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    MF Complications and Transfer Pricing Updates

    1. Background 

    In keeping with India’s commitment to implement the recommendations of Action Plan 13 of Base Erosion and Profit Shifting (BEPS), the Finance Act, 2016 introduced Section 286 of Income-tax Act, 1961 (the Act) providing for furnishing of Country-by-Country Report (CbCR) in respect of an International Group. 

    Section 92D of the Act which contained provisions for preparing TP documentation was also amended to provide for keeping and maintaining of Master File. 

    In continuation with the amendment, the Central Board of Direct Taxes (CBDT) on 6 October 2017, released the draft rules and forms in relation to manner of preparation and furnishing of Master File and CbCR. It is commendable, on part of CBDT, to consistently follow an inclusive approach and seeking public comments when introducing a new and important regulation. 

    In the draft rules circulated on October 6, 2017 the CBDT had proposed insertion of New Rules 10DA and Rule 10DB of the Income-tax Rules, 1962 (the Rules), and the new Forms were prescribed i.e. Form Nos.

    3CEBA to 3CEBE. 

    The Final rules in relation to Country-by-country reporting (‘CbCR’) and Master File (‘MF’) as required to be furnished to tax authorities in terms of Sec.286(8) and Sec 92(D) of Income Tax Act, 1961 have been notified on October 31, 2017. 

    While in principle there are no major differences in the draft rules and final rules, however a careful reading and comparison reveals certain key changes which have an impact on the nature and extent of disclosures required to be made. The notification of CbCR is likely to significantly increase the compliance burden for MNC subsidiaries and Indian MNC Groups and shall require them to re-strategize their transfer pricing policy in light of heightened disclosure norms laid down under the CbCR / Master File regime. This article discusses some of the key changes between the draft rules and the final notified rules and key implications of the final rules on Domestic and foreign MNCs operating in India. 

    1. Key Revisions in Final Rules vis-à-vis Draft Rules 


    Applicable Year for Threshold Limits

    As per draft rules, MF for Financial year (FY) 2016-17 for entities having consolidated turnover of more than INR 500 crores during previous year i.e. FY2015-16. However, basis Final rules, MF for FY 2016-17 required for entities having consolidated group turnover of more than INR 500crores during same year (i.e. FY 2016-17). 

    In simple terms, data for same year needs to be looked into to confirm applicability of MF for that particular year. 


    • Rule 10DA(1)(ii)(B)(a) revised in final rules to include list of all entities of International Group (IG), as compared to list of only operating entities. 

    This might result in inclusion of Constituent Entities (CEs) even if the same are not operational, investing/ financing entities etc. 

    • Rule10DA(1)(ii)(B)(c)(VIII) revised to include details of functions performed, assets employed & risks assumed (FAR) by CEs that contribute at least 10% of either: 
    • Revenues of group; or
    • Assets of group; or
    • Profit of group 

    as compared to draft rules wherein contribution of at least 10% of total revenue, assets and profit had to be considered cumulatively. 

    Hence the threshold of 10% to be verified by checking revenue or assets or profits for each CE. 

    • Rule 10DA(1)(ii)(B)(c)(IX) revised to include description of important business restructuring transactions, acquisitions & divestments during all accounting years, as compared to draft rules wherein description during the accounting year were required to be reported. 

    Hence, Inclusion of all business restructuring transactions, acquisitions and divestments made by the IG during previous as well as current accounting period. IGs will have to be more vigilant interms of the documentation maintained for such transactions during previous & current accounting period. Chapter IX of OECD TPGuidelines, 2017could be referred. 

    lRevision in Reporting Forms:

    • Masterfile to be furnished in“Form 3CEAA” instead of Form 3CEBAas specified in draft rules; 
    • According to Final rules, Part A of Form 3CEAA shall be applicable to every CE of IG irrespective of whether entity satisfies thresholds prescribed 


    Part B is applicable only to CEs satisfying thresholds prescribed. Hence the Final rules provide more clarity on reporting requirements 

    • The Final Rules (Rule 10DA(4))clarifies that in case of multiple CEs of an IG resident in India, some or all of which satisfy prescribed thresholds, the IG may designate one of the CEs for MF 

    Further, in case of multiple CEs resident in India, none of which satisfy prescribed thresholds, IG may designate one CE to file the Part A of Form 3CEAA. 

    As per Final rules, the above information is to be provided in “Form 3CEAB” to the Director General of Income Tax (Risk Assessment) as against Form 3CEBE specified in the Draft Rules 


    Final rules are largely in line with draft rules. Key changes as follows: 

    Revision in Reporting Forms:



    Forms as per draft rules

    Forms as per Final rules









    Form 3CEBB –



    Form 3CEAC –



    Notification Report by CE, resident in India, of

    Intimation by CE, resident in India, of IG,parent


    non-resident IG for sub-section (1) of Section 286

    entity of which is not resident in India, for the





    purposes of sub-section (1) of section 286









    Form 3CEBC –

    Form 3CEAD –








    Report by parent entity or an alternate reporting

    Report by a parent entity or an alternate reporting


    entity or any other CE, resident in India, for the

    entity or any other CE, resident in India, for the


    purposes of sub-section (2) or sub-section (4) of

    purposes of sub-section (2) or sub-section (4) of





    Form 3CEBD-



    Form 3CEAE –



    Notification on behalf of the IG for the purposes of

    Intimation on behalf of the IG for the purposes of


    the proviso to sub-section (4) of section 286

    the proviso to sub-section (4) of section 286









    lAdditional Business Activity to be reported 

    As per draft rules, Part B of CbC Report required disclosure of 12 business activities. However, Final rules require an additional business activity titled ‘Administrative, Management and Support Services’ to be disclosed.


    Other revisions common to MF and CbC Report both: 

    lTerm‘reporting year’ replaced by ‘accounting year’. 

    lIncase total consolidated group revenue is in foreign currency, Final rules provide using telegraphic transfer (TT) buying rate on the last day of accounting year preceding the accounting year under consideration, to convert to Indian rupees

    Finalrules prescribe signatories eligible to sign forms who shall be persons competent to verify return of income under Section140. 

    Additional disclosure requirements in Master file as compared to OECD: 

    lListofall entities in the group (in Indian MF requirement) vs the operational entities in OECD. 

    lDescription of the MNE business entities (contributing to at least 10% of the group revenues, assets or profits) vs general FAR of the individual entities of the group 

    lTopten unrelated lenders (in Indian MF requirement) vs important financing arrangements with unrelated lenders (as per OECD). 

    lListof all entities engaged in Intangible development/creation along with the names and addresses of the entities owning them (in Indian MF requirement) vs important intangibles of the MNE group and the names of the entities that legally own them. 

    1. Compliance Issues/ Challenges - Signaling significant increase in Indian compliance obligations? 

    The notification of CbCR is likelyto significantly increase the compliance burden for MNC subsidiaries and Indian MNC Groups and shall require them to re-strategizetheir transfer pricing policy in light of heightened disclosure norms laid down under the CbCR / Master File regime.

    lSomecountries have high thresholds (e.g. Australia, Japan, etc.), whereas some countries (e.g.

    Mexico, Peru, etc.) have adopted a significantly lower threshold. 

    India too adopted a lower threshold of INR 500crore and related party transactions threshold of INR50 / 10 crore. With such a low threshold, many inbound MNCs having presence in India would have the obligation of preparing and filing the Master File in India, even though they may not be required to prepare the same in their home jurisdictions. This may put an additional compliance burden on domestic MNCs. 

    lTheFinal Rules have a welcome relaxation to allow only one constituent entity to File Part A and admittedly reduces compliance burden. 

    However, the Final rules state that the declaration in Form 3CEAB is required to be undertaken only by constituent entities resident in India, this leaves the scope for interpretation with respect to multiple project offices and branch offices operating in India which are non-residents as per the Income Tax Act. 

    lThenew regulations shall also entail disclosure of detailed group financial and strategic information as well as aggressive tax and transfer pricing positions, which could possibly open unnecessary litigation with tax authorities. Accordingly, we may experience an increased propensity of MNCs to evaluate options of entering/reviewing the advance pricing agreement (APA) in specific countries to ensure certainty. 

    1. Penal consequences:

     Concluding Remarks

    While Final rules seem to have taken into consideration comments that might have been received by CBDT, there still remain grey areas like CEs of IG that have not entered into any international transactions will still have to comply with MF/ CbCR requirements (limited – Intimations and Part-A) &for purpose of applicability of MF, value of international transactions as per books of accounts (instead of as per Form 3CEB), FAR for least contributing entities, TP policy –whether transaction wise detailed or an overview of the groups policy and the filing procedures like upload procedures etc have to be addressed. These issues might get clarified very soon.

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