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 :

1. one enterprise holds, directly or indirectly, shares carrying not less than twenty six per cent of the voting power in the other enterprise; or
2. any person or enterprise holds, directly or indirectly, shares carrying not less than twenty six per cent of the voting power in each of such enterprises; or
3. a loan advanced by one enterprise to the other enterprise constitutes not less than fifty one per cent of the book value of the total assets of the other enterprise; or
4. one enterprise guarantees not less than ten per cent of the total borrowings of the other enterprise; or
5. more than half of the board of directors or members of the governing board, or one or more executive directors or executive members of the governing board of one enterprise, are appointed by the other enterprise; or
6. 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 or persons; or
7. the manufacture or processing of goods or articles or business carried out by one enterprise is wholly dependent on the use of know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights; or
8. ninety per cent, or more of the raw materials and consumables required for the manufacture or processing of goods or articles carried out by one enterprise are supplied by the other enterprise, or by persons specified by the other enterprise, and the prices and other conditions relating to the supply are influenced by such other enterprise; or
9. the goods or articles manufactured or processed by one enterprise, are sold to the other enterprise or to persons specified by the other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprise; or
10. 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 relative of such individual; or
11. where one enterprise is controlled by a Hindu undivided family, the other enterprise is controlled by a member of such Hindu undivided family, or by a relative of a member of such Hindu undivided family, or jointly by such member and his relative; or
12. where one enterprise is a firm, association of persons or body of individuals, the other enterprise holds not less than ten per cent interest in such firm, association of persons or body of individuals; or
13. there exists between the two enterprises, any relationship of mutual interest, as may be prescribed. It may be noted that the Rules 10A to 10E do not refer to any relationship of mutual interest.

2. How to Determine Arms Length Price?

Basis of charge:

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.

Computation of ALP

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:

1. Comparable uncontrolled price method
2. Resale price method
3. Cost plus method
4. Profit split method
5. Transactional Net Margin Method
6. Such other method as may be prescribed by the Board

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.

3. What Records You Should Maintain and What Reports You Should Submit?

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.

Section 92D:

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

• background information on the commercial environment in which the transaction has been entered into
• Description & working of the method considered for determining ALP
• Assumptions / adjustments /policies & price negotiations, which have critically effected the determination of ALP

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.

4. Consequences of Non Complaince with Transfer Pricing Regulations

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 :

• Income will be re computed based on ALP worked out by him. Sec (92C)
• The said addition will be treated as undisclosed income & penalty ranging between 100-300% of the tax can be levied (sec 271 (1)( c ))
• deduction u/s.10A, u/s.10B and Chapter VI-A shall not be allowed from the additional income computed by him

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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