History of Transfer Pricing in India
Written by gkkedia Dt. March 9th, 2023
Excessive enhancement in the global transactions during the First world war ended way back in 1918-19, turned the table towards the concept of “Transfer Pricing”. The League of Nations recognized that the interaction of several tax systems in the world can lead to double non-taxation of incomes which can affect global prosperity and trade. That was first time when the UK introduced the Arm’s Length principle not only in Europe but in India too by virtue of section 43 of erstwhile tax law i.e., Income-tax Act, 1922.
In 1992, India became liberalized & also globalized its economy. Since then, the variance in the rate of charging taxes across different tax jurisdictions become a cause for shifting their profits to the lower tax jurisdictions.
Consequently, India has introduced Transfer Pricing in 2001 by virtue of a series of Section 92 and it become the most important tax issue for MNCs operating in India.
Transfer pricing refers to prices at which goods and/or services transacted between associated enterprises which may take place under conditions differing from those taking place between independent enterprises. The transfer of value can be taken place between related entities as well as unrelated parties controlled by a common entity.
Let’s say that Division X is in a higher tax country than Division Y. The company can save on taxes by making Division X less profitable and Division Y more profitable. By making Division X charge lower prices and pass those savings on to Division Y, boosting its profits through a lower COGS, Division Y will be taxed at a lower rate. In other words, Division X’s decision not to charge market pricing to Division Y allows the overall company to evade taxes.
In short, by charging above or below the market price, companies can use transfer pricing to transfer profits and costs to other divisions internally to reduce their tax burden.
Applicability of Transfer Pricing Regulations: The provisions of Section 92 to 92F of the Income Tax Act, 1961 are applicable only if:
There are two or more enterprises (Section 92F)
The enterprises are associated enterprises (Section 92A)
The enterprises enter into a transaction (Section 92F)
The transaction is an International transaction or a specified domestic transaction* (Section 92B and Section 92BA)
*Note: Specified domestic transaction means where the aggregate of such transactions entered into by the assessee in the previous year exceeds a sum of Rs. 20 crores.
Rule 10DA defines thresholds for applicability, timelines, requirements and procedure in relation to Master File. The relevant information and intimation related to Master File is required to be filed in Form No. 3CEAA and 3CEAB.
Provisions for Applicability of Form 3CEAA (Section 92D of the Income Tax Act, 1961):
Part A: To be filed by every constituent entity(*Constituent Entity of the International Group in India means any entity of the International Group in India whose accounts is included in Consolidated Financial Statement.)
Part B: To be filed if the consolidated revenue of any International Group exceeds Rs. 500 crores and international transactions exceeds Rs. 50 crores or Intangibles related transactions exceeds Rs. 10 crores.
Due Date: Rule 10DA requires the constituent entity to file this form on or before the due date for furnishing the return of income as specified under Section 139(1).
The above mentioned provides that, if more than one constituent entities resident in India of an international group required to file the information and document under Rule 10DA(2), the Form 3CEAA may be furnished by anyone constituent entity under the following circumstances:
The international group has designated such entity for this purpose.
The information has been conveyed in Form No. 3CEAB to the Joint Commissioner on this behalf thirty days before the due date of furnishing Form No. 3CEAA.
Penalty: As per Section 271AA, the assessee is required to pay Rs. 5 Lacs in case of failure.
Provisions for Applicability of Country-by-Country Reporting (Rule 10DB):
The CbC Reporting is applicable to an international group having total consolidated group revenue of more than Rs. 64 Billions (Euro 750 million as per International guidelines) in prescribed forms.
Every parent entity or an alternate reporting entity, resident in India, is required to furnish CbCR as prescribed under Form No. 3CEAD. The intimation under Form no. 3CEAC has to be filed by every constituent entity resident in India, of an international group, the parent entity of which is not resident in India.
Due Date: The Cbc report needs to be filed on or before the date of filing of the return of income.
Penalty: As per Section 286, the assessee needs to pay the following penalty, in case of failure:
Rs. 5,000 per day up to one month; or
Rs. 15,000 per day beyond one month, if the failure continues after penalty order of Rs. 50,000 per day.
Provisions for Applicability of Form 3CEB (Section 92E of the Income Tax Act, 1961 read with Rule 10E):
Every person who has entered into an international transaction or a specified domestic transaction during a previous year, is required to be furnished a report from an accountant, i.e., Form No. 3CEB and be verified in the manner indicated therein.
Steps to file Form 3CEB:
Identify all international transactions / specified domestic transaction during the year with Associated Enterpise(s) / related party
Compute the Arm’s Length Price as per Section 92C
Collate, maintain information / documentation prescribed under Section 92D
Furnish completed Annexure to Form No. 3CEB to Accountant
Approve the Form No. 3CEB uploaded online by the Accountant
Due Date: This form is required to be filed on or before the due date for furnishing the return of income as specified under Section 139(1).
Penalty: Under section 271BA, the assesse in case of failure to furnish a report from an accountant, is required to pay Rs. 1 Lakhs.
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