News Items on Taxation Topics

Income from transaction with Non-Residents – Transfer Pricing Applicability Section 92 is the charging section for Chapter X of the Act. Sec 92 provides that any income arising from an ‘International transaction’ shall be computed having regard to ALP. For this purpose, the allowance for any expense or interest shall be determined on the basis of ALP. Further, where two or more enterprises enter into mutual agreement or arrangement for cost allocation or cost contribution, they would also be covered within sec 92 and would be subject to ALP. This provision will not be applicable – While determining ALP under…

Limitation of interest deductions – transfer pricing Introduction Popularly known as ‘Thin Capitalization Rules’, this provision intends to cap the interest that can be paid to the AEs in case of borrowings. Generally, debt is a preferred instrument to provide funds to the subsidiary or group company rather than equity due to the fact that interest on debt is a deductible expenditure for tax and there would be regular cash flow to the lender as well. The DTAAs also provide a favourable tax rate for the interest earned by the non-residents High leverage and excess interest deductions erodes the profitability…

International Transaction [Section 92B] – Transfer Pricing Transfer pricing provisions are applicable to determine the arm’s length price of international transaction and specified domestic transaction. Though, specified domestic transactions are also part of the transfer pricing provisions, it predominantly deals with international transaction. Therefore, it is essential to understand the term which is provided in Section 92B (1) Transaction between two or more AEs either or both are NRs. Summary Question                Which of the following is an international transaction? Nippon USA purchases goods from Nippon Japan amounting to $1 million Interest of Rs 10 crores paid by K Ltd (India)…

Secondary Adjustment – transfer pricing Introduction As per the OECD’s TP guidelines for Multinational Enterprises and Tax Administrations (OECD TP Guidelines), secondary adjustment may take the form of constructive dividends, constructive equity, or constructive loans. The provisions of secondary adjustment are internationally recognized and are already part of the TP rules of many leading economies in the world., though the approach by various countries vary. India’s secondary adjustment provisions are enshrined in section 94CE of the Act. India had initially taken a position to treat secondary adjustment as constructive loan and thereby imputing interest on the outstanding amount. However, budget…

Specified Domestic Transactions – Transfer Pricing Introduction The concept of Specified Domestic Transactions (SDT) was introduced in Finance Act 2012. Prior to that the AO were empowered to disallow payments made to related parties which were unreasonable or excessive under section 40A(2)(b) of the Act. Further, TPPs were applicable only for international transactions. SC in the case of Re Glaxo Smithkline Asia P Ltd recognised the complications of arriving at the Fair Market value (FMV) in case of transactions involving related parties and suggested why transfer pricing provisions could not be extended to domestic transactions as well This led to…

Arm’s Length Principle – Transfer Pricing Why Arm’s length price? The cornerstone of the Transfer Pricing Provision is determining an Arm’s Length Price (‘ALP’) of a transaction between Associated Enterprises.   This course will provide you the methods to be adopted for determining the ALP and factors which needs to be considered in order to identify comparable uncontrolled transactions. ALP is defined in section 92F(ii) to mean price which is applied or proposed to be applied in a transaction between persons other than associated enterprises in uncontrolled conditions. Section 92C deals with the method for determining arm’s length price and…

Economic analysis – Transfer Pricing Characterization of the transacting parties For applying the above methods, following factors needs to be analyzed with respect to the transactions Specific characteristic of the property transferred or services rendered The functions performed taking into account assets employed and risks assumed by the respective parties. Characterization of entities based on functions performed by each associate enterprise, assets employed by them to carry out the functions and risks assumed by each enterprise in carrying out the functions. Conditions prevailing in the market in which the respective parties operate, laws of the territory, labour and capital markets…

FAR Analysis – Transfer Pricing Functional, asset and risk analysis is often referred to as FAR analysis. When transactions between the AEs are examined for the purpose of determining the ALP, one has to analyse the three components closely, namely Functions performed Functions performed by different parties are examined to ascertain which party performs the most significant activities and which one performs the routine activities. Suppose A Inc (US Company) is a manufacturer of a product and B Ltd (Indian Company) is a distributor while A Inc identifies undertakes the manufacturing process, employs intangibles, conducts quality checks etc. and B…

Determination of ALP – Transfer Pricing Rule 10C deals with the determination of most appropriate method. Under this Rule, the method is best suited to the facts and circumstances, and which provides the most reliable measure of ALP in relation to the international transaction will be considered to be the MAM. Factors that needs to be considered are: Nature or class of transaction The class or classes of AEs and FAR Availability and reliability of data Degree of comparability between the transactions Extent to which reliable and accurate adjustment can be made to account for the difference The nature, extent…

Returns, Audit and other miscellaneous provisions – Transfer pricing Records to be maintained Each person who has entered into international transaction has to maintain certain information and documents in respect thereof as may be prescribed by Central Board of Direct Taxes (‘CBDT’). Apart from that, if the person belongs to an International Group and if the group meets certain monetary threshold, then the person is required to additionally maintain and submit prescribed information and document regarding the international group. Each person undertaking an international transaction has to maintain the following documents in accordance with Rule 10D of the Income Tax…

Transfer pricing audit cycle Reference to Transfer Pricing Officer Section 92CA provides for procedure for reference to a Transfer Pricing Officer (‘TPO’) of any issue relating to computation of ALP in an international transaction. The procedure is as under: The option to make reference to TPO is given to the Assessing Officer. He may do it if he considers it necessary or expedient to do so. As per CBDT instruction in 2016, the AO has to make mandatory reference to TPO only under following TP risk parameters assisted by CASS and compulsory manual selection on the basis of earlier non-compliance…

Transfer pricing adjustment and consequence Transfer pricing adjustment If the transaction price is not within the ALP range or the tolerance band and if adopting ALP would not reduce the profit or increase losses etc, then the difference between the ALP and the transaction price is added to the income of the assessee. The AO would make the adjustment in the assessment order. The effect of this adjustment would be as under: Penalty for transfer pricing compliance Question Once the TPO passes the order, which of the following is correct The AO has the discretion of incorporating the order of…

Dispute Mitigation strategies in transfer pricing Determining ALP is not an exact science and often may lead to different answer depending on many factors. This has resulted in huge litigation leaving the assessee and the income tax authorities often in the loggerheads. The data available at the time of concluding the agreement / work order, the data at the time of preparing documentation and filing return of income, and the data available at the time when the issue is taken up during the assessment would be widely varying. This has resulted in disputes running into crores and uncertainty in the…

Advance Pricing Agreements (APA) APA objective APA is an agreement between the taxpayer and the taxing authority on an appropriate transfer pricing methodology for a set of transactions over a fixed period of time in future. Section 92CC empowers the Board to enter into APA with any person undertaking an international transaction. Purpose of APA: the APA shall relate to an international transaction to be entered into by such person. The APA shall be entered into for the purpose of determination of ALP or specifying the manner in which ALP shall be determined. The budget 2020 has extended the scope…

Mutual Agreement Procedure Mutual Agreement Procedure (‘MAP’) is a procedure set out in most treaties which permit designated Government representatives to work together to resolve international tax disputes including issues involving double taxation, questions regarding residential status, tax recovery etc. MAP is used to eliminate double taxation that can arise from transfer pricing adjustments. Eligibility for MAP MAP application can be filed by a person when he considers that he has not been taxed in accordance with the Treaty. Even if such person has other remedies such as appeal process under the domestic laws, MAP can be initiated. MAP can…

Fundamentals of Base Erosion and Profit Shifting – Transfer Pricing Introduction In the past few decades, the world has seen large movement of capital and investment from developed and developing countries. This has resulted in huge economic development, boosted trade and increases foreign direct investment in various countries. Many developing countries (low – cost locations) saw boon in their manufacturing activity and become operation hub for many MNEs. This also accelerated growth, innovation and created jobs. Taxes are the main revenues for the economy. Once cross border activities increased, there were many instances of double-taxation and need to eliminate the…

Anti-Avoidance measures in certain jurisdictions – Transfer pricing Specific anti-avoidance measures in respect of transactions with persons located in Notified Jurisdictional area was introduced in the Act under sec 94A We have seen in earlier sections that transactions with the AEs are subject to transfer pricing provisions. This is generally sufficient to cover all the related party transactions, since most countries exchange information to the tax authorities of the other country. Where the exchange of information regarding the tax residence of a particular country is difficult to obtain, the CBDT had come up with the idea of Notified Jurisdictional Area…

Additional reporting by Multinational companies – Transfer pricing The OECD had devised many action plans to combat BEPS. OECD also recommended a three-tier documentation approach for transfer pricing under Action Plan 13. Three tier documentation Advantages of three tier reporting Elements of CbC and Master File reporting requirement and related matters have been incorporated in the Section 286 of the Act. This reporting shall be applicable in respect of an international group for an accounting year if the total consolidated revenue as reflected in the CFS for the accounting year preceding year is above the threshold limit. Key terms to…

Introduction to Transfer Pricing Transfer Price “Transfer Price” is the price at which an enterprise charges for its transaction within its group entities International transaction involves more than one tax jurisdiction, and due to disparity in tax rates and method of computing income, the parties may try to adjust the transfer prices Since the parties are related there is a possibility that the price at which the transactions are carried out can be fixed in such a way that profits can be parked in the country which has less tax and entity in high tax country earns less or no…

Penalties for non-compliance – Transfer Pricing The Act has prescribed strict penalties for non-compliance in terms of non-disclosure or incorrect disclosure Question International group shall maintain information and documents in Master file when Consolidated group revenue of the International group is (as reflected in Consolidated Financial Statements of the International Group) is More than Rs.500 crores More than 5500 crores More than Rs 50 crores Answer a. International group shall maintain information and documents in Master file when Consolidated group revenue of the International group is (as reflected in Consolidated Financial Statements of the International Group) is Rs 500 crores.…