Introduction
As globalization continues to reshape the business landscape, international transactions have surged, with companies increasingly engaging in cross-border trade and investment. In this interconnected world, multinational corporations (MNCs) are conducting business activities across various jurisdictions, often within their own corporate groups. Amidst this growing trend, transfer pricing has gained paramount importance.  Transfer pricing (“TP”) refers to the pricing of goods, services, intangible assets etc transferred between affiliated entities within a corporate group, particularly when these entities operate in different tax jurisdictions.

The Finance Act of 2001 introduced transfer pricing regulations in India, outlined in sections 92A to 92F of the Indian Income Tax Act, 1961.  According to Section 92D of the Act, entities involved in international transactions must retain and manage the specified documentation substantiating the transfer pricing of each transaction. Rule 10D of the Regulations outlines the details and records to be upheld to comply with the Transfer Pricing Regulations.

What is a TP Intercompany Agreement?

Amongst the specified list of documents, agreements and contracts upheld by associated enterprises in relation to international transactions hold significant importance. These agreements are popularly called as “Intercompany Transfer Pricing Agreement” or in short “TP Agreement”. A TP Agreement is a legal contractual arrangement between related entities within a multinational group (group) that outlines the terms and conditions under which they transact with each other, especially in the context of intercompany transactions. They demonstrate the transactions between related entities adhering to the transfer pricing regulations of various jurisdictions.

Key components of TP Agreements:

The components/clauses used in the TP agreement shall be subject to the nature of the agreement and the parties involved. The TP agreement is usually made with certain generic clauses that define the general terms involved in an agreement and the specific clauses tailor made and agreed upon by the parties of the agreement depending upon the substance of the transaction and the terms and conditions laid out therein. Given below is a non-exhaustive list of a few key clauses defined in the TP agreement:

• Preamble/ Identification of Parties: This section provides the details of the parties involved in transfer pricing arrangement, including their legal names & addresses.
• Definitions & Interpretations: This section provides definitions for key terms used throughout the agreement. Any interpretations of sections, schedules, recitals, and clauses are all based on the definitions outlined within this agreement.
• Effective date: It encompasses the commencement date, marking when the agreement takes effect.
• Term: This defines the term of the agreement indicating when the agreement concludes. Some agreements may be open-ended, lacking a specific termination date.
• Purpose/Objective: It contains the purpose or objective of the agreement, such as collaboration on projects, sharing of resources, or transfer pricing arrangements.
  
  
• Scope of Agreement: It gives the details of the specific activities, assets or services covered by the agreement.  In short, it defines the character of the transaction which is undertaken.
• Compensation & payment clause: This clause mentions about the payment terms, basis, cycle, offsets if any.
• Limitation of liability: This clause in the agreement defines the bifurcation of liability on the side of each party in the case where damages, liability or costs are incurred by any of them as a result of breach, negligence or wilful default.
• Intellectual property ownership: This section addresses ownership and usage rights of any intellectual property developed or utilized during the course of the agreement.
• Confidentiality nature: This specifies any confidentiality or non-disclosure obligations to protect sensitive information shared between the parties
• Dispute Resolution Procedures: This defines procedures for resolving disputes related to transfer pricing issues, including mechanisms for arbitration or negotiation.

Warranties, Insurance: Warranties section outlines the parties’ assurances not to engage in any agreements that could potentially contradict the terms of this agreement. Insurance section outlines the insurance policies obtained by the parties concerning their respective obligations under this agreement.

Some other clauses that may be used in the agreement are severability, governing law, jurisdiction, taxes, force majeure, notices, waiver, and amendment and so on. Further to the clauses, annexures/ schedules to be referred thereupon shall also form part of the TP agreement.

Significance
The Transfer Pricing Intercompany Agreement holds significant importance for both parties involved in a business relationship. These agreements are important as it establishes the foundation for a successful business relationship, providing clarity, consistency, risk management, legal protection and professionalism. The major value benefits of maintaining TP agreements are as follows:

• Ensures Arm’s Length Pricing: A TP agreement outlines the terms and conditions for transactions between affiliated companies within the group. This helps ensure the prices for goods, services, or intangibles transferred are set at “arm’s length,”
• Supports Tax Compliance: Tax authorities around the world have transfer pricing regulations to prevent MNCs from shifting profits to low-tax jurisdictions. A well-drafted TP agreement demonstrates that the MNC is complying with these regulations by conducting transactions at arm’s length. This reduces the risk of tax adjustments by authorities.
• Aids in assessments:  During assessments, these agreements are summoned by the respective regulatory authorities to support the validity and pricing of transactions between related parties. It aids in scrutinizing the facts presented to revenue and appellate authorities.
• Helps in TP Documentation: It serves as an important reference in finalising TP documentation. It forms the basis for preparation of FAR (Functions, Assets & Risk) Analysis.
• Assists in Benchmarking Analysis: It is important to understand the nature/characterisation of transaction to select the comparable entities to perform benchmarking analysis. TP agreement is the first step reference for it.
• Adhering the legal rules: These agreements help in conducting related party transactions while adhering to legal mandates. It ensures compliance with legal regulations when executing related party transactions.
• Encourages Transparency: These agreements outline the expectations of both parties in writing which helps protect against potential risks.
• Speed up the future process by minimising the disputes: These agreements can speed up the ratification of future agreements by defining clear expectations and incorporating provisions for dispute resolution.

What we offer?

Don’t let complex transfer pricing agreements become a burden. We understand the challenges businesses face in complying with international tax regulations. BCL India team of experienced transfer pricing specialists can help by providing a range of services ranging from compliance, planning, advisory, TP Study, benchmarking analysis, BEPS compliance, litigation, representation, drafting agreements, etc. We offer our expertise in drafting a wide range of TP agreements for transactions in the nature of royalty, research & development, manufacturing & sale, master services, cost allocation amongst group entities, engineering & consultancy, software development, corporate guarantee, market support services, business support services, etc. Our  comprehensive Transfer Pricing Intercompany Agreement drafting services ensure your agreements are:

• Drafted according to the latest guidelines and best practices.
• Tailored to your specific business model and transactions.
• Supported by thorough analyses and documentation.

  By working with BCL India, you can:

• Minimize the risk of tax audits and disputes.
• Avoid costly adjustments and penalties.
• Gain peace of mind knowing your transfer pricing practices are compliant.

Contact rakesh@bclindia.in & heena.jain@bclindia.in from our TP department today for a consultation and learn how our expertise can help you navigate the complexities of transfer pricing effectively.