Through the addition of Section 92 to Section 92F of the Act—also known as the Transfer Pricing Code of India—the Finance Act, 2001 brought the notion of transfer pricing to India. In order to broaden the tax base, the Finance Act of 2012 made numerous changes to the Transfer Pricing Regulation. As a result, the scope of the transfer pricing provisions was expanded to include certain "specified domestic transactions" (i.e., transactions that are not international) that are entered into within or between two domestic entities within India.
Applicability of Transfer Pricing
Based on certain requirements, the transfer pricing legislation would be applicable. First and foremost, a global transaction is required. Second, for an international transaction to be considered valid, it must involve two or more affiliated firms, one or both of which must be non-resident. Furthermore, in order for a defined domestic transaction—which is not an international transaction—to be subject to the transfer pricing regulations, it must meet the requirements listed in section 92BA of the Act.
Any costs, expenses, or interest should be incurred during the international transactions, as well as any purchases, sales, or leases of real or intangible property, loans, or borrowings of money, or any other transaction that has an impact on the assets, income, losses, or profits of these businesses.
Furthermore, in accordance with section 92B(2), a transaction entered into by an enterprise with a person who is not an associated enterprise will be considered to be a transaction between associated enterprises if the terms of the relevant transaction are decided upon in substance between the associated enterprise and the other person, or if there is a prior agreement between the associated enterprise and the other person regarding the relevant transaction. Therefore, even in these situations, the rules in this chapter will be applicable.
Furthermore, in accordance with section 92(3), these regulations on transfer pricing are not meant to be enforced in situations where doing so would decrease the amount of revenue that is subject to Indian taxes or raise any losses that may be incurred.
Transfer Pricing - Documentation
The Income Tax Act, 1961's Section 92D provides the legal framework for taxpayers to maintain information and documentation. It states that anyone who has entered into a specified domestic transaction or an international transaction in the past is required to keep the information and documentation that the Board prescribes in order to help the Assessing Officer and Transfer Pricing Officer calculate the income resulting from the transaction while taking the arm's length price into account.
Rule 10D(1) lays down thirteen different types of information and documents that a person has to keep and maintain. Broadly, these information and documents may be classified into three types:
1.) Enterprise-related documents: These are those that provide details on the business, its affiliations with other businesses, the type of business it conducts, etc. The majority of this material is descriptive [clauses (a) through (c)].
2.) Documents particular to a transaction: These are the documents that go into more depth about the overseas transaction. It contains details about every transaction (the type of transaction, the terms of the contract, etc.), an explanation of the tasks carried out, the assets used, the risks taken by each party, market and economic evaluations, etc. [Clauses (d) to (h)] contain both quantitative and descriptive information.
3.) Documents pertaining to computations: These are those that explain in detail the approaches taken into consideration, the real working assumptions, policies, etc., the modifications made to transfer prices, and any other pertinent data or information that was used to determine the arm's length price [clause (i) to (m)].
- An explanation of the enterprise's ownership structure, including information about shares or other ownership interests held by other enterprises;
- (b) A synopsis of the multinational group that the assessee enterprises, or taxpayers, are a part of, including the names, addresses, legal statuses, and tax residence countries of each enterprise in the group that the taxpayer has transacted with internationally, as well as the ownership relationships between them;
- A synopsis of the taxpayer's business, the industry it works in, and the businesses of its affiliated companies;
- The type, conditions, and costs of any foreign transactions made with related businesses, the specifics of any property transferred or services rendered, the amount and worth of each transaction, or class of transactions;
- An explanation of the roles played, the risks taken, and the assets used or planned to be used by the taxpayer and the related business in the foreign transaction;
- A copy of all financial estimations, forecasts, budgets, and market and economic analyses that the taxpayer has made, either for the company as a whole or individually for each division or product that could be relevant to the taxpayer's foreign transaction;
- A record of uncontrolled transactions, including the nature, terms, and conditions of any uncontrolled transaction with third parties that may be pertinent to the international transactions' pricing, that are taken into consideration for analyzing their comparability with the international transactions entered into;
- A transcript of the analysis carried out to determine whether uncontrolled transactions can be compared to the pertinent international transaction;
- An explanation of the techniques used to calculate the arm's length price for each international transaction or class of transactions, the technique that was determined to be the most appropriate technique, along with an explanation of the reasoning behind the selection and an example of how the technique was used in each case;
- A statement of the actual work done in order to calculate the arm's length price, including the specifics of the comparable data and financial information applied in order to apply the best method and any adjustments made in order to account for variations between the enterprises engaging in the transaction and the comparable uncontrolled transactions or between the international transaction;
- Any price negotiations, policies, or assumptions that have significantly impacted the arm's length price determination;
- The following details should be noted: Any adjustments, if any, made to the transfer price in order to bring it into compliance with the arm's length price as established by these rules;
- Any additional information, data, or document, including data pertaining to the associated enterprise, that may be pertinent for determining the arm's length price.
Additionally, Rule 10D mandates that the aforementioned information be backed up by genuine documents, which could include the following:
- official documents, research, reports, and databases from the government of the linked enterprise's home nation or of any other nation;
- reports from completed market research studies and technical papers from reputable national and international organisations;
- publications that deal with prices, such as quotes from stock exchanges and commodity markets;
- released financial statements and accounts detailing the operations of the affiliated businesses;
- contracts and agreements signed with unaffiliated or affiliated businesses on transactions resembling those conducted internationally;
- letters and other communication that records the conditions that the taxpayer and the affiliated business agreed upon;
- Records typically generated in relation to different transactions under the established accounting procedures
Submission of Documents with the Tax Authorities
Neither the Income Tax Act nor the Income Tax Rules contain any references to any requirement that the necessary documents and information be submitted at the initial compliance stage in the form of a report submitted under Section 92E. All that is necessary to comply with Section 92E is for the concerned taxpayer to get a report in the prescribed form (Form 3CEB) from an accountant and submit it by the deadline.
A certificate from the accountant stating that, in his view, the taxpayer has kept the necessary records and information is contained in Form 3CEB. As much as feasible, the information and documents kept must be contemporaneous and present before the deadline for filing the report under Section 92E, according to Rule 10D. Additionally, Section 92D stipulates that the Assessing Officer or the Appellate Commissioner may requisition information and documentation with thirty days' notice, which may be extended by an additional thirty days.
Retention Period of Documents kept under Rule 10D
According to Rule 10D of the Income Tax Rules, 1962, the required records and information must be kept on file for eight years following the conclusion of the applicable Assessment years.
According to Section 92D(3) of the Act, an individual who has engaged in an international transaction or a specific domestic transaction may be required by the Assessing Officer or the Commissioner (Appeals) to provide any information or document that he was expected to maintain under Section 92D (1). The individual must provide the requested information or document within thirty days of receiving a notice in this regard.
However, the Assessing Officer or Commissioner (Appeals) may, upon the person's application, extend the period by a further period or periods not to exceed, in total, thirty days if, for any reason, the person is unable to produce the information or documents called for within the allotted thirty days.
Penalties for non-compliance with new documentation requirements:
The fine for not providing the master file is INR 5,000,000.
- Penalties for not providing CbCR or further information (when requested) regarding CbCR range from INR 5,000 to INR 50,000 per day, based on length of delay.
- INR 500,000 is the penalty for demonstrating false information in the CbCR.
Regulations governing transfer pricing are essential for guaranteeing that linked parties execute transactions at arm's length, which prevents profit shifting and guarantees that taxable revenue is distributed among countries appropriately. Businesses that trade with related parties on a global or large domestic level must carefully follow transfer pricing regulations and keep the necessary records to back up their pricing strategies.
How SKMC Global Can Help?
- Expert Transfer Pricing Consultation: Our team provides expert guidance to ensure that your international transactions are in compliance with transfer pricing regulations.
- Form 3CEB Preparation: We assist in accurately preparing and filing Form 3CEB, ensuring that it includes all necessary details regarding your international transactions with associated enterprises.
- Transfer Pricing Documentation: SKMC Global offers comprehensive transfer pricing documentation services, substantiating the arm's length pricing of your related-party transactions.
- Form 3CEAA and Master File Reporting: We facilitate the preparation and filing of Form 3CEAA and master file reporting, ensuring that all reporting requirements are met accurately.
- Country-By-Country Reporting (CBCR): Our services extend to CBCR reporting, helping multinational corporations disclose essential financial and tax information in each jurisdiction of operation.
- Minimizing Tax Risks: By adhering to transfer pricing regulations, we assist in reducing the risk of transfer pricing adjustments and penalties, ensuring compliance with global tax standards.
- Supporting Equitable Taxation: Our services contribute to equitable taxation across jurisdictions, minimizing the risk of double taxation and promoting fair tax practices in the global marketplace.
Reducing Transfer Pricing Disputes: By maintaining compliance and accuracy in your transfer pricing practices, SKMC Global helps in reducing disputes and audits by tax authorities, supporting seamless cross-border business operations.