Selection of Foreign Company as a tested party –
practical considerations
Introduction
Transfer pricing regulations adopted by India are based on the
arm's length principle which revolves around the concept that
the price or margin determined in a controlled transaction
involving two Associated Enterprises (AE) should be commensurate
with an uncontrolled transaction between two independent
enterprises operating under similar circumstances. The process of
identification of uncontrolled comparables and consequently, the
arm's length price (ALP), is known as the 'comparability
analysis' and consists of two steps, namely the functional
analysis and the economic analysis.
The functional analysis (also called FAR analysis) involves the
analysis of functions carried out, assets used and risks assumed by
the AE involved in the international transaction. The FAR analysis
helps in characterising the roles of the entities involved in the
transaction under examination,
