Transfer Pricing – The Expanded Version

Vivek Rajan.V

The Finance Act, 2012 expanded the scope of the term “International Transaction” thereby giving the clarity as to what the legislature meant or rather deemed fit to be International Transaction and consequential amendments were also made to other connected  sections of Transfer Pricing in the Income-tax Act, 1961. In the course of this article, attempt is made to discuss those amendments at reasonable length.

1. Broadening of the term “International Transactions”

The meaning of the term International Transaction is given by Section 92B of the Income-tax Act, 1961. The FA 2012 has inserted an Explanation (with retrospective effect from 01-04-2002) to the said section, for removal of doubts that existed previously. The scope of the explanation is captured in the following table

S.No	Item	Item includes	International Transaction  includes
1	Tangible Property	Tangible Property includes i. Building ii. Transportation Vehicle iii. Machinery iv. Equipment v. Tools vi. Plant vii. Furniture viii. Commodity or ix. Any other article, product or thing	a)   Purchase of Tangible Property b)   Sale of Tangible Property c)   Transfer of Tangible Property d)   Lease of  Tangible Property or e)    Use of Tangible Property
2	Intangible Property	Intangible Property includes i. Transfer of Ownership or Provision of use of rights regarding land use ii. Copyrights iii. Patents iv. Trademarks v. Licences vi. Franchises vii. Customer List viii. Marketing Channel ix. Brand x. Commercial Secret xi. Know-how xii. Industrial Property Right xiii. Exterior Design or Practical & New Design or xiv. Any other business or commercial right of similar nature	a) Purchase of Intangible Property b)   Sale of Intangible Property c) Transfer of Intangible Property d) Lease of  Intangible Property or e) Use of Intangible Property
3	Capital Financing	All aspects that can be generically attributed to “Capital Financing”	a) Any type of Long Term or Short Term Borrowing b) Lending or Guarantee c) Purchase  or Sale of marketable securities or any type of advance d) Payments e) Deferred Payment or Deferred Receivable or f) Any other debt arising during the course of business
4	Provision of Services	All aspects that can be generically attributed to “ Provision of Services”	a) Provision of market research service b) Provision of market development service c) Provision of marketing management service d) Provision of administration service e) Provision of Technical Service f) Provision of  Repair service g) Provision of Design Service h) Provision of Consultancy Service i) Provision of Agency Service j) Provision of Scientific Research k) Provision of legal or accounting service
5	Transaction of business restructuring or reorganization	All aspects that can be generically attributed to “Business Restructuring or Reorganization”	Transaction of this nature entered into by an enterprise with an associated enterprise, irrespective of the fact that it has bearing on the profit, income, losses or assets of such enterprises at the time of transaction or at any future date.

The expression “intangible property” shall include

Intangible Property relating to	Intangible Property includes9
Marketing	Trademarks Trade Names Brand Names and logos
Technology	Process Patents Patent applications Technical Documentation such as laboratory notebooks Technical know-how
Artistic	Literary Works and Copyrights Musical Compositions Copyrights Maps and Engravings
Data Processing	Proprietary computer software Software Copyrights Automated Databases Integrated circuit masks and masters
Engineering	Industrial Design Product Patents Trade Secrets Engineering Drawing and Schematics Blueprints roprietary Documentation
Customers	Customer Lists Customer Contracts Customer Relationship Open Purchase orders
Contract	Favorable supplier Contracts License Agreements Franchise Agreements Non- Compete Agreements
Human Capital	Trained and Organized work force Employments agreements Union contracts
Location	Leasehold interest Mineral Exploitation rights Easements Air rights Water rights
Goodwill	Institutional goodwill Professional practice goodwill Personal goodwill of professional Celebrity goodwill General business going concern value
Methods, programmes, systems, procedures, campaigns, surveys, studies. Forecasts, estimates, customer lists or technical data
Any other similar item that derives its value from its intellectual content rather than its physical attributes

2. Another Method for determination of Arm’s Length Price

As per section 92C of the Income Tax Act, 1961, the arm’s length price shall be determined by any of the following method –

a) Comparable Uncontrolled Price Method

b) Resale Price Method

c) Cost Plus Method

d) Profit Split Method

e) Transactional Net Margin Method

f) Such other method as may be prescribed by the Board

As per rule 10AB of the Income Tax Rules, 1962 the other method for determination of the arm’s length price would be as follows –

Rule 10AB of Income-tax Rules, 1962

As per the above rule, the any other method for determination of arms’ length price in relation to an international transaction or specified domestic transaction shall be any method which takes into account the price which has been charged/chargeable or paid/payable for same or similar uncontrolled transaction, with or between non – associated enterprises under similar circumstances, considering all relevant facts.

3. Form 3CEB

To give effect to the expanded meaning of the term “International Transaction”, the existing Form 3CEB has been substituted by a revised Form 3CEB through CBDT notification dated 10^th June 2013. 

Form 3CEB contains 25 clause which requires disclosure of details of various international and specified domestic transaction. Further Form 3EB is divided into following three parts –

A. Requires the taxpayer to provide general information about itself along with the aggregate value of the international and specified domestic transaction;

B. Requires the taxpayer to provide the details of the international transactions entered into during the Financial Year;

C. Requires the taxpayer to provide the details of the specified domestic transactions entered into during the Financial Year.

4. Advance Pricing Agreement

As per section 92CC of the Income Tax Act, the arm’s length price of any international transaction shall be determined in accordance with the advance pricing agreement in cases, wherein, advance pricing agreement has been entered.

Advance Pricing Agreement is an agreement between a tax payer and a taxing authority on an appropriate transfer pricing methodology for a set of transactions over a fixed period of time in future. The CBDT, with the approval of Central Government may enter into an advance pricing agreement with any person, in relation to an international transaction, determining the arm’s length price or specifying the manner in which the arm’s length price is to be determined

 All the aspects concerning the Advance Pricing Agreement like the manner of determination, term of the agreement, binding nature of the agreement and other incidental matters are governed by Section 92CC and Section 92CD of Income-tax Act, 1961

5. Clarifying the Legislative Intent & Putting a Upper cap

Earlier, if there was a variation between the arm’s length price and the international transaction price and if the variation did not exceed the specified percentage of international transaction price, as specified by the Central Government, the international transaction price shall be deemed to the arm’s length price.[Second proviso  to Sec 92C of Income-tax Act, 1961]. By exercising the above power, the Central Government can specify such percentage as it deemed fit.

Clarifying the legislative intent: This second proviso to Section 92C was introduced (by Finance Act, 2009) to make it clear that the 5% tolerance band was not a standard deduction (in some cases this tolerance band was taken as standard deduction prior to insertion of second proviso) and the proviso also changed the base of determination of the 5% allowance to transaction price instead of earlier base of arithmetic mean. In certain cases, this second proviso was held to be applicable only in respect of proceedings for AY 2010-11 and subsequent years. To clarify the legislative intent, Explanation to Section 92C(2) has been inserted  to provide that the second proviso shall also be applicable to all assessment or reassessment proceedings pending before an Assessing Officer as on 01.10.2009. By the insertion of this explanation that, the Revenue can proceed either u/s 147-Reopening of Assessments (read with Sec 149-Sec 153) of Income-tax Act or proceed u/s 154 – Rectification of Mistake, to give effect to the real legislative intent for insertion of Second Proviso.

Further addition –

Further as per the third proviso to section 92 C in cases where more than one price is determined by the most appropriate method, the arms’ length price in relation to international transaction or specified domestic transaction undertaken on or after 01.04.2014 shall be computed in such manner as may be prescribed and accordingly first and second proviso shall not apply.

Putting a Upper Cap: By exercising the power conferred by Second proviso to Section 92C, the Central Government can specify such percentage of international transaction price, as it deemed fit keeping the market conditions in India and abroad in mind.

 Now the said second proviso has been amended so as to restrict the Central Government to specify any such percentage, not exceeding three percentage of the international transaction price. Hence forth, the Central Government cannot fix any percentage beyond three percentage of international transaction price.

6. Consequences of failure to furnish report u/s 92E and other non compliances

a. Failure to furnish report deemed to be  income escaping assessment

As per section 92E of the Income-tax Act, 1961, every person who had entered into an international transaction during a previous year shall obtain and furnish a report (Form 3CEB) from a Chartered Accountant within the specified date (30^th November of Assessment Year).

The Finance Act 2012 has amended section 147 of the Income-tax Act, 1961 by inserting clause (ba) to Explanation 2 to Section 147(w.e.f 01.07.2012). By virtue of the insertion of the above clause, failure to furnish a report as said by Section 92E will be deemed to be case where the income chargeable to tax has escaped assessment and consequently the assessment proceedings under Income-tax Act will be done based on Sections 147 to Section 153.

Further, the Assessing officer need not establish “Reason to believe” to initiate proceedings as per Section 148 to Section 153 , as the failure to furnish is deemed to be income escaping assessment.

b. Substituted Penal Provisions

Section 271AA has been recast with effect from 01.07.2012 to include in its scope the following

• Failure to keep and maintain such information and document as required u/s 92D (1) or u/s 92D (2) of Income-tax Act, 1961
• Failure to report such transactions consequent to requirement
• Maintaining or furnishing an incorrect information or document

The penalty may be levied by Assessing Officer or Commissioner (Appeals) and the quantum of penalty shall be a sum equal to two percent of the value of each international transaction or specified domestic transaction entered into by such person.

Further, if the person fails to furnish the information / documents as required under section 92D (4), penalty of Rs. 5000 would be leviable in such case.

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7. Enhanced power of Transfer Pricing Officer

As per Section 92E of Income-tax Act, 1961, the assessees who had entered into international transaction or specified domestic transaction, are required to furnish a report from a Chartered Accountant on or before the specified date (Form 3CEB). This report is the primary source of information for the Assessing Officer as regards the international transactions and specified domestic transaction.

Further, the Assessing Officer by virtue of powers conferred by Section 92CA(1) of Income-tax Act, 1961,  may refer, with the previous approval of Principal commissioner or the Commissioner, for the computation of arm’s length price to the Transfer Pricing Officer.

If the assessee does not report any of the international transactions in the report u/s 92E, the   Assessing Officer may not be aware of such transactions. Further, the Transfer Pricing Officer may notice such international transactions(s) during the course of proceedings before him and may proceed to determine the arm’s length price. This action of the Transfer Pricing Officer would be devoid of specific power in the Income-tax Act. To give explicit power in cases like these, sub section (2B) to Section 92CA has been inserted by Finance Act, 2012 with retrospective effect from 01.06.2002.

As per section 92CA (2B)of Income-tax Act, 1961, in course of an international transaction, if the assessee has not furnished report u/s 92E and if such transaction comes to the notice of Transfer Pricing Officer in course of proceeding , the provisions of the Income-tax Act shall apply as if such transaction was an international transaction referred to under section 92CA(1).

In the above context, the power of the Assessing Officer is restricted by insertion of sub section 2C to Section 92CA(w.e.f 01.07.2012). As per Section 92CA(2C) of Income-tax Act, 1961,  the Assessing Officer cannot proceed u/s 147 to assess or reassess the case or cannot proceed u/s 154 to pass an order enhancing the assessment or reducing a refund already made  or increase the liability as regards proceedings which have been completed before 01.07.2012.

8. E-filing of Form 3CEB

The filing of Form 3CEB is mandated by Section 92 E of the Income-tax Act, 1961. Hitherto, the said report in Form 3CEB was furnished manually. Henceforth, vide CBDT Notification No.34 /2013 dated 01.05.2013 the reports under sections 44AB, 92E, 115JB (which previously were not furnished electronically) have to be furnished electronically. To implement this, the tax authorities have specified the utilities through which the aforesaid reports have to be furnished electronically.

Conclusion

The scope of transfer pricing has increased significantly so much so, that  every transaction that has the potential of having a bearing on the profits of the entities concerned, either in the present or in the future (which presently might not be ascertainable) comes under the ambit of international transaction and consequently Transfer Pricing.  As a consequence to scope enhancement, additional method for determination of Arm’s Length Price has been notified , the Form 3CEB has been amended , futuristic transfer pricing methodology has been initiated, e-filing of reports has been made mandatory and the time limit for completion of assessments has also been extended.

The assessees will have to spend some additional time to capture all the transactions at the source level itself so that the uncontrolled prices for the transactions are ascertained (after adjusting for functional differences if any) and sufficient comparables (both internal and external) are captured to arrive at and also justify the uncontrolled nature of the transaction i.e. arm’s length price.

Note The article is based on the provisions of Income-tax Act, 1961 as amended by Finance Act, 2012, relevant notifications.

Disclaimer: Every effort has been made to avoid errors or omissions in this article. In spite of this errors may creep in. The readers are requested by the writer, to bring to his notice any mistake or error for which act, the writer shall be ever grateful. The writer can be contacted at gsv.vivekrajan@gmail.com.

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