Contemporaneous documentation means information, records and other documents which exist or brought into existence at the time the taxpayer is developing or implementing any arrangement that might raise transfer pricing issues. It is important that documentation on which assessee is placing reliance to establish arm’s length price should be the one which was available when the transaction was entered into between parties or latest by the time analysis was made and not created afterwards. In India the regulations provide that documentation must be existing latest by due date of filing form 3CEB is to be submitted with the return of income which contains the details of international transactions, transfer price as per books and arm’s length price computed by the methods selected by the taxpayer. The documents which were relied for computing arm’s length price or making comparability of transactions should be available by that date.
The concept of contemporaneous documentation is used in the transfer pricing regulations of many countries. Sub-rule (4) of rule 10D provides that information and documents should as far as possible, be contemporaneous and available latest by the specified date which is the due date of filing return of income. The words “as far as possible” used in the rule means that unless there are exceptional circumstances the documentation cannot be created at any available later date for evidentiary purpose. For example, if the taxpayer relies on the terms and conditions of a contract for provision of services, the contract must be entered into when the transaction is made or before due date of return. Any agreement made to support the transaction after due date even though given effect from earlier date cannot be regarded as contemporaneous documentation. The contemporaneous documentation can be in form of books, records, studies, budgets, plans, etc.
Some countries like Spain and UK follow OECD guidelines. Para 5.15 of OECD guidelines, 2010 provide that tax administrators should limit the amount of information that is requested at the time of filing the tax return. This rule also therefore, recommends existence of documentation till the date of filing tax returns.
The requirement to keep and maintain contemporaneous data can sometime give rise to issues which are beyond the control of the taxpayer. The information and data of comparable uncontrolled transactions may not always be available in public domain till the specified date prescribed in law. But such data would be available to the tax authorities at the time when transfer pricing assessment or audit is undertaken. In such a situation it may be difficult for the taxpayer to comply with legal requirement of maintaining contemporaneous documents by specified date. The board therefore, should issue guidelines providing for conditions to relax rules for maintaining contemporaneous documentation.
As per proviso to sub-rule (4) of rule 10D when an international transaction continues to have effect over more than one previous year, fresh documentation need not be maintained in respect of each year unless there is significant change in the nature of terms of international transaction. This provision is exception to the general rule that assessee must have contemporaneous documents and record of international transaction to establish arm’s length price. The fresh documents are not considered necessary in case of same transaction.
This issue was examined by Delhi Tribunal in case of Airtech (P) Ltd. Vs Dy. CIT. The assessee engaged in the business of manufacture of designer furniture made supply of goods of INR 30.24 crores to its subsidiary company in UK. The transfer price of goods in the books was accounted as per cost plus method. During assessment proceedings the assessee was asked to furnish information and documents as prescribed in section 92D(1) and transfer pricing study report to support the claim that international transactions were made at arm’s length price. The assessee did not furnish any supporting documents or transfer pricing study report as in its view such documents were not required when there was long term contract to supply goods by way of export at cost plus method. The tribunal held that exception to the rule of contemporaneous documentation is applicable only when international transaction continues to have effect over two or more years. In this case the assessee had not produced any agreement that may show the terms had binding effect from year 1996 onwards. Moreover, the market conditions also kept on changing from year to year. Thus there was no merit in the argument that margins charged in year 1996 should be considered as fair margins in the later years. Accordingly, it was held that proviso to rule 10D(4) was not applicable in the facts of the case and the assessee was required to maintain necessary documents for the relevant years under consideration.
Waiver from Documentation requirement
Sub-rule (2) of rule 10D(1) provides that prescribed documentation requirements shall not apply where the aggregate value, as recorded in the books of accounts, of international transaction entered into by the assessee does not exceed one crore rupees. As per proviso to this rule if value of international transactions is less than rupees one crore, the assessee must be able to substantiate, on the basis of material available with him, that income arising from international transactions has been computed as per arm’s length price. Therefore, even though taxpayers covered under this rules are exempted from maintaining prescribed documents and information they have to keep some records / data to establish that their transfer prices are as per principle of arm’s length price provided in section 92 of the act.
(Author – CA Deepanshu Bansal , Legal Quotient Consultants, Email: email@example.com, Ph: +91-9873681488)