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Transfer Pricing regulations have gained significant attention due to the rise in disputes from multinational companies’ tax strategies in India. What adds to the controversy and intrigue is how regulators perceive these strategies as intentionally structured to leverage advantages such as comparable labor costs and tax benefits, potentially at the expense of a country’s tax revenues. Therefore, it was necessary to establish a consistent and globally accepted framework for determining fair and equitable profits and taxes for such multinational enterprises operating in India.
Sections 92 to 92F of the Indian Income Tax Act 1961 specifically address transfer pricing, covering both intra-group cross-border and specified domestic transactions. Since its implementation, this code has made transfer pricing the primary international tax issue affecting multinational enterprises in India. These regulations draw heavily from the Organisation for Economic Co-operation and Development (“OECD”) Guidelines, detailing various transfer pricing methodologies, mandating extensive annual documentation requirements, and imposing severe penalties for non-adherence.
The Indian Transfer Pricing Code mandates that income generated from international transactions or specified domestic transactions between associated enterprises must be calculated based on the arm’s length price. It is specified that any deduction for an expenditure, interest, or allocation of cost or expense arising from such transactions should also be determined in accordance with the arm’s length price. The Act provides definitions for terms like international transactions, specified domestic transactions, associated enterprises, and arm’s length price.
Indian transfer pricing regulations apply to international and specified domestic transactions between associated enterprises. An “international transaction” is a transaction involving the sale, purchase, or lease of tangible or intangible property; provision of services; cost-sharing arrangements; lending or borrowing of money; or any other transaction affecting the profits, income, losses, or assets of such enterprises. It also includes mutual agreements between enterprises for the allocation, apportionment, or contribution to any cost or expense related to a benefit or service provided or to be provided to one or more of those enterprises.
Further, the transfer pricing regulations are also applicable to “specified domestic transactions” if the transactions fall in any of the seven clauses of section 92BA, if the aggregate of all transactions entered into by the assessee covered by all seven clauses of section 92BA in the previous year exceeds ₹20 crores:
Hence, the SDT provisions are applicable if any of the domestic Indian entities engaged in the inter-company transaction benefit from a tax holiday or profit-linked deduction provided that the aggregate value of such transactions exceeds INR 20 crores.
| Section | Taxpayers Covered | Deduction |
| 10AA | Persons with income from SEZ units | 100% of the profit coming from export is entitled to a tax deduction for the first 5 consecutive years (1st to 5th year).
50% of the export profit is entitled to a deduction for the next 5 years (6th to 10th year). 50% of Export Profits (or) the amount credited to the SEZ Reinvestment Allowance reserve, whichever is lower (11th to 15th year) |
| 80-IA | Infrastructure developers | 100% of the profits for a period of 10 consecutive assessment years out of 15/20 years, as the case may be from the date of commencement of operation. |
| 80-IA | Telecommunication service providers | 100% of the profits for a period of the first 5 assessment years, 30% for the next 5 years out of 15 years from the date of commencement of operations. |
| 80-IA | Developers of Industrial Park | 100% of the profits for a period of 10 consecutive A.Y. out of 15 years from the date of commencement of operations. |
| 80-IA | Producers or distributors of power | 100% of the profits for a period of 10 consecutive A.Y. out of 15 years from the date of commencement of operations. |
The relationship of associated enterprises encompasses direct or indirect involvement in the management, control, or capital of one enterprise by another. It also includes scenarios where the same person, directly or indirectly, has involvement in the management, control, or capital of both enterprises. The section specifies criteria that establish when two enterprises are considered associated enterprises for this definition.
Section 92F of the Act defines ‘arm’s length price’ as the price applied in transactions between non-associated enterprises under uncontrolled conditions. Section 92C of the Act prescribes the following methods for determining the arm’s-length price:
Such other methods, as may be prescribed under Rule 10AB, allow for any method that best suits the facts and circumstances of the transaction.
These regulations mandate that taxpayers determine an arm’s length price for international transactions or specified domestic transactions. Transfer pricing aims to ensure fair arm’s length pricing and prevent profit shifting. The ultimate goal is to determine taxable income accurately. If the arm’s length price genuinely results in lower taxable income, it should still be applied.
If the difference between the arm’s length price determined and the actual price at which the international transaction or specified domestic transaction was conducted does not exceed a percentage, not exceeding three percent of the latter, as notified by the Central Government in the Official Gazette, then the price at which the transaction was actually undertaken will be considered as the arm’s length price.
In recent years, there has been a rise in transfer pricing audits and the adoption of assertive stances by the Indian Revenue Authority, leading to prolonged and complex legal disputes. The Advance Pricing Agreement (APA) program aims to mitigate conflicts arising from audits and foster better communication between taxpayers and the Indian Revenue Authority. By facilitating early agreement on pertinent facts and circumstances, the APA program aims to enhance efficiency and clarity for both parties involved.
An Advance Pricing Agreement (APA) is a formal agreement between the CBDT and a taxpayer that establishes the arm’s length price (ALP) for an international transaction in advance or outlines the method for determining the ALP. Once an APA is signed for an international transaction, the ALP for that transaction during the specified period covered by the APA will be determined exclusively according to the terms of the APA. Participation in the Advance Pricing Agreement (APA) process is voluntary. It serves as a complement to other mechanisms, such as appeals and Double Taxation Avoidance Agreements (DTAA), for resolving transfer pricing disputes. APAs are typically valid for a maximum period of 5 years.
Terms of an APA:
Any other conditions, if any
Types of APA
* The decision to choose a particular type of APA rests with the applicant at the time of application submission.
Key Benefits of an APA
Therefore, APAs offer a mutually beneficial situation for all the stakeholders involved.
Following the APA processes in other countries worldwide, the Indian APA rules outline a process that consists of the following four phases:
Statutory Fee for Filing an APA Application
The APA filing fee, which is payable when submitting the formal APA application, varies depending on the amount of the proposed covered transactions over the proposed APA term, as outlined below:
– Rs. 10 lakhs for international transactions up to Rs. 100 crores.
– Rs. 15 lakhs for international transactions up to Rs. 200 crores.
– Rs. 20 lakhs for international transactions exceeding Rs. 200 crores.
* No fee is specified for the pre-filing consultation process.
Reporting Requirement
Every person who has entered into an international or specified domestic transaction during a previous year must obtain a report from an accountant (CA) and furnish it electronically by 31st October of the relevant assessment year in Form 3CEB. This applies to all international transactions, irrespective of value, and specified domestic transactions if the aggregate value exceeds INR 20 crore.
An accountant’s report in Form 3CEB must be submitted along with the Income Tax Return, i.e., (on or before 30 November following the end of the relevant financial year). While taxpayers must maintain transfer pricing documentation beforehand, there is no obligation to provide this documentation along with the accountant’s report or Form 3CEB at the time of filing the tax return.
Penalty for Failure to Furnish Report:
If any person fails to furnish a report from an accountant as required by section 92E, the Assessing Officer may impose a penalty of one hundred thousand rupees.
Documentation Requirements as Per Indian TP Regulations
Taxpayers must annually maintain comprehensive information and documents regarding international transactions with associated enterprises (AEs) or specified domestic transactions.
Complete transfer pricing documentation, which encompasses an updated functional analysis and a recent economic analysis utilizing current data, must be maintained if the total worth of international transactions surpasses INR 10 million (approximately US$156,250) or the combined value of specified domestic transactions exceeds INR 200 million (US$3,125 million).
As per provisions in the Income Tax Act 1961, the following are the prescribed documentation:
Master File: According to section 92D, every constituent entity of an international group operating in India is required to maintain prescribed information and documentation.
The Master File (MF) should offer a summary of the multinational enterprise’s (MNE) business, including its global operations, transfer pricing (TP) policies, income allocation, and economic activities. The document is not meant to be exhaustive. Still, it will primarily cover the group’s structure, business description, intangible assets, financial transactions between group entities, and the MNE’s financial and tax positions.
Part A must be completed by every constituent entity. (*Constituent Entity of the International Group in India refers to any entity of the International Group in India whose accounts are included in the Consolidated Financial Statement.)
Part B applies to Group entities under the following conditions:
♦ Due Date: Form 3CEAA must be filed on or before the due date for furnishing the return of income as specified under sub-section (1) of section 139.
Form 3CEAB provides a practical solution for international groups operating in India with multiple constituent entities. It allows the group to designate a single constituent entity to submit the mandatory Form 3CEAA to the tax authorities. This simplifies the process by eliminating the requirement for each entity to file separately. To utilize this option, the designated entity must inform the Joint Commissioner using Form 3CEAB at least 30 days before the deadline for filing Form 3CEAA.
CBC (Country-by-Country) Reporting: Section 286 mandates the reporting of aggregate information concerning various aspects such as revenue, profit and loss before income tax, income tax paid and accrued, stated capital, number of employees, and details of the primary business activities of each constituent entity.
To compile such a detailed report, the board must be engaged. Senior management must intervene early on to ensure compliance with regulations concerning the sensitive information that must be included in the report.
An inbound Constituent Entity (CE) is required to file a Country-by-Country Report (CbCR) in India under the following circumstances:
In these cases, the inbound CE must fulfill its obligation to file the CbCR in India.
Information and Documents to be Kept and Maintained in Respect of International Transactions or SDTS:
The concept of contemporaneous documentation in transfer pricing regulations provides that information and documents should, as far as possible, be contemporaneous and available by the specified date, which is the due date of filing a return of income.
If a person engaged in an international or specified domestic transaction fails to provide the required information or document, the Assessing Officer, Transfer Pricing Officer, or Commissioner (Appeals) may impose a penalty of two percent of the transaction’s value for each instance of failure.
Conclusion
Transfer pricing is a critical and complex process that is covered under Sections 92 to 92F of the Indian Income Tax Act 1961. Different sections of the act cover both international and domestic transactions, as well as various types of taxpayers and their respective deductions, which are crucial parts of transfer pricing compliance.
Where Section 92F of the Income Tax Act covers Arm’s Length Pricing, Section 92C covers its methodologies, both of which are relevant to understanding how to prevent profit shifting. By understanding the various types, benefits, and processes of the Advance Pricing Agreement (APA) in India, individuals and businesses can stay compliant with the transfer pricing rules and regulations.
At Mercurius, our dedicated team of professionals provides comprehensive support, covering all documentation, including Form 3CEAA and Form 3CEAB, along with country-by-country reporting.
For a more detailed discussion of specific transfer pricing rules or to obtain personalized assistance in domestic transfer pricing compliance, transfer pricing study, planning activities, and addressing and resolving intercompany transfer pricing issues, please contact us.
