Transfer Pricing Background
The economy of India had undergone significant policy shifts in the beginning of the 1990s. This new model of economic reforms is commonly known as the Liberalisation, Privatisation and Globalisation model (LPG). The primary objective of this model was to make the economy of India the fastest developing economy in the globe with capabilities that help it match up with the biggest economies of the world.
Salient features of LPG Model were Tax Reforms, Foreign Technology Agreements, Seeking Foreign Investment in India and opportunities for overseas trade. The Standing Committee in March 1991 observed that the legal provisions of the Income Tax Act, 1961 (ITA) may not be effective enough to curb transfer prices in respect of MNCs and such corporations may in turn exploit this inadequacy. In consequence of which following provisions and rules have been incorporated and amended effectively.
Introduction of Transfer Pricing Regulations in India
Transfer pricing is the study related to the determination of Arm Length Section92C price between Associated Enterprises Section 92A (members of the same multi-national enterprise) for the International transactions Section 92B entered into bearing effect on Profit, Loss, Income, Expenditure, Assets and Liabilities etc. Compliance of Transfer pricing is required in the context of international or Specified Domestic Section 92BA Transaction (interstate taxation) where tax authorities are in different jurisdictions, for ensuring taxable profit is appropriately reported in each jurisdiction.
In simple words, we can say that transfer Price is the price at which transaction between two associated persons located at different jurisdiction of two countries, recorded in the books of Accounts subject to appropriately reporting of taxable profit in each jurisdiction.
Information and Documents to be kept & maintained by a person entering into International /Specified Domestic Transaction
Section 92D of Income Tax Act-1961 requires every person (Herein Assessee) entering into International /Specified Domestic Transaction 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, 1961 prescribes detailed information and documentation that has to be maintained by the Assessee. Such requirements are as follow:
Mandatory documents or information that an Assessee must maintain
- Ownership structure, group profile, business overview of the Assessee and Associated Enterprise’s
- Nature, terms, quantity, value, etc of international transactions or specified domestic transactions
- Record of the economic and market analyses, forecasts, budgets or any other financial estimates prepared by the assessee for the business as a whole and for each division or product separately
- Assumptions, policies and price negotiations, if any, which have arbitrarily affected/dictated, the determination of the arm’s length price
- Description of the methods considered for determining the arm’s length price in relation to each international transaction [or specified domestic transaction],
- Method selected as the most appropriate method along with explanations as to why such method was so selected, and how such method was applied in each case
- The rule also requires the Assessee to document a comprehensive transfer pricing study. The requirement in this respect includes documentation of functions performed, risks assumed, assets employed, details (nature, terms and conditions) of relevant uncontrolled transactions, comparability analysis, benchmarking studies, assumptions, policies, details of adjustments and explanations as to the selection of the most appropriate transfer pricing method.
Nothing contained under Rule 10D shall apply if Assessee having aggregate international transactions below the prescribed threshold of INR 10 million and specified domestic transactions below the threshold of INR 50 million i.e. relieved from maintaining the prescribed documentation. However, even in these cases, it is imperative and recommended that the documentation maintained should be adequate to substantiate the arm’s-length price of the international transactions or specified domestic transactions.
All prescribed documents and information have to be contemporaneously maintained (to the extent possible) and must be in place by the due date of the tax return filing. Companies to whom transfer pricing regulations are applicable are currently required to file their tax returns along with Form 3CEB on or before 30 November following the close of the relevant tax year. The prescribed documents must be maintained for a period of nine years from the end of the relevant tax year, and must be updated annually on an ongoing basis.
Arm’s-length principle (ALP) and pricing methodologies
Section 92C of income Tax Act, 1961 read with rule 10B specified the following methods for computation of ALP:
- 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 (Rule 10AB)
*Transactional profit methods were used in more than 75 % of the American APA’s cases as per Statistics released by Organization for Economic Co-Operation and Development (OECD)
Safe Harbour Rules
In order to reduce the number of transfer pricing audits and Prolonged Disputes, a New Section 92CB has been inserted to provide that the Determination Of Arm’s Length Price under Section 92CC with rule 10TB to Rule 10TG shall be subject to Safe Harbour Rules.
These rules will specify the circumstances in which the tax authorities will accept the arm’s-length price as declared by a Assessee, without detailed analysis. The basic intention behind the introduction of these rules is to reduce the impact of judgmental errors in determining the transfer prices of international transactions or specified domestic transactions. However, the adaptation of these rules might help relieve Assessees of the burden of carrying out detailed comparability analysis and benchmarking studies in support of their intercompany transactions.
Advance Pricing Agreement
An advance pricing agreement (APA) is an ahead-of-time agreement between a taxpayer and a tax authority on an appropriate transfer pricing methodology (TPM) for a set of transactions at issue over a fixed period of time (called “Covered Transactions”) it may be appropriate from taxpayer’s perspective to enter into an APA with the tax authorities, wherein intercompany transactions are complex.
An APA is binding on the assessee who entered into an APA in relation to the covered transactions and on the Commissioner of Income-tax and other income tax authorities subordinate to him in respect of that assessee and that transaction. If the assessee complies with the terms and conditions of the APA, the tax administration will not contest the ALP or the application of the TPM to the covered transactions in the APA in the case of the assessee for the years to which the APA specifically relates.
Therefore operation of the APA may depend on you complying with particular requirements, and certain critical assumptions being met. Where you have done this, we will be administratively bound by the terms of the APA. In this case, we will not impose any additional income tax to that payable based on the pricing worked out under the APA on the covered cross border dealings. The arrangement generally covers a period of three to five years and may be reviewed if trading circumstances materially change. APAs are also subject to an annual reporting requirement.
Report from Accountant Section 92E
Every person who has entered into an international transaction or specified domestic transaction during a previous year shall obtain a report (Form No 3CEB as per rule 10E) from an accountant (Chartered Accountant) and furnish such report on or before the specified date in the prescribed form duly signed and verified in the prescribed manner by such accountant and setting forth such particulars as may be prescribed.
Services we offer
We G.K. Sureka & Co. have skilled team of Chartered Accountants, Lawyers, Tax practitioners, economists and financial Analysts, Actuarial and Certified Valuers. They advice and focus on reducing non compliance in such a way by evaluating the unpredictable tax risk and to reduce the tax burden from transfer prices by avoiding legally and thereby, at both the global as well as local levels, Develop transfer pricing documentation, Detailed analyze of Organization hierarchy coordinated across all your territories and harmonized with Indian Tax Regime, and Case Filling.