Tag Archives: Statutory rules and regulations

Transfer Pricing

Domestic Transfer Pricing

Introduction

domestic

Applicability of Transfer Pricing (“TP”) provisions was earlier limited to International Transactions only. With effect from April 1, 2013, the scope of Transfer Pricing provisions extended to “Specified Domestic Transactions (“SDT”).

With the applicability of transfer pricing provisions on Specified Domestic Transactions, it is the obligation on the taxpayer to report / document and substantiates the arm’s length nature of such transaction.

Transfer pricing regulations were extended to include transactions entered into with domestic parties or by an undertaking with other undertakings of the same entity for the purpose of section 40A, Chapter VI-A and section 10AA. All the compliance requirements relating to transfer pricing documentation, including accountant’s report, etc. equally apply to specified domestic transactions as they do for international transactions amongst associated enterprises. However, with a view to reduce the compliance burden, the scope of applicability of domestic transfer pricing has been relaxed by excluding the reporting of expenditure in section 40A under the ambit of SDT provisions.This amendment will take effect from April 1, 2017 and accordingly apply in relation to AY 2017-18 and onwards.

Objective of domestic transfer pricing

Prior to the introduction of domestic transfer pricing, tax officers were empowered to re-compute tax holiday eligible profit if undertaking makes more than ordinary profits as a result of arrangements with closely connected persons or otherwise. In case of inter-unit transfer of goods or services, tax officer/ taxpayer allowed to determine tax holiday profits based on FMV of goods/ services. Thus, no specific methodology was prescribed for disallowance/ tax holiday profit adjustment and it was important to consider making TP provisions applicable to aforesaid transactions.

There are two counts where tax arbitrage happen in India viz. tax holidays and accumulated losses. The objective of introducing the domestic transfer pricing provisions in India is to deal with the tax arbitrage possibilities in India arising out of differential taxes and accumulated losses of loss making concerns.

Statutory rules and regulations

A separate code on transfer pricing under Sections 92 to 92F of the Indian Income TaxAct, 1961 (“the Act”) covers intra-group specified domestic transactions.

The Indian Transfer Pricing Code prescribes that income arising from specified domestic transactions should be computed having regard to the arm’s length price. It has been clarified that any allowance for an expenditure or interest or allocation of any cost or expense arising from a specified domestic transaction also shall be determined having regard to the arm’s-length price. The Act defines the term specified domestic transactions, related parties and arm’s length price.

Type of transactions covered

Finance Act 2012 extended the application of Indian transfer pricing regulations tospecified domestic transactions, being the following transactions with certain related domestic parties, if the aggregate value of such transactions exceeds 20crores:

  • Any transaction referred to in section 80A;
  • Any transaction related to businesses eligible for profit-linked tax incentives, for example, infrastructure facilities (Section 80-IA) and SEZ units (Section 10AA) and
  • Any other transactions as may be specified.

Thus, SDT provisions are applicable only if one of the domestic Indian entities involved in the inter-company transaction is enjoying benefits of any tax holiday / profit linked deduction and the aggregate of such transactions exceed INR 20crores.

Eligible business covered

Section Tax payers covered Deduction
10AA Persons with income from SEZ units 100% for the first 5 years50% for the next 5 years50% of the profits or amount credited to SEZ re-investment reserve, whichever is less for next 5 years
80-IA Infrastructure developers 100% for a period of 10/15 years out of 15/20 years, as the case maybe from the date of commencement of operation
80-IA Telecommunication service providers 100% for a period of 5 years30% for the next 5 yearsout of 15 years from the date of commencement of operations
80-IA Developers of Industrial park 100% for a period of 10 years out of 15 years from the date of commencement of operations
80-IA Producers or distributors of power 100% for a period of 10 years out of 15 years from the date of commencement of operations
80-IAB Developers of SEZ 100% for a period of 10 years out of 15 years from the date of commencement of operations
80-IB Small scale industry engaged in operating cold storage plant 30% of profits for the first 10 years
80-IB Industrial undertaking in Industriallybackward state as mentioned in VIIISchedule
(ex: Jammu and Kashmir)
100% of profits for 5 years and 30% for the next 5 years
80-IB Multiplex theaters and convention centre 50% for the first 5 years
80-IB Company carrying on scientific researchand development 100% of profits for first 10 years
80-IB Eligible housing projects 100% of profits from such business
80-IB Eligible hospitals 100% of profits for first 5 years
80-IC/ 80-IE Persons with units in North-eastern states claiming deduction 100% for a period of first 10 years
80-ID Hotels located in districts having World Heritage site 100% of profits for first 5 years of commencement of business

 

Documentation requirements

As per section 92D, every person who has entered into SDT shall keep and maintain such information and documents in respect thereof, as prescribed in Rule 10D of the Income Tax Rules. As per Section 92E, the assessee has to take an accountant’s report, in Form 3CEB, duly signed and verified as per the provisions of the Act. The Transfer Pricing Audit Report is required to file electronically on or before the due date of filing of Income Tax Return i.e. on or before November 30 of the respective assessment year.

Penal provisions

If any person fails to keep and maintain any such information and document as required by section 92D, the Assessing Officer or Commissioner (Appeals) may direct that such person shall pay, by way of penalty, a sum equal to 2% of the value of each SDT entered into by such person.

Further, failure to furnish a report from an accountant (Form 3CEB) as required by section 92Eby the due date shall attract a penalty of INR 100,000. However, in case of a transfer pricing adjustment, in absence of good faith and due diligence by the taxpayer in applying the provisions and maintaining adequate documentation, tax authorities in India can levy a penalty of 100% – 300% of tax on the adjusted amount.

 

For a more detailed discussion of specific transfer pricing rules, or to obtain further assistance in domestic transfer pricing compliance, transfer pricing study, planning activities,addressing and resolving intercompany transfer pricing issues, please contact AJSH & Co LLP. If you have any query regarding this Click Here.

transfer pricing law in India

Transfer Pricing Law in India

Introduction

Transfer Pricing (“TP”) regulations have been at the forefront of corporate headlines over the last few years due to the increasing number of controversies resulting out of tax structuring by multinational companies in India. What makes the topic both contentious and interesting is that regulators view the various techniques applied to inter-corporate transactions as purportedly planned with the intent of achieving benefits of comparable labor cost and tax advantage at the cost of a countries tax revenues.

Hence, there was a need to introduce a uniform and internationally accepted mechanism of determining reasonable, fair and equitable profits and tax in India in the case of such multinational enterprises.

Statutory rules and regulations

A separate code on transfer pricing under Sections 92 to 92F of the Indian Income TaxAct, 1961 (“the Act”) covers intra-group cross-border transactions and specified domestic transactions. Since the introduction of the code, transfer pricing has become the most important international tax issue affecting multinational enterprises operating in India. The regulations are broadly based on the Organisation for Economic Co-operation and Development (“OECD”) Guidelines and describe the various transfer pricing methods, impose extensive annual transfer pricing documentation requirements and containharsh penal provisions for noncompliance.

The Indian Transfer Pricing Code prescribes that income arising from international transactions or specified domestic transactions between associated enterprises should be computed having regard to the arm’s length price. It has been clarified that any allowance for an expenditure or interest or allocation of any cost or expense arising from an international transaction or specified domestic transaction also shall be determined having regard to the arm’s-length price. The Act defines the terms international transactions, specified domestic transactions, associated enterprises and arm’s length price.

Type of transactions covered

The Indian transfer pricing regulations are applicable to an international transaction as well as to specified domestic transactions entered into two (or more) associated enterprises.Section 92B of the Act defines the term “international transaction” to mean a transaction between two (or more) associated enterprises involving the sale, purchase or lease of tangible or intangible property; provision of services; cost-sharing arrangements; lending/borrowing of money; or any other transaction having a bearing on the profits, income, losses or assets of such enterprises.

Further, the Finance Act 2012 extended the application of transfer pricing regulations to “specified domestic transactions”, being the following transactions with certain related domestic parties, if the aggregate value of such transactions exceeds INR 5 crore:

  • Any transaction related to businesses eligible for profit-linked tax incentives, for example, infrastructure facilities (Section 80-IA) and SEZ units (section 10AA); and
  • Any other transactions as may be specified.

Associated enterprises (“AEs”)

The relationship of associated enterprises is defined by Section 92A of the Actto cover direct/ indirect participation in the management, control or capital of an enterprise by another enterprise. It also covers situations in which the same person (directly or indirectly) participates in the management, control or capital of both the enterprises. For the purposes of the above definition, Section 92A of the Act specifies certain parameters have been laid down based on which two enterprises would be deemed as AEs.

Arm’s length principle and pricing methodologies

The term ‘arm’s length price’ is defined by Section 92F of the Act to mean a price that is applied or is proposed to be applied to transactions between persons other than AEs in uncontrolled conditions. The following methods have been prescribed by Section 92C of the Act for the determination of the arm’s-length price:

  • Comparable uncontrolled price (CUP) method
  • Resale price method (RPM)
  • Cost plus method (CPM)
  • Profit split method (PSM)
  • Transactional net margin method (TNMM)
  • Such other methods as may be prescribed

These regulations require a taxpayer to determine an arm’s-length price for international transactions or specified domestic transactions. However, transfer pricing provisions will not apply if the arm’s-length price would result in a downward revision in the income chargeable to tax in India.

Documentation requirements

Taxpayers are required to maintain, on an annual basis, a set of extensive information and documents relating to international transactions undertaken with AEs or specified domestic transactions. Rule 10D of the Income Tax Rules, 1962 prescribes detailed information and documentation that has to be maintained by the taxpayer.

Further, it is mandatory for all taxpayers, without exception, to obtain an independent accountant’s report in respect of all international transactions between associated enterprises or specified domestic transactions. The report has to be furnished by the due date of the tax return filing (i.e. on or before 30 November) to avoid stringent penalties prescribed for noncompliance with the provisions of the transfer pricing code.

 For a more detailed discussion of specific transfer pricing rules, or to obtain further assistance in transfer pricing compliance, transfer pricing study, planning activities,addressing and resolving intercompany transfer pricing issues, please contact AJSH & Co LLP. If you have any query regarding this Click Here.