Transfer Pricing and Other provisions to check avoidance of Tax Flashcards

Question

Who are the persons to which this agreement will be binding upon? and when will this binding stop? under what circumstances?

Answer 1

* the person in whose case, and in respect of the transaction in relation to which, the APA has been entered into; and * the Principal Commissioner or Commissioner and the income-tax authorities subordinate to him, in respect of the said person and the said transaction. * The APA shall not be binding if there is any change in law or facts having bearing on such APA.

Answer 2

* all the provisions of the Act shall apply to such person as if such APA had never been entered into. * The period beginning with the date of such APA and ending on the date of order declaring the APA as void ab initio, shall be excluded for the purpose of computation of any period of limitation under this Act * In case the period of limitation after exclusion of the above mentioned period is less than 60 days, such remaining period of limitation shall be extended to 60 days.

Answer 3

Any person who has undertaken an international transaction or is contemplating to undertake an international transaction, shall be eligible to enter into an agreement under these rules.

Answer 4

* if such person desires to enter into an agreement furnish an application in the prescribed form along with proof of payment of requisite fee as specified, to the **Director General of Income-tax (International Taxation) in case of unilateral agreement** and to the **competent authority in India in case of bilateral or multilateral agreement**. * The application may be filed at any time - (i) **before the first day of the previous year relevant to the first assessment year** for which the application is made, in respect of transactions which are of a continuing nature from dealings that are already occurring; or (ii) **before undertaking the transaction in respect of remaining transactions**

Answer 5

An agreement may among other things, include – (i) the international transactions covered by the agreement; (ii) the agreed transfer pricing methodology, if any; (iii) determination of arm's length price, if any; (iv) definition of any relevant term to be used in item (ii) or (iii); (v) critical assumptions i.e., the factors and assumptions that are so critical and significant that neither party entering into an agreement will continue to be bound by the agreement, if any of the factors or assumptions is changed; (vi) rollback provision referred to in Rule 10MA; (vii) the conditions, if any, other than provided in the Act or these rules.

Answer 6

* The assessee shall furnish an annual compliance report in quadruplicate in the prescribed form to Director General of Income-tax (International Taxation) for each year covered in the agreement. * Time limit - within 30 days of the due date of filing income-tax return for that year, or within 90 days of entering into an agreement, whichever is later * The compliance audit report shall be furnished by the Transfer Pricing Officer within six months from the end of the month in which the Annual Compliance Report is received by the Transfer Pricing Officer.

Answer 7

* An agreement shall be cancelled by the Board for any of the following reasons: (i) the compliance audit has resulted in the finding of failure on the part of the assessee to comply with the terms of the agreement; (ii) the assessee has failed to file the annual compliance report in time; (iii) the annual compliance report furnished by the assessee contains material errors; or (iv) the assessee is not in agreement with the revision proposed in the agreement or the agreement is to be cancelled under rule 10RA(7);. * An opportunity of being heard shall be given before proceeding to cancel the agreement * Mere application for APA without having a binding agreement will not stop the provisions of chapter X -92C and 92CA etc. *

Answer 8

Any previous year, falling within the period **not exceeding four previous years, preceding the first of the five consecutive previous years** referred to in section 92CC(4).

Answer 9

* Hence, if there is a return which is filed under section 139(5) to revise the original return filed before the due date specified in Explanation 2 to sub-section (1) of section 139, the applicant would be entitled for rollback on this revised return of income. * However, rollback provisions will not be available in case of a return of income filed under section 139(4) because it is a return which is not filed before the due date.(Since it is a belated return which is filed after the due date)

Answer 10

* The term same international transaction implies that the transaction in the rollback year has to be of same nature and undertaken with the same associated enterprise(s), as proposed to be undertaken in the future years and in respect of which agreement has been reached * the word “materially” will be interpreted consistently with its ordinary definition and in a manner that a material change of facts and circumstances would be understood as a change which could reasonably have resulted in an agreement with significantly different terms and conditions.

Answer 11

* The applicant does not have the option to choose the years for which it wants to apply for rollback. The applicant has to either apply for all the four years or not apply at all. However, if the covered international transaction(s) did not exist in a rollback year or there is some disqualification in a rollback year, then the applicant can apply for rollback for less than four years. * However, for other rollback years, it can still apply for rollback.

Answer 12

The reason for not allowing rollback for the international transaction for which Appellate Tribunal has passed an order disposing of an appeal is that the ITAT is the final fact finding authority and hence, on factual issues, the matter has already reached finality in that year. However, if the ITAT has not decided the matter and has only set aside the order for fresh consideration of the matter by the lower authorities with full discretion at their disposal, the matter shall not be treated as one having reached finality and hence, benefit of rollback can still be given.

Answer 13

It is clarified that in case the terms of rollback provisions contain specific agreement between the Board and the applicant that the agreed determination of ALP or the agreed manner of determination of ALP is subject to the condition that the ALP would get modified to the extent that it does not result in reducing the total income or increasing the total loss, as the case may be, of the applicant as declared in the return of income of the said year, the rollback provisions could be applied

Answer 14

rollback provision has been introduced for the benefit of the applicant and is applicable at its option. Accordingly, if the rollback provision cannot be given effect to for any of the rollback years on account of the applicant not taking the actions specified in sub-rules (2), (3), (4) or (6), the entire agreement gets vitiated and will have to be cancelled.

Answer 15

* If MAP has been already concluded for any of the international transactions in any of the rollback year under APA, rollback provisions would not be allowed for those international transactions for that year but could be allowed for other years or for other international transactions for that year, subject to fulfilment of specified conditions in Rules 10MA and 10RA. * However, if MAP request is pending for any of the rollback year under APA, upon the option exercised by the applicant, either MAP or application for roll back shall be proceeded with for such year.

Answer 16

* If MAP has been already concluded for any of the international transactions in any of the rollback year under APA, rollback provisions would not be allowed for those international transactions for that year but could be allowed for other years or for other international transactions for that year, subject to fulfilment of specified conditions in Rules 10MA and 10RA. * However, if MAP request is pending for any of the rollback year under APA, upon the option exercised by the applicant, either MAP or application for roll back shall be proceeded with for such year.

Answer 17

Yes, the ALP could be different for different years. However, the manner of determination of ALP (including choice of Method, comparability analysis and Tested Party) would be same.

Answer 18

* Since rollback provisions are for past years, ALP for the rollback years would be agreed after full examination of all the facts, including validation of critical assumptions. * Hence, compliance audit for the rollback years would primarily be to check if the agreed price or methodology has been applied in the modified return.

Answer 19

* The applicant has an option to withdraw its roll back application even while maintaining the APA application for the future years. * However, it is not possible to accept the rollback results without accepting the APA for the future years * It may also be noted that the fee specified in Rule 10MA(5) shall not be refunded even where a rollback application is withdrawn.

Answer 20

The second proviso to Rule 10MA(5) provides for revision of APAs already concluded to include rollback provisions.

Answer 21

The time to file modified return for rollback years will start from the date of signing the revised APA incorporating the rollback provisions.

Answer 22

The agreement is between the Board and a person. The principle to be followed in case of merger is that the person (company) who makes the APA application would only be entitled to enter into the agreement and be entitled for the rollback provisions in respect of international transactions undertaken by it in rollback years. Other persons (companies) who have merged with this person (company) would not be eligible for the rollback provisions.

Answer 23

The same principle as mentioned in the previous answer, i.e., the person (company) who makes an APA application or enters into an APA would only be entitled for the rollback provisions, would continue to apply

Answer 24

then, such person shall, **within a period of three months** from the **end of the month in which the said agreement was entered into**, furnish a modified return, notwithstanding any contrary provision contained in section 139.

Answer 25

* the Assessing Officer shall, in a case where modified return is filed in accordance with the provisions of this section, **pass an order modifying the total income of the relevant assessment year** determined in such assessment or reassessment, as the **case may be, having regard to and in accordance with the APA,** instead of proceeding to assess or reassess the total income. * Such order for assessment or reassessment or re-computation of total income shall be passed **within a period of 1 year from the end of the financial year in which the modified return was furnished**(Period of limitation to not apply here)

Answer 26

* the Assessing Officer shall proceed to complete the assessment or reassessment proceedings in accordance with the APA taking into consideration the modified return so furnished. * In this case, the time period of completion of pending assessment or reassessment mentioned under section 153 or 153B or 144C shall be extended by 12 months * This shall apply notwithstanding the period of limitation contained under section 153 or 153B or 144C.

Answer 27

* Primary Adjustments - to a transfer price means the determination of transfer price in accordance with the arm’s length principle r**esulting in an increase in the total income or reduction in the loss**, as the case may be, of the assessee. * Secondary Adjustment - means an a**djustment in the books of accounts of the assessee** and its associated enterprise to reflect that the a**ctual allocation of profits between the assessee and its associated enterprise** are consistent with the transfer price determined as a result of primary adjustment, thereby removing the imbalance between cash account and actual profit of the assessee.

Answer 28

(a) has been made Suo moto by the assessee in his return of income; or (b) made by the Assessing Officer has been accepted by the assessee; or (c) is determined by an advance pricing agreement entered into by the assessee under section 92CC on or after the 1.4.2017; or (d) is made as per the safe harbor rules framed under section 92CB; or (e) is arising as a result of resolution of an assessment by way of the mutual agreement procedure under an agreement entered into under section 90 or 90A for avoidance of double taxation.

Answer 29

the amount of primary adjustment made in the case of an assessee in any previous year does not exceed ` 1 crore or the primary adjustment is made in respect of A.Y.2016-17 or an earlier assessment year.

Answer 30

If the excess money is not repatriated to India within the time as may be prescribed, shall be deemed to be an advance made by the assessee to such associated enterprise(Who is non resident in India) and the interest on such advance, shall be computed as the income of the assessee, in the prescribed manner

Answer 31

General time limits - Rule 10CB(1) prescribes the time limit for repatriation of excess money or part thereof i.e., on or before 90 days from the date given 1. date from which the above time limits has to be computed - the due date of filing of return u/s 139(1) 2. the date of the said order 3. **A.** the date of filing of return u/s 139(1) **B.** The end of the month in which the APA has been entered into 4. the due date of filing of return u/s 139(1) 5. the date of giving effect by the A.O. under Rule 44H to such resolution

Answer 32

1. At the one year marginal cost of fund lending rate of SBI as on 1st April of the relevant previous year + 3.25% 2. At six month London Interbank Offered Rate (LIBOR) as on 30th September of the relevant previous year + 3.00%(telegraphic transfer buying rate of such currency on the last day of the previous year in which such international transaction was undertaken.) 3. Also additional income tax at 20.9664% on the excess money or part therof could be p**aid to avoid interest payments from the date of payment of such tax.**

Answer 33

Section 92D imposes responsibility on every person * who enters into an international transaction to keep and maintain such information and documents in respect thereof as may be prescribed; * being a constituent entity of an international group(**Whether or not any international transaction was undertaken**), to keep and maintain the prescribed information and document in respect of an international group.(The constituent entity has to **furnish the information and document** to the authority prescribed under section 286(1), i.e., J**oint Commissioner as designated by DGIT (Risk Assessment)** in the prescribed manner, on or before prescribed date.)

Answer 34

Section 92D imposes responsibility on every person * who enters into an international transaction to keep and maintain such information and documents in respect thereof as may be prescribed; * being a constituent entity of an international group(**Whether or not any international transaction was undertaken**), to keep and maintain the prescribed information and document in respect of an international group.(The constituent entity has to **furnish the information and document** to the authority prescribed under section 286(1), i.e., J**oint Commissioner as designated by DGIT (Risk Assessment)** in the prescribed manner, on or before prescribed date.)

Answer 35

The Assessing Officer or the Commissioner (Appeals) may, in the course of any proceedings under the Income-tax Act, require any person who has entered into an international transaction to furnish any such prescribed information or documents within a period of 30 days from the date of receipt of a notice issued in this regard(Can be extended on request by a further period of 30 days)

Answer 36

* Rule 10D(2) provides that in a case where the aggregate value of international t**ransactions does not exceed INR 1 crore**, it will not be obligatory for the assessee to maintain the above information and documents. * This will mean that, even if the aggregate value of the international transactions is less than INR 1 crore, the assessee will have to maintain adequate records and evidence to show that the international transactions with associated enterprises are on the basis of arm’s length principle

Answer 37

The above information and documents are required to be maintained for a period of eight years from the end of the relevant assessment year

Answer 38

* Section 92C(3) and (4) gives power to the Assessing Officer to determine the arm’s length price under the following circumstances and also empowers the Assessing Officer to re-compute total income of the assessee having regard to arm’s length price determined by him. * It also provides that deduction under section 10AA and Chapter VI-A shall not be allowed from the additional income computed by him. * Circumstances where power to determine ALP is given to the AO - (a) The price charged or paid in an international transaction has not been determined in accordance with section 92C(1) and (2); or (b) Any information and documents relating to an international transaction has not been kept and maintained by the assessee in accordance with the provisions contained in section 92D(1) and the rules made in this behalf (Rule 10D); 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 documents which he was required to furnish by a notice issued under section 92D(3). * Second proviso to section 92C(4) provides that if the total income of an associated enterprise is computed under this section on the determination of arm’s length price paid to another associated enterprise, from which tax is deducted or deductible at source, the income of the other associated enterprise shall not be recomputed on this count.(that is Not to ask for TDS refund if recomputed income is less than before)

Answer 39

* Rule 10E provides that the auditor’s report shall be in Form No.3CEB * He has also to give his opinion whether the prescribed information and documents relating to the above transactions have been kept by the assessee * In the first part of the Annexure, general information of the assessee is required to be reported * the second part of the Annexure, the particulars about the international transactions are required to be stated. Broadly stated, these particulars include list of associated enterprises, particulars and description of transactions relating to purchase, sales, provisions of service, loans, advances, etc * “Specified date” means the date one month prior to the due date for furnishing the return of income under section 139(1) for the relevant assessment year. The due date for filing of transfer pricing report under section 92E in Form 3CEB is 31st October of the assessment year.

Answer 40

* **Master File** - Standardized information relevant for all multinational enterprises (MNE) group members * **Local file** - Specific reference to material transactions of the local taxpayer * **Country-by-country report** - Information relating to the global allocation of the MNE's income and taxes paid; and Indicators of the location of economic activity within the MNE group.

Answer 41

The Country-by-Country (CbC) report has to be submitted by parent entity of an international group to the prescribed authority in its country of residence. This report is to be based on consolidated financial statement of the group.

Answer 42

1. the total **consolidated group revenue** as reflected in the consolidated financial statement (CFS) for the accounting year **preceding such accounting year** is above a threshold to be prescribed i.e., **` 5,500 crore. (**If CFS is in Foreign currency, then use telegraphic transfer buying rate (TTBR) of such currency **on the last day of the accounting year preceding the accounting year** [Rule 10DB(7)].) 2. The parent entity of an international group or the alternate reporting entity, **if it is resident in India** shall be required to furnish the report in respect of the group to the J**oint Commissioner, designated by the Director General of Income-tax (Risk Assessment)** for every reporting accounting year, **within a period of twelve months** from the end of the said reporting accounting year for which the report is being furnished, **in Form No. 3CEAD.** 3. of an international group having parent entity that is not resident in India, shall notify the Joint Commissioner, designated by the Director General of Income-tax (Risk Assessment) at least **two months prior to the due date for furnishing CbC report** –**1)** whether it is the alternate reporting entity of the international group; or **(2)** the details of the parent entity or the alternate reporting entity, if any of the international group, and the country of territory of which the said entities are resident. The report shall be furnished in Form **No.3CEAC.**

Answer 43

(1) the amount of **revenue**, (2) **profit and loss** before income-tax, (3) amount of **income-tax paid and accrued**, (4) details of stated capital, accumulated earnings, number of employees, tangible assets other than cash or cash equivalent in respect of each country or territory along with details of each constituent's incorporation country and residential status, nature and details of main business activity or activities of each constituent entity and any other information as may be prescribed. This shall be based on the **template** provided in the **OECD BEPS report on Action Plan 13.**

Answer 44

(1) in which it is not obligated to file report of the nature of CbC report; (2) with which India **does not have an arrangement for exchange** of the CbC report; or (3) there has been a **systemic failure of the country or territory** i.e., such country is not exchanging information with India e**ven though there is an agreement** and this fact has been intimated to the entity by the prescribed authority. If the said failure has been intimated to such constituent entity, the period for submission of the report would be **six months from the end of the month in which said systemic failure has been intimated**.

Answer 45

1. 5000 per day 2. 15,000 per day for the period exceeding one month 3. 50,000 per day of continuing failure beginning from the date of service of order

Answer 46

1. ` **5,000 per day of continuing failure**, from the day immediately following the day on which the period for furnishing the information and document expires. 2. ` **50,000 per day for the period of default** beyond the date of service of order.

Answer 47

If the reporting entity has provided any inaccurate information in the report, the penalty would be ` **5,00,000** if * the entity has knowledge of the inaccuracy at the time of furnishing the report but does not inform the prescribed authority; or * the entity discovers the inaccuracy after the report is furnished and fails to inform the prescribed authority and furnish correct report **within a period of fifteen days of such discovery**; or * the entity furnishes inaccurate information or document in response to notice of the prescribed authority under section 286(6).

Answer 48

the aggregate value of international transactions - Of the constituent entity - * during the accounting year, as per the books of accounts, exceeds ` **50 crore**, or * in respect of purchase, sale, transfer, lease or use of intangible property during the accounting year, as per the books of accounts, **exceeds ` 10 crore** keep and maintain information and documents of the international group * Part A of Form No. **3CEAA (Master File), however, shall be furnished by every person**, being a constituent entity of an international group, **whether or not the above conditions are satisfied** [Rule 10DA(3)].

Answer 49

The information and document shall be furnished in **Form No. 3CEAA** to the Joint Commissioner as may be designated by DGIT (Risk Assessment) and it shall be furnished **on or before the due date for furnishing the return of income specified under section 139(1).**

Answer 50

Where there are more than one constituent entities resident in India of an international group, then, the Form No 3CEAA may be furnished by any one constituent entity, if, - (a) the i**nternational group has designated such entity** for this purpose and (b) the **information has been conveyed** to the Joint Commissioner in **Form No 3CEAB**, in this behalf **at least 30 days before the due date** of furnishing the Form No. 3CEAA.

Answer 51

Any group that includes,— (i) two or more enterprises which are r**esident of different countries or territories**; or (ii) an enterprise, being a resident of one country or territory, which **carries on any business** through a **permanent establishment in other countries or territories**;

Answer 52

the specified domestic transaction shall mean any of the following transactions, not being an international transaction, namely,- (1) any transaction referred to in section 80A i.e., inter-unit transfer of goods and services by an undertaking or unit or enterprise or eligible business to other business carried on by the assessee or vice versa, for consideration **not corresponding to the market value on the date of transfer**; (2) any transfer of goods or services referred to in section **80-IA(8**) i.e., inter-unit transfer of goods or services between eligible business and other business, where the consideration for transfer does not correspond with the market value of goods and services; (3) any business transacted between the assessee carrying on eligible business and other person as referred to section **80-IA(10)**; (4) any transaction, referred to in any other section under **Chapter VI-A or section 10AA**, to which provisions of **section 80-IA(8) or section 80-IA(10) are applicable**; or (5) any business **transacted between a company** opting for **section 115BAB** and person with whom the company has close connection; or (6) any other transaction as may be prescribed, above mentioned transactions shall not be treated as specified domestic transaction in case the a**ggregate of such transactions** entered into by the **assessee in the previous year does not exceed a sum of ` 20 crore**

Answer 53

* All the provisions above in relation to international transactions be **copied verbatim for specified domestic transactions as well**, with exception in 92CA that the TPO can determine the ALP in respect of other international transaction that came to his notice subsequently during the course of proceedings but such **power is not available in respect of specified domestic transaction subsequently identified.**

Answer 54

Situation 1 - the transfer price of such goods and services shall be determined at the **market value of such goods or services as on the date of transfer.** Situation 2 - **(1)** the price that such goods or services would ordinarily fetch in the open market; or **(2)** the arm’s length price as defined under section 92F, where the transfer of such goods or services is a specified domestic transaction referred to in section 92BA.

Answer 55

* Safe Harbour means circumstances in which the income-tax authorities shall accept the transfer price or income, deemed to accrue or arise under section 9(1)(i), as the case may be, declared by the assessee. * A person who has exercised a v**alid option for application** of safe harbour Rules in accordance with the provisions of Rule 10THC, AND * is a **Government company** engaged in the **business of generation, supply, transmission or distribution of electricity**; or * is a **co-operative society** engaged in the business of **procuring and marketing milk and milk products**. * A specified domestic transaction undertaken by an eligible assessee and which comprises of: (i) **supply** of electricity; or (ii) **transmission** of electricity; or (iii) **wheeling** of electricity; or (iv) **purchase of milk or milk products** by a co-operative society from its members

Answer 56

The assessee has to furnish **Form 3CEFB,** complete in all respects, to the Assessing Officer **on or before the due date for furnishing the return of income** for the relevant assessment year specified in Explanation 2 to section 139(1), for exercising the option of safe harbour.

Answer 57

* The Assessing Officer has to pass the order declaring the option exercised by the assessee as invalid **within a period of 3 months from the end of the month in which Form 3CEFB is received by him**.

Answer 58

* he may file his objections with the P**rincipal Commissioner or the Commissioner or the Principal Director or the Director,** as the case may be, to whom the Assessing Officer is subordinate, **within 15 days of receipt of the order of the Assessing Officer**. * On receipt of objection, shall, after providing an opportunity of being heard to the assessee, pass appropriate order, **within a period of 2 months** from the end of the month in **which the objection filed by the assessee is received by him**(If not passed within this time, then the safe harbour option shall be treated as valid) * A copy of the said order has to be served on the **assessee and the Assessing Officer**

Answer 59

For the purpose, the word “non-resident” also includes a person who is not-ordinarily resident. In order to attract the provisions of this section, all the following conditions must be satisfied: * There is a transfer of assets - **whether movable or immovable** and whether tangible or intangible. * The transfer is made **by any person in India or outside** **irrespective of his residential status or citizenship**. * The transfer is made either a**lone or in connection with associated operations.** * The assets transferred **directly yield income** chargeable to tax under this Act. * The transfer of assets is effected in such a manner that the **income becomes payable to a person outside India** who is either a non-resident or a not ordinarily resident in India * The **transferor acquires any right** by virtue of which he gets the **power to enjoy the income whether immediately or in future.** * The Assessing Officer is satisfied that a**voidance of liability to tax** in India **is the purpose of the transfer.**

Answer 60

* In order to determine the liability of the assessee in respect of the deemed income it is immaterial if the income or benefits from the transfer (i) are actually received or not or (ii) are received or are receivable in cash or kind or (iii) are receivable directly or indirectly(It includes a payment of any kind.) * It may be noted that where an assessee has been charged to tax in respect of **a sum deemed to be his income under this section**, the subsequent receipt of that sum by the assessee, whether as income or in any other form, **shall not be liable to tax in his hands at the time of receipt.**

Answer 61

* A transaction where one of the parties thereto is a person located in a NJA would be deemed to be an international transaction then all parties to the transaction to be deemed as associated enterprises, and accordingly, all the provisions of transfer pricing to be attracted in case of such a transaction. * However, the benefit of permissible v**ariation between the ALP and the transfer price** [provided for in the second proviso to section 92C(2)] **based on the rate notified by the Central Government would not be available in respect of such transaction.** * Person located in a NJA shall include a **person who is a resident of the NJA** and a person, n**ot being an individual, which is established in the NJA**. It would also include a **permanent establishment of any other person in the NJA.** * No deduction in respect of any other expenditure or allowance, including depreciation, arising from the transaction with a person located in a NJA would be allowed unless the **assessee maintains the relevant documents** and furnishes the prescribed information. * The rate of TDS in respect of any payment made to a person located in the NJA, on which tax is deductible at source, will be the higher of the following rates –(However refund of excess tax deducted along with interest can be claimed) (1) rates specified in the relevant provision of the Income-tax Act, 1961; or (2) rate or rates in force; or (3) 30%.(Also include HEC along with this)

Answer 62

* Where the debt is issued by a lender which is not associated but an associated enterprise either - provides an implicit or explicit guarantee to such lender or - deposits a corresponding and matching amount of funds with the lender, such debt shall be deemed to have been issued by an associated enterprise.(Indirect debt)