Transfer Pricing Regulations in India

Transfer Pricing Regulations in India

In this post, we walk you through the transfer pricing regulations of India, as well as the master file and CbCR requirements. 

Intragroup transactions between AEs are not subject to market considerations, so transfer pricing refers to the prices of “controlled transactions” between cross-border associated enterprises (AE), which may take place under conditions different from those taking place between independent enterprises. It’s usually done to save money on taxes by putting money in AEs in tax havens.

The value associated with transfers of goods, services, and technology between related businesses, as well as value attached to transfers between unrelated parties with common ownership or control, is referred to as “transfer pricing.” The Income Tax Act of 1961 in India codifies the legislation on transfer pricing.

Income from ‘foreign transactions’ between ‘related firms’ must be calculated using the ‘arm’s-length pricing’ approach, according to India. In addition, any allowance for expenses or interest incurred as a result of an overseas transaction must be calculated using the arm’s-length pricing.

Regulations governing transfer pricing in India have a long history

With the liberalization of India’s economy in 1991, the country’s market began to draw FDI as well as interest from multinational firms (MNCs).

Existing provisions to address tax reduction through transfer pricing were declared insufficient by a standing committee dealing with the issue in 1991.

Following that, in 1999, an expert group within the Central Bureau of Direct Taxes (CBDT) proposed that section 92 of the Income Tax Act of 1961 be completely overhauled.

In April 2001, the Income Tax Act, 1961 was amended to implement Indian transfer pricing regulations (TPR) by Article 9 of the Organization for Economic Co-operation and Development (OECD) guidelines on transfer pricing, in response to a recommendation to prevent erosion of India’s tax base.

The amendment also provides a broad definition of international transactions, documentation requirements, and associated enterprises. These rules, which took effect in 2002, mostly applied to intra-group cross-border transactions.

The provisions were extended to certain domestic transactions between linked firms beginning in April 2013.

As a result, India’s transfer pricing regime applies to both domestic and international transactions that are above a certain threshold in terms of the transaction value. It is governed under section(s) 92A-F of the Income Tax Act of 1961, as well as related Rule(s) 10A-E of the Income Tax Rules of 1962.

The 1961 Income Tax Act contains transfer pricing rules.

Section 92: Income to be calculated on an arm’s-length basis

  • Any income deriving from an overseas transaction must be computed using the arm’s-length price, according to Section 92(1).

  • Cost-sharing arrangements are covered by Section 92(2).

  • The use of the transfer pricing regulations, according to Section 92(3), should not result in a reduction in the income determined based on books of account.

Associated enterprise (Section 92A)

Two or more businesses are referred to as associated businesses if:

  • One of them has a stake in another’s management, control, or capital; alternatively

  • Some people are in charge of common management, control, or capital.

International Transactions (Section 92B)

A transaction involving two or more associated businesses (AEs), one or both of which are non-residents, is referred to as an international transaction.

A purchase, sale, or lease of property or provision of services, lending or borrowing money, and any other transaction that affects profits, income, losses, or assets, including cost contribution arrangements, are all examples of international transactions.

A transaction between an enterprise and an unassociated third party (whether situated in India or abroad) is deemed to be an international transaction if there is a prior agreement between the AE and the third party, according to Section 92B.

Furthermore, if the AE determines the conditions of such transactions with unrelated parties, the transaction will be considered an international transaction. As a result, transfer pricing restrictions in India will apply to these transactions.

Section 92C: Arm’s-length price calculation

A price that is applied to transactions between individuals other than AEs in uncontrolled settings is referred to as an arm’s-length price, as specified by section 92F. Section 92C specifies the procedures for determining the arm’s-length price and states that the most appropriate approach will be used to compute it.

For the computation of arm’s-length price, five approaches were initially prescribed:

  • Method of comparable unregulated price (CUP);

  • RPM stands for resale price method.

  • CPM stands for the cost-plus method.

  • PSM (profit split method); and

  • Method of transactional net margin (TNMM).

A sixth technique, known as the “Other Method,” was announced in 2012 and is outlined in Rule 10AB of the Income Tax Rules of 1962. The Other Approach can be any method that takes into account the price that has been charged or paid or would have been charged or paid, for a similar or identical uncontrolled transaction with or between unrelated parties under similar circumstances, taking all relevant facts into account.

Documentation (Section 92D)

This section outlines how to keep documents up to date as required. This is necessary for calculating the arm’s-length pricing. The documents that must be kept are listed in Rule 10B. As a constituent entity of an international group, taxpayers must also keep track of such documents.

Accountant’s report (Section 92E)

The entity conducting an international transaction or a defined domestic transaction must present an audit report from the accountant in a prescribed format, according to this section. This report, which must be presented with the income tax return, must certify the kind and amount of the transaction. For this, you’ll need to fill out Form 3CEB.

Definitions (Section 92F)

This section contains definitions for terms such as accountant, arm’s[1]length price, enterprise, transaction, and so on that are related to the computation of arm’s-length price.

Safe Harbor Regulations

Safe harbour rules, in the context of transfer pricing, refer to legal provisions that reduce or eliminate liability for taxpayers if certain conditions are met, as they provide for circumstances in which a specific group of taxpayers can follow a set of rules under which transfer prices are automatically accepted by the income tax authorities.

These rules relieve compliance and litigation burdens while also streamlining the administrative procedure. They specify taxpayer eligibility criteria, eligible overseas transactions, the target operating margin, procedural features, and audit timelines, among other things.

Specific Domestic Transactions

Domestic transactions were not subject to transfer pricing regulations until the fiscal year 2011-12.

By inserting section 92BA in the Income Tax Act of 1961, the Finance Act of 2012 extended the application of transfer pricing laws to domestic transactions, dubbed “Specified Domestic Transactions.” From FY 2012-13 onwards, this modification will be in effect.

Specified domestic transactions include the following transactions with linked domestic parties, if the total amount of the transactions exceeds INR 200 million (US$2.69 million):

  • Section 80A of the Income Tax Act of 1961 refers to any transaction.

  • Any transfer of goods or services as defined in section 80-IA, subsection (8). Inter-unit transfers of goods and services by an entity claiming a deduction under section 80-IA are covered by section 80-IA(8).

  • Any business transacted between the assessee and a third party as defined in section 80-IA, sub-section (10)

  • Any transaction referred to in any other section of Chapter VI-A or section 10AA that is subject to the provisions of section 80-IA, subsections (8) and (10);

  • Any business is done between the parties listed in section 115BAB’s sub-section (6); or

  • Any other transaction that is required by law.

The Master File and Country-by-Country Reporting are now available (CbCR)

The OECD’s BEPS project has proposed “minimum standards” to be implemented under different Action Plans, including Country-by-Country Reporting (CbCR), which is specified in Action 13. CbCR applies globally to MNCs having a combined revenue of at least US$890 million. Large multinational corporations are required to submit an annual return that breaks down important financial statement elements by jurisdiction under the CbC reporting requirement.

India is dedicated to the BEPS programme, including Action 13 implementation. The Central Board of Direct Taxes (CBDT) has established multi-layered transfer pricing paperwork requirements, including standards for keeping and providing the Master File and CbCR for an international organization.

The CBDT amended the Income Tax Rules, 1962, with new rules – Rule 10DA and Rule 10DB – and new forms – Form CEBA to Form 3CEBE – in October 2017. The CBDT further reduced these Master File and CbCR regulations in April 2021 by amending the Income Tax Rules, which will apply to the assessment year (AY) 2021-22.

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