Transfer Pricing and Other provisions to check avoidance of Tax

Question 1

When are two enterprises be called as associated under the transfer pricing provisions?

Answer 1

Two enterprises are “associated enterprises” if one of the enterprises participates directly or indirectly in the management, control or capital of the other or if both enterprises are under common control.

Question 2

What is the simple action that ALP seems to achieve?

Answer 2

The arm’s length principle seeks to adjust the profits between two associated enterprises by comparing the same as if the transaction is carried out between two independent enterprises. It treats each enterprise as a separate independent entity rather than as inseparable parts of a single unified business.

Question 3

What is the significance of the Arm’s Length Principle in general terms?

Answer 3

• Parity between MNCs and independent enterprises
• Determines real taxable profits
• Reduction of artificial price distortion
• Minimization of double taxation - adjustment to the transfer price in one tax jurisdiction requires a corresponding adjustment in the other tax jurisdiction
• Accurate measurement of economic contribution and risk assumed.

Question 4

What are certain Practical difficulties in Application of ALP?

Answer 4

• True comparison difficult in certain cases
• Availability of data and reliability of available data
• Absence of market price - it is very difficult to know the actual market price unless a market transaction actually takes place
• Absence of comparable market price for “intangible” transactions - Due to their uniqueness in comparison with the standard transactions.
• Administrative burden -Due to evaluating significant numbers and types of cross-border transactions.
• Time lag

Question 5

What are the conditions that must be satisfied in order to attract the provisions of Chapter X(Transfer pricing in relation to international transactions?

Answer 5

• There must be an international transaction
• Such international transaction should be between two or more associated enterprises either or both of whom are non-residents
• Such international transaction should be in the nature of:
  (a) purchase, sale or lease of tangible or intangible property; or
  (b) provision of service; or
  (c) lending or borrowing money; or
  (d) any other transaction having a bearing on the profits, income, losses or assets of such enterprise.
• If transaction not done on Arm’ length basis, then it shall require determination of income or apportionment of cost or expense on the basis of arm’s length price
• Adjustment should either result in an increase of income or decrease of loss returned by the assessee and not the other way around.

Question 6

What are the key words as per Section 92(92A,92B and 92C)?

Answer 6

• Associated enterprises(92A)
• International transactions(92B)
• Arm’s Length price(92C)

Question 7

What are the conditions to be satisfied for associated enterprise as per S.92A(1)?

Answer 7

1. An enterprise which participates, directly or indirectly, or through one or more intermediaries, in:
   • management of the other enterprise,
   or
   • control of other enterprise, or
   • capital of other enterprise
2. If one or more persons participates, directly or indirectly, or through one or more intermediaries in:
   • management of the two different
   enterprises • control of two different enterprises
   • capital of two different enterprises
   Then, those two enterprises are AEs.

Question 8

What are the situation covered for deemed associated enterprises as per 92A(2)?

1. Enterprise ownership
2. Substantial voting power in two entities by common
   person
3. Advancing substantial sum of Money
4. Guaranteeing Borrowings
5. Appointment of majority of directors of other enterprise
6. Dependence on intangibles w.r.t which other enterprise has exclusive rights
7. Dependence on raw material supplied by other enterprise
8. Dependence on sale
9. Control by common individual
10. Control by HUF or member thereof
11. Interest in a firm, AOPs or BOIs
12. Mutual interest relationship

Answer 8

1. 26% or more voting power
2. 26% or more voting power
3. 51% or more of the book value of the total assets of other enterprise
4. 10% or more of the total borrowings of the other enterprise
5. More than half of the directors or members of the governing board, or one or more of the executive directors or members of the governing board of each of the two enterprises are appointed by the same person(s).
6. The manufacture or processing of goods or articles or business carried out by one enterprise is wholly dependent (i.e. 100%) on the know-how
7. 90% or more of raw materials and consumables required for the manufacture or processing of goods or articles or business carried out by one enterprise, are supplied by the other enterprise, or by persons specified by the other enterprise
8. The goods or articles manufactured or processed by one enterprise, are sold to the other enterprise or to persons specified by the other enterprise
9. Where one enterprise is controlled by an individual, the other enterprise is also controlled by such individual or his relative or jointly by such individual and his relatives.
10. Similar to above - sub with HUF or member of HUF or relative of HUF.
11. Where one enterprise is a firm, AOPs or BOls, the other enterprise holds 10% or more interest in firm/AOPs/BOIs.
12. There exists b/w the two enterprises, any relationship of mutual interest, as may be prescribed.

Question 9

What is a deemed International transaction as per section 92B(2)?

Answer 9

Where, in respect of a transaction entered into by an enterprise with a person other than an associated enterprise (hereinafter referred to as “other person”),

• there exists a prior agreement in relation to the relevant transaction between the other person and the associated enterprise or,
• where the terms of the relevant transaction are determined in substance between such other person and the associated enterprise; and
• either the enterprise or the associated enterprise or both of them are non-residents,

then such transaction entered into between the enterprise and the other person shall be deemed to be an international transaction entered into between two associated enterprises, whether or not such other person is a non-resident.

Question 10

What is the meaning of specified foreign company is relation to the meaning of a company being covered as associated enterprises?

Answer 10

which means that A Ltd. holds 26% or more in the nominal value of the equity share capital of C Inc.

(This is basically an indirect ownership by A, in terms of having direct ownership of B and Indirect ownership of C)

Question 11

What is the definition of transaction under section 92F? and when a particular transaction will be covered as international transaction between associated enterprises?

Answer 11

• section 92F to include an arrangement, understanding or action in concert
  (i) whether or not such arrangement, understanding or action is formal or in writing; or
  (ii) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings.”
• If a transaction is entered in between Resident assessee and it’s foreign branches, it will not be covered as an international transaction, since all the branches will be deemed to be a resident in India automatically.
• But where Indian branch of a foreign company is having a transaction with it’s head office, then it will be covered as an international transaction and ALP principle will be applicable.
• This will be the position even in respect of transactions between a parent company (“A” Ltd.) and its foreign subsidiary and, therefore, such transactions will have to comply with the provisions of transfer pricing regulations.

Question 12

What are the various traditional transaction methods for determination of ALP under section 92C?

Answer 12

• Comparable uncontrolled price method - This is used where there are similar transactions between unconnected parties and we identify a price from such comparable uncontrolled transaction and adjust for the material differences in terms of contract, credit, transport - The adjusted price is ALP.
• Resale Price Method - Where the same is resold or provided to an unrelated enterprise and adjustment on the gross profit margin for expenses and functional and other differences are made to arrive at the arm’s length price.
• Cost Plus Method - direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise. The above normal gross profit mark-up can be adjusted to take into account the functional and other differences. Costs referred to in (a) above should be increased by the adjusted profit mark-up as stated in (c) above to arrive at the APL.

Question 13

What are the various transactional profit methods for determination of ALP under section 92C?

Answer 13

• Profit Split Method - Split the combined NP amongst the enterprise in proportion to market returns; & residual profits in proportion to their relative contribution
• Transactional Net margin method - Compare NP margin relative to costs/sales/assets of the AE with NP margin of uncontrolled party in comparable transactions - The Adjusted NP margin taken into A/c to arrive at ALP

Question 14

What are the other methods for determining ALP as per 92C prescribed by CBDT ?

Answer 14

• any method’ which takes into account

(i) the price which has been charged or paid or
(ii) would have been charged or paid for the same or similar uncontrolled transactions with or between non-associated enterprises, under similar circumstances.

Question 15

What is the data to be used for analyzing the comparability of an uncontrolled transaction with an international transaction?

Answer 15

• The data to be used for analyzing the comparability of an uncontrolled transaction and an international transaction should relate to the financial year (current year) in which the international transaction has been entered into.
• In case the most appropriate method for determination of ALP of a transaction entered into on or after 1.4.2014 is the resale price method or cost plus method or the transactional net margin method.
• the data relating to the financial year immediately preceding the current year, if the data relating to the current year is not available at the time of furnishing the return of income by the assessee, for the assessment year relevant to the current year.(See exception where it becomes available subsequently the same shall be used irrespective of the fact that it was not available at the time of furnishing of the returns.

Question 16

What is the manner of computation of Arm’s length price applicable for International transactions and specified domestic transactions as per rule 10CA?

Answer 16

• Application of multiple year data for construction of dataset - where Prices are computed using only TNMM, RPM and CPM methods(Excludes profit split and CUP methods)
• Range concepts - •MostappropriatemethodselectedisComparableuncontrolledpricemethod,resalepricemethod,costplusmethodortransactionalnetmarginmethodand
  •The dataset constructed has six or more entries.

Question 17

How to compute the ALP when Multiple year data is used for construction of a data set?

If CUT has been identified based on the data relating to the current year and the enterprise undertaking the said uncontrolled transaction, [not being the enterprise undertaking the international transaction or the specified domestic transaction referred to in sub-rule (1)]

has in either or both of the two financial years immediately preceding the current year undertaken the same or similar comparable uncontrolled transaction then,-

Answer 17

• the most appropriate method used to determine the price of the comparable uncontrolled transaction undertaken in the aforesaid period and the price in respect of such uncontrolled transactions has to be determined; and
• the weighted average of the prices, computed in accordance with the manner provided in sub-rule (3), of the comparable uncontrolled transactions undertaken in the current year and in the aforesaid period preceding it has to be included in the dataset instead of the price referred to in sub-rule (1).

Question 18

How to compute the ALP when Multiple year data is used for construction of a data set?

Where comparable uncontrolled transaction has been identified on the basis of the data relating to the financial year immediately preceding the current year and the enterprise undertaking the said uncontrolled transaction, [not being the enterprise undertaking the international transaction or the specified domestic transaction referred to in sub-rule (1)], has in the financial year immediately preceding the said financial year undertaken the same or similar comparable uncontrolled transaction then, -

Answer 18

• the price in respect of such uncontrolled transaction shall be determined by applying the most appropriate method in a similar manner as it was applied to determine the price of the comparable uncontrolled transaction undertaken in the financial year immediately preceding the current year; and
• the weighted average of the prices, computed in accordance with the manner provided in sub-rule (3), of the comparable uncontrolled transactions undertaken in the aforesaid period of two years shall be included in the dataset instead of the price referred to in sub-rule (1).

Question 19

How to construct a dataset when range concept is being used in accordance with Rule 10CA(4)?

Answer 19

• an arm’s length range beginning from the thirty-fifth percentile of the dataset and ending on the sixty-fifth percentile of the dataset would be constructed(arrange the values in the dataset in ascending order)
• Where the actual transaction price falls within 35th and 65th percentile of the dataset, the value of transaction will be accepted to be arm’s length price.
• Where the TP does not fall within the above range, he arm’s length price shall be taken to be the median of the dataset [Rule 10CA(6)].

Question 20

What are situations in which range concepts may not be applicable?

Answer 20

• if the variation between the arm’s length price so determined and price at which the international transaction or specified domestic transaction has actually been undertaken does not exceed such percentage not exceeding 3% of the latter, as may be notified by the Central Government in the Official Gazette in this behalf
• the price at which the international transaction or specified domestic transaction has actually been undertaken shall be deemed to be the arm’s length price [Rule 10CA(7)].

Question 21

Who can make a reference to the TPO under section 92CA what prior approvals are required to be taken by AO prior to the issue of notice?

Answer 21

• if Assessing Officer considers it necessary or expedient to do so he may refer the computation of the arm’s length price in relation to the said international transaction to the TPO. This option is not, however, available to the assessee.
• The Assessing Officer has to take the approval of the Principal Commissioner of Income-tax (PCIT)/Commissioner of Income-tax (CIT) before making such a reference.
• Any Joint /Deputy/Assistant Commissioner of Income-tax, authorized by CBDT, can be appointed as TPO.

Question 22

What is the time limit to complete the assessment where a reference is made with the transfer pricing officer under 92CA(3A)?

Answer 22

• determination of arm’s length price of international transactions by the Transfer Pricing Officer at least 60 days before the expiry of the time limit under section 153 or section 153B for making an order of assessment by the Assessing Officer.
• it has been provided that where assessment proceedings are stayed by any court or where a reference for exchange of information has been made by the competent authority under an agreement referred to in section 90 or 90A, the time available after excluding the above time periods from the period of limitation is less than 60 days, then such period has to be extended up to 60 days

Question 23

What is main intent or purpose of entering into an APA as per 92CC and 92CD? Who has to primarily approve the agreement?

Answer 23

Section 92CC enables the CBDT (with the approval of the Central Government), to enter into an APA with any person determining the –

• arm’s length price or specifying the manner in which the arm’s length price is to be determined, in relation to an international transaction to be entered into by that person;
• income referred to in section 9(1)(i), or specifying the manner in which said income is to be determined, as is reasonably attributable to the operations carried out in India by or on behalf of that person, being a non-resident.

Question 24

What is the validity of the APA agreement entered into?

Answer 24

The APA shall be valid for such period as specified in the agreement, which shall in no case exceed five consecutive previous years.

Question 25

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

Answer 25

• 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.

Question 26

What will happen when an APA is declared Void ab initio with the approval of CG, due to the board finding out that the APA so entered into has been obtained by the person by way of fraud or misrepresentation of facts?

Answer 26

• 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.

Question 27

Who are the persons eligible to apply for APA for the purpose of Section 92CC - Rule 10G(10F to 10T)?

Answer 27

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.

Question 28

To whom the application for APA be lodged with and what are the time limits within which it should be lodged as per Rule 10 -I?

Answer 28

• 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

Question 29

What are the terms of the APA agreement as per rule 10M?

Answer 29

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.

Question 30

What are the requirements in relation to furnishing an annual compliance report as per R.10-O and compliance audit of the agreement as per R.10Q?

Answer 30

• 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.

Question 31

What are the scenarios in which the agreement entered could be cancelled as per Rule 10R?

Answer 31

• 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.
  *

Question 32

What is the time period to which provision for roll back in the APA scheme could be enacted as per 92CC(9A) and it’s rules(very important)?

Answer 32

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).

Question 33

Under rule 10MA(2)(ii) there is a condition that the return of income for the relevant roll back year has been or is furnished by the applicant before the due date specified in Explanation 2 to section 139(1). It is not clear as to whether applicants who have filed returns under section 139(4) or 139(5) of the Act would be eligible for roll back.?

Answer 33

• 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)

Question 34

Rule 10MA(2)(i) mandates that the rollback provision shall apply in respect of an international transaction that is same as the international transaction to which the agreement (other than the rollback provision) applies. It is not clear what is the meaning of the word “same”. Further, it is not clear whether this restriction also applies to the Functions, Assets, Risks (FAR) analysis.?

Answer 34

• 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.

Question 35

Rule 10MA(2)(iv) requires that the application for rollback provision, in respect of an international transaction, has to be made by the applicant for all the rollback years in which the said international transaction has been undertaken by the applicant. Clarification is required as to whether rollback has to be requested for all four years or applicant can choose the years out of the block of four years.?

Answer 35

• 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.

Question 36

Rule 10MA(3) states that the rollback provision shall not be provided in respect of an international transaction for a rollback year if the determination of arm’s length price of the said international transaction for the said year has been the subject matter of an appeal before the Appellate Tribunal and the Appellate Tribunal has passed an order disposing of such appeal at any time before signing of the agreement. Further, Rule 10 RA(4) provides that if any appeal filed by the applicant is pending before the Commissioner (Appeals), Appellate Tribunal or the High Court for a rollback year, on the issue which is subject matter of the rollback provision for that year, the said appeal to the extent of the subject covered under the agreement shall be withdrawn by the applicant.
There is a need to clarify the phrase “Tribunal has passed an order disposing of such appeal” and on the mismatch, if any, between Rule 10MA(3) and Rule 10RA(4).?

Answer 36

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.

Question 37

Rule 10MA(3)(ii) provides that rollback provision shall not be provided in respect of an international transaction for a rollback year if the application of rollback provision has the effect of reducing the total income or increasing the loss, as the case may be, of the applicant as declared in the return of income of the said year. It may be clarified whether the rollback provisions in such situations can be applied in a manner so as to ensure that the returned income or loss is accepted as the final income or loss after applying the rollback provisions?

Answer 37

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

Question 38

Rule 10RA(7) states that in case effect cannot be given to the rollback provision of an agreement in accordance with this rule, for any rollback year to which it applies, on account of failure on the part of applicant, the agreement shall be cancelled. It is to be clarified as to whether the entire agreement is to be cancelled or only that year for which roll back fails.?

Answer 38

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.

Question 39

If there is a Mutual Agreement Procedure (MAP) application already pending for a rollback year, what would be the stand of the APA authorities? Further, what would be the view of the APA Authorities, if MAP has already been concluded for a rollback year?

Answer 39

• 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.

Question 40

If there is a Mutual Agreement Procedure (MAP) application already pending for a rollback year, what would be the stand of the APA authorities? Further, what would be the view of the APA Authorities, if MAP has already been concluded for a rollback year?

Answer 40

• 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.

Question 41

Rule 10MA(1) provides that the agreement may provide for determining ALP or manner of determination of ALP. However, Rule 10MA(4) only specifies that the manner of determination of ALP should be the same as in the APA term. Does that mean the ALP could be different?

Answer 41

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.

Question 42

Will there be compliance audit for roll back? Would critical assumptions have to be validated during compliance audit?

Answer 42

• 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.

Question 43

Whether applicant has an option to withdraw its rollback application? Can the applicant accept the rollback results without accepting the APA for the future years?

Answer 43

• 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.

Question 44

For already concluded APAs, will new APAs be signed for rollback or earlier APAs could be revised?

Answer 44

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

Question 45

For already concluded APAs, where the modified return has already been filed for the first year of the APA term, how will the time-limit for filing modified return for rollback years be determined?

Answer 45

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

Question 46

In case of merger of companies, where one or more of those companies are APA applicants, how would the rollback provisions be allowed and to which company or companies would it be allowed?

Answer 46

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.

Question 47

In case of a demerger of an APA applicant or signatory into two or more companies (persons), who would be eligible for the rollback provisions?

Answer 47

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

Question 48

According to 92CD, in case of a person has entered into an APA and prior to the date of entering into such APA, he has furnished the return of income under the provisions of section 139 in respect of any assessment year relevant to a previous year to which the APA applies, what is the action of the assessee in this case?

Answer 48

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.

Question 49

If the assessment or reassessment proceedings for an assessment year relevant to a previous year to which the APA applies have been completed before the expiry of period allowed for furnishing of modified return, what will AO do with respect to the modified return filed?

Answer 49

• 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)

Question 50

Where the assessment or reassessment proceedings for an assessment year relevant to the previous year to which the APA applies, are pending on the date of filing of modified return, what will the AO do as per 92CD?

Answer 50

• 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.

Question 51

What are the differences between primary and secondary adjustments under section 92CE?

Answer 51

• Primary Adjustments - to a transfer price means the determination of transfer price in accordance with the arm’s length principle resulting in an increase in the total income or reduction in the loss, as the case may be, of the assessee.
• Secondary Adjustment - means an adjustment in the books of accounts of the assessee and its associated enterprise to reflect that the actual 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.

Question 52

What are the cases in which assessee shall be required to carry out secondary adjustments where the primary adjustment to transfer price as per Section 92CE?

Answer 52

(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.

Question 53

Where it is not required to make secondary adjustments where primary adjustments are made?

Answer 53

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.

Question 54

What is the meaning of the term excess money and how to compute it? and what is it’s relation to repatriation by the associated enterprises outside India as per 92CE?

Answer 54

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

Question 55

What is the time limit within which the repatriation has to be made of the excess money or part thereof as per 92CE?

1. Where primary adjustments to transfer price has been made suo-motu by the assessee in his return of income
2. If primary adjustments to transfer price as determined in the order of the Assessing Officer or the appellate authority has been accepted by the assessee
3. Where primary adjustment to transfer price is determined by an advance pricing agreement (APA) entered into by the assessee under section 92CC in respect of a previous year - A.** If the APA has been entered into on or before the due date of filing of return for the relevant P.Y. **B. If the APA has been entered into on or after the due date of filing of return for the relevant P.Y.
4. Where option has been exercised by the assessee as per the safe harbour rules under section 92CB
5. Where the primary adjustment to the transfer price is determined by a resolution arrived at under Mutual Agreement Procedure under a DTAA has been entered into u/s 90 or 90A

Answer 55

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

Question 56

What will be the rate of interest when there is a failure to repatriate?

Note: the date from which interest has to be computed is similar to the date as per 10CB(1) as per the previous question.

1. Where the international transaction is denominated in Indian rupee
2. Where the international transaction is denominated in foreign currency

Answer 56

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 paid to avoid interest payments from the date of payment of such tax.

Question 57

Who are the persons responsible to maintain records as per the provisions of section 92D?

Answer 57

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., Joint Commissioner as designated by DGIT (Risk Assessment) in the prescribed manner, on or before prescribed date.)

Question 57

Who are the persons responsible to maintain records as per the provisions of section 92D?

Answer 57

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., Joint Commissioner as designated by DGIT (Risk Assessment) in the prescribed manner, on or before prescribed date.)

Question 58

Who can require the assessee to furnish prescribed information and documents?

Answer 58

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)

Question 59

What is the threshold limit for maintenance of prescribed information and documents as per Rule 10D(2)?

Answer 59

• Rule 10D(2) provides that in a case where the aggregate value of international transactions 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

Question 60

What is time period for which the information or documents specified in this section should be maintained?

Answer 60

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

Question 61

What are the wide powers of the assessing officer in relation to section 92C(3) and (4)? under what circumstances can they be enforced?

Answer 61

• 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)

Question 62

What is the audit report which has to be submitted under section 92E and what are the annexures in the report and the due date for filing of the report under this section?

Answer 62

• 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.

Question 63

What are the various penalties which shall be applicable under different provisions of transfer pricing?

Answer 63

Question 64

What is the three tier structure mandated by BEPS?

Answer 64

• 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.

Question 65

Who has to furnish the country by country report: reporting requirement of MNE?

Answer 65

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.

Question 66

What are the important elements of CbC reporting requirement and related matters which has been incorporated in the income tax act, 1961?

1. Threshold limit for applicability of CbC reporting [Sub-section (7)]:
2. Time limit for furnishing CbC report [Sub-section (2)]:
3. Details to be furnished by constituent entity resident in India [Sub-section (1)]

Answer 66

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 Joint 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.

Question 67

What are the important details to form part of the CbC report ?

Answer 67

(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.

Question 68

What are the situations where the constituent entity itself(Not being a parent or alternate reporting entity resident in India) has to furnish the CbC report within 12 months from the end of the accounting year to prescribed income tax authority?

Answer 68

(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 even 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.

Question 69

What are the penalties for non furnishing of report by any reporting entity which is obligated to furnish such report as per Section 271GB(1) & (3)?

1. Period of delay/default not more than a month ?
2. Period of delay/default beyond one month ?
3. Continuing default even after service of order levying penalty either under (a) or under (b) ?

Answer 69

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

Question 70

What is the penalty for failure o produce information and documents within prescribed time [Section 271GB(2) & (3)] - That is within 30 days of receipt of notice, which can further be extended by another 30 days?

1. Failure to produce information and documents before prescribed authority within the period allowed u/s 286(6)
2. Continuing default even after service of penalty order

Answer 70

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.

Question 71

What is the penalty for submission of inaccurate information in the CBC report [Section 271GB(4)]? and the circumstances which shall be considered as conducive for providing inaccurate information?

Answer 71

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).

Question 72

As per Rule 10DA(1), who are Persons required to keep and maintain the information and documents, which is a constituent entity and which has already cross the consolidated revenue limit of 500 crores?

Answer 72

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)].

Question 73

What is the due date for furnishing report under section 10DA(2) - Maintenance and furnishing of information and documents by certain person under section 92D?

Answer 73

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).

Question 74

Who has to submit the report under S.10DA(2) where there is more than one constituent entity - Section 10DA(4)/(5)?

Answer 74

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 international 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.

Question 75

What is the meaning of the term international group as per section 286(9)?

Answer 75

Any group that includes,—

(i) two or more enterprises which are resident 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;

Question 76

What is the meaning of specified domestic transaction as per section 92BA?

Answer 76

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 aggregate of such transactions entered into by the assessee in the previous year does not exceed a sum of ` 20 crore

Question 77

Can the same provisions of section 92&92C for Determination of ALP and 92D and 92E for maintaining information and documents and furnishing of report of the accountant and 92CA for making reference to the TPO for computation of ALP in relation to international transactions be applied to specified domestic transactions as well? If yes, are there any exception which we need to apply here.?

Answer 77

• 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.

Question 78

How to determine the Arm’s length price of goods and services in a specified domestic transaction under section 80A and 80IA(8)?

Situation 1 - where the goods or services held for the purpose of the undertaking or unit or enterprise or eligible business are transferred to any other business carried on by the assessee or where any goods or services held for the purposes of any other business carried on by the assessee are transferred to the undertaking or unit or enterprise or eligible business

Situation 2- for the purpose of section 80-IA(8), the market value, in relation to any goods or services transferred between the eligible business and any other business carried on by the assessee

Answer 78

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.

Question 79

What does safe harbor rules mean? who is covered under the scheme as an eligible assessee? and what transactions are covered under specified domestic transaction?

Answer 79

• 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 valid 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

Question 80

What is the form that needs to be furnished for exercising of safe harbour rules to the assessing officer?

Answer 80

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.

Question 81

What is the time period within which an order rejecting the application as invalid under S.10THD could be made?

Answer 81

• 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.

Question 82

Can the assessee file objections to the order passed under 10THD, if yes what is the time limit and what is the time limit within which the order should be passed in this regard?

Answer 82

• he may file his objections with the Principal 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

Question 83

What are the conditions to be satisfied for invoking the provisions of section 93 - Transfer of Income to Non resident?

Answer 83

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 alone 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 avoidance of liability to tax in India is the purpose of the transfer.

Question 84

What is the meaning of benefit in accordance with the provisions of section 93?

Answer 84

• 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.

Question 85

What is the effect of entering into a transaction with persons in NJA in accordance with section 94A?

Hint: Tax treatment and TDS on such transactions, Allowance of deduction etc.

Answer 85

• 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 variation 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, not 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)

Question 86

Discuss the provisions of limitation of interest deduction in certain cases as per the provisions of section 94B?

Answer 86

• 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)