Transfer Pricing System:Definitions &Relevant Acts (Part B)

What we have below

• are the terms and definitions used in Transfer Pricing.
• the relevant acts pertaining to Transfer Pricing in India.
• a sample report from an accountant to be furnished under Section 92E

Transfer Pricing Regulations:are applicable to all enterprises that enter into an “International Transaction” with an “Associated Enterprise“. The objective is to arrive at a comparable price,as available,in relation to transactions with unrelated parties in open market conditions and is known as the “Arm’s Length Price”.

“Associated Enterprise”:The basic criterion to determine an “Associated Enterprise”is the participation in management,control or capital (ownership) of one enterprise by another enterprise. The participation may be direct or indirect or through one or more intermediaries. The concept of control extends not only to control through holding shares or voting power or the power to appoint the management of an enterprise,but also through debt and control over various components of the business activity such as control over raw materials,sales and intangibles.

Section 92A (1) of the Income Tax Act,1961 defines “Associated Enterprise”,in relation to another enterprise as one which participates,directly or indirectly,or through one or more intermediaries,in the management or control or capital of the other enterprise;or in respect of which one or more persons who participate,directly or indirectly,or through one or more intermediaries,in its management or control or capital,are the same persons who participate,directly or indirectly,or through one or more intermediaries,in the management or control or capital of the other enterprise.
“International Transaction”:An “International Transaction”is essentially a cross border transaction between two or more associated enterprises in any sort of property,tangible or intangible,or in the provision of services,lending of money,etc. At least one of the parties to the transaction must be a non-resident entering into one or more of the following transactions:

• Purchase,sale or lease of tangible or intangible property,
• Provision of services,
• Lending or borrowing of money,
• Any transaction having a bearing on profit,income or assets.
• Mutual agreement between “associated enterprises”for allocation / apportionment of any cost,contribution or expense.

“Arm’s Length Price”:The Transfer Pricing Regulations have provided that any income arising from an international transaction between “associated enterprises shall be computed having regard to the “arm’s length price”,which is the price that would be charged in the transaction if it had been entered into by unrelated parties in similar conditions.
Section 92 –Computation of income from international transaction having regard to arms length price

(1) Any income arising from an international transaction shall be computed having regard to the arms length price.
Explanation.For the removal of doubts,it is hereby clarified that the allowance for any expense or interest arising from an international transaction shall also be determined having regard to the arms length price.
(2) Where in an international transaction,two or more associated enterprises enter into a mutual agreement or arrangement for the allocation or apportionment of,or any contribution to,any cost or expense incurred or to be incurred in connection with a benefit,service or facility provided or to be provided to any one or more of such enterprises,the cost or expense allocated or apportioned to,or,as the case may be,contributed by,any such enterprise shall be determined having regard to the arms length price of such benefit,service or facility,as the case may be.
(3) The provisions of this section shall not apply in a case where the computation of income under sub-section (1) or the determination of the allowance for any expense or interest under that sub-section,or the determination of any cost or expense allocated or apportioned,or,as the case may be,contributed under sub-section (2),has the effect of reducing the income chargeable to tax or increasing the loss,as the case may be,computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction was entered into.]
Section 92 D –Maintenance and keeping of information and document by persons entering into an international transaction

(1) Every person who has entered into an international transaction shall keep and maintain such information and document in respect thereof,as may be prescribed.
(2) Without prejudice to the provisions contained in sub-section (1),the Board may prescribe the period for which the information and document shall be kept and maintained under that sub-section.
(3) The Assessing Officer or the Commissioner (Appeals) may,in the course of any proceeding under this Act,require any person who has entered into an international transaction to furnish any information or document in respect thereof,as may be prescribed under sub-section (1),within a period of thirty days from the date of receipt of a notice issued in this regard:
Provided that the Assessing Officer or the Commissioner (Appeals) may,on an application made by such person,extend the period of thirty days by a further period not exceeding thirty days

Section 92E –Report from an accountant to be furnished by persons entering into international transaction

Every person who has entered into an international transaction during a previous year shall obtain a report from an accountant and furnish such report on or before the specified date in the prescribed form ( Form 3CEB) duly signed and verified in the prescribed manner by such accountant and setting forth such particulars as may be prescribed.
Rule 10D –Information and documents to be kept and maintained
(1) Every person who has entered into an international transaction shall keep and maintain the following information and documents,namely:
(a) a description of the ownership structure of the assessee enterprise with details of shares or other ownership interest held therein by other enterprises;
(b) a profile of the multinational group of which the assessee enterprise is a part along with the name,address,legal status and country of tax residence of each of the enterprises comprised in the group with whom international transactions have been entered into by the assessee,and
ownership linkages among them;
(c) a broad description of the business of the assessee and the industry in which the assessee operates,and of the business of the associated enterprises with whom the assessee has transacted;
(d) the nature and terms (including prices) of international transactions entered into with each associated enterprise,details of property transferred or services provided and the quantum and the value of each such transaction or class of such transaction;
(e) a description of the functions performed,risks assumed and assets employed or to be employed by the assessee and by the associated enterprises involved in the international transaction;
(f) a record of the economic and market analyses,forecasts,budgets or any other financial estimates prepared by the assessee for the business as a whole and for each division or product separately,which may have a bearing on the international transactions entered into by the assessee;
(g) a record of uncontrolled transactions taken into account for analysing their comparability with the international transactions entered into,including a record of the nature,terms and conditions relating to any uncontrolled transaction with third parties which may be of relevance to the pricing of the international transactions;
(h) a record of the analysis performed to evaluate comparability of uncontrolled transactions with the relevant international transaction;
(i) a description of the methods considered for determining the arms length price in relation to each international transaction or class of transaction,the method selected as the most appropriate method along with explanations as to why such method was so selected,and how such method was applied in each case;
(j) a record of the actual working carried out for determining the arms length price,including details of the comparable data and financial information used in applying the most appropriate method,and adjustments,if any,which were made to account for differences between the international transaction and the comparable uncontrolled transactions,or between the enterprises entering into such transactions;
(k) the assumptions,policies and price negotiations,if any,which have critically affected the determination of the arms length price;
(l) details of the adjustments,if any,made to transfer prices to align them with arms length prices determined under these rules and consequent adjustment made to the total income for tax purposes;
(m) any other information,data or document,including information or data relating to the associated enterprise,which may be relevant for determination of the arms length price.
(2) Nothing contained in sub-rule (1) shall apply in a case where the aggregate value,as recorded in the books of account,of international transactions entered into by the assessee does not exceed one crore rupees:
Provided that the assessee shall be required to substantiate,on the basis of material available with him,that income arising from international transactions entered into by him has been computed in accordance with section 92.
(3) The information specified in sub-rule (1) shall be supported by authentic documents,which may include the following:
(a) official publications,reports,studies and data bases from the Government of the country of residence of the associated enterprise,or of any other country;
(b) reports of market research studies carried out and technical publications brought out by institutions of national or international repute;
(c) price publications including stock exchange and commodity market quotations;
(d) published accounts and financial statements relating to the business affairs of the associated enterprises;
(e) agreements and contracts entered into with associated enterprises or with unrelated enterprises in respect of transactions similar to the international transactions;
(f) letters and other correspondence documenting any terms negotiated between the assessee and the associated enterprise;
(g) documents normally issued in connection with various transactions under the accounting practices followed.
(4) The information and documents specified under sub-rules (1) and (2),should,as far as possible,be contemporaneous and should exist latest by the specified date referred to in clause (iv) of section 92F:
Provided that where an international transaction continues to have effect over more than one previous year,fresh documentation need not be maintained separately in respect of each previous year,unless there is any significant change in the nature or terms of the international transaction,in the assumptions made,or in any other factor which could influence the transfer price,and in the case of such significant change,fresh documentation as may be necessary under sub-rules (1) and (2) shall be maintained bringing out the impact of the change on the pricing of the international transaction.
(5) The information and documents specified in sub-rules (1) and (2) shall be kept and maintained for a period of eight years from the end of the relevant assessment year.

Sample Report From An Accountant to be furnished under Section 92E
FORM NO. 3CEB

[See rule 10E]
Report from an accountant to be furnished under section
92E relating to international transaction(s)
1. *I/We have examined the accounts and records of _______________________________________________ (name and address of the assessee with PAN) relating to the international transactions entered into by the assessee during the previous year ending on 31st March,______________
2. In *my/our opinion proper information and documents as are prescribed have been kept by the assessee in respect of the international transaction(s) entered into so far as appears from *my/our examination of the records of the assessee.
3. The particulars required to be furnished under section 92E are given in the Annexure to this Form. In *my/our opinion and to the best of my/our information and according to the explanations given to *me/us,the particulars given in the Annexure are true and correct.
**Signed
Name:
Address:
Membership No.:
Place:_____________
Date:_____________
Notes:
1. *Delete whichever is not applicable.
2. **This report has to be signed by -
(i) a chartered accountant within the meaning of the Chartered Accountants Act,1949 (38 of 1949);or
(ii) any person who,in relation to any State,is,by virtue of the provisions in sub-section (2) of section 226 of
the Companies Act,1956 (1 of 1956),entitled to be appointed to act as an auditor of companies registered
in that State.
ANNEXURE TO FORM NO. 3CEB
Particulars relating to international transactions required to befurnished under section 92E of the Income-tax Act,1961
PART A

• Transfer Pricing Systems:Methods &Selection(Part C)
• Transfer Pricing System:Core Documentation File (Part A)
• TRANSFER PRICING IS AN IMPENDING MAJOR TAX CHALLENGE FOR COMPANIES ESPECIALLY MULTINATIONALS
• WHAT IS ARM’S LENGTH PRINCIPLE AND WHAT ARE THE METHOD TO DETERMINE ARM’S LENGTH
• Drafting/Formulating Management Services As Part of Management Fee/Transfer Pricing Strategy
• Reasons For Implementing Intra Group Transfer Pricing(Part1)
• Criteria Of A Good Intra Transfer Pricing System(Part2)