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Penalties in connection with transfer pricing regulations

TP documentation and Accountant’s report:

Clause Default Nature of penalty
270A Under-reporting or misreporting of income A sum equal to 50% of the amount of tax payable on under-reported income; or
A sum equal to 200% of the amount of tax payable on under-reported income where under-reported income is in consequence of any misreporting
271AA(1) Failure to maintain TP documentation, failure to report the transaction, maintenance or furnishing of incorrect information/document 2% of the value of each International Transaction/ SDT
271G Failure to furnish documents/ report transaction 2% of the value of the International Transaction/ SDT
271BA Failure to furnish accountant’s report INR 100,000

Master file and CbCR

Default Nature of penalty
Furnishing of details pertaining to master file
Failure to furnish the master file by prescribed date INR 500,000
Failure to respond within 30 days to master file related queries 2% of the value of international transaction(s)
Furnishing of details pertaining to CbCR
Furnishing inaccurate particulars in the CbCR (subject to certain conditions) INR 500,000

Under reporting of income shall not include an amount represented by a transfer pricing adjustment where the assessee has declared the international transaction under Chapter X, maintained information and documents as prescribed under section 92D and disclosed all the material facts relating to the transaction

2020-01-10 05:11:21

Applicability of Master File and CbCR

In line with the BEPS Action Plan 13, the Finance Act 2016 has introduced new provisions i.e. section 92D(4) read with section 286 in relation to master file and CbCR requirements applicable from FY 2016-17. The rules with respect to the same have been notified by the CBDT on 31 October 2017.

Master file requirements

As per Section 92D(1), 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. Further as per Section 92D(4) of the Act read with Rule 10DA(2) of the Rules, the said information is to be furnished to the Director General of Income-tax (Risk Assessment).
In relation to the above, every person, being a constituent entity of an international group shall file such details in part A to Form 3CEAA. Further, such person shall also be required to file additional details as required under part B of Form No. 3CEAA if it satisfies the following criteria:

 

  • Consolidated group revenue of the international group, as reflected in the consolidated financial statement of the international group for the accounting year preceding such previous year, exceeds INR 5 billion; and
  • The aggregate value of international transactions:
    • during the accounting year, as per the books of accounts, exceeds INR 500 million, or
    • in respect of purchase, sale, transfer, lease or use of intangible property during the accounting year, as per the books of accounts, exceeds INR 100 million.

 

We have summarised below the compliance requirements which are to be adhered by constituent entity (ies) towards furnishing of master file requirements with the prescribed authority:

Any entity of international group

  • that is included in consolidated financial statement of the group for financial reporting purposes or may be so included if the equity share of any entity of the international group were to be listed on a stock exchange
  • that is excluded from consolidated financial statement solely on the basis of size or materiality
  • that is a PE of any separate business entity of the international group and such PE prepares separate financial statement for financial reporting, regulatory, tax reporting or internal management control purposes

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:

  • is required to be prepared under any law/accounting standard of the country/territory of which the parent entity is resident; or
  • would have been required to be prepared if the equity shares of any of the enterprises were listed on a stock exchange in the country/territory in which the parent entity is resident

Parent entity is a constituent entity of the international group holding directly or indirectly an interest in one or more of the other constituent entities of the group such that it is required to prepare a consolidated financial statement:

  • under any law/accounting standard of the country/territory of which the entity is resident; or
  • would have been required to prepare the same if the equity shares of any of the enterprises were listed on a stock exchange,

and there is no other constituent entity of such group that is required to prepare a consolidated financial statement in the circumstances as mentioned above. Any group that includes:

  • two or more enterprises which are resident of different countries / territories or
  • an enterprise, being resident of one country/territory carrying on business through a permanent establishment (“PE”) in other countries/territories

 

Form To be filed Particulars Due Date
3CEAA – Part A Furnishing of basic details pertaining to the international group – To be filed by every constituent entities of the international group. (In the case of more than one constituent entity resident in India – by the entity designated by the international group for this purpose) Due date of filing return of income under section 139(1)
3CEAA –Part B Furnishing of further detailed information as specified - To be filed by those constituent entities of the international group that satisfy the additional criteria as detailed above. (In the case of more than one constituent entity resident in India – by the entity designated by the international group for this purpose)
3CEAB Notification in case there are more than one constituent entities of international group resident in India – To be filed by the entity designated by the international group to furnish the report in Form 3CEAA At least 30 days before the due dates as mentioned above for furnishing of Form No. 3CEAA

CbCR Requirements

The CbCR filing and exchange mechanism is summarised as under:

What Who When
Notification report filing (in Form 3CEAC) by every constituent entity resident in India.
[Section 286(1), Rule 10DB(1)]
Constituent entity resident in India Atleast 2 months prior to the due date for filing the CbCR under section 286(2)
Filing CbCR in India for every reporting accounting year [Section 286(2), Rule 10DB(3)] Indian resident which is the parent entity of group (‘Indian parent’)
Alternate reporting entity , which is resident in India (“Indian ARE”)
12 months from the end of relevant accounting year

A constituent entity that has been designated, in place of parent entity, to furnish CbCR, in the country or territory in which such constituent entity is resident on behalf of the group.

What Who When
Filing of CbCR in India in special cases
[Section 286(4), Rule 10DB(4)]
  • Constituent entity resident in India, not being Indian parent or Indian ARE and
  • India does not have agreement for exchange of the report (“ERA”) referred to in section 286(2) with country/territory of parent entity of group; or
  • Systemic failure of country or territory and constituent entity is notified of failure by Indian tax authorities
  • If there are more than one constituent entities in India, then the entity designated by the international group for this purpose shall file a intimation with the prescribed authority,
  • in the form 3CEAE.
Due date has not been prescribed yet
Exchange of CbCR through ERA between Parent country and India Parent entity files CbCR in the country of its tax residence CbCR to be automatically exchanged through ERA entered into between India and parent entity’s country
Exchange of CbCR through ERA entered into between ARE country and India [section 286(5)] ARE files CbCR in the country of its tax residence
  • Report is required to be filed in ARE country and India has ERA with ARE country
  • No systemic failure of exchange of report
  • Indian tax authorities are notified about ARE by Indian constituent entity vide Form 3CEAC.

Systemic failure with respect to a country/territory means that the country/territory has an ERA with India, but—

  • in violation of the said agreement, it has suspended automatic exchange; or
  • has persistently failed to automatically provide to India the report in its possession in respect of any international group having a constituent entity resident in India.

2020-01-10 05:10:38

Applicability of Transfer Pricing

In the Income-tax Act, 1961 (“Act”), Sections 92 to 92F govern and regulate the transfer pricing provisions in India. Section 92(1) provides that any income arising from an International Transaction shall be computed having regard to the arm's length price (“ALP”).
Where in an International Transaction or SDT, two or more Associated Enterprises (“AEs”) enter into a mutual agreement or arrangement for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises, the cost or expense allocated or apportioned to, or, as the case may be, contributed by, any such enterprise shall be determined having regard to the ALP of such benefit, service or facility, as the case may be.

Definition of International Transaction
As per Section 92B of the Act, an International Transaction means a transaction between two or more AEs, either or both of whom are non-residents, in the nature of: the purchase, sale, transfer, lease or use of tangible property including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing;

  • the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know-how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature;
  • provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service;
  • lending or borrowing money or capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;
  • a transaction of business restructuring or reorganisation, entered into by an enterprise with an AE, irrespective of the fact that it has bearing on the profit, income, losses or assets of such enterprises at the time of the transaction or at any future date;
  • any other transaction having a bearing on the profits, income, losses or assets of such enterprises and shall include a mutual agreement or arrangement between two or more AEs for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises.

The term “intangible property” has been defined to include:

  • marketing related intangible assets, such as, trademarks, trade names, brand names, logos;
  • technology related intangible assets, such as, process patents, patent applications, technical documentation such as laboratory notebooks, technical know-how;
  • artistic related intangible assets, such as, literary works and copyrights, musical compositions, copyrights, maps, engravings;
  • data processing related intangible assets, such as, proprietary computer software, software copyrights, automated databases, and integrated circuit masks and masters;
  • engineering related intangible assets, such as, industrial design, product patents, trade secrets, engineering drawing and schematics, blueprints, proprietary documentation;
  • customer related intangible assets, such as, customer lists, customer contracts, customer relationship, open purchase orders;
  • contract related intangible assets, such as, favourable supplier, contracts, licence agreements, franchise agreements, non-compete agreements;
  • human capital related intangible assets, such as, trained and organised work force, employment agreements, union contracts;
  • location related intangible assets, such as, leasehold interest, mineral exploitation rights, easements, air rights, water rights;
  • goodwill related intangible assets, such as, 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
  • Further, transactions with a third party would be deemed to be a transaction between AEs if:
  • there exists a prior agreement in relation to the relevant transaction between the third party and the AE; or
  • terms of the relevant transaction are determined in substance between the third party and the AE

Maintenance of prescribed transfer pricing documentation
TP Report:Section 92D read with Rule 10D provides that every person who has undertaken an International Transaction or SDT shall keep and maintain such information and documents as
specified by rules made by the Board (Rule 10D) and supported by authentic documents in a case where the aggregate value, as recorded in the books of account, of international transactions entered into by the assessee exceed one crore rupees. The Board has also specified by the Rules that information and documents are required to be retained for a period of 8 years.
Form 3CEB:Section 92E read with Rule 10E provides that every person who has entered into an International Transaction/SDT during a previous year shall obtain a report from an accountant and furnish such report on or before the specified date (i.e. 30 November of the relevant Assessment Year) in the prescribed form (Form 3CEB) and manner.

2020-01-10 05:05:51