CS Deepak Pratap Singh
Transfer Pricing, a concept generally used in case of an International as well as Domestic Transactions between interrelated or associated enterprises. These provisions have been introduced to check revenue erosion from India by Multinational companies. These MNCs are big corporate having Subsidiaries, Associates, Joint Ventures etc., all over the World. They adjust their profits through inter corporate transactions.
Provisions of Sections 92 to 92F have been enacted with a view to provide a statutory framework , which can lead to computation of reasonable, fair and equitable profit and tax in India. These provisions have been enacted so that no profit has been diverted by these MNCs from India. The MNCs apply various methods to reduce their tax liability in India, such as purchasing goods or availing services from their associates on higher prices and selling or providing services to them on lower prices, showing higher expenditure, interest etc., these way they adjust their profits to reduce payment of taxes in India and divert their resources to those countries , taxes are low or they are tax heaven countries.
The provision of Sections 92 to 92F provides that any income arising from international transactions shall be computed having regarded to Arm’s Length Price.
From AY 2013-14, the government has introduced Section 92BA to extend transfer pricing provisions to few domestic transactions.
Main Condition for Applicability of Arm’s Length Price;
Arm’s Length Price;
Section 92 F provides that the price applied or proposed to be applied when two unrelated persons enter into a transaction in uncontrolled conditions. Two conditions should be complied for ALP;
Note: it is established that, when computing income, allowance for any expense or interest shall also be determined having regard to ALP.
As decided in case of Union of India v. Sanyasi Rao219ITR330(SC) it was held that income includes losses also and the word “Income” as referred to in section 92 will constitute “Income net of expenses”. Now in a case of international transactions, where only outgoing are reported net income , now in this case the nature and value of international transactions related to expenses should be calculated at the basis of APL.
There are various methods for calculation of Arms’ Length Price;
NOW LET US CONSIDER PROVISIONS REGARDING ADVANCE PRICING AGREEMENT;
Provisions of Sections 92CC and 92CD are applicable in this case;
Advance Pricing Agreement is an agreement between the tax payer and the Board (CBDT) or tax authorities on some set of international transactions over a fixed period of time in future. Provisions of Sections 92CC and 92CD were introduced by the Finance Act, 2012 and became effective from 1st July, 2012.
Lets us consider a case suppose X Limited filed its return on 31st October, 2014 for FY 2013-14 and on 18th November, 2014 , it enters into an APA with the Board for determination of Arm’s Length Price in connection with import of semi-finished goods from its holding company at United States of America. The agreement provides ALP transactions pertaining to the AYs 2013-14 and 2014-15 and return for Ay 2013-14 has been filed but AY 2014-15 has been pending. Now in this case X Ltd., has to submit a modified return for AY 2013-14 (an also for AY 2014-15) on or before 28th February, 2015(i.e. within 3 months from the end of the month in which APA is made).
Note: if AO has completed assessment for AY 2013-14 before 28th February, 2015 then he has to consider again and reassess the income of X Ltd., on the basis of modified return submitted by the company according to the provisions of APA. This reassessment should be completed before 31st March, 2016(i.e. within a period of one year from the end of the financial year in which modified return is submitted).
Now in case of AY 2014-15 AO has time to complete assessment till 31st March, 2017 under normal provisions of Income Tax Act, 1961. Now in case of APA entered he has time to complete assessment of AY 2014-15 till 31st March, 2018.