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;
- There should be two or more enterprises and they are associate enterprises , provisions of Section 92F(iii) defines an Enterprise;
- Enterprises should be regarded as Associate Enterprises, provisions of Section 92A(1) defined Associate Enterprises;
- International transaction should be carried out by the Associate Enterprise
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;
- The persons to the transactions should be unrelated or they should not be associated or deemed to be associated with each other;
- Conditions which are not controlled or suppressed or molded for achievement of pre-determined results are said to be uncontrolled conditions. If a buyer is related to a seller, or where prices are governed by the government policy then transaction is said to be taking place under controlled conditions.
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;
- Comparable Uncontrolled Price Method;
- Resale Price Method;
- Cost Plus Method;
- Profit Split Method;
- Transactional Net Margin Method;
- Such other methods or rules as may be prescribed by the Board.
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.
- Section 92CC empowers the Board (CBDT)( with the approval of Central Government) to enter into an advance pricing agreement with any person;
- The APA specify the methods for calculating Arms’ Length Price ,in relation to international transactions to be entered by that person;
- The Arms’ Length Price should be determined thorough any one of the methods provided under provisions of Section 92C(1) of the Income Tax Act, 1961, with necessary adjustment or variations;
- The provisions of Sections 92C or 92CA related to calculation of Arms’ Length Price should be to the extent adjusted or modified to the method prescribed in Advance Pricing Agreement. In other words we can say that the method for calculation in APA ,supersede provisions of Section 92C or 92CA in calculation of Arms’ Length Price;
- The Advance Pricing Agreement is valid only for five years;
- The APA shall be binding only one person and the Commissioner (including income tax authorities’ sub-ordinate to him) in respect of transaction in relation to which agreement has been entered into. The APA shall not bind if there is any change, in law or facts having bearing on such APA.
- If an person enter into APA with an intention of fraud or if an APA has been made with fraud , then the Board is empowered to declare, with the approval of Central Government , any such agreement to be void ab initio and all provisions of shall be applicable to the person as if APA has been never entered;
- The Board is empowered to frame scheme providing for the manner, form, procedure and any other matter generally in respect of Advance Pricing Agreements;
- The person entering into such APA shall necessarily have to furnish a modified return within a period of three(3) months from the end of the month in which the said APA was entered into in respect of return of income already filed for a previous year to which the APA applies. The modified return has to reflect modification to the income only in respect of the issue arising from APA and in accordance with it.
- If assessment for any year is pending in which APA applies , the Assessing Officer should assess the accounts of the person according to the provisions of Advance Pricing Agreement or considering the modified return filed by the person according to the provisions contained in APA.
- If the assessment or reassessment proceedings for an assessment year relevant to a previous year to which the agreement applies has been completed before expiry of period allowed for furnishing of modified return, the AO I case where a modified return is filed , proceeds to assess or reassess or recomputed the total income of the relevant assessment year having regard to and in accordance with the APA. In this case all provisions of Income Tax Act, 1961 will be applied as if return has been filed under provisions of section 139. The assessment should be completed within a period of one year from the date of filing of modified return;
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.