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• Friday, December 20th, 2013

Transfer Pricing Laws In India, International Transaction And Arm’s Length PriceTransfer pricing laws in India are frequently invoked these days. Many international transactions that have taken place in the past are now under the scrutiny of Department of Income Tax, Government of India. The transfer pricing regulatory environment of India is fast changing and it is pertinent for various individuals and companies to get themselves aware of the transfer pricing laws and regulations of India.

Perry4Law and Perry4Law’s Techno Legal Base (PTLB) have been discussing this c crucial area for the larger benefit of all the stakeholders.

The Income Tax 1961 of India deals with taxation of international transactions and transfer pricing issues in India. The objective of these provisions is to curb tax evasion on the part of taxable entities and individuals. However, the provisions of the Income Tax Act, 1961 in the past proved to be inadequate and ineffective to curb tax evasions, especially long term capital gains, arising out of foreign transactions having Indian ramifications.

One such incidence involves the company Vodafone where there is a present tax dispute between the company and Indian government. In fact, Vodafone may invoke arbitration for fresh tax demands by India. Vodafone taxation, parliament, international treaty and taxation issues of India need a fresh outlook on the part of our Parliament and Indian government.

We at Perry4Law and PTLB have provided a research report titled Global Taxation and Anti Competition Regulatory Issues In 2012 And Projections Report for 2013 by Perry4Law that is discussing these issues. The report highlights global taxation issues including the recent allegations of tax avoidance labeled against Amazon, Google and Starbucks regarding UK Tax Laws.

Even the foreign direct investment (FDI) are strict actions have been initiated by Indian government. After canceling the telecom licenses of many telecom companies, now Indian government would ascertain beneficiary in Walmart probe to ascertain possible violation of Indian laws. The Competition Commission of India (Procedure in Regard to the Transaction of Business Relating to Combinations) Regulations, 2011 have also been formulated by the Competition Commission of India in 2011 to regulate anti competition combinations. The same may be pressed more frequently in the year 2013.

It is obvious that transfer pricing laws in India and laws pertaining to international transactions and arm’s length dealing in India need a total rejuvenation. The present provisions incorporated in the Income Tax Act, 1961 are inadequate in this regard.

Computation Of Income From International Transaction Having Regard To Arm’s Length Price

Section 92(1) of the Act prescribes that any income arising from an international transaction shall be computed having regard to the arm’s length price. The explanation to Section 92(1) provides that 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(2) of the Act prescribes that where in an international transaction, two or more associated enterprises enter into a mutual agreement or arrangement for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises, the cost or expense allocated or apportioned to, or, as the case may be, contributed by, any such enterprise shall be determined having regard to the arm’s length price of such benefit, service or facility, as the case may be.

Section 92(3) of the Act prescribes that the provisions of this section shall not apply in a case where the computation of income under sub-section (1) or the determination of the allowance for any expense or interest under that sub-section, or the determination of any cost or expense allocated or apportioned, or, as the case may be, contributed under subsection (2), has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction was entered into.

Associated Enterprise Under Indian Tax Laws

Section 92A (1) of the Act provides that for the purposes of this section and sections 92, 92B, 92C, 92D, 92E and 92F, “associated enterprise”, in relation to another enterprise, means an enterprise—

(a) Which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; or

(b) In respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise.

Section 92A (2) of the Act provides that for the purposes of sub-section (1), two enterprises shall be deemed to be associated enterprises if, at any time during the previous year:

(a) One enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in the other enterprise; or

(b) Any person or enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in each of such enterprises; or

(c) A loan advanced by one enterprise to the other enterprise constitutes not less than fifty-one per cent of the book value of the total assets of the other enterprise; or

(d) One enterprise guarantees not less than ten per cent of the total borrowings of the other enterprise; or

(e) More than half of the board of directors or members of the governing board, or one or more executive directors or executive members of the governing board of one enterprise, are appointed by the other enterprise; or

(f) More than half of the directors or members of the governing board, or one or more of the executive directors or members of the governing board, of each of the two enterprises are appointed by the same person or persons; or

(g) The manufacture or processing of goods or articles or business carried out by one enterprise is wholly dependent on the use of know how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights; or

(h) Ninety per cent or more of the raw materials and consumables required for the manufacture or processing of goods or articles carried out by one enterprise, are supplied by the other enterprise, or by persons specified by the other enterprise, and the prices and other conditions relating to the supply are influenced by such other enterprise; or

(i) The goods or articles manufactured or processed by one enterprise, are sold to the other enterprise or to persons specified by the other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprise; or

(j) Where one enterprise is controlled by an individual, the other enterprise is also controlled by such individual or his relative or jointly by such individual and relative of such individual; or

(k) Where one enterprise is controlled by a Hindu undivided family, the other enterprise is controlled by a member of such Hindu undivided family or by a relative of a member of such Hindu undivided family or jointly by such member and his relative; or

(l) Where one enterprise is a firm, association of persons or body of individuals, the other enterprise holds not less than ten per cent interest in such firm, association of persons or body of individuals; or

(m) There exists between the two enterprises, any relationship of mutual interest, as may be prescribed.

Meaning Of International Transaction Under Indian Tax Laws

Section 92B (1) of the Act provides that for the purposes of this section and sections 92, 92C, 92D and 92E, “international transaction” means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of 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 such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises.

Section 92B (2) of the Act provides that a transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise.

Computation Of Arm’s Length Price Under Indian Tax Laws

Section 92C (1) of the Act prescribes the procedure to calculate the arm’s length price for an international transaction. As per Section 92C (1) the arm’s length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely:

(a) Comparable uncontrolled price method;

(b) Resale price method;

(c) Cost plus method;

(d) Profit split method;

(e) Transactional net margin method;

(f) Such other method as may be prescribed by the Board.

Section 92C (2) of the Act provides that the most appropriate method referred to in sub-section (1) shall be applied, for determination of arm’s length price, in the manner as may be prescribed.

The proviso to Section 92C (2) provides that where more than one price is determined by the most appropriate method, the arm’s length price shall be taken to be the arithmetical mean of such prices, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean.

Section 92C (3) of the Act provides that where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that-

(a) The price charged or paid in an international transaction has not been determined in accordance with sub-sections (1) and (2); or

(b) Any information and document relating to an international transaction have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf; or

(c) The information or data used in computation of the arm’s length price is not reliable or correct; or

(d) The assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D,

the Assessing Officer may proceed to determine the arm’s length price in relation to the said international transaction in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him:

Provided that an opportunity shall be given by the Assessing Officer by serving a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the arm’s length price should not be so determined on the basis of material or information or document in the possession of the Assessing Officer.

Section 92C (4) of the Act provides that where an arm’s length price is determined by the Assessing Officer under subsection (3), the Assessing Officer may compute the total income of the assessee having regard to the arm’s length price so determined:

Provided that no deduction under section 10A [or section 10AA] or section 10B or under Chapter VI-A shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under this sub-section:

Provided further that where the total income of an associated enterprise is computed under this sub-section on determination of the arm’s length price paid to another associated enterprise from which tax has been deducted [or was deductible] under the provisions of Chapter XVIIB, the income of the other associated enterprise shall not be recomputed by reason of such determination of arm’s length price in the case of the first mentioned enterprise.

Reference To Transfer Pricing Officer

Section 92CA (1) of the Act provides that where any person, being the assessee, has entered into an international transaction in any previous year, and the Assessing Officer considers it necessary or expedient so to do, he may, with the previous approval of the Commissioner, refer the computation of the arm’s length price in relation to the said international transaction under section 92C to the Transfer Pricing Officer.

Section 92CA (2) of the Act provides that where a reference is made under sub-section (1), the Transfer Pricing Officer shall serve a notice on the assessee requiring him to produce or cause to be produced on a date to be specified therein, any evidence on which the assessee may rely in support of the computation made by him of the arm’s length price in relation to the international transaction referred to in sub-section (1).

Section 92CA (3) of the Act provides that on the date specified in the notice under sub-section (2), or as soon thereafter as may be, after hearing such evidence as the assessee may produce, including any information or documents referred to in sub-section (3) of section 92D and after considering such evidence as the Transfer Pricing Officer may require on any specified points and after taking into account all relevant materials which he has gathered, the Transfer Pricing Officer shall, by order in writing, determine the arm’s length price in relation to the international transaction in accordance with sub-section (3) of section 92C and send a copy of his order to the Assessing Officer and to the assessee.

Section 92CA (3A) of the Act provides that where a reference was made under sub-section (1) before the 1st day of June, 2007 but the order under sub-section (3) has not been made by the Transfer Pricing Officer before the said date, or a reference under sub-section (1) is made on or after the 1st day of June, 2007, an order under sub-section (3) may be made at any time before sixty days prior to the date on which the period of limitation referred to in section 153, or as the case may be, in section 153B for making the order of assessment or reassessment or recomputation or fresh assessment, as the case may be, expires.

Section 92CA (4) of the Act provides that On receipt of the order under sub-section (3), the Assessing Officer shall proceed to compute the total income of the assessee under sub-section (4) of section 92C in conformity with the arm’s length price as so determined by the Transfer Pricing Officer.

Section 92CA (5) of the Act provides that with a view to rectifying any mistake apparent from the record, the Transfer Pricing Officer may amend any order passed by him under sub-section (3), and the provisions of section 154 shall, so far as may be, apply accordingly.

Section 92CA (6) of the Act provides that where any amendment is made by the Transfer Pricing Officer under subsection (5), he shall send a copy of his order to the Assessing Officer who shall thereafter proceed to amend the order of assessment in conformity with such order of the Transfer Pricing Officer.

Section 92CA (7) of the Act provides that the Transfer Pricing Officer may, for the purposes of determining the arm’s length price under this section, exercise all or any of the powers specified in clauses (a) to (d) of sub-section (1) of section 131 or sub-section (6) of section 133.

The Explanation to Section 92CA provides that for the purposes of this section, “Transfer Pricing Officer” means a Joint Commissioner or Deputy Commissioner or Assistant Commissioner authorised by the Board to perform all or any of the functions of an Assessing Officer specified in sections 92C and 92D in respect of any person or class of persons.

Maintenance And Keeping Of Information And Document By Persons Entering Into An International Transaction

Section 92D (1) of the Act provides that every person who has entered into an international transaction shall keep and maintain such information and document in respect thereof, as may be prescribed.

Section 92D (2) of the Act provides that without prejudice to the provisions contained in sub-section (1), the Board may prescribe the period for which the information and document shall be kept and maintained under that sub-section.

Section 92D (3) of the Act provides that the Assessing Officer or the Commissioner (Appeals) may, in the course of any proceeding under this Act, require any person who has entered into an international transaction to furnish any information or document in respect thereof, as may be prescribed under sub-section (1), within a period of thirty days from the date of receipt of a notice issued in this regard:

Provided that the Assessing Officer or the Commissioner (Appeals) may, on an application made by such person, extend the period of thirty days by a further period not exceeding thirty days.

Report From An Accountant To Be Furnished By Persons Entering Into International Transaction

Section 92E of the Act provides that every person who has entered into an international transaction during a previous year shall obtain a report from an accountant and furnish such report on or before the specified date in the prescribed form duly signed and verified in the prescribed manner by such accountant and setting forth such particulars as may be prescribed.

Definitions Of Certain Terms Relevant To Computation Of Arm’s Length Price, Etc

Section 92F of the Act provides that in sections 92, 92A, 92B, 92C, 92D and 92E, unless the context otherwise requires-

(i) “Accountant” shall have the same meaning as in the Explanation below sub-section (2) of section 288;

(ii) “Arm’s length price” means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions;

(iii) “Enterprise” means a person (including a permanent establishment of such person) who is, or has been, or is proposed to be, engaged in any activity, relating to the production, storage, supply, distribution, acquisition or control of articles or goods, or know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights, or the provision of services of any kind, [or in carrying out any work in pursuance of a contract,] or in investment, or providing loan or in the business of acquiring, holding, underwriting or dealing with shares, debentures or other securities of any other body corporate, whether such activity or business is carried on, directly or through one or more of its units or divisions or subsidiaries, or whether such unit or division or subsidiary is located at the same place where the enterprise is located or at a different place or places;

(iiia) “Permanent establishment”, referred to in clause (iii), includes a fixed place of business through which the business of the enterprise is wholly or partly carried on;

(iv) “Specified date” shall have the same meaning as assigned to “due date” in Explanation 2 below sub-section (1) of section 139;]

(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.

Perry4Law and PTLB hope this research work would prove useful to all concerned.

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