Definitions & determination applicability of TPR:
There are two fundamental tests to conclude whether TPR apply to a particular entity and transaction :
Section 92B: International Transaction :
For a Transaction to be an international transaction, it should satisfy the following two conditions cumulatively :
Also various types of transactions like purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business etc are covered.
Section 92A: Foreign Associated Enterprise (FAE) The concept of deemed an associated enterprise has also been incorporated in S. 92A (2) which provide that two enterprises shall be deemed to be associated enterprises if, at any time during the previous year :
Section 92: Computation of Income from International Transaction having Regard to Arm's Length Price (ALP)
TP relates to determination of correct market price i.e. arm's length price.
Section 92(1) & (2) Any income / allowance / expense allocation from an international transaction with FAE shall be computed having regard to the correct market price i.e. arm's length price.
Further, the regulations are applicable to sale /purchase / allocation of cost/expense in connection with services provided etc.
Section 92(3) Where the application of ALP price results in decrease in the overall tax incidence in India, the TPR will not be applied.
Section 92C:The ALP in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely:
Comparable uncontrolled price method - This method compares the price charged in transaction with FAE to the price charged in a comparable un-controlled transaction.
Resale price method - The resale price method begins with the price at which a product is resold to an independent enterprise by an associate enterprise. The profit from the said subsequent sale is to be reduced by normal expenses & gross profit margin to arrive at arm's length price.
Cost plus method - In this method the ALP is determined as total cost to associated enterprise plus normal gross margin of the industry.
Profit split method - This method may be applicable mainly in international transactions involving transfer of unique intangibles or in multiple international transactions which are so interrelated that they cannot be evaluated separately for the purpose of determining the ALP of any one transaction, by which consolidated profit for entire transaction for all enterprise put together is determined & then the same is split between all enterprises on the basis of the functions performed/assets/risks taken etc.
Transactional Net Margin Method - This method compares the net profit margin in transaction with FAE to net profit margin in a comparable un-controlled transaction.
Maintenance of books of accounts & submission of reports:
Section 92CA gives powers to assessing officer to refer any case to transfer pricing officer. It also describes the procedure a transfer pricing officer should follow to complete the assessment.
This section provides that every person who has undertaken an international taxation shall keep and maintain prescribed information and documents. Such documentation inter alia includes
Rule 10D (2) provides that in a case where the aggregate value of international trans-actions does not exceed Rs.1 Crore,
it will not be obligatory for the assesse to maintain the above information and documents. Considering the wording of this Rule
it appears that this limit will apply with reference to the aggregate value of the inter-national transactions with each
associated enterprise and not with reference to the aggregate value of the international trans-actions with all associated enterprises during the financial year put together.
However, it is provided that in the above cases also the assessee will have to substantiate that the income arising from the inter-national transactions with associated enterprises, as disclosed by the accounts, is in accordance with S. 92. This will mean that, even if the aggregate value of the international transactions is less than Rs.1 Crore, the assessee will have to maintain adequate records and evidence to show that the international trans-actions with associated enterprises are on the basis of arm's length principles
Section 92E: Report from accountant
This section provides that every person who has entered into an IT during a previous year shall obtain a report from an accountant in prescribed form & submit the same to income tax authority before prescribed date.
Consequences of non compliance of TPR:During the course of assessment, based on the material or information or documents in his possession, assessing officer is of the opinion that the arm length price determined by enterprise is not reliable or correct & is resulting in lower profit (or increase in loss), the officer has right to determine correct ALP based on above information & following consequences will follow :
Section 271AA - Penalty for non maintenance of prescribed record/ documents:
Prescribes for imposition of penalty equal to 2% of the value of each international transaction on account of failure to maintain information & document
Section 271BA - Penalty for failure to submit audit report within prescribed time limit: Penalty equal to Rs.1, 00,000 for failure to furnish audit report from an accountant as required u/s 92E
Section 271G - Penalty for failure to submit records / documents called for: Penalty of 2% of the value of international transaction for each failure to produce information & document as requisitioned by Income tax authorities
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