- Form 3CEB
Section 92E requires every person entering into an international transaction or specified domestic transactions with their related parties to obtain an accountant's report to be submitted on or before the due date for filing tax return. Form 3CEB prescribed is declaration by the accountant about examination of accounts with an Opinion on information and documents prescribed by Rule 10D and maintained by the assesse.
Challenges
ØTransaction not having effect on profits, income, losses and assets should it be reported by way of note or disclosed as an international transactions in the Form 3CEB. Example: Disclosure of the amount receivables/payables from/to the AE
ØEarlierthe reporting in certain cases was being done by way of providing details of such transactions by way of only notes to the Form 3CEB. In order to further streamline the reporting, the format of the Form 3CEB was revised in June 2013, which now includes specific clauses asking for information on such types of international transactions.
ØAllofthese changes coupled with enhanced powers of the Transfer Pricing Officer to scrutinise any international transaction not already referred to him by the Assessing Officer or reported in Form 3CEB, has led to mounting pressure on the taxpayer to make full disclosure about any and all international transactions.
ØIdentify the impact of change in definition of international transactions
– How to report business restructuring reorganization
– How to value and determine ALP of intangible assets like customer list, human capital and any other kind of intangibles
ØCheckfor application of method with relevance to the international transactions.
ØIdentification and reporting of international transactions to be reported which are received or provided free of cost in the Form 3CEB
ØPenalties under section 271 BA of INR 1,00,000 are attracted on failure to report any transaction in form 3CEB. 2% of the value of international transactions u/ 271BA.
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SBS Wiki www.sbsandco.com/wiki
- TP Documentation
What is Transfer Pricing Report?
Section 92D, of the Income Tax Act requires companies having International transactions > 1crore and Domestic Transactions (tax holiday related entities and their transactions)> 20 crores with their related parties, to maintain information and documentation as prescribed in Rule 10D.
Challenges in furnishing information as per rule 10D:
ØAvailability of financial information of comparables ØAvailability of External Comparables which are functionally similar ØTransaction-wise analysis vs. aggregation approach ØDetermination/Availability of CUP data
ØAvailability of documentation to substantiate benefit test (Management fees/ Intra-group services)
ØAvailability of Independent Comparables. Companies having no related PROCPL party transactions
ØSelection of Tested Party
ØSelection of PLI
ØSelection of most appropriate method
ØReliability and sources of data to present the industry overview.
ØPenalty under section 271AA, Sec 271G- 2% of the value of transaction.
- Undoing of SDT – TP provisions under Sec 40A (2)(b):
ØInitially from 2012 to 2016, section 92BA of the Act, inter-alia provide that any expenditure in respect of which payment has been made by the assessee to certain "specified persons" under section 40A(2)(b) are covered within the ambit of specified domestic transactions.
ØInorder to reduce the compliance burden of taxpayers, the indian government through FA 2017 has removed the SDT compliances for transactions section 40A(2)(b) and has excluded it from the scope of SDT Provisions u/s 92BA.
ØEventthough there is change in the scope of the SDT provisions, form 3CEB has not been modified till date. Thus, Assessee’s and professionals have to take note of this significant change and maintain notes for non-disclosure and document the positions to be taken for the Specified Domestic transactions and attach the same along with Form 3CEB upload.
- Safe Harbour Rules (SHR) -“Safe harbour” is defined as circumstances in which the tax authority shall accept the transfer price declared by the taxpayer to be at arm’s length. (Rule 10TD of the Income Tax Rules). The last date for filing safe harbour application for FY 2016-17 is 30-11-2017 or before filing the return of income. (details of SHR are provided in our SBS WIKI)
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TP Challenges to be faced and Compliances |
SBS Wiki www.sbsandco.com/wiki
Challenges
ØTheSHR cover only certain specified/eligible transactions. Therefore w.r.t the other transactions, one would need to consider benchmarking the same in its TP documentation in the normal course. Such transactions can still be subject to a routine TP audit/adjustments, if not properly benchmarked.
ØForm3CEFA is a self declaration to be signed by the person authorized to sign the tax return and not in the nature of a Chartered Accountant’s (CA) certificate. Thus it creates a more onerous obligation on the taxpayer to ensure that the election is made after satisfying all the eligibility criterion and a detailed review of the SHR.
ØItsnotjust the prescribed margins/mark-ups which needs to be met, one would also need to satisfy the other prescribed pre-conditions,like falling within the definitions prescribed in the SHR, to be eligible to opt for the SHR
ØDefinitions prescribed under the SHR are very technical (relating to software development, contract R&D etc.). Need to undertake a detailed interview/ discussion with the business team of the taxpayer to technically evaluate the coverage/appropriate classification of activities undertaken as IT, ITeS, KPO & Contract R&D.
ØMaintenance of the following documents is required which could be potentially called for during scrutiny process.
- TP documentation and inter company agreements detailing the FAR profile as well as the activity profile of the taxpayer;
- details on the list of employees in India and at the AE location, their qualifications and role played by the parties to satisfy that the prescribed conditions are met [Rule 10TB(2)];
- Email correspondences exchanged during the year, copies of project reports/SOWs as evidence with regard to the actual conduct of the parties;
Segmental details with evidences where the taxpayer has opted for more than one category of eligible international transaction with different prescribed mark-ups.
