Transfer Pricing (TP) Regulations in India were introduced in 2001 for curbing tax avoidance by laying down norms for computation of income arising from international transactions or specified domestic transactions(“SDTs”) having regard to the “arm’s length price”. Transfer pricing basically is the setting of price for transactions between holding and subsidiary company either domestic or international.
Key features of the TP Regulations
- every person who has undertaken an international transaction with an associated enterprise shall maintain information and contemporaneous (meaning in the same period of time) documentation as prescribed under the Rules
- every person who has entered into an international transaction during a previous year shall obtain an Accountant’s Report and furnish such report on or before the filing of the income tax return which is 30th November following the end of the financial year.
- Stringent penalties have been prescribed for non-adherence to the TP Regulations
Transfer Pricing Planning
In order to avoid any issues with the compliance of TP regulations one must make sure to study all transactions well and take all necessary steps to mitigate any non-compliance issues. Therefore, prior to taking on any international transactions or specified domestic transactions with its associated enterprise it is essential that the transaction is evaluated, structured and planned specifically considering the transfer pricing impact.
Planning approach is fact specific and would cover the following:
- supply chain Re- engineering
- new transactions planning
- process set up and integration
Transfer Pricing Documentation
The burden of demonstrating the arm’s length nature of the international transactions rests on the taxpayer. Indian Income Tax Act, 1962, prescribes thirteen mandatory documents in this regard and requires the taxpayer to maintain documentation contemporaneously. Some of the requirements are general in nature while others are more specific to the relevant international transactions.
Documentation approach is non-standard and in-fact specific or unique for each assesse to ensure practical and robust defence during TP Assessments.
Issuance of Accountants Report
The taxpayer is required to file an Accountant’s Report in Form 3CEB with the Income Tax Department within the due date of filing of return of income which is 30th November following the end of the financial year, for taxpayers subject to transfer pricing. The report provides details on the international related party transactions and provides a confirmation of the Accountant on whether the required documentation has been maintained by the taxpayer.
Planning & Documentation For Specified Domestic Transactions (SDTs)
The Indian TP Regulations are applicable to SDTs from 01 April 2012. SDTs would include transactions entered into by domestic related parties, or by an undertaking with other undertakings of the same entity, for the purposes of section 40A, Chapter VI-A, section 10AA, and which exceed a monetary threshold of Rs 5 crore in aggregate during a financial year.
Litigation Support & Representation Services
Indirect taxation laws have always been complex and subject matter of interpretation/ litigation. This leads to the Companies receiving Show Cause Notices requiring them to explain the rationale for following a particular interpretation/ claiming tax benefits, etc. This generally culminates into a long draw litigation matter. Further it is always advisable to obtain upfront clarification from tax offices on specified issue if there is a mechanism in place.
The new section 92BA provides that SDTs are following transactions:
Diagnostic exercise would be conducted for review of the transactions & policies and to develop transaction matrix and understanding the current policy adopted by the group
Planning – functional analysis and economic analysis for determination of appropriate TP policy for SDT
First year monitoring on a quarterly basis to ensure smooth implementation
Compliance would include documentation and filing of Form 3CEB
Defense – Assistance, Representation & Advisory
The conclusion of latest transfer pricing audits by Indian revenue authorities witnessed aggregate income adjustments to the tune of Rs 44,000 crore for one year alone, which is more than the aggregate income adjustments made by revenue authorities in audits of previous 4 years.
Looking at this, the year-on-year rapid escalation in transfer pricing disputes, it is imperative to handle the Transfer pricing disputes strategically and with great caution.
Due Diligence Review
Companies are increasingly opting for the mutual agreement procedure as one of the options of resolving disputes. This route is used for mainly resolving issues relating to characterization of income, permanent establishment profit attribution and transfer pricing issues. It provides a mechanism to avoid double tax and resolve issues through the competent authority route when actions adopted by either of the tax authorities are contrary to the treaty provisions. The aggrieved party has to approach the competent authority of their country who will then decide whether to admit the application and if so forward the application to the CA of the other country. The settlement is achieved through negotiations between the CA’s and the conclusions are binding on the revenue of the respective countries.