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    Transfer Pricing - Revised Guidance Note -ICAI 2016 Key Highlights

    Post budget 2012 and after introduction of part C in form 3CEB, ICAI had revised the guidance Note on Sec 92E (August 2013) and since then there have been various developments in TP Provisions like notification of safe harbour rules, notification of provisions/rules for Advance Pricing Agreement (APA) roll back mechanism, range concept and use of multiple year data for determination of arm’s length price, Deemed International Transactions, increased threshold limit for the applicability of the specified domestic transaction provisions, CBCR requirements etc. 

    Thus ICAI has come up with the revised Guidance Note (Fifth Edition), 2016 which contains guidance on all these important changes. In this article we have summarised the key changes or revisions made in the Guidance Note on Report u/s 92E.


    1. Specified Domestic Transactions:


    1. Threshold limit of Rs. 5 crores above which specified transactions will be regarded as SDT has been increased to 20 crores from 1 April 2015 onwards.


    1. Revenue transactions vs Capital transactions: As per Sec 58 (2),the provisions of section 40A shall, so far as may be, apply in computing the income chargeable under the head "Income from other sources" as they apply in computing the income chargeable under the head "Profits and gains of business or profession.’ These provisions are applicable to expenditures which are capital in nature and fully claimed as deduction under other provisions (e.g. Sec35(2AB), 35 or 35AD) since any expenditure is covered under the scope of sec 40A (2)(b). However, the Revised Guidance Note clarifies that “these provisions are not applicable to capital expenditures which are capitalized in the books of accounts and not claimed as deduction in the profit & loss account.”


    However, the department has been taking stand in the assessments that got closed recently (FY 12-13) that disclosure in 92E certificate (Form 3CEB ) and documentation is required for capital expenditures also with regard to Sec 92BA and Sec 40A(2)(b) as the provisions refer to “any payment” to related parties


    1. Deemed international transactions:


    1. Sec 92B(2) was amended vide Finance Act (No.2) 2014 w.e.f. April 1, 2015 to provide that even where the unrelated third party is located in India, the transaction between the Indian entity and the unrelated third party will be deemed as an international transaction between the Indian entity and its AE located overseas.
      1. The Revised Guidance Note clarifies that the amended provisions would certainly cover within its ambit a three party scenario under the provisions of Sec 92B(2). However, a four party situation would need a detailed analysis / evaluation by the Accountant which has been explained in the form of example.


      Thereafter, the Revised Guidance Note explains the impact of the amendment as follows:


      • The tax authorities may evaluate whether the profits earned in India is lower because of the influence of a non-resident AE on that transaction.


      As per the amendment, domestic transactions which are influenced by an AE would also be covered with the scope of TP provisions. Care should be taken to properly report and disclose such transactions to avoid levy of penalty under Sec 271AA
      1. Associated enterprise: (Sec 92A(2)(f)) - Revised guidance note clarifies that two enterprises shall be deemed to be associated enterprises only when one of the enterprise exercises its right and actually appoints one executive director/ member to the board or more than half of the Board of directors at any time during the year. The mere right to appoint one executive director or executive member by one enterprise to the Board of another enterprise would not make both the entities as associated



      1. Use of multiple year data and application of range concept (CBDT notification No.83 of 2015)


      1. Central Board of Direct Taxes (CBDT) on October 20, 2015,issued the final rules to give effect to the use of ‘multiple year data’ and ‘range concept’ which were introduced by Finance Act, 2014. These rules are applicable to international transactions and specified domestic transactions that are entered into by taxpayers on or after 1 April 2014.


      1. Use of multiple year data is applicable only in cases where RPM, CPM or TNMM has been selected as the Most Appropriate Method. For each comparable selected under RPM, CPM or TNMM, the data of the current year is required to be considered. In case such data is not available at the time of furnishing the return of income, data pertaining to up to two preceding financial years may be used.


      1. Further, the notification provides that in the event current year data becomes available during the course of the assessment proceedings, then the same shall be used by the TPO for the purpose of the analysis.


      1. As per the notification, the ‘range concept’ shall be applicable when: (a) the MAM is CUP, RPM, CPM, or TNMM; and (b) there are at least 6 entries in the data set. Where these conditions are not fulfilled, ‘arithmetic mean’ shall continue to apply, as before, along with the tolerance range benefit (3% or 1%). For determination of the quartiles, the margins in the data set (i.e., set of comparable companies) are required to be arranged in ascending order and the arm’s length range would be data points lying between the 35th and 65th percentile of the data set.
      1. Three tier documentation structure (on par with Action 13 of BEPS)


      1. The three-tiered documentation structure (applicable w.e.f. FY 2016-17) would consist of a “master file”, “local file” and “Country-by-Country Report” (CbC Report).


      1. The master file seeks to capture information regarding the taxpayer’s global operations and their transfer pricing policies (form yet to be prescribed).


      1. The local file would capture entity-specific information with reference to the related party transactions. The Revised Guidance Note clarifies that in the Indian context, the existing transfer pricing documentation requirements as per Rule 10D of the Income Tax Rules, 1962 (the Rules) already encompasses the local file requirements.


      1. Threshold - Applicable for international groups with consolidated annual group revenue for the accounting year exceeding EUR 750 Mn (for India, to be converted using the exchange rate as on the last day of each previous year)


      1. Effective date -Applicable for financial year 2016–17 – to be filed by the return due date i.e. November 30, 2017. (Rules/ forms for filing the master file and CbC report to be prescribed)


      1. Reporting - Report to include details, inter-alia of revenue, profits/losses, income tax paid / accrued, stated capital, accumulated earnings, tangible assets and number of employees, for each of the constituent entity of the group.


      1. Documentation and check points (other important revisions highlighted in the Revised Guidance Note):


      1. Reconcile with tax audit report 40A(2)(b) clause: In respect of SDTs with specified person u/s 40A(2)(b), the Revised Guidance recommends that reference can be made to tax audit report and on register of members maintained by assessee.


      1. Workings of the arm’s length price: 92E Auditor should maintain / provide detailed reasons as to why particular set of data points can be or cannot be considered as comparable to the international transaction / specified domestic transaction under consideration. Further, the enterprise should demonstrate that the analysis undertaken to determine the comparables is scientific and does not represent a cherry picking.


      1. The Revised Guidance also states that working in respect of the adjustments (Capacity, risk and depreciation adjustments) undertaken by the enterprise needs to be detailed.


      1. Back up Documentation for benefit test: Supporting documentation (including correspondence such as mails, brochures, minutes of the meetings etc) to be maintained case of specific transactions like management fees/ royalties charges etc. as per Rule 10D (2), such as analysis detailing the justification of the ‘benefit test’ from a service recipient perspective and documents evidencing the receipt of benefits by the service provider.
        1. Documentation compulsory as per Sec 92D for International, Deemed International (crossing 1Crore value) and specified domestic transactions (crossing 20 Crore value).


        1. Related parties u/s Sec 40A(2)(b) is different to that of AS-18: in relation to the specified domestic transactions is different than the definition of related party under AS 18 and therefore the accountant should review the Associated Enterprises for the purpose of Sec 92BA independently


        1. Deemed International Transactions: In relation to deemed international transactions, the Revised Guidance states that the primary responsibility for identification / analyzing such


        transaction rests with the assessee. Noting that w.e.f. FY 2014-15, assessee’s transactions with


        an Indian company are also covered within the ambit of ‘deemed international transaction’,


        the Guidance suggeststhe accountant to obtain a representation from the management of the assessee as to completeness of the listing of such transaction and also to exercise his professional judgment in this regard.


        1. Notes to form 3CEB: From AY 2012-13, CBDT has made it mandatory for enterprises to file their Form 3CEB online, with a view to make the process faster and less error prone. However, the Revised Guidance states that the online filing mode does not provide for a facility for documenting notes by the accountant in each of the relevant clauses or Annexure to Form No.3CEB, therefore the Accountant may issue a memo under his/her signature to the enterprise presenting his/ her notes against each of the relevant clauses or Annexure to Form No.3CEB.


        1. Relying on the work of the other auditor: The 92E auditor can rely on the figures or transactions reported in the financial statements / tax audit report of the company, however, the auditor should undertake due diligence to assess the reasonableness of the value reported therein (by undertaking test checks) and also obtain a representation from the management of the company in this regard.


        1. Penalty Provisions: 270A, 271G and 271GB


        Revised Guidance gives an overview of new Sec 270A which provides for penalty for under reporting and misreporting of income, as well as penalties u/s 270A, 270A(6)(d), 270A(8) and 270A(9)(f). Further, the Guidance also outlines Sec 271AA(2) (which prescribes penalty for failure to furnish master file) and Sec 271GB (which provides for penalty for failure to furnish the documents prescribed u/s 286). The Guidance explains that power to levy penalty u/s 271G has also been extended now to the TPO.

    Existing Penalty Provisions under

    New Penalty Provisions under Section 270A

    Section 271(1) (c)




    •   100-300%  of  tax  on  transfer  pricing

    •   No  penalty,  where  transfer  pricing

    adjustment, in absence of good faith and

    documentation  maintained,  transaction

    due diligence

    declared and material facts disclosed


    •   Penalty at 50% of tax on transfer pricing


    adjustment,  where  transfer  pricing


    documentation not maintained


    •   Penalty at 200% of tax on transfer pricing


    adjustment, where the TP adjustment is in


    consequence  of  not  reporting  an


    international transaction



    Concluding remarks:


    The guidance note has provided clarity on lot of new developments and would help the members in their day to day practice from a transfer pricing perspective. We have summarised the key highlights and revisions made by ICAI in the guidance note in this article. In the upcoming article, we would be covering the steps that have been prescribed in the revised guidance note in determining the Arm’s length price.

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