The Central Board of Direct Taxes issued Income Tax (Twenty Fourth Amendment) Rules, 2017 on 31st October, 2017 to insert Rule 10DA and 10DB which contain provisions regarding the information and documents to be maintained and reports to be filed by a person who is a constituent entity of an international group. This article analyses the provisions notified to give effect to the OECD recommendations on three tiered Transfer Pricing documentation, regarding the entities to which the provisions will apply.
Local File provisions:
The information and documents prescribed under Section 92D read with Rule 10D cover the local file requirements of the OECD transfer pricing documentation recommendations. Under Section 92D(1) every person who has entered into an international transaction or specified domestic transaction shall keep and maintain such information and document in respect thereof, as may be prescribed. Section 92B defines the term ‘international transaction’. Section 92BA defines the term ‘specified domestic transactions’ by listing the transactions which will fall within the ambit and where the aggregate value of such transactions entered into by the assesse in the previous year exceeds a sum of Twenty Crore rupees.
♠ The provisions of Section 92D regarding maintenance of such information and documents as may be prescribed, is applicable to
i) every person
ii) who has entered into an international transaction or specified domestic transaction.
♠ The term person is defined in an inclusive manner under Section 2(31) to include
i) an individual,
ii) a Hindu Undivided Family,
iii) a Company,
iv) a firm,
v) an association of persons or a body of individuals, whether incorporated or not,
vi) a local authority, and
vii) every artificial juridical person, not falling within any of the preceding sub-clauses.
♠ Sub-rule (1) of Rule 10D contains provisions regarding the information and documents to be maintained under Section 92D.
♠ Sub-rule 2 to Rule 10D provides that the provisions of sub-rule 1 shall not apply where the aggregate value, as recorded in the books of account, of international transactions entered into by the assesse does not exceed Rupees One Crore.
♠ Sub-rule 2A provides that the provisions of sub-rule 1 shall not apply in the case of eligible specified domestic transactions referred in rule 10THB and in case of an eligible assesse covered under rule 10THA who are covered by the documentation requirements specified in sub-rule 2A.
Hence a person who has entered into an international transaction or specified domestic transaction, irrespective of his residential status is covered by the provisions of Section 92D. Only the persons covered under sub-rule 2 to Rule 10D (i.e., persons other than persons who have entered into specified domestic transactions covered under Rule 10THB and eligible assesse under Rule 10THA) where the aggregate value of international transactions as recorded in the books of the assesse does not exceed One crore rupees are excluded.
Section 92E provides for furnishing report from accountant by every person who has entered into international transaction or specified domestic transaction during a year. The report has to be filed in Form 3CEB. The report has to be filed irrespective of the aggregate value of the international transactions by every person who has entered into international transaction.
Master File Provisions:
Provisions of the Income Tax Act:
Proviso to Section 92D(1) provides that a 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. Explanation to Section 92D(1) provide that for the purposes of Section 92D the terms ‘constituent entity’ and ‘international group’ shall have the meaning assigned to in clause (d) and clause (g) of sub-section 9 of Section 286 respectively.
Constituent entity is defined to mean,—
(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 clause (i)* or 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;
“International group” is defined to mean 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;
The terms group, consolidated financial statements, parent entity and permanent establishment are defined under Section 286 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;
“Consolidated financial statement” means the financial statement of an international group in which the assets, liabilities, income, expenses and cash flows of the parent entity and the constituent entities are presented as those of a single economic entity;
“Parent entity” means a constituent entity, of an international group holding, directly or indirectly, an interest in one or more of the other constituent entities of the international group, such that,—
(i) it is required to prepare a consolidated financial statement under any law for the time being in force or the accounting standards of the country or territory of which the entity is resident; or
(ii) it would have been required to prepare a consolidated financial statement had the equity shares of any of the enterprises were listed on a stock exchange,
and, there is no other constituent entity of such group which, due to ownership of any interest, directly or indirectly, in the first mentioned constituent entity, is required to prepare a consolidated financial statement, under the circumstances referred to in *clause (i) or *clause (ii), that includes the separate financial statement of the first mentioned constituent entity;
“Permanent establishment” shall have the meaning assigned to it in clause (iiia) of section 92F;
A proviso is not a separate or independent enactment and must be prima facie be read and considered in relation to the principal provision to which it is a proviso. Hence the provisions of the Income Tax Act regarding master file apply only to
i) a person who has entered into an international transaction or specified domestic transaction (to whom the provisions of Section 92D(1) apply) and
ii) who is a constituent entity of an international group (covered by proviso to Section 92D(1))
Provisions of the Income Tax Rules:
♣ As per the provisions of Rule 10DA (1) every person, being a constituent entity of an international group shall maintain the information and documents specified therein if the following conditions are met:
1) Consolidated group revenue of the international group, of which such person is a constituent entity, as reflected in the consolidated financial statement of the international group for the accounting year exceeds Five hundred crore rupees; and
2) The aggregate value of the international transactions
a) during the accounting year, as per the books of account, exceeds fifty crore rupees or
b) In respect of purchase, sale, transfer, lease or use of intangible property during the accounting year, as per the books of accounts, exceeds ten crore rupees.
♣ Sub-rule 2 of Rule 10D provides that the report of information referred to in sub-rule 1 shall be furnished in Form 3CEAA to the Director General of Income Tax (Risk Assessment).
♣ Sub-rule 3 provides that information in Part A of Form 3CEAA shall be furnished by every person being a constituent entity of an international group whether or not the conditions as provided in sub-rule 1 are satisfied and information in Part B where the conditions provided in sub-rule 1 are met.
♣ Sub-rule 4 provides that where there is more than one constituent entities resident in India, then the report may be furnished by constituent entity designated by the international group, to furnish the report and intimation of such designation shall be given by the designated entity in Form 3CEAB.
It is clear from these provisions that as per Rule 10DA every person, who is a constituent entity of an international group who has entered into international transaction has to file Part A of Form 3CEAA irrespective of the consolidated group revenue, the aggregate value of international transactions. If the threshold limits are met for both consolidated group revenue and the aggregate value of international transaction or transactions in intangibles information has to be filed in both Part A and Part B. The question that arises is whether information in Part A has to be filed even when no international transaction has been entered into during the year as the provisions of Section 92D(1) does not apply in such situations.
Country by Country Report Provisions
♣ Section 286 of the Income Tax Act contains provisions regarding Country by Country Report. As per the provisions of this sub-section 1 of section 286 read with Rule 10DB(1) 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 file Form 3CEAC the following information:
1) Whether it is the alternate reporting entity of the international group; or
2) The details of the parent entity or the alternate reporting entity and the country or territory of which the said entity is a resident
♣ Section Under sub-section 2 of Section 286 read with Rule 10DB(3) every parent entity or the alternate reporting entity, resident in India shall furnish the report in respect of international group of which it is constituent in Form 3CEAD.
♣ Section Under Sub-section 4 of section 286 the report in Form 3CEAD has to be filed by a constituent entity of an international group, resident in India, if the parent entity is resident of a Country or territory with which India does not have an agreement providing for exchange of the report or there has been a systemic failure of the country or territory and the said failure has been intimated by the prescribed authority to the constituent entity.
♣ Section Sub-section 5 of Section 286 provides that the provisions of sub-section 4 regarding filing of Form 3CEAD by constituent entity belonging to an international group of which the parent entity is resident in a country or territory with which there is no agreement for exchange of report or systemic failure of the country shall not apply, if the alternate reporting entity has filed the report with the tax authority of the country of which it is resident subject to the following conditions:
♣ Section Sub-section 7 of the Section 286 provides that the provisions of the section shall not apply in respect of an international group, if the consolidated group revenue, as reflected in the consolidated financial statement for the accounting year preceding such accounting year does not exceed the amount, as may be prescribed. As per Rule 10DB(6) the consolidated group revenue of the international group shall be five thousand five hundred crore rupees.
♣ Section Sub-rule 6 of Rule 10DB provides that where there is a constituent entity of an international group resident in India, other than the parent entity or alternate reporting entity, resident in India, the intimation of the entity designated to file the report, shall be intimated in Form 3CEAE.
There are many questions such as the applicability of Form 3CEAA filing requirements on non-resident entities and on resident entities which have not entered into international transaction during the year, determination of consolidated group revenue, entities to be included in the consolidated financials, on which more clarity is required.
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If company has a foreign holding but do not enter in any transaction with foreign entity in FY 19-20, then form 3CEAA is applicable ?