Transfer Pricing in India

Transfer Pricing Documentation and compliances

Section 92D of the Income Tax Act of 1961 establishes a legal framework for taxpayers to maintain information and documentation. It states that anyone who engages in an international transaction or a specified domestic transaction during the previous year must keep such information and documents as the Board prescribes to assist the Assessing Officer and the Transfer Pricing Officer in computing the income arising from that transaction, taking into account a variety of factors.

Transfer pricing documentation

According to the OECD’s transfer pricing rules, taxpayers should undertake reasonable efforts at the time the transfer pricing is determined to ascertain whether the transfer pricing is suitable for tax purposes in conformity with the arm’s length principle. Tax administrations should be able to obtain the paperwork created or referred to in this procedure as a means of assuring conformity with the arm’s length principle. Furthermore, the requirement for the papers should be assessed against the expenses and administrative burdens, especially where this process implies the preparation or reference of documents that would not otherwise be prepared or referred to in the lack of tax concerns.

Rule 10D (1) specifies thirteen different sorts of information and documents that must be kept and maintained by a person. These data and documents can be categorized into three categories:

1. Enterprise-wise documents: These are the documents that explain the business, its relationships with other related businesses, the type of work it does, and so on. The majority of this data is descriptive.

2. Transaction-specific documents: These are the documents that go into additional detail about the overseas transaction. It contains details on each transaction (such as the nature and terms of the contract), an explanation of the functions performed, the assets used, and the risks assumed by each party to the transaction, as well as economic and market analysis. This data is descriptive as well as quantitative in nature.

3. Computation related documents: These are the documents that describe and outline the methodologies used, as well as the actual working assumptions, principles, and changes made to transfer pricing, as well as any other relevant information, data, or document that was used to determine the arm’s length price.These include the following:

• A summary of the company’s ownership structure, including any shares or other ownership interests held by other companies.
• A description of the multinational company in which the assessee enterprise, i.e., the taxpayer^[1], is a member, as well as the name, address, legal recognition, and country of tax residence of each of the companies in the group with whom the taxpayer has conducted international transactions, as well as the ownership relationships between them.
• A comprehensive description of the taxpayer’s business and the industry in which it operates, as well as the business of related entities.
• The type, conditions, and pricing of each foreign transaction carried into with each related firm, as well as the details of property transferred or services delivered, as well as the volume and value of each such transaction or class of such transactions.
• A statement of the functions performed, risks assumed, and assets used or to be used by the assessee and the related firm in the foreign transaction.
• A record of the taxpayer’s economic and market assessment, projections, budgets, or any other financial predictions generated for its business as a whole or separately for every division or product that may have an impact on the taxpayer’s foreign transaction entered into by it.
• A record of uncontrolled transactions taken into consideration for comparing them to the international transaction engaged into, including a record of the type, terms, and circumstances of an uncontrolled transaction with third parties that may be important to the pricing of the international transaction
• A record of the analysis that is conducted to compare uncontrolled transactions to the relevant international transaction
• A summary of the methods explored for estimating the arm’s length price in regard to each international transaction or class of transactions, the approach chosen as the most appropriate technique, along with justifications for why it was chosen, and how it was implemented in each case.
• A document of the actual work done to determine the arm’s length price, which would include details of the comparable data and financial information used during the application of the most appropriate technique, as well as any adjustments made to account for differences between the foreign transaction and comparable uncontrolled transactions or between the companies involved in the transaction.
• The assumptions, policies, and pricing negotiations, if any, that have had a significant impact on the arm’s length price determination
• Details of any modifications made to the transfer price, if any, to bring it into line with the arm’s length price determined under these regulations, as well as the resulting adjustment to total income for tax purposes.
• Any other information, data, or document that may be significant to determining the arm’s length pricing, including information or data pertaining to the related enterprise.

Burden of Proof

It is important to note that the above-mentioned information and the transfer pricing documentation requirements are linked to the taxpayer’s burden of proof to demonstrate that the transfer price used is in conformity with the arm’s length principle. One of the prerequisites for the taxpayer to discharge this burden is to keep prescribed information and records in relation to an international transaction entered into with an affiliated firm or a designated domestic transaction.

One of the situations that may prompt a transfer pricing audit under Section 92C (3) is a failure to retain information and records in conformity with the regulations. Any failure to comply with the paperwork requirement and transfer pricing documentation may result in a penalty of 2% of the value of the foreign transaction or designated domestic transaction (under Sec 271AA).

Submission of Documents to Tax Authorities

There is no mention of any necessity to provide the prescribed information and transfer pricing documentation at the level of initial compliance in the form of a report under Section 92E in the provisions included in either the Income Tax Act or the Income Tax Rules. Section 92E only requires that the concerned taxpayer receive a report from an Accountant in the appropriate form (i.e., Form 3CEB) and submit it by the stipulated date. A chartered accountant’s report is essential for entities engaging in foreign transactions. A penalty of Rs. 100,000 might be imposed if a chartered accountant’s report is not provided.

Form 3CEB includes a certificate from the accountant stating that, in his opinion, the taxpayer has kept proper information and records as stipulated. Rule 10D mandates that the information & documents kept be as current as practicable and exist no later than the deadline for filing the report under Section 92E. Section 92D additionally states that the Assessing Officer or the Appellate Commissioner may requisition information and transfer pricing documentation with a thirty-day notice, which may be extended by another thirty days.

Non-applicability of Transfer Pricing Documentation

According to Rule 10D (2) of the Income Tax Rules, 1962, the necessity of maintaining information and documents is waived in the case of persons who have entered into overseas transactions the aggregate value of which, as recorded in the books of account, does not exceed Rs. 1 crore. However, the concerned taxpayer may be asked to prove, using accessible materials, that the revenue being derived from the overseas transaction is computed in compliance with the arm’s length rule.

Furthermore, there is no exception for such taxpayers in obtaining and furnishing an audit report under section 92E of the Income Tax Act, which states that even if the aggregate value of the international transactions during the previous year does not exceed one crore, the taxpayer is required to obtain and furnish an audit report.

Retention Period of Transfer Pricing Documentation

According to Rule 10D of the Income Tax Rules of 1962, the requisite information and transfer pricing documentation must be kept for a period of eight years after the end of the relevant assessment year.

Section 92D (3) of the Act states that during the course of any proceeding under the Income Tax Act, the Assessing Officer (AO) or the Commissioner (Appeals) can require an assessee who has been engaged in an international transaction or a designated domestic transaction to provide any information or document that he was required to keep under section 92D (1), and the taxpayer must provide the information or document within thirty days of receiving the notice. If for whatever reason, the taxpayer is unable to supply the requested information or documents within the thirty-day period, the Assessing Officer or Commissioner (Appeals) can, on the person’s application, extend the time by a further period or periods not exceeding thirty days in total.

Conclusion

According to the Income Tax Act, everyone who engages in an overseas transaction or a defined domestic transaction must acquire a report from a Chartered Accountant in the prescribed form and submit it to the Income Tax Department. The penalty for failing to deliver a report from a Chartered Accountant in the manner specified under the rules is Rs. 100,000.

Furthermore, organizations engaging in international transactions are required to keep certain documents, as indicated above. Failing to keep such documents, as well as failure to report or furnishing of erroneous information, can result in a penalty of up to 2% of the value of each transaction where non-compliance exists.

Read our Article:Meaning of International Transaction in Transfer Pricing