2 Contents Penalties Income Tax Rules for TP Amendment by FA 2007 Tax ProvisionsDefinition of Transfer PricingAssociated EnterpriseEnterprise DefinedInternational TransactionArm’s Length PriceMethods of Determining ALPMaintainance of RecordsPenaltiesIncome Tax Rules for TPAmendment by FA 2007Judicial DecisionsTransfer Pricing StatisticsTransfer Pricing Mechanism
3 Tax ProvisionsIncome Tax Act Contains Provisions for regulating transfer price.Chapter X Containing Sec 92-92F incorporated by finance Act 2001.TP policies of India is based on OECD Guidelines.
4 Definition of Transfer Pricing Sec 92 Transfer pricing provisions primarily require any income arising from an International transaction between two or more Associated Enterprises (‘AE’) to be at Arm’s length price and comparable to similar transactions between unrelated enterprises.
5 When TP Provision Apply International TransactionBetween two or more associated enterprisesEither or both of whom are non residents.TP Provision application cann’t reduce income in India.
6 Associated Enterprises Sec 92A(1) Associated Enterprises will include :An Enterprise which participated directly or indirectly in Management or Control or Capital of Other Enterprise OrWhere one or more persons participate directly or indirectly in Management Control or Capital of two enterprises. These Two Enterprises shall be associated enterprises OrIncludes Deemed Associated Enterprises.
7 Deemed Associated Enterprises Sec 92A(2) If at ANY TIME DURING THE PREVIOUS YEAR any of the following 13 criteria is satisfied :Holding 26% or More shares carrying Voting Rights.Any Person Hold 26% or more shares in two enterprises .These two enterprises will be AEs.Advancing Loans > 51% of Book Value of Total Assest of Borrower.
8 Deemed Associated Enterprises Contd.. Providing Gurantee for at least 10% borrowing of other enterprises.Appointment(Actual) of more than Half of BOD or Ex Director of Other Enterprise.Appointment of specified directorship of both enterprise by same personManufacturing or Processing wholly dependent on Intangible of other enterprises.Supply of 90% or more of raw material or consumables to other enterprise or its specified persons where prices are influenced by the former.
9 Deemed Associated Enterprises Contd.. Sale of Mfd. goods of other enterprise to such enterprise or its specified persons and the prices are influenced by Former.An individual control one enterprise and other enterprise is also controlled by such individual or its relatives.An HUF control one enterprise and other enterprise is also controlled by such HUF or its members.An Enterprise holding more than 10% internts in any Firm, BOI and AOP.Existence of Any Mutual Interest as may be prescribed.
10 What is Enterprise ? Sec 92F(iii) Enterprise Means a Person including such person’s PE who is, has been or proposed to be engaged in any specified business activities directly or through its subsidiary located at same place or different place.
11 Permanent Establishment (PE) Permanent Establishment includes a Fixed place of business through which the business of enterprise is carried out wholly or partly.
12 What is International Transaction ? Sec 92B A Transaction between two or more AEs, either or both of whom are non residents, in the nature of :Sale,purchase or lease of Tangible /Intagible property ORProvision of services ORLending or borrowing money OROther Transactions having bearing on profits or income of such enterprises .
13 Arms Length Price (ALP) Sec 92F(ii) ALP Means a price which is applied or proposed to be applied in a transaction between Non Associated Enterprises in uncontrolled conditions.
14 Methods of Applying ALP Sec 92C Arms Length Price can be determined by any of the following method :Comparable Uncontrolled Price Method (CUPM)Resale Price Method (RPM)Cost Plus Method (CPM)Profit Split Method(PSM)Transactional Net Margin Method (TNMM)Other Method as prescribed.Where More than one method can be applied the ALP shall be calculated on average mean of all such computations.
15 Maintainance of Records Sec 92D Every person who enters into any international transaction has to maintain such records as prescribed and has to furnish a report from CA in form 3CEB.3CEB is required to be filed alongwith Return of Income.Under Income tax act rules , Rule 10A to 10E deals with transfer pricing.No Documentation required if International transaction is less than 1 Crore.
16 PenaltiesSec271(1)(c)(iii) provides that where any amount is added or disallowed under these regulations it shall be deemed to be concealed income,Unless assessee proves that there was sufficient cause.Sec 271AA Provides that failure to maintain books of accounts will attract a penalty upto 2% of value of international transaction.Sec 271BA provides that if form 3CEB is not furnished the penalty upto 1Lac may be imposed.271G provide for failure to furnish information/Document as required the penalty levied may be upto 2% of value of international transaction for each occurrence.
17 Income Tax Rules Rule 10A : Definitions Rule 10B : Determination of Arm’s Length PriceRule 10C : Most Appropriate method.Rule 10D : Documents to be kept and maintainedRule 10E : Furnishing report from Chartered Accountant in Form 3CEB
18 Amendments by FA 2007Sec 92CA(4) has been amended to provide that on receipt of order of TPO the A O shall proceed to compute total income of assessee in conformity with the Arm’s Length price determined by TPO. (Overriding Sony India case of Delhi High Court).
19 Latest Judicial Decisions Morgan Stanley CaseAztech Softwares and Tech, Services Ltd.
20 Director of IT Vs Morgan Stanley & Co. 1. Back Office Operations would not constitute a fixed place PE under article 5(1).2. Of all MNEs only that profits are taxable in india which arise due to economic nexus with PE in India.3.Activities of BPOs doesn't constitute PE in IndiaData EntryProviding Advice on servicesPreparing PowerPoint presentationsSending Stewardship activitiesHowever sending persons on Deputations to india will constitute service PE on account of Deputionists activity
21 Aztec Software & Technology Services Ltd.(ITAT Order) On the matter of referring the case by AO to TPO it is not a legal requirement that A O should prove tax avoidance.For referring a case to TPO u/s 92CA(1) it is not necessary for AO to show that transaction fall U/s 92CA(1)(a) to (d).For referring a case to TPO no need to record reason for getting the approval of Commissioner.Not Necessary to give assessee a option of being heard before referring a case to TPO.
22 Transfer Pricing Assessment Mechanism As per CBDT instruction No.3 of 2003 dated 25/03/2003 Where aggregate value of International Transaction exceed 5 Cr the case shall be referred by A O to TPO along with for 3CED.On Receipts of documents from Jurisdictional AO ,The TPO calls for details from assessed u/s 92CA(1).TPO offers a personal hearing of assessee or his representative to justify as to how the TP is arrived at as per ALP.
23 After hearing the assessee a draft copy of order is prepared by TPO and is send to Director IT – Transfer Pricing For its approval.After approval formal order is issued and send to jurisdictional AO for proceeding with the assessment.