Key Highlights of Transfer Pricing Proposal in Union Budget 2020-21:

> As per amended provisions, Form 3CEB filing date is 31st October 2020 for FY 2019-20.

> Dispute Resolution Panel forum is now not limited to Transfer Pricing disputes only but also allowed to non residents for all disputes.

> Provisions of interest limitation (Section 94B) would not apply to the interest paid to an Indian PE i.e. branch of a non-resident bank.

> Advance Pricing Agreement (Section 92CC) and Safe Harbour Rules (Section 92CB) include the determination of attribution of profit to PE /business connection.

TRANSFER PRICING PROPOSALS:

1. Section 92F (iv): “Specified Date”-Rationalization of due date of filing of Accountant’s Report (Form 3CEB)

Existing Provisions (Relevant Provision Only) Amended Provisions Analysis of Amendments
92F (iv). “Specified dateshall have the same meaning as assigned to “due date” in Explanation 2 below sub-section (1) of section 139.

139 (1) Explanation 2

Explanation 2—In this sub-section, “due date” means,—

a)  where the assessee other than an assessee referred to in clause (aa) is—

I.  a company; or

II. a person (other than a company) whose accounts are required to be audited under this Act or under any other law for the time being in force; or

III. a working partner of a firm whose accounts are required to be audited under this Act or under any other law for the time being in force, the 30th day of September of the assessment year;

aa)   in the case of an assessee who is required to furnish a report referred to in section 92E, the 30th day of November of the assessment year;

b) in the case of a person other than a company, referred to in the first proviso to this sub-section, the 31st day of October of the assessment year;

c) in the case of any other assessee, the 31st day of July of the assessment year.

92F (iv). “Specified date” means the date one month prior to the due date for furnishing the return on income under sub-section (1) of section 139 for the relevant assessment year”.

139 (1) Explanation 2

Explanation 2—In this sub-section, “due date” means,—

a)  where the assessee other than an assessee referred to in clause (aa) is—

I. a company; or

II. a person (other than a company) whose accounts are required to be audited under this Act or under any other law for the time being in force; or

III. a partner of a firm whose accounts are required to be audited under this Act or under any other law for the time being in force, the 31st day of October of the assessment year;

aa)  in the case of an assessee who is required to furnish a report referred to in section 92E, the 30th day of November of the assessment year;

b) in the case of a person other than a company, referred to in the first proviso to this sub-section, the 31st day of October of the assessment year;

c) in the case of any other assessee, the 31st day of July of the assessment year.

All the provisions that mandate filing of an audit report along with the return of income or by the due date of filing of return of income would be amended to require the same to be furnished at least one month prior to the due date of filing of such return of income.

Hence, the date of filing the Accountant’s Report i.e. Form 3CEB is also 31st October of the relevant assessment year instead of 30th November.

This amendment will take effect from 1st April, 2020 i.e. applicable from the FY 2019-20 relevant to the assessment year 2020-21 and subsequent years.

2. Section 144C: Reference to Dispute Resolution Panel 

Existing Provisions (Relevant Provision Only) Amended Provisions Analysis of Amendments
1) The Assessing Officer shall, notwithstanding anything to the contrary contained in this Act, in the first instance, forward a draft of the proposed order of assessment (hereafter in this section referred to as the draft order) to the eligible assessee if he proposes to make, on or after the 1st day of October, 2009, any variation in the income or loss returned which is prejudicial to the interest of such assessee.

(2) to (14)…….

15)  For the purposes of this section,—

a) “Dispute Resolution Panel” means a collegium comprising of three Principal Commissioners or Commissioners of Income-tax constituted by the Board for this purpose;

b) “eligible assessee” means,—

(i)  any person in whose case the variation referred to in sub-section (1) arises as a consequence of the order of the Transfer Pricing Officer passed under sub-section (3) of section 92CA; and

 (ii)  any foreign company.

1) The Assessing Officer shall, notwithstanding anything to the contrary contained in this Act, in the first instance, forward a draft of the proposed order of assessment (hereafter in this section referred to as the draft order) to the eligible assessee if he proposes to make, on or after the 1st day of October, 2009, any variation which is prejudicial to the interest of such assessee.

(2) to (14)…….

15)   For the purposes of this section,—

a) “Dispute Resolution Panel” means a collegium comprising of three Principal Commissioners or Commissioners of Income-tax constituted by the Board for this purpose;

b)  “eligible assessee” means,—

(i)  any person in whose case the variation referred to in sub-section (1) arises as a consequence of the order of the Transfer Pricing Officer passed under sub-section (3) of section 92CA; and

(ii)  any non-resident not being a company, or any foreign company.

With this proposed amendment, scope of said section has expanded to include all the disputes of non-residents.

Therefore, now the Dispute Resolution Panel forum is not limited to Transfer Pricing disputes only but also allowed to non residents for all disputes.

This amendment will take effect from 1st April, 2020. Thus, said provision will be applicable, if the Assessing Officer proposes to make any variation after this date.

3. Section 94B: Limitation on interest deduction in certain cases. 

Existing Provisions Amended Provisions Analysis of Amendments
1)  Notwithstanding anything contained in this Act, where an Indian company, or a permanent establishment of a foreign company in India, being the borrower, incurs any expenditure by way of interest or of similar nature exceeding one crore rupees which is deductible in computing income chargeable under the head “Profits and gains of business or profession” in respect of any debt issued by a non-resident, being an associated enterprise of such borrower, the interest shall not be deductible in computation of income under the said head to the extent that it arises from excess interest, as specified in sub-section (2) :

Provided that where the debt is issued by a lender which is not associated but an associated enterprise either provides an implicit or explicit guarantee to such lender or deposits a corresponding and matching amount of funds with the lender, such debt shall be deemed to have been issued by an associated enterprise.

2) For the purposes of sub-section (1), the excess interest shall mean an amount of total interest paid or payable in excess of thirty per cent of earnings before interest, taxes, depreciation and amortisation of the borrower in the previous year or interest paid or payable to associated enterprises for that previous year, whichever is less.

3) Nothing contained in sub-section (1) shall apply to an Indian company or a permanent establishment of a foreign company which is engaged in the business of banking or insurance.

4)  Where for any assessment year, the interest expenditure is not wholly deducted against income under the head “Profits and gains of business or profession”, so much of the interest expenditure as has not been so deducted, shall be carried forward to the following assessment year or assessment years, and it shall be allowed as a deduction against the profits and gains, if any, of any business or profession carried on by it and assessable for that assessment year to the extent of maximum allowable interest expenditure in accordance with sub-section (2):

Provided that no interest expenditure shall be carried forward under this sub-section for more than eight assessment years immediately succeeding the assessment year for which the excess interest expenditure was first computed.

5) For the purposes of this section, the expressions—

(i) “associated enterprise” shall have the meaning assigned to it in sub-section (1) and sub-section (2) of section 92A;

(ii) “debt” means any loan, financial instrument, finance lease, financial derivative, or any arrangement that gives rise to interest, discounts or other finance charges that are deductible in the computation of income chargeable under the head “Profits and gains of business or profession“;

(iii) “permanent establishment” includes a fixed place of business through which the business of the enterprise is wholly or partly carried on.

1) Notwithstanding anything contained in this Act, where an Indian company, or a permanent establishment of a foreign company in India, being the borrower, incurs any expenditure by way of interest or of similar nature exceeding one crore rupees which is deductible in computing income chargeable under the head “Profits and gains of business or profession” in respect of any debt issued by a non-resident, being an associated enterprise of such borrower, the interest shall not be deductible in computation of income under the said head to the extent that it arises from excess interest, as specified in sub-section (2) :

Provided that where the debt is issued by a lender which is not associated but an associated enterprise either provides an implicit or explicit guarantee to such lender or deposits a corresponding and matching amount of funds with the lender, such debt shall be deemed to have been issued by an associated enterprise.

1A) Nothing contained in sub section 1 shall apply to Interest paid in respect of a debt issued by a lender which is a permanent establishment in India of a non-resident, being a person engaged in the business of banking.

2)  For the purposes of sub-section (1), the excess interest shall mean an amount of total interest paid or payable in excess of thirty per cent of earnings before interest, taxes, depreciation and amortisation of the borrower in the previous year or interest paid or payable to associated enterprises for that previous year, whichever is less.

3) Nothing contained in sub-section (1) shall apply to an Indian company or a permanent establishment of a foreign company which is engaged in the business of banking or insurance.

4)  Where for any assessment year, the interest expenditure is not wholly deducted against income under the head “Profits and gains of business or profession”, so much of the interest expenditure as has not been so deducted, shall be carried forward to the following assessment year or assessment years, and it shall be allowed as a deduction against the profits and gains, if any, of any business or profession carried on by it and assessable for that assessment year to the extent of maximum allowable interest expenditure in accordance with sub-section (2):

Provided that no interest expenditure shall be carried forward under this sub-section for more than eight assessment years immediately succeeding the assessment year for which the excess interest expenditure was first computed.

5) For the purposes of this section, the expressions—

(i) “associated enterprise” shall have the meaning assigned to it in sub-section (1) and sub-section (2) of section 92A;

(ii) “debt” means any loan, financial instrument, finance lease, financial derivative, or any arrangement that gives rise to interest, discounts or other finance charges that are deductible in the computation of income chargeable under the head “Profits and gains of business or profession”;

(iii) “permanent establishment” includes a fixed place of business through which the business of the enterprise is wholly or partly carried on.

The proposed amendment u/s 94B of the Act provides that provisions of interest limitation would not apply to the interest paid to an Indian PE i.e. branch of a non-resident bank and hence, would be excluded from the application of the thin capitalization rules under the transfer pricing provisions.

This amendment will take effect from 1st April, 2021 i.e. applicable from the FY 2020-21 relevant to the assessment year 2021-22 and subsequent years.

4. Section 92CB and Section 92CC: Safe Harbour Rules and Advance Pricing Agreements 

Existing Provisions Amended Provisions Analysis of Amendments
Section 92CB: Safe Harbour Rules

1)      The determination of arm’s length price under section 92C or section 92CA shall be subject to safe harbour rules.

2) The Board may, for the purposes of sub-section (1), make rules for safe harbour.

Explanation.—For the purposes of this section, “safe harbour” means circumstances in which the income-tax authorities shall accept the transfer price declared by the assessee. 

Section 92CC: Advance Pricing Agreements

1)      The Board, with the approval of the Central Government, may enter into an advance pricing agreement with any person, determining the arm’s length price or specifying the manner in which arm’s length price is to be determined, in relation to an international transaction to be entered into by that person.

2)      The manner of determination of arm’s length price referred to in sub-section (1), may include the methods referred to in sub-section (1) of section 92C or any other method, with such adjustments or variations, as may be necessary or expedient so to do.

3)      Notwithstanding anything contained in section 92C or section 92CA, the arm’s length price of any international transaction, in respect of which the advance pricing agreement has been entered into, shall be determined in accordance with the advance pricing agreement so entered.

4) The agreement referred to in sub-section (1) shall be valid for such period not exceeding five consecutive previous years as may be specified in the agreement.

5)  The advance pricing agreement entered into shall be binding—

(a) on the person in whose case, and in respect of the transaction in relation to which, the agreement has been entered into; and

(b) on the Principal Commissioner or Commissioner, and the income-tax authorities subordinate to him, in respect of the said person and the said transaction.

6) The agreement referred to in sub-section (1) shall not be binding if there is a change in law or facts having bearing on the agreement so entered.

7) The Board may, with the approval of the Central Government, by an order, declare an agreement to be void ab initio, if it finds that the agreement has been obtained by the person by fraud or misrepresentation of facts.

8) Upon declaring the agreement void ab initio,—

(a) all the provisions of the Act shall apply to the person as if such agreement had never been entered into; and

(b) notwithstanding anything contained in the Act, for the purpose of computing any period of limitation under this Act, the period beginning with the date of such agreement and ending on the date of order under sub-section (7) shall be excluded:

Provided that where immediately after the exclusion of the aforesaid period, the period of limitation, referred to in any provision of this Act, is less than sixty days, such remaining period shall be extended to sixty days and the aforesaid period of limitation shall be deemed to be extended accordingly.

9) The Board may, for the purposes of this section, prescribe a scheme specifying therein the manner, form, procedure and any other matter generally in respect of the advance pricing agreement.

(9A) The agreement referred to in sub-section (1), may, subject to such conditions, procedure and manner as may be prescribed, provide for determining the arm’s length price or specify the manner in which arm’s length price shall be determined in relation to the international transaction entered into by the person during any period not exceeding four previous years preceding the first of the previous years referred to in sub-section (4), and the arm’s length price of such international transaction shall be determined in accordance with the said agreement.

10)   Where an application is made by a person for entering into an agreement referred to in sub-section (1), the proceeding shall be deemed to be pending in the case of the person for the purposes of the Act.

Section 92CB:

1) The determination of-

a) Income referred to in clause (i) of sub section (1) of section 9; or

b)  arm’s length price under section  2C  or section 92CA  shall be subject to safe harbour rules.

2) The Board may, for the purposes of sub-section (1), make rules for safe harbour.

Explanation.—For the purposes of this section, “safe harbour” means circumstances in which the income-tax authorities shall accept the transfer price declared by the assessee.

Section 92CC: Advance Pricing Agreements

1) The Board, with the approval of the Central Government, may enter into an advance pricing agreement with any person, determining the

a)  arm’s length price or specifying the manner in which arm’s length price is to be determined, in relation to an international transaction to be entered into by that person.

b)  Income referred to in clause (i) of sub section (1) of section 9 or specifying the manner in which said income is to be determined, as is reasonable attributed to the operations carried out in India by or on behalf of that person, being a non-resident

2) The manner of determination of arm’s length price referred to in clause (b) of sub-section (1), may include the methods referred to in sub-section (1) of section 92C or the methods provided by the Rules made under this Act, respectively, with such adjustments or variations, as may be necessary or expedient so to do.

3) Notwithstanding anything contained in section 92C or section 92CA or the methods provided by the Rules made under this Act, the arm’s length price of any international transaction or the income referred to in clause (b) of sub-section (1), in respect of which the advance pricing agreement has been entered into, shall be determined in accordance with the advance pricing agreement so entered.

4)  The agreement referred to in sub-section (1) shall be valid for such period not exceeding five consecutive previous years as may be specified in the agreement.

5) The advance pricing agreement entered into shall be binding—

(a) on the person in whose case, and in respect of the transaction in relation to which, the agreement has been entered into; and

(b) on the Principal Commissioner or Commissioner, and the income-tax authorities subordinate to him, in respect of the said person and the said transaction.

6) The agreement referred to in sub-section (1) shall not be binding if there is a change in law or facts having bearing on the agreement so entered.

7)  The Board may, with the approval of the Central Government, by an order, declare an agreement to be void ab initio, if it finds that the agreement has been obtained by the person by fraud or misrepresentation of facts.

8) Upon declaring the agreement void ab initio,—

(a) all the provisions of the Act shall apply to the person as if such agreement had never been entered into; and

(b) notwithstanding anything contained in the Act, for the purpose of computing any period of limitation under this Act, the period beginning with the date of such agreement and ending on the date of order under sub-section (7) shall be excluded:

Provided that where immediately after the exclusion of the aforesaid period, the period of limitation, referred to in any provision of this Act, is less than sixty days, such remaining period shall be extended to sixty days and the aforesaid period of limitation shall be deemed to be extended accordingly.

9) The Board may, for the purposes of this section, prescribe a scheme specifying therein the manner, form, procedure and any other matter generally in respect of the advance pricing agreement.

(9A) The agreement referred to in sub-section (1), may, subject to such conditions, procedure and manner as may be prescribed, provide for determining the-

a) arm’s length price or specify the manner in which arm’s length price shall be determined in relation to the international transaction entered into by the person;

b) income referred to in clause (i) of sub-section (1) of section 9, or specifying the manner in which said income is to be determined, as is reasonably attributable to the operations carried out in India by or on behalf of that person, being a non-resident, during any period not exceeding four previous years preceding the first of the previous years referred to in sub-section (4), and the arm’s length price of such international transaction or the income of such person shall be determined in accordance with the said agreement.

10) Where an application is made by a person for entering into an agreement referred to in sub-section (1), the proceeding shall be deemed to be pending in the case of the person for the purposes of the Act.

The purpose behind such amendment is that the issue of attribution of profit to the PE has always been a subject matter of litigation which resulted in increased or long pending cases, as the Assessing Officers often resort to ad-hoc attribution of profits to PE without any reasonable and cogent basis.

Hence, in order to provide more certainty and clarity to assessee, the determination of profits attributable to a permanent establishment (PE) in India of a non-resident brought within the scope of the Advance Pricing Agreement (APA) Rules and the Safe Harbour Regime.

This amendment will take effect from 1st April, 2020 i.e. applicable from the FY 2019-20 relevant to the assessment year 2020-21 and subsequent years.

Disclaimer: The contents of these updates are for informational purpose only. It does not constitute any professional advice.

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