Transfer Pricing Solutions and Rules – India
The Transfer Pricing Regulations (TPR) were introduced vide the Finance Act, 2001, and, are presently embodied in section 92 to 92F, section 94A and 94B and section 286 of the ITA and rules 10A-10THD of the TPR. The TPR are applicable to relevant international transactions and specified domestic transactions.
The TPR feature several concepts that are in line with the concepts of the OECD Guidelines 2017 and the regulations of certain other countries. However, other concepts are unique to the TPR, viz. a broader definition of associated enterprise, international transaction, the concept of arithmetical mean instead of arm’s length range, etc.
The Finance Act 2014 proposed to introduce the concept of range for determination of the ALP where an adequate number of comparable companies is available in the benchmarking set. It is effective for international transactions and specified domestic transactions undertaken after 1 April 2014. On 19 October 2015, vide Notification No. 83/2015, the CBDT notified final rules for comparability analysis using multiple-year data and range concept for determining the ALP in respect of international transactions and specified domestic transactions.
Following the release of the OECD Base Erosion and Profit Shifting (BEPS) Report on Action Plan 13 (Transfer pricing documentation and country-by-country (CbC) reporting), the Indian TP legislation has been amended by the Finance Act 2016 to include specific requirements in respect of CbC reporting and Master File documentation with effect from financial year 2016-17.
Transfer Pricing in India
- Taxpayers are required to obtain from a chartered accountant (practising Indian CPA), or any other person qualified to be appointed as an auditor, a report relating to international transactions and/ or specified domestic transactions entered into by the taxpayer in the prescribed Form No. 3CEB.
- The Indian transfer pricing regulations under section 92D of the ITA, read with Rule 10D of the IT Rules, require every person who has entered into an international transaction to maintain prescribed information/documents for substantiating the arm’s length price of its transactions with the related parties. The documentation must be prepared and maintained in English.
A revenue threshold for maintenance of TP documentation exists. The TP documentation is required to be maintained only in cases where the aggregate value of international transactions, recorded in the books of accounts of the taxpayer, exceeds INR one crore.
Further, in the case of a non-resident taxpayer, it is mandatory to maintain necessary documentation as provided for in section 92D of the Act. No exception/exemption whatsoever has been provided to the non-resident taxpayers from maintaining their own transfer pricing documentation, and relying on the supporting documents of the Indian AE may not be sufficient.
- The CBDT, on 31 October 2017, released the final rules on CbC reporting and Master File requirements in India (vide Notification No. 92/2017). Accordingly, every person, being a constituent entity of an international group, shall keep and maintain information and documents of the international group:
- if the consolidated group revenue of the international group of which such person is a constituent entity, as reflected in the consolidated financial statement of the international group for the accounting year, exceeds INR 500 crores; and
- if the aggregate value of international transactions:
- during the accounting year, as per the books of accounts, exceeds INR 50 crores; or
- in respect of purchase, sale, transfer, lease or use of intangible property during the accounting year, as per the books of accounts, exceeds INR 10 crores.
Finance Act 2019 has amended the transfer pricing provisions to provide that every constituent entity of an international group shall also be required to file a Master File even when there is no international transaction undertaken by such constituent entity. Further, where more than one constituent entity of an international group is required to file a Master File in India, the international group may designate any one of the constituent entities to file the Master File on behalf of the other constituent entities, including non-resident entities. The said amendment was issued by the CBDT, vide Notification No. 31/2021 dated 5 April 2021.
The provisions in relation to filing a Master File are effective from 1 April 2016 and therefore the first year is FY 2016/17. Rule 10DA(2) of the IT Rules specifies that Form No. 3CEAA has to be furnished on or before the due date of filing the return of income.
Penalty – Section 271AA of the ITA has specified a penalty of INR 500,000 for non-furnishing of prescribed information and documents as required under section 92D(4).
- CbC reporting has been implemented in India and is effective from FY 2016/17 as per the Finance Act 2016, which introduced section 286 with respect to the CbC reporting requirement. As per Rule 10DB of the IT Rules,[28] released by the CBDT on 31 October 2017, the information requirements of the CbC report are similar to those prescribed by the OECD BEPS Action Plan 13. The CbC report is required to be drawn up for each jurisdiction, with specific data pertaining to revenue, income, taxes, the number of employees, the capital and tangible assets.
Section 286 of the ITA provides that MNEs headquartered in India, with consolidated group revenues above the prescribed threshold in the preceding accounting year, will be required to file the CbC report in India for FY 2016/17 onwards. Rule 10DB(6) has prescribed the threshold to be INR 6,400 crores. The threshold was increased by the CBDT from INR 5,500 crores to INR 6,400 crores (vide Notification No. 31/2021 dated 5 April 2021). This turnover is based on the Indian rupee equivalent of EUR 750 million at the current exchange rate as specified in the G20/OECD BEPS Action 13 Guidelines. The amendment is effective from 1 April 2021.
Section 286(2) of the ITA requires every parent entity or alternate reporting entity, resident in India, for every reporting accounting year, in respect of the international group of which it is a constituent, to furnish the CbC report in Form No. 3CEAD, within 12 months from the end of the said reporting accounting year.
MNEs not headquartered in India, having group companies resident in India, are required to notify the Indian tax authorities of the details of their parent entity/alternate reporting entity and its jurisdiction. As per rule 10DB(2), such Notification is required to be made at least 2 months prior to the due date for furnishing the report as specified in section 286(2).
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