanism includes matters like entering into the ‘Advance Pricing Agreements’ (APA) with the Tax Authorities (Government) for upfront determination of Transfer Pricing for future and ‘Safe Harbour’ regimes where the Taxpayer is expected to maintain minimum profitability as suggested by the Government. It is possible to enter into an Advance Pricing Agreement for the purpose of determination of Transfer Pricing in India
for a period of 9 consecutive years out of which 5 years are forward looking and a roll back provision for past 4 years is also included. A reactive Transfer Pricing defense mechanism includes representation before the Transfer Pricing Authorities including detailed submissions on the Transfer Pricing positions and policies. Further it also includes instigation resolution before the Dispute Resolution Panel, Commissioner (Appeals), Tax tribunals, Facilitation at High courts and Supreme Court.