Transfer Pricing Law in India
DELHI – India’s market began to emerge on the global stage in 1991 with the implementation of several governmental policies relating to foreign trade and foreign direct investment. This move towards globalization brought about new requirements relating to taxation and other laws as multinational corporations began investing in India and acquiring local companies.
There were many transactions taking place between the same group of companies and the transfer price between them started playing a major role in impacting the profits and losses of Indian companies. Amendment in taxation laws for such transactions then became the need of the hour so that tax planning could be kept under check and protect against tax evasion.
With these concerns in mind, the Indian Tax Authorities first introduced the Transfer Pricing Regulations (TPR) through the Finance Act, 2001, and made it effective from the Financial year ending March 2002. These provisions were set to be governed by the Income Tax Act, 1961, and were based on the Transfer Pricing guidelines of the Organization for Economic Co-Operation and Development.
The Transfer Pricing Laws have been enumerated under Sections 92 to 92F of the Indian Income Tax Act and cover intra-group cross-border transactions. Rules and regulations prescribe that income arising from International Transactions or Specified Domestic Transactions between Associated Enterprises (AE) should be computed using the arm’s-length price principle.
“International transactions” refers to transactions between two (or more) AEs involving the sale, purchase or lease of tangible or intangible property, the provision of services or cost-sharing agreements, lending/ borrowing of money or any other transaction having a bearing on the profits, income, losses or assets of such enterprises.
Relationships falling under the AE category include direct/indirect participation in the management, control, or capital of an enterprise by another enterprise. It also covers situations in which the same person participates in the management, control or capital of both the enterprises.
For tax purposes, companies are required to record the exchange of goods using the arms-length principal, which states that the prices charged by the affiliated companies should be equivalent to the prices that would have been charged by a third-party. The following methods are prescribed under the Act for the determination of the arm’s-length price:
- Comparable uncontrolled price (CUP) method;
- Resale price method (RPM);
- Cost plus method (CPM);
- Profit split method (PSM);
- Transactional net margin method (TNMM);
- Such other methods as may be prescribed.
It has been notified that the ‘other method’ for determination of the arm’s-length price in relation to an international transaction shall be any method which takes into account the price which has been charged for the same or similar transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts. No particular method has been accorded priority and the most appropriate method for the transaction would need to be determined with regard to the nature and class of transaction or associated persons and functions performed by such persons, as well as other relevant factors.
Until Financial Year 2011-12, transfer pricing regulations were not applicable to domestic transactions. The Finance Act, 2012, has extended the application of transfer pricing regulations to domestic transactions, christened as “Specified Domestic Transactions.”
The following transactions with related domestic parties qualify as Specified Domestic Transactions, provided the aggregate value of such transactions exceed INR 5 crore (US$800,000):
- Any expenditure with respect to which deduction is claimed while computing profits and gains of business or profession;
- Any transaction related to businesses eligible for profit-linked tax incentives, (e.g. infrastructure facilities, under Section 80-IA, and SEZ units, under section 10AA);
- Any other transactions as may be specified.
This amendment will be applicable from fiscal year 2012-13 and onwards.
Taxpayers are required to maintain information relating to International Transactions undertaken with AEs. The rules prescribe detailed information and documentation that has to be maintained by the taxpayer. Such requirements can broadly be divided into two parts:
The first part includes information on the ownership structure of the taxpayer, a group profile, and a business overview of the taxpayer and AEs, including prescribed details such as the nature, terms, quantity and value of international transactions. The rules also require the taxpayer to document a comprehensive transfer pricing study.
The second part of the rules require adequate documentation be maintained to substantiate the information, analysis and studies documented under the first part of the rule. It also contains a recommended list of such supporting documents, including government publications, reports, studies, technical publications and market research studies undertaken by reputable institutions, price publications, relevant agreements, contracts and correspondence.
Taxpayers having aggregate international transactions below the prescribed threshold of INR 1 crore (US$160,000) and Specified Domestic Transactions below the threshold of INR 5 crore (US$800,000) are relieved from maintaining the prescribed documentation. However, it is imperative that the documentation maintained should be adequate to substantiate the arm’s-length price of the international transactions or specified domestic transactions.
Companies to whom transfer pricing regulations are applicable are currently required to file their tax returns on or before 30 November following the close of the relevant tax year. The prescribed documents must be maintained for a period of eight years from the end of the relevant tax year, and must be updated annually on an ongoing basis.
It is also imperative to obtain an Independent Accountant’s Report in respect of all international transactions between AEs and the same has to be submitted by the due date of the tax return filing, on or before 30 November.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
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