This article is must read for Business Owners who engage in foreign transactions with their associate enterprise.  This article should help you in understanding the requirement of stringent transfer pricing provision.

India Transfer Pricing Provisions decoded for Business Owners

With opening of Indian Markets in 1991, there is tremendous increase in trading and investment in India. This move towards globalization has also brought in new requirements relating to taxation and other laws. Transfer pricing is one such area. Ideally when a transaction is entered into between two independent enterprises, the consideration is determined by market forces. But when two associated  or for that matter related enterprises  enter into any transaction, there might be a possibility that the consideration as well as other commercial aspects of the transaction is not decided as per prevalent market prices but decided on the basis of internal factors. This might distort the profit and tax liabilities of the associated enterprises and also the tax revenue of the host country. To prevent these situations, the transfer pricing regulations were introduced and are covered u/s 92 to 92 F of the Indian Income tax Act, 1961. Types of transactions covered: There are two types of transactions which come within the ambit of transfer pricing regulations: I.            Intra-group cross-border transactions (applicable from 1 April 2001); II.            Specified domestic transactions (applicable from 1 April 2012). The transfer pricing regulations describes various transfer pricing methods, annual transfer pricing documentation requirements, and penal provisions for noncompliance.   Transfer Pricing Code: The Indian Transfer Pricing Code prescribes that:

• Any income arising from international transactions or specified domestic transactions between associated enterprises should be computed having regard to the arm’s-length price.

• Any allowance for an expenditure or interest or allocation of any cost or expense arising from an international transaction or specified domestic transaction also shall be determined having regard to the arm’s-length price.

  What is meant by International transaction? Transaction between two (or more) associated enterprises involving the sale, purchase or lease of tangible or intangible property; provision of services; cost-sharing arrangements; lending/borrowing of money; or any other transaction having a bearing on the profits, income, losses or assets of such enterprises.   What is meant by associated enterprise (AE)? The following are covered within the definition of associated enterprise Two non-residents or A resident and a non-resident, or A foreign enterprise and a permanent establishment (PE) of that foreign enterprise.   What is meant by Arms’ length price? A price that will be applied to transactions entered into by persons other than AEs in an uncontrolled condition. Specified domestic transactions (SDT): Until financial year (FY) 2011-12, transfer pricing regulations were not applicable to domestic transactions. However, the Finance Act 2012 has extended the application of transfer pricing regulations to ‘specified domestic transactions’ as well. Thus now, if certain related domestic parties enter into specified transactions and the total value of such transactions exceeds Rs 5 crore, transfer pricing regulations are attracted. Following are transactions covered:

• Expenditure under section 40A(2)
• Transfer of goods and services between the tax holiday undertaking and other  undertakings of the taxpayer
• Business transacted between the tax holiday undertaking and other ‘closely connected entities’
• Any other notified transaction

Compliances: Documentation requirement: Taxpayers are required to maintain, on an annual basis, a set of extensive information and documents (prescribed) relating to international transactions undertaken with AEs or specified domestic transactions. Taxpayers having the total value of international transactions below INR 1 Crore and specified domestic transactions below INR 5 Crore are relieved from maintaining the prescribed documentation. However, even in these cases, it is imperative that the documentation maintained should be adequate to substantiate the arm’s-length price of the international transactions or specified domestic transactions. Accountant’s report: It is mandatory for all taxpayers (no exception) to obtain an independent accountant’s report in respect of all international transactions between associated enterprises or specified domestic transactions. The report has to be furnished by the due date of the tax return filing (i.e. on or before 30 November).   The report requires the accountant to give an opinion on the proper maintenance of prescribed documents and information by the taxpayer. Furthermore, the accountant is required to certify the correctness of an extensive list of prescribed particulars. Penalties: Non-compliance with the provisions of the transfer pricing code may lead to following stringent penalties:

Failure to maintain the prescribed information/document	2% of transaction value
Failure to furnish information/documents during audit	2% of transaction value
Failure to disclose any transaction in Accountant’s report	2% of transaction value
For adjustment to taxpayer’s income	100% to 300% of the total tax on the adjustment amount.
For failure to furnish an accountant’s report	INR 100,000.

  To Conclude: All the business owners should determine the applicability of transfer pricing provisions on the international and Specified Domestic Transactions  carried out by their various entities all over India and follow the compliance requirements since the penalties for non-compliance are very severe. Taxpayers should plan their transfer pricing policy in advance before even executing the transactions. It is only then that businesses can adopt strategies in order to achieve the most tax efficient solutions. Taxpayers should try to prepare a very detailed and exhaustive transfer pricing documentation so that it will be easy later on to defend your arm length’s price analysis. Want to know more about transfer pricing or looking to strategies your transfer pricing transactions, feel free to write us an email at ( info@taxmantra.com) or visit our Tax & Regulatory Page.