Brief Introduction to Transfer Pricing Law In India : Intent behind introduction of Transfer Pricing (TP) Provisions
Concept of Transfer Pricing
Applicability of Transfer Pricing Provisions
- The provisions of Section 92 to 92F of the Act are applicable only if:
- There are two or more enterprises (defined in Sec 92F); and
- The enterprises are Associated Enterprises (defined in Sec 92A); and
- The enterprises enter into a transaction (defined in Sec 92F); and
- The transaction is an International transaction (defined in Sec 92B).
- Further w.e.f. 1 April 2012, TP provisions shall also apply to specified domestic transactions (SDTs) (defined in Sec 92BA)
- Section 92(1)
- Any income arising from an international transaction shall be computed having regard to the arm’s length price
- Explanation – the allowance for any expense or interest arising from an international transaction shall also be determined having regard to the arm’s length price
- Section 92(3) The provisions are not intended to be applied in case determination of arm’s length price reduces the income chargeable to tax or increases the loss as the case may be.
Meaning of Associated Enterprises (Sec 92A)
Recent case law – Over 20% sales to two customers constitutes ‘dominant influence’; Upholds Associated enterprise relationship
Hospira Healthcare India Private Limited [TS-147-ITAT-2017(CHNY)-TP]
Facts of the case –
- Hospira Healthcare India Private Limited, is engaged in manufacturing and selling of generic injectable drugs to its group entities and certain other concerns called as distribution partners.
- Distribution partners sells the goods to end customer and eventually decides final sales price to the customer
- Profits out of the transaction is distributed equally between Hospira and Distribution partners
- During year, Assessee has made sales of more than 20% to Apotex Corp and Apotex Inc and the profit share earned from them aggregated to Rs 30.07 crores out of total profits of Rs. 125.25 crores
Ruling – ITAT held that a person who purchased more than 1/5th of the total sales of assessee would have a distinctly dominant influence on the pricing and can exercise a defacto control over the assessee and can be treated as Associated enterprise
Comment – Tax authorities may use the above ruling and take assessee within the framework of transfer pricing.
Hence, following should be evaluated
a) Is there any overseas party to whom there is sales of more than 20% (Defacto control – satisfying conditions laid down in Section 92A(1))
b) Are the prices influenced by the overseas party (Satisfying deeming condition laid down in Section 92A(2)(i))
c) Even if assessee is of the view that prices are not influenced but sales are more than 20% to one party, position can be taken to file form 3CEB on an abundant caution basis to protect assessee from transfer pricing penalties
International Transaction (Sec 92B)
- Transactions between two or more AEs, either or both of whom are non-residents
- Transaction relates to:
- Purchase, sale or lease of tangible or intangible property; or
- Provision of services; or
- Lending or borrowing money; or
- Any other transaction having a bearing on the profits, income, losses or assets of the enterprises; or
- Mutual agreements or arrangements for allocation or apportionment of, or any contribution to, any cost or expense incurred; or
- Business restructuring or reorganization irrespective of fact that it has bearing on the profit, income, losses or assets
As per Section 92F(V):
- transaction includes an arrangement, understanding or action in concert
- (A) whether or not such arrangement, understanding or action is formal or in writing: or
- (B) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceeding.
Deemed International transaction- Sec 92B(2)
- An transaction with an unrelated company (3rd party) is deemed to be an international transaction and subject to transfer pricing regulations if
- a prior agreement exists between A’s AE and 3rd party in relation to services rendered by A to the 3rd party; or
- terms of transaction are determined in substance by A’s AE and 3rd party
Domestic Transfer Pricing
Specified Domestic Transaction – Sec 92(2A)
- Scope of TP provisions expanded w.e.f. AY 2013-14 by including SDT if aggregate value of such transaction exceeds INR 50 Million ( INR 5 Crores)
[Threshold increased to INR 20 Crores by Finance Act 2015 w.e.f. 1 April 2016]
- Applicability of TP regulations (including procedural and penalty provisions) to specified transactions between domestic related parties and payments made to related parties.
- Section 92BA – Specified Domestic Transactions in case of an Assessee means any of the following transactions, not being an international transaction, namely –
- Any expenditure in respect of which payment is made or to be made to a person u/s 40A(2)(b); (Omitted by the Finance Act, 2017, w.e.f. FY 2016-17)
- Tax holiday related transactions (eligible business);
- Any transaction referred u/s 80A;
- Any transfer of goods/services u/s 80-IA;
- Any business transaction u/s 80-IA(10);
- Any transaction under Chapter VI-A or u/s 10AA to which provisions of Sec 80-IA (8) or (10) applies; or
- Any other transaction as may be prescribed.
- All provisions applicable for determination of ALP for international transactions would apply in case of SDT also. Also penal provisions applicable to international transactions would apply to SDT
TP Documentation & Penalties
|Any other information e.g. data, documents like invoices, agreements, price related correspondence etc.||Transaction Related|
- Detailed documentation not required in case aggregate transaction value is less than INR 1 Crore
- In case aggregate value of transaction is less than 1 Crore, detailed documentation is not required provided that the assessee has required documents to substantiate, on the basis of material available with him, that income/expense arising from international transactions entered into by him has been computed in accordance with section 92.
- List of supporting documents are also provided in the law
- Contemporaneous data requirements
- Documents to be retained for a fixed period from end of the assessment year
- Need to obtain Accountant’s report (under Form 3CEB) to be filed along with the return of income
Transfer Pricing Penalties-Section 271
|Nature of Default||Penalty|
|Post-inquiry adjustment (deemed concealment of income) —> u/s 270A||50% / 200% of tax on the adjusted amount|
|Failure to maintain information or documents; or
Fails to report transactions; or
Fails to maintain proper documentation; or
Furnishes an incorrect information or documents u/s 271AA
|2% of the transaction value|
|Failure to furnish information or documents u/s 271G||2% of the transaction value|
|Failure to furnish accountants report (Form 3CEB) u/s 271BA||Rs 100,000|
Empowering the TPO to levy penalty under section 271G
- The existing provisions of section 271G of the Act provide that if any person who has entered into an international transaction or specified domestic transaction fails to furnish any such document or information as required by sub-section (3) of section 92D, then such person shall be liable to a penalty up to 2% of the value of international transactions (or specified domestic transaction) which may be levied by the Assessing Officer or the Commissioner (Appeals).
- Given that determination of ALP in several cases is done by TPOs, TPOs are now empowered to levy penalty under section 271G for failure to furnish information/ documentation.
- The amendment came into effect from 1 October 2014.
- Need to be mindful of the 30 days time limit for submission of information/ documents during the course of transfer pricing audits
This article is for Discussion purpose only.
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This article is written by CA Rajat Bansal. He can be contacted at Email –[email protected]