What a transfer pricing advisory engagement should cover

A transfer pricing consulting engagement is worth comparing only once its letter names what the work covers and the standard the file will be judged against. Five terms decide both: the tested party, the transaction set, the years, the database release and the acceptance range.

This note is for the finance team holding a proposal and a draft engagement letter, with a second quote to set beside them. It works through what each of those terms does to the work, who owns the facts the study rests on, the Rule 10D evidence an adviser asks for in the first week, and the three events that end a scope as written. It closes with four questions to put to two firms quoting the same deliverable. If a draft scope has reached your desk, you can contact us for a second reading of it.

• The quotes become comparable once both name the same tested party, the same years, a dated database release and a stated tolerance band.

• Rule 10D(1) puts the functions, assets and risks write-up in the client's own file at clause (e), so those facts come from your operations and finance teams.

• The rule's clauses (a) to (m) read as a document list, and that list is what an adviser's first-week request looks like.

• Section 92C(1) requires the most appropriate method for the transaction, and the tolerance is a notified percentage, capped at three percent in the section text.

• A new transaction, a change of business model, and an assessment or a reference to the Transfer Pricing Officer each end the scope as written.

The five terms the engagement letter has to fix

A transfer pricing advisory scope should name five terms before it names a fee: the tested party, the transaction set, the years covered, the benchmarking database and its version, and the acceptance range. Each one changes the work, so two letters that leave any of them open cannot be compared on price.

Section 92C(1) settles the first two terms. The arm's length price is fixed by the most appropriate method, chosen with regard to the nature of the transaction, so the tested party and the method belong in the letter (section 92C). Where a letter names neither, one firm may test the Indian entity and the other the foreign parent, and the comparables sets are then different.

The acceptance range is the term buyers leave to the adviser more often than any other. Section 92C allows the price to sit within a percentage the Central Government notifies, capped at three percent in the section text, so the band for a given year comes from that year's notification (section 92C).

Where two quotes still differ once those terms are fixed, the difference sits in volume and comparables work; why two study cost quotes rarely match sets out the drivers. Most of the hours go on the comparables search, and comparable company benchmarking describes what that work involves.

Who supplies the FAR facts, and who signs on them

Clause (e) of Rule 10D(1) asks the assessee to describe the functions each entity performs, the risks it assumes and the assets it employs, on both sides of the transaction (Rule 10D, Income-tax Rules 1962). A firm's method does not produce that description. Your operations head knows how the plant serves the group, your finance team holds the segment numbers, and the executives who negotiated the agreement know what was promised.

The letter should say who from the client reviews the write-up before it is finalised, who signs it off, and what happens when a fact changes afterwards: a tolling arrangement added in October, a secondment that shifts where risk sits, a price renegotiated mid-year. The report carries the adviser's name, and the facts stay yours.

In practice that means a session with operations and finance for each tested transaction, recorded and sent back for confirmation, with the write-up closed only after your sign-off. Name the attendee in the letter, and the schedule has something to hold.

Section 92D carries the weight here. Where the file is not kept as that section requires, section 92C allows the Assessing Officer to determine the arm's length price on the material he holds (section 92C). A file built on assumptions nobody on your side confirmed is judged on those assumptions, and the analysis behind it never reaches the record.

What Rule 10D asks for, and why it becomes a week-one request list

Rule 10D(1) puts the duty to keep and maintain the listed information and documents on every person who has entered into an international transaction or a specified domestic transaction, and the clauses that follow run from (a) to (m) (Rule 10D). Read as a list of documents, they cover the ownership structure and group profile, the intercompany agreements and their terms, the financial and segment data, the functions, assets and risks write-ups, the uncontrolled transactions and comparables analysis, and the assumptions and adjustments behind the price.

The final clause stays open. Clause (m) reaches information, data or documents, including material relating to the associated enterprise, that may be relevant to determining the arm's length price, which leaves the list without a fixed edge (Rule 10D). A first-week request from a careful adviser is that rule plus whatever the year's transactions add.

A well-drawn letter turns that rule into a first-week request:

• the shareholding chart and the group organisation chart, with the Indian entity's place in both;

• the intercompany agreements in force during the year, including amendments;

• audited financials and the segment data the tested margin is drawn from;

• the prior year's study, the Form 3CEB filed, and any correspondence with the department;

• the transaction list, with counterparties, values and currencies.

If you want each clause taken on its own, what Rule 10D requires sets it out item by item. At proposal stage one thing matters more: the list is finite, it comes from your own records, and a firm that cannot describe it before signing has not read your year closely.

When the engagement has to be re-scoped

An advisory file dates faster than the relationship it sits in, and a handful of changes end the scope as written.

The first is a new flow: a service line charged to the parent, a second entity pulled into a cost-allocation arrangement, a guarantee that was absent at signing. The second is a change to the business model or to the tested party, after which last year's comparables describe a business the group no longer runs. The third is an assessment, or a reference to the Transfer Pricing Officer, which turns an advisory file into an evidence file with dates attached.

The letter should carry all three as clauses: a variation clause that prices added transactions, a re-test date for the comparables, and a named deliverable if a notice arrives, agreed while the calendar is still empty. The filing calendar beside this is covered in the last Form 3CEB season and Form 48, which sets out the move to Form 48 for tax year 2026-27.

Four questions to put to two firms quoting the same scope

Put these to both firms in writing, and compare the answers before the totals.

1. Who supplies the functions, assets and risks facts, and who on our side signs them off before the study is finalised?

2. Which years does the price cover, and which database release will the comparables come from?

3. What acceptance range will the file be tested against, and which notification sets that range for the year?

4. What happens to the fee if a transaction or a counterparty is added after the letter is signed?

Each answer can be checked against the letter, and two firms quoting the same deliverable rarely answer them alike. Where the answers diverge, the letter has to say which version you bought.

Our transfer pricing strategy support work begins with exactly this comparison, and if you would like a second reading of a scope you have been given, contact us with both proposals in hand.