Transfer Pricing India
Transfer Pricing India
Transfer Pricing authority and tax law
Income Tax Department. Section 40A (2), 92-92F, 271, 271AA, 271BA and 271G of the Income Tax Act, 1961.
Transfer Pricing regulations and rulings
Rule 10 to 10E of the Income Tax Rules, 1962.
OECD guidelines of Transfer Pricing
The Indian legislation is broadly based on the OECD guidelines. In conformity with the OECD guidelines, the legislation prescribes the same five methods to compute the arm’s length price. Further, the revenue authorities generally recognize the OECD guidelines and refer to the same for guidance, to the extent they are not inconsistent with the domestic law.
Transfer Pricing methods
The Indian legislation prescribes the following methods: CUP, Resale Price, Cost Plus, Profit Split and Transactional Net Margin Method. The legislation also grants the power to the Central Board of Direct Taxes (CBDT) to prescribe any other method; however, no other method has been prescribed by the CBDT to date. No hierarchy of methods exists. The most appropriate method should be applied.
Penalties in Transfer Pricing
For inadequate documentation, the taxpayer is fined 2% of the transaction value. For not furnishing sufficient information or documents requested by the tax officer, the taxpayer is fined 2% of the transaction value. If due diligence efforts to determine the arm’s length price have not been made by the taxpayer, then 100% to 300% of incremental tax on transfer pricing adjustments may be levied by the tax officer. For not furnishing an Accountant’s Certificate (Form 3CEB) along with the return of income, the taxpayer is fined Rs.one lakh.
Penalty relief in Transfer Pricing
Penalties may be avoided if the taxpayer can demonstrate that it exercised good faith and due diligence in determining the arm’s length price. This is also demonstrated through proper documentation and timely submission of documentation to the revenue authority during assessment proceedings.
Transfer Pricing Documentation requirements
A detailed list of mandatory documents are listed in Rule 10D (1). The categories of documentation required are:
- Ownership structure
- Profile of the multinational group
- Business description
- The nature and terms (including prices) of international transactions
- Description of functions performed, risks assumed and assets employed
- Record of any financial estimates
- Record of uncontrolled transaction with third parties and a comparability evaluation
- Description of methods considered
- Reasons for rejection of alternative methods
- Details of transfer pricing adjustments
- Any other information or data relating to the associated enterprise which may be relevant for determination of the arm’s length price
A list of additional optional documents is provided in Rule 10D (3). The taxpayer is required to obtain and furnish an Accountant’s Certificate (Form 3CEB) regarding adequacy of documentation maintained.
Documentation deadlines for Transfer Pricing
The information and documentation specified should, as far as possible, be contemporaneous and exist by the specified date of filing the income tax return, which has been changed to September 30 instead of October 31 following the end of the financial year. Although an Accountant’s Report must be submitted along with the tax return, the taxpayer is not required to furnish the transfer pricing documentation with the Accountant’s Report at the time of filing the tax return. Transfer pricing documentation must be submitted to the tax officer within 30 days of the notice during assessment proceedings.
Statute of limitations of transfer pricing assessments
Tax assessments (where a matter has been referred to the transfer pricing officer) are to be completed within three years and nine months from the end of the financial year (1 April to 31 March). However, if the revenue authority determines that income has escaped assessment, an assessment may be re-opened within seven years from the end of the financial year.
Return disclosures/related-party disclosures
92E, an Accountant’s Report is required to be provided along with the tax return. The accountant certifies whether proper documentation is maintained by the taxpayer.In accordance with Indian Accounting Standard 18, the company is required to disclose related-party transactions in its financial statements.
Transfer Pricing Audit risk/transfer pricing scrutiny
Internal guidelines have been issued by the revenue authority, pursuant to which companies with related party transactions in excess of Rs.5.00 Crores are being scrutinized. In most cases, the revenue authority does not seem to have adopted a centralized or coordinated approach to audits, with officers in different locations taking divergent positions on similar taxpayer fact patterns. Substantial documentation is being requested in the course of audit proceedings. The information technology, business process outsourcing, banking and pharmaceutical sectors have received particular attention. The revenue authority has sought an updated analysis using data that may not be available to the taxpayer at the time of the preparation of contemporaneous documentation. Furthermore, officers have insisted on unbundling transactions in cases where the taxpayer has adopted an aggregate or combined approach to its transfer pricing documentation. During recent audits, the approach adopted by the taxpayer in the selection of comparable data has received considerable attention from the revenue authorities.
Advance Pricing Agreements of tansfer pricing
APAs are not available yet, but may become available as India increases its third-party comparables database and gains more experience in cross-border transfer pricing issues.