Generally, framework of any compliance mechanism under any law will consist of provisions related to a) what and how the compliance is to be done? (Charging Sections), b) to whom the compliance requirement is applicable? (Applicability), c) what details and documents are to be maintained and what are the reports to be filed to bring compliance on record? (Documentation & Reporting) d) How the authorities keep watch to ensure that the compliance has been made in accordance with the provisions of the law? (Assessment) e) Miscellaneous matters.
Transfer Pricing Compliance Mechanism under the Income Tax Act, 1961 (the act) is developed in the same pattern.
The transfer pricing compliance under the act, can be said to be based on following four aspects.
1.1 What is to be done and how the same is to be done? – Requirements/ Charging Sections – Relevant sections 92, 92C, 92F
1.2 To whom does this apply? – Applicability – Relevant sections – 92A, 92B, 92BA
1.3 What details, documents and reports are to be maintained/ submitted to substantiate that the compliance requirements are met? – Documentation and Reporting – Relevant sections 92D, 92E, 286
1.4 How authorities keep watch and what are the proceedings to ensure that the compliance requirements are fulfilled? – Assessment and other matters – Relevant sections 92CA, 92CB, 92CC, 92CD, 92CE
In this article, we have discussed the provisions related to applicability, due dates and penalties related to Documentation and Reporting requirements pertaining to transfer pricing prescribed in the act and relevant rules. However, before moving to the detailed discussion on the topic, it is necessary to highlight the basic Transfer Pricing provisions in the act.
2. Basic Provisions
2.1 Charging Section
Section 92 requires computation of income from International Transactions/ Specified Domestic Transactions having regard to arm’s length price (ALP). Section 92C prescribed the manner in which the arm’s length price is to be computed and the methods to be used.
2.2 Applicability Criteria – 92A & 92B
As discussed, section 92 requires computation of income from International Transactions having regard to ALP. It is crucial to understand the meaning of term international transactions. Section 92B provides meaning of the International Transactions as certain specified transactions between two or more associated enterprises where either or both of them are non – resident.
The term Associated Enterprise is given meaning to under section 92A. Sub – Section (1) sets out the basic principle of participation two or more enterprises in Capital, Control or Management of one another. Sub – Section (2) prescribes criteria which if fulfilled by two entities, they shall be deemed to be an associated enterprise. (clause – (a) to (m) of sub – section (2) of section 92A).
Hence, Transfer Pricing provisions applies when there are certain specified transactions as referred to in section 92B between two or more Associated Enterprises. i.e. International Transactions.
2.3 Documentation and reporting (Transfer Pricing Documentation) – 92D(1), 286, 92E
Before budget 2016, provisions under the act required to keep, maintain and report the information, details and documents related to International Transactions. In other words, the documentation and reporting of information related to existence, accuracy, correctness and computation of ALP of International Transactions in accordance with the regulations were required to be kept and maintained. Hence, documentation and reporting were limited to International Transactions.
OECD (Organisation of Economic Co-operation and Development) has issued report on 15 BEPS Action Plans. The OECD report on Action 13 of BEPS Action plan provides for revised standards for transfer pricing documentation. It is recommended in the BEPS report that the countries should adopt a standardised approach to transfer pricing documentation. Three-tiered structure has been recommended which consists: —
India is one of the active members of OECD and BEPS initiative. Hence, in order to implement the OECD recommendations, India has inserted the 1st proviso to section 92D and section 286 in the act by Finance Act, 2016. These provisions require certain specified entities to keep, maintain and report information and documents in respect of MNE as a whole. These additional reporting can be broadly classified as master file and country by country report (CBCR). Applicability of these provisions have been discussed in details in para 3 of this article.
Hence now, documentation and reporting requirements in Indian Transfer Pricing Regulations can be classified into two broad categories. One is with respect to International Transactions and another is with respect to the MNE as a whole i.e. International Group. Reporting related to international group can be sub categorised as master file and CBCR.
2.4 Assessment and other matters
Assessment and other matters like safe harbour rules, advance pricing agreements etc. are not discussed in this article.
3. Documentation and Reporting – In detail
3.1 Documentation and reporting with respect to International Transaction – Section 92D (1) & Section 92E r.w. rule 10D and 10E
Sub – Section (1) of Section 92D requires the persons who enters into International Transactions to keep and maintain the information and documents pertaining to International Transactions as prescribed under the rules. Rule 10D of Income Tax Rules prescribes the detailed list of information and documents to be kept and maintained in respect of International Transactions.
Section 92E requires every person who enters into the international transactions to obtain a report from the Chartered Account and furnish such report to the department. Rule 10E prescribes form 3CEB for this purpose. Due date for filing report in form 3CEB is 30th November of the assessment year related to the previous year for which the report is to be filed. The assessing officer or Commissioner (A) may direct the imposition of penalty for sum equal to 2% of the value of international transaction in case if the person fails to comply with the requirements of section 92D(1) or 92E r.w. rule 10D and rule 10E or files incorrect information or documents. Also, in section 271BA, penalty of Rs. 1,00,000/- has been prescribed for failure to file report as required under section 92E.
Hence, whenever there are international transactions between two or more associated enterprises, the details and documents as prescribed u/s 92D(1) read with rule 10D, shall be kept and maintained and also transfer pricing audit report in form 3CEB shall be filed in accordance with section 92E r.w. rule 10E.
3.2 Documentation with respect to International Group
3.2.1 Section 92D, 1st Proviso (Rule 10DA and Form 3CEAA) – Master File
First proviso to section 92D (1) reads as under,
“Provided that the person, being a constituent entity of an international group, shall also keep and maintain such information and document in respect of an international group as may be prescribed”
Plain reading of the proviso clearly suggests that the responsibility of keeping and maintaining the prescribed information and documents in respect of international group is of constituent entity of an international group. Hence, to understand that who has to comply with the additional documentation requirements prescribed under first proviso to section 92D, we have to refer to the meaning of terms “Constituent Entity” and “International Group”.
Explanation to the above mentioned proviso provides the meaning of terms “Constituent Entity” and International Group as under-
“constituent entity” shall have the meaning assigned to it in clause (d) of sub-section (9) of section 286;
“international group” shall have the meaning assigned to it in clause (g) of sub-section (9) of section 286.]
Meaning of term “Constituent Entity” –
clause (d) of sub-section (9) of section 286 reads as under –
“Constituent Entity means –
(i) any separate entity of an international group that is included in the consolidated financial statement of the said group for financial reporting purposes, or may be so included for the said purpose, if the equity share of any entity of the international group were to be listed on a stock exchange.
(ii) any such entity that is excluded from the consolidated financial statement of the international group solely on the basis of size or materiality; or
(iii) any permanent establishment of any separate business entity of the international group included in [sub-clause (i) or sub-clause (ii)], if such business unit prepares a separate financial statement for such permanent establishment for financial reporting, regulatory, tax reporting or internal management control purposes;”
It is understood that the constituent entity is separate entity of the International Group which is included in the group’s consolidated financial statements (CFS) for Financial Reporting (FR) purpose or if the entity is not included in CFS for FR purpose, but it would have been included had the equity shares of any entity were to be listed on stock exchange. It also included Permanent Establishment (PE) of constituent entity even if PE’s Financial Statements are being prepared separately.
Plain reading of the definition suggests that if separate entity is not included in the CFS may be because of the manner in which it is associated with the international group or for any other reason, the same cannot be held as a constituent entity even though it is integral part of the International Group or even if it is associated enterprise for some entities of the international group as per the section 92A.
Meaning of term “International Group”
Now it is important to understand what forms an International Group. Clause (g) of sub-section (9) of section 286 reads as under –
““international group” means any group that includes, —
(i) two or more enterprises which are resident of different countries or territories; or
(ii) an enterprise, being a resident of one country or territory, which carries on any business through a permanent establishment in other countries or territories;”
This means when there is a group which has presence in more than once country, the same can be said to be an International Group. Hence, it is inevitable to understand the meaning assigned to the term “Group”.
Clause (e) of sub – section 9 of section 286 defines “Group” as under
““group” includes a parent entity and all the entities in respect of which, for the reason of ownership or control, a consolidated financial statement for financial reporting purposes, —
(i) is required to be prepared under any law for the time being in force or the accounting standards of the country or territory of which the parent entity is resident; or
(ii) would have been required to be prepared had the equity shares of any of the enterprises were listed on a stock exchange in the country or territory of which the parent entity is resident”
Group is formed of a parent entity and all the other entities in respect of which the condition specified in clause (i) or clause (ii) is satisfied. So when more than one entities are interconnected, they form the group as per this definition only when there is a parent entity and the remaining entities fall in the criteria specified in clause (i) or clause (ii) of the definition of term “group”.
Hence, when the entities are interconnected, we first have to see which is the parent entity. Then we have to check if in respect of other entities, the consolidated financial statements (CFS) are required to be prepared under any law in force or the Accounting standards of the country in which the parent entity is resident or if the CFS would have been required to be prepared in respect of the other entities if the shares of any enterprise would have been listed on a stock exchange of the country in which parent entity is resident.
This means that the entities in respect of which no CFS is to be prepared under any of the situation given in clause (i) and clause (ii), are not part of the group.
Hence, the requirements of first proviso to section 92D(1) are to be fulfilled when there is group which is international group. The compliance is to be done by the constituent entity of such international group. The criteria for determining whether there exist international group or group or constituent entity is linked to the requirement of preparation of CFS and inclusion of the separate entity into such CFS.
Compliance requirements of the first proviso to section 92D(1) have been prescribed in rule 10DA. It requires to file details of Master File in Form 3CEAA. It also provides for the monetary limits for the applicability of reporting requirement in Form 3CEAA. Form 3CEAA is divided into following 2 parts.
1. A Consolidated Group Revenue for the accounting year exceeds five hundred crores rupees
2. Aggregate value of International Transactions, –
Applicability of reporting requirements in form 3CEAA – Summary
In the backdrop of the provisions discussed above, it appears that the additional documentation requirements under 1st proviso to section 92D read with rule 10DA i.e. Master File shall be applicable subject to following tests.
Probable queries and Clarification in my view – Form 3CEAA
1. Are all the persons who enter into International Transactions have to file part A of form 3CEAA?
Ans. No, Because 1st proviso to section 92D read with Rule 10DA(3) specifically requires constituent entities of international group to file part A. when there are international transactions between two or more associated enterprises but the relation between the associated enterprises is such that the same does not form International Group, or the same cannot be constituted as a constituent entity, 1st proviso to section 92D in itself does not apply.
2. Are all the persons who enter into International Transactions have to file part B of form 3CEAA?
Ans. No, first proviso to section 92D(1) does not apply to all cases of international transactions between associated enterprises (refer answer to question a) above. However, even when there is the constituent entity of international group but the monetary limits specified in rule 10DA as specified in para 3.2.1 above, is not crossed, requirement of filing part B of form 3CEAA does not apply.
c) In case where there is constituent entity of international group, however, there are not international transactions between associated enterprises, will requirement of filing any part of 3CEAA still apply?
Ans. No, according to section 92D(1), when there are international transactions between associated enterprise, information and details with respect to international transaction are to be kept and maintained. Requirement of the documentation pertaining to international group in form 3CEAA is inserted vide proviso to sub section (1) of 92D. As it is cardinal rule of Interpretation that a proviso to a particular provision of the statute only embrace the field which is covered by the main provision. Ordinarily proviso is not interpreted as stating a general rule.
Insertion of the requirement to file 3CEAA vide proviso to sub – section (1) makes it clear that the requirement of filing 3CEAA is in addition to filing of 3CEB for those associated enterprises having international transactions which can be classified as the constituent entity of International Group. Hence, if no international transactions between associated enterprise, no requirement of filing 3CEAA regardless of whether the constituent entity of international group is there or not.
Also, one of the criteria for the applicability of requirement of filing part B of 3CEAA is linked to the quantum of international transactions. Hence, it is clear that existence of international transactions is the primary requirement for form 3CEAA being applicable.
3.2.2 Section 286 (Rule 10DB and Form 3CEAC/ 3CEAB/ 3CEAE) – CBCR
Section 286, sub – section (1) reads as under –
“Every constituent entity resident in India, shall, if it is constituent of an international group, the parent entity of which is not resident in India, notify the prescribed income-tax authority (herein referred to as prescribed authority) in the form and manner, on or before such date, as may be prescribed:—
Sub – Section (1) requires constituent entity of international group whose parent entity is not resident in India, to intimate if it is the reporting entity of international group. In case it is not, it has to report which is its parent entity or other reporting entity and the same is resident of which country. The form prescribed for this compliance is 3CEAC in Rule 10DB.
Section 286, sub – section (2) reads as under –
“Every parent entity or the alternate reporting entity, resident in India, shall, for every reporting accounting year, in respect of the international group of which it is a constituent, furnish a report, to the prescribed authority [within a period of twelve months from the end of the said reporting accounting year], in the form and manner as may be prescribed.”
Sub – section (2) requires parent entity or alternate reporting entity to file report in relation to international group (CBC Report) if it is resident of India. Form 3CEAD has been prescribed for this purpose under rule 10DB. The same is to be filed within 12 Months from the end of the reporting accounting year.
Further, sub – section (3) onwards have not been discussed here as the same talks about the shifting of responsibility to file CBC between Constituent Entity, Parent Entity or Alternate Reporting Entity in different scenarios. (See Summary given in tabular form below)
However, it is very much clear that applicability of filing CBC Report in India depends upon existence of International Group and the location of its constituent entity or parent entity or alternate reporting entity.
Similar to the master file reporting applicability, applicability of CBCR is also linked to existence of constituent entity of international group. However, it shall be observed that international transactions between associated enterprise is not the condition for the applicability CBCR reporting requirements under section 286. The only requirement is the existence of constituent entity or parent entity or alternate reporting entity of international group and crossing the limits specified in the rule 10DB.
Compliance requirements of section 286 have been prescribed in rule 10DB. As per the rules, requirements of section 286 applies when consolidated revenue of the International Group Exceeds Rs. 5,500 Crores.
4. Summary – Additional Documentation – Master File and CBCR Applicability, Due Dates and Penalties
|3CEAA – Part A||Every Constituent Entity (CE) of an International Group irrespective of threshold applicability, whether entity is resident or not.||For FY 2016 – 17, by 31st March, 2018 & then after, on or before due date of filing Income Tax Return||Section 271AA (2) – Rs. 5,00,000/-
(Prescribed Authority may direct to pay such penalty)
|3CEAA – Part B||CE (designated by group) only if the prescribed threshold is met by the International Group. (Refer Note 1)||For FY 2016 – 17, by 31st March, 2018 & then after, by the due date of filing Income Tax Return|
|3CEAB (Intimation)||In case of multiple CE in India, by designated CE||At least 30 days before the date of filing 3CEAA|
|CBC Report (Refer Note 2) Rule 10DB||3CEAC||Intimation of details of Parent Entity or Alternate Reporting entity of the group which will file CBC Report.||At least two months prior to the due date of filing 3CEAD.||Refer Note – 3|
|3CEAD||Every Parent Entity or Alternate Reporting Entity resident in India or CE in India in case country in which Parent Entity is located does not have an agreement of exchange of CBCR with India.||Within the 12 months from the end of the reporting accounting year||Refer Note – 3|
|3CEAE||In case of multiple CE in India and country of parent entity or alternate reporting entity does not have agreement for exchange of CBCR with India, by the Designated CE which will file 3CEAD||Within 12 Months from the end of reporting accounting year.||Refer Note – 3|
Note 1 – Threshold for Master file compliance
Form 3CEAA – Part A – Every Constituent Entity of an International Group
Form 3CEAA – Part B and 3CEAB (if applicable) –
Consolidated Group Revenue in accounting year > INR 500 crore,
Aggregate value of International transactions (as per books of accounts) of CE during accounting year –
1. > INR 50 crore (Total), or
2. > INR 10 crore in relation to intangible property
Note 2 – Threshold for CBCr Compliance
Consolidated Group Revenue in preceding accounting year > INR 5500 crore
Note 3 – Penalties for non – compliance with the requirements of CBC Reporting (Section – 271GB)
Non-filing of CbC report by Indian resident parent company or alternate resident company – 3CEAD
Not furnishing the information called for by the Indian tax authority within the given time limit
Furnishing inaccurate details or non-filing of corrected report within 15 days
5. Important Observation – Applicability of reporting requirements
The thin line difference between applicability of various reporting requirements under Transfer Pricing provisions can be summarised as below.
Applicability of international transfer pricing provisions i.e. carrying out International Transactions at ALP, filing report under 3CEB and Maintaining Information and Documents specified under rule 10D is depended upon two factors. One is International Transactions and Another one is Associated Enterprise. Deeming provisions in respect of term Associated Enterprise given in sub section (2) of section 92A gives wide range of criteria based on the principle of participation in control, capital and management. The criteria also include indirect participation in control management and capital.
Applicability of Additional Documentation requirements in first proviso to section 92(D) depends upon the factors like Constituent Entity, International Group and exceeding the monetary limits prescribed in rules in addition to the primary condition of presence of international transactions between associated enterprise. While referring to the definitions of constituent entity, international group or group, it can be seen that the same are linked to preparation of CFS or inclusion of separate entity into CFS of the group. CFS preparation is generally applicable when there is direct participation in capital or control. – Master File
Applicability of Additional Documentation requirements in section 286 depends upon the factors like Constituent Entity, International Group, parent entity, alternate reporting entity and exceeding the monetary limits prescribed in rules. Condition of existence of international transactions between associated enterprise is not found in section 286. Hence, it can be fairly concluded that reporting requirement under section 286 i.e. CBC reporting is applicable regardless of whether there are international transactions between associated enterprise or not. – CBCR