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.