ICAI’s Revised Guidance Note on Report under Section 92E of Income Tax (Transfer Pricing)
A. ICAI’s Revised Guidance Note on Report under S. 92E of Income Tax (Transfer Pricing) dt. 22 Nov. 2017
The ICAI has released 6th Edition (Nov. 2017) of the Guidance Note on Report Under Section 92E of the Income Tax Act, 1961 (Transfer Pricing). This Guidance Note was last revised in Nov. 2016. However, considering the changes effected by the Finance Act, 2017 and OECD TP Guidelines (2017), the same has been revised again by the ICAI. The exposure draft of this Guidance Note was hosted on ICAI’s website for inputs from members at large. The suggestions so received have been considered and appropriately incorporated.
Since 2001, when sections 92A to 92F were inserted for the first time in the Income-tax Act, 1961, there has been rapid changes/ developments in the field of Transfer Pricing. Application of the complex provisions of transfer pricing require determination of proper income, arising from international transactions, where either or both the parties involved happen to be non-resident(s). Global existence of the multinational enterprises has augmented the number of cross border transactions with the associated enterprises. At the same time, the related law has also evolved and has posed various challenges for stakeholders.
The responsibility of examining the records and issuing the report in Form No. 3CEB under section 92E of the Income Tax Act, 1961 is on ICAI members. This Guidance note on Report under section 92E of the Income tax Act, 1961 provides guidance to the members in this regard.
B. Legislative Framework on Report under Section 92E of Income Tax as per Revised Guidance Note of ICAI (Nov. 2017)
1. In an era of liberalization and globalization of trade and investment and the emergence of e-commerce, the perceptible results have been – increase in the number of cross-border transactions, the complexity, speed and lack of transparency with which global business can be transacted. There is a general belief that multi-national corporations, in an effort to manage and minimize their global tax outflows, have employed creative transfer pricing approaches in the context of flow of goods, services, funds, intangibles, etc.
2. When transactions are entered into between independent enterprises, the consideration therefore is determined by market forces. However, when associated enterprises deal with each other, it is possible that the commercial and financial aspects of the transactions are not influenced by external market forces but are determined based on internal factors. In such a situation, when the transfer price agreed between the associated enterprises does not reflect market forces and the arm’s length principle, the profit arising from the transactions, the consequent tax liabilities of the associated enterprises and the tax revenue of the host countries could be distorted.
3. The existence of different tax rates and rules in different countries offers a potential incentive to multinational enterprises to manipulate their transfer prices to recognise lower profit in countries with higher tax rates and vice versa. This can reduce the aggregate tax payable by the multinational groups and increase the after tax returns available for distribution to shareholders.
4. In India, the Act had hitherto not dealt with this problem in a detailed manner. The erstwhile section 92 sought to determine the amount of profits which may reasonably be deemed to have been derived from a business carried on between a resident and a non-resident which, owing to the close connection between them is so arranged that it produced, to the resident, either no profits or less than the ordinary profits which might be expected to arise in that business in case the transaction would have been entered into between two entities having no close connection. Besides, sections 40A(2), 80IA(10) and 80IB(13) of the Act provide powers to the Assessing Officer to interfere with the pricing or costing of certain transactions in certain cases in order to determine the correct quantum of deduction permissible.
5. The Finance Act, 2001, recognised that international transactions between Associated Enterprises may not be subject to the same market forces that shape relations between two independent firms, and therefore introduced a set of provisions in Chapter X of the Act under the title “Special Provisions relating to avoidance of tax”. The statutory framework attempts to monitor transfer prices for goods, facilities and services in order to determine that they conform to the “arm’s length principle”. Not only has section 92 of the Act been completely recast but new sections 92A to 92F have also been introduced to meet the desired objective of ensuring that the local tax base of an assessee is fair.
6. The relevant provisions contained in Chapter X (sections 92 to 92F) of the Act and the provisions dealing with the levy of penalties for noncompliance thereof are reproduced in Annexure I. The Finance Act, 2002 made certain changes to the provisions contained in sections 92A, 92C, 92F and 271F. The Finance Act, 2006 further amended section 92C. Further, the Finance Act, 2007 inserted sub-sections (3A) and (4) in section 92CA. Finance Act 2009 amended the proviso to section 92C, provided for constitution of the dispute resolution panel and empowered the Board to formulate safe harbor rules. Finance Act 2011 amended the allowable variation as per second proviso to section 92C (2) to be notified by the Central Government, and made changes to Section 92CA. The Finance Act 2012 has introduced significant amendments including inter alia clarifying the coverage of the term ‘international transactions’, expanding the scope of transfer pricing provisions to specified domestic transactions (Section 92BA) and providing an Advance Pricing Agreement framework (Section 92CC and Section 92CD). Further changes specifically in respect of arm’s length price determination were introduced vide Finance (No. 2) Act 2014 and the Finance Act 2015. The Finance Bill 2014 introduced the use of multiple year data and the Finance Act (No. 2), 2014 introduced range concept for determination of arm’s length price and roll-back mechanism for APA. The final rules in relation to the range concept and use of multiple year data were notified by the Central Board of Direct Taxes in October, 2015.
7. Further, section 92B extended application of transfer pricing provisions to transaction entered by an Indian entity with a resident independent third party. The Finance Act 2015 increased the threshold limit for the applicability of specified domestic transaction from INR 5 crores to INR 20 crores with effect from Financial Year 2015-16.
8. The Finance Act 2016, in line with recommendations of the BEPS Action Plan 13, inserted section 286 for furnishing of country-by-country report and inserted proviso to section 92D(1) for maintenance of Masterfile (form to be prescribed), with effect from Financial Year 2016-17.
9. Further, the existing penalty provisions have been rationalised along with insertion of additional penalties for non-furnishing/ maintenance of country-by-country report and master file.
10. The Finance Act 2017, amended the applicability of specified domestic transactions compliance by excluding expenditure made to person referred to in Sec. 40A(2)(b) of the Act, from the ambit of the definition.
11. Further, provisions regarding secondary adjustments and limitation on interest deduction were introduced and inserted as new sections (92CE and 94B respectively) vide Finance Act, 2017. Finance Act 2017 also introduced section 271J for levying penalty on accountants for furnishing incorrect information in reports or certificates furnished under any provisions of the Act or the rules made thereunder.
12. These amendments are also included in the said Annexure. The Rules prescribed in this regard by the Central Board of Direct Taxes are reproduced in Annexure II. The relevant extracts from the Memorandum explaining the provisions of the Finance Act, 2001, Finance Act, 2002, Finance Act, 2006, Finance Act, 2007, Finance Act, 2009, Finance Act, 2011, Finance Act 2012, Finance (No. 2) Act 2014, Finance Act 2015, Finance Act 2016 and Finance Act, 2017 are given in Annexure III. The Central Board of Direct Taxes has issued Circulars explaining the provisions and clarifying certain related aspects. These circulars are given in Annexure IV.