TRANSFER PRICING REGULATIONS -2013

TRANSFER PRICING REGULATIONS -2013

Transfer pricing until now was applicable to companies having cross border transactions with their associated enterprises. However Finance Bill 2012 in the light of the Supreme Court ruling in case of CIT vs. M/s Glaxo Smithkline Asia (P) Ltd. expanded the ambit  of transfer pricing to specified domestic transaction w.e.f. April 2013.

TRANSFER PRICE means the price or value at which transactions take place among related parties. It means the price at which an enterprise transfers physical goods and intangible property and provides services to associated enterprises.

The Statutory framework governing taxation laws in India has enacted Transfer Pricing provisions to provide unambiguous, reasonable, equitable and fair accountability of the prices charged and profits derived.

The Finance Bill 2012 has brought into the pictures various changes in the existing transfer pricing provisions such as-

1.       Enlargement of definition of International Transactions.

2.       Applicability of transfer pricing to certain domestic transaction.

3.       Availability of +/-3% as a standard deduction

4.       Introduction of Advance Pricing Agreements

5.       Penalty Provision Increased

6.       Other Administrative changes

• Revised Definition of International Transaction Sec 92B.(w.e.f. 01/4/2012)

Transactions between two or more associated enterprises of which either both or one is a non resident.

Transaction Covered:

-          Purchase / Sale / Lease

-          Provision of Service

-          Leasing or borrowing

-          Guarantees

-          Any debt arising during the course of business

-          Business reorganization or restructuring, irrespective of its effect on current year’s profits, income, losses or assets

-          Intangible properties

•  Applicability of Transfer Pricing Provisions to Certain Domestic Transaction:

Since the introduction of Transfer pricing provisions in Finance Act 2001, the applicability was restricted to the ambit of international transactions. But from April 2013 the regulations have widened their scope by covering certain specified domestic transactions also.

However the provision will apply only if the aggregate value of all the transaction entered into by the assessee in a year with its domestic associated enterprise exceeds Rs. 5 crores.

1.       Any expenditure in respect of which payment is made or is to be made to a person referred to in Section 40A(2)(b) of the IT Act;

2.       Any transaction that is referred to in Section 80A;

3.       Any transfer of goods or services referred to in Section 80-IA(8) i.e. applicable to companies operating as industrial undertaking or enterprises engaged in infrastructure development.

4.       Any business transacted between the assessee and the other person as referred to in section 80-IA(10);

5.       Any transaction, referred to in section any other section under Chapter VI-A or section 10AA, to which provision of sub-section (8) or sub-section (10) of section 80-IA are applicable

6.       Any other transaction, as may be prescribed by the board.

•  Availability of +/-3 as A Standard Deduction –Tolerance Limit Band for Arm’s Length Price

Arm’s Length Price means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions.

As per Sec 92C the arms length price for an international transaction can be determined by any of the following methods-

1.       Comparative Uncontrolled Price Method (CUP)

2.       Resale Price Method (RPM)

3.       Cost Plus Method (CPM)

4.       Profit Split Method (PSM)

5.       Transactional Net Margin Method (TNMM)

6.       Such other method as prescribed by the board

Note: Tolerance Limit Band for Arm’s Length Price was +/-5% till 31.03.2013. The Finance Bill 2012 has provided an upper ceiling of 3% as the tolerance range for the determination of ALP w.e.f 01.04.2013

• Introduction of Advance Pricing Agreements Sec 92CC & 92CD

1.       A person who has undertaken an international transaction or is contemplating one can enter into an agreement with CBDT.

2.       A person desired to enter into an agreement may furnish an application in Form No. 3CED alongwith the requisite fee.

3.       The application shall be furnished to Director General of Income Tax  (International Taxation) in case of unilateral agreement and to the competent authority in India in case of bilateral of multilateral agreement.

4.       The agreement entered into will be between the tax payer and the tax authorities for specifying the manner in which the ALP is to determine in relation to an International Transaction.

5.       The validity of the agreement entered into will be for consecutively 5 years unless any modification in provisions bearing any impact on transactions took place.

6.       Modified returns have to be filed by the assessee based on agreement entered, if the return has already been filed for the transactions covered in agreement.

7.       Terms of the agreement-

i.                     The international transactions covered by the agreement;

ii.                   The agreed transfer pricing methodology, if any;

iii.                  Determination of arm’s length price, if any;

iv.                 Definition of any relevant term to be used

v.                   Critical assumptions;

vi.                 The conditions if any other than provided in the Act or these rules.

•   Penalty Provision Increased

The amendments made below will also apply to Specific Domestic Transaction as well.

Earlier Scope:

Penalty @ 2% on the value of the international transaction is to levied on the tax payer if the non compliance amounts to non maintenance of prescribed documents or information (Sec 271 AA)

Further Inclusions: (w.e.f. 01.07.2012)

Extension in the scope of levy of penalty provisions on the following non compliances-

i.                     Failure to report an international transaction

ii.                   Maintains or furnishes incorrect documents/information.

•  Other Administrative Changes

IN RELATION TO	AMENDMENTS
1.       Powers of the Transfer Pricing Officer	TPO now can examine even those international transactions identified by him for which accountant’s report has not been furnished. (retrospective amendment from 01/06/2012)
2.       Deemed Escapement of Income	Non Inclusion/reporting of any international transaction in the report under sec 92E would amount to Deemed escapement of income under sec 147. (amendment from 01/07/2012)
3.       Dispute Resolution Panel	Matters to be undertaken may also include the proceedings related to draft assessment orders whether made by eligible tax payers or not. (retrospective amendment from 01/04/2009)

Implication of Such Amendments by Finance Act 2012

The foremost effect of introducing domestic transactions under the sphere of transfer pricing have included the following transactions/persons under taxation net-

1.       Transactions entered  into by the taxpayers operating in Special Economic Zones (SEZs)

2.       Taxpayers entering into transactions with certain related parties specified under section 40A (2)

3.       All the taxpayers claiming profit based deductions for undertaking specified business activities (under section 80A, 80-IA, etc.)

4.       Which would further effect the industries operating in SEZs, infrastructure developers and/or infrastructure operators, telecom services industries, industrial park developers, power generations or transmission, etc.

  The introduction of Advance pricing agreements shall also provide an early or no dispute mechanism between the tax payers and the judiciary of the country, therefore it can taken as welcome step towards dispute resolution mechanism.

Source: The Management Accoutant-2013