ICAI Released Exposure Draft of Guidance Note on Report under Section 92E of the Income Tax Act 1961

The Institute of Chartered Accountants of India(ICAI) has released Exposure Draft of Guidance Note on Report under Section 92E of the Income Tax Act 1961.

Introduction

In an era of liberalization and globalization of trade and investment and the emergence of digital economy, the perceptible results have been – increase in the number of cross-border transactions and the complexity and speed with which global business can be transacted.

When transactions are entered into between independent enterprises, the consideration therefore is determined by market forces. However, when associated enterprises deal with each other, it is possible that the commercial and financial aspects of the transactions are not influenced by external market forces but are determined based on internal factors. In such a situation, when the transfer price agreed between the associated enterprises does not reflect market forces and the arm‟s length principle, the profit arising from the transactions, the consequent tax liabilities of the associated enterprises and the tax revenue of the host countries could be distorted.

The existence of different tax rates and rules in different countries offers a potential incentive to multinational enterprises to manipulate their transfer prices to recognise lower profit in countries with higher tax rates and vice versa. This can reduce the aggregate tax payable by the multinational groups and increase the after tax returns available for distribution to shareholders.

In India, the Act for a long time did not deal with this problem in a detailed manner. The erstwhile section 92 sought to determine the amount of profits which may reasonably be deemed to have been derived from a business carried on between a resident and a non-resident which, owing to the close connection between them is so arranged that it produced, to the resident, either no profits or less than the ordinary profits which might be expected to arise in that business in case the transaction would have been entered into between two entities having no close connection. Besides, sections 40A(2); 80IA(10) and 80IB(13) of the Act provide powers to the Assessing Officer to interfere with the pricing or costing of certain transactions in certain cases in order to determine the correct quantum of deduction permissible.

The Finance Act, 2001, recognised that international transactions between Associated Enterprises may not be subject to the same market forces that shape relations between two independent firms, and therefore introduced a set of provisions in Chapter X of the Act under the title “Special Provisions relating to avoidance of tax”. The statutory framework attempts to monitor transfer prices for goods, facilities and services in order to determine that they confirm to the “arm‟s length principle”. Not only has section 92 of the Act been completely recast but new sections 92A to 92F have also been introduced to meet the desired objective of ensuring that the local tax base of a taxpayer is fair.

The relevant provisions contained in Chapter X (sections 92 to 92F) of the Act and the provisions dealing with the levy of penalties for noncompliance thereof are reproduced in Annexure I. The Finance Act, 2002 made certain changes to the provisions contained in sections 92A, 92C, 92F and 271F. The Finance Act, 2006 further amended section 92C. Further, the Finance Act, 2007 inserted sub-sections (3A) and (4) in section 92CA. Finance Act 2009 amended the proviso to section 92C, provided for constitution of the dispute resolution panel and empowered the Board to formulate safe harbour rules. Finance Act 2011 amended the allowable variation as per second proviso to section 92C(2) to be notified by the Central Government, and made changes to Section 92CA. The Finance Act 2012 has introduced significant amendments including inter alia clarifying the coverage of the term „international transactions‟, expanding the scope of transfer pricing provisions to specified domestic transactions (Section 92BA) and providing an Advance Pricing Agreement framework (Section 92CC and Section 92CD) empowering the transfer pricing officer to determine arm‟s length price of an international transaction noticed during the course of proceedings before him, even if the said transaction has not been referred by the Assessing Officer, provided such transaction has not been reported by taxpayer as per requirement of Section 92E of the Income Tax Act, 1961 [Section 92CA(2B)] and expanding the scope of penalties and amending Section 147 of the Act to provide that non-reporting of transaction in report as per Section 92E would be deemed to be case of escapement of income.

Further, changes specifically in respect of arm‟s length price determination were introduced vide Finance (No. 2) Act 2014 and the Finance Act 2015. The Finance Bill 2014 introduced the use of multiple year data and the Finance Act (No. 2), 2014 introduced range concept for determination of arm‟s length price and roll-back mechanism for APA. The final rules in relation to the range concept and use of multiple year data were notified by the Central Board of Direct Taxes in October, 2015.

The Committee on International Taxation of the ICAI has released the Exposure Draft of the Guidance Note on Report under Section 92E of the Income-tax Act, 1961 (Transfer Pricing) for views.

Changes have been made to the extent of amendments made by the Finance Act, 2022.

Comments are most helpful if they indicate the specific paragraph or group of paragraphs to which they relate, contain a clear rationale and, where applicable, provide suggestions for alternative wording.

How to comment:

Comments can be sent to [email protected] so as to be received before 1st August, 2022.

For Exposure Draft – Click Here