Income Tax

Amendment in Rule 10DA and Rule 10DB of IT Rules 1962

India being a member of OECD and BEPS, introduced section 286 in Income tax Act, 1961 to make mandatory for the companies to submit Country by Country Report and another section 92D for the companies to make filing of Master File to the tax authorities. Both these documents form part of Transfer Pricing Documentation. Recently an amendment was introduced in Rule 10DA and 10DB to introduce changes in the filing of the documentation and with respect to the prescribed authority. 

Tax authorities around the world have been concerned with the tax evasion strategies adopted by business entities running their operations in multiple jurisdictions. This mostly happens in the transfer pricing mechanisms adopted by these business entities. One of the reasons why tax authorities have not been able to curb this malpractice by these business entities is lack of availability of data on corporate taxation.

In order to counter the menace of tax avoidance by the multinational business groups running their operations in multiple jurisdictions, OECD came out with an Action Plan 13 under Base Erosion and Profit Shifting (BEPS) which mandated submission of documents like Master File (MF) and Country by Country Report (CbCR) to the tax authorities in their respective jurisdictions giving details of their economic activities.  

What is an ‘International Group’?

An international Group comprises of a group having-

1. two or more business entities having residency in more than one jurisdictions OR
2. one enterprise having residency in one jurisdiction through a permanent establishment  but carrying business operations in more than one jurisdiction

What is a ‘Parent Entity’?

A parent entity is one that holds controlling interest in other business entity (usually called a subsidiary of the parent company) with respect to the amount of managerial decision making power and affecting the running of operations of the subsidiary company.

What is a ‘Constituent Entity’?

A constituent entity comprises of the following entities:

1. that is included in the consolidated financial statement
2. that is excluded from the consolidated financial statement by reason of size and materiality
3. Permanent establishment also forms part of a constituent entity of an International Group
4. And similarly the other entities of the International group working in other establishments are also included in the constituent entity.

What does ‘Transfer pricing’ documentation include?

A Transfer pricing documentation includes the following documents:

1. Country by Country Report
2. Master file that is submitted by the company to the jurisdiction where the company resides
3. Local file

What is a ‘Country by Country Report’?

A Country by Country report (CbCR) finds mention in section 286 of the Income Tax Act, 1961^[1] mandating the parent entity and the constituent entity having residency in India to share details of their business activities in each jurisdiction where that business conducts its operations. These details include information about their employees, assets with the company, sources of earnings, tax paid, amount of revenue etc.  

What is a ‘Master File’ under Rule 10DA?

A Master File is a document which finds existence in section 92D of the Income Tax Act, 1961 which mandates the constituent entity of an international business group to keep and maintain such details and information about their business operations as have been mentioned in Rule 10DA of Income tax Rules, 1962. This document is then bound to be submitted to the income tax authorities for their scrutiny.

Amendments in Rule 10DA and Rule 10 DB of Income Tax Rules, 1962

Some amendments have been made by the Central Board of Indirect Taxes (CBDT) with respect to the Rule 10DA and Rule 10DB of Income tax Rules, 1962. The amendments are in regard to the changes introduced in the Transfer Pricing documentation. The changes are brought in the submission of the Master File (MF) and Country by Country report (CBCR).

Rule 10DA

As per sec 92D of the Income Tax Act, 1961 a constituent entity of an international group is required to keep and maintain such documents and information that have been prescribed by the Rule 10DA of Income Tax Rules, 1962.

1. The Rule 10DA(2) requires the constituent entity to submit such information in the Form 3CEAA to the Joint Commissioner as specified under sec 139(1). Now instead of submitting such information to the Joint Commissioner, the information is to be furnished to the Joint ‘Director’.
2.  Another amendment has been made in Rule 10DA sub rule (4) which substituted the words “constituent entities in India of an international group” with “constituent entities of an international group required to file the information and document under sub-rule (2). This has expanded the scope of the filing of information by all the constituent entities of a whether they are resident in India or not of International group.
3. Another amendment has been made with respect to the sub-rule(4) wherein furnishing of information will be made to the Joint Director instead of Joint Commissioner.

Rule 10DB

Section 286 of the Income Tax Act, 1961 mandates every constituent entity of every international group to furnish a report.

• The sub rule (1) of Rule 10DB mandates that the prescribed authority is Joint Commissioner for the purpose of fulfilling obligations mentioned under section 286. This was the position prior to the amendment made by the Notification Number 31/2021 in G.S.R 250(E) that came on 5^th April 2021.

The amendment has changed the designation of the Income tax authority for the purpose of Section 286 from “Joint Commissioner as may be designated by the Director General of Income-tax (Risk Assessment)”to “Joint Director as may be designated by the Principal Director General of Income-tax (Systems) or the Director General of Income-tax (Systems), as the case may be”.

• Section 286(7) read with Rule 10DB  sub rule (6) provides that an international group whose consolidated group revenue for an accounting year that is reflected in its consolidated financial statement of the accounting year preceding such accounting year  does not exceed the limit of 5,500 crores. This limit has been increased to the limit of 6,400 crores. Therefore, for an international group to be eligible to submit Country by Country Report, its consolidated gross revenue must exceed 6,400 crores from the previous accounting year. This becomes applicable from 1^st April, 2021 onwards.       

Conclusion

With the business entities coming out with innovative methods to avoid tax, the tax authorities too are making their joint efforts to curb the menace of tax avoidance under the garb of transfer pricing by the business entities conducting their operations in multiple jurisdictions. As a result of it, a list of transfer pricing documentation has been devised by the OECD under their BEPS initiative wherein business entities have been mandated to share details of their economic activities in the documentations like Master File and Country by Country Report.

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