Section 92 of Income Tax Act: Computation of Income from International Transactions
Section 92 of Income Tax Act provides provisions regarding calculating income generated via international transactions concerning arm’s length price. However, owing to tax avoidance practices in intra-group transactions, the government introduced the Transfer Pricing (TP) Regulations via The Finance Bill (2001).
Thereafter, the amendment in Section 92 of Income Tax Act saw the insertion of Section 92A to 92F. This amendment introduced the transfer pricing regulations in India.
Read on to know more about the various sections that fall under the Indian transfer pricing regulations.
About Income from International Transactions with Regard to Arm’s Length Price
Typically, countries around the globe feature massive tax differences. These differences provide incentives to multinational entities when they transfer profits from countries with high tax rates to those having tax rates that are lower.
An enterprise can derive this shift in profit via various internal transactions. This might include a holding company that provides its subsidiaries, or an enterprise providing services to another, with consultancy or financing services.
Now, such multinational enterprises can determine the price and authorise the terms and conditions for such transactions. Thus, they can impact the profit amount and, resultantly, the amount of due tax.
To prevent such circumstances, the Income Tax Department created the arm’s length price. This principle states that controlled transactions must be done at market rates.
In simple terms, entities that seek relation through management, capital or control with regard to their controlled transactions must agree to the same terms and conditions, those non-related entities would have agreed to in relation to their comparable uncontrolled transactions. Thus, if an entity meets this principle, it is definitive that a particular transaction is at ‘arm’s length’.
Also read: Ways To Invest In The International Stock Market https://navi.com/blog/how-to-invest-in-international-stock-market/
Section 92 of Income Tax Act Provisions
As mentioned above, this particular section mentions provisions regarding transfer pricing in India. Find details about them below:
- Section 92 (1) of Income Tax Act mentions that any income that arises from an international transaction should be calculated with regard to arm’s length price.
- Section 92 (2) of Income Tax Act covers the cost of contribution arrangements.
- Section 92 (3) of Income Tax Act mentions that transfer provision application must not reduce the income calculated as per the book of account.
Section 92A of Income Tax Act – Associated Enterprise Meaning
As per Section 92A of Income Tax Act, two or more enterprises should be called associated enterprises if:
- Any one enterprise participates in the management, capital or control of another enterprise, or
- Both the enterprises share common management, capital or control
Furthermore, the section mentions the categorisation of associated enterprises provided two such enterprises meet the following criteria:
- Enterprises that hold, indirectly or directly, a shareholding of voting power up to 26% in the other enterprise.
- Any individual that holds, indirectly or directly, a shareholding of voting power up to 26% in both the enterprises.
- A loan advance from one enterprise to the other with at least 51% of the total assets’ book value of another enterprise.
- An enterprise guaranteeing 10% of the other enterprise’s total borrowings.
- At least 51% of the board of directors or the governing board must be appointed by another enterprise.
- One enterprise holds dependency on patents, trademarks or any other commercial rights. This could also include specification drawing of patent, design or model for processing or manufacturing of goods. Meanwhile, another enterprise must hold the right to these patents.
- One enterprise supplies the goods and articles to another one. In this regard, the prices stay under control by the other enterprise.
- An individual who controls one enterprise and the other enterprise also retains control over the same individuals or his/her relatives.
- A mutual interest exists between the two enterprises.
Section 92B of Income Tax Act – International Transaction Meaning
Upon the amendment of Section 92 of Income Tax Act, the IT Department introduced Section 92B, which defines international transactions.
As per this section, any transaction should be deemed international if it happens between two or more associated enterprises, provided both are NRIs.
This transaction can fall under the nature of purchase, sale, and provision of services or lease of property. Additionally, it could also be in the form of any other transaction that affects the profit, loss or income.
This section also mentions that any transaction between an unrelated third party and an enterprise is an international transaction if a prior arrangement exists between these two parties.
Furthermore, if the associated enterprise determines the terms and conditions of such transactions with an unrelated third party, it shall also be called an international transaction. As a result, they will fall under the regulation of transfer pricing.
Also read: Section 94A of Income Tax Act: Foreign Tax Jurisdictions https://navi.com/blog/section-94a-of-income-tax-act-foreign-tax-jurisdictions/
Section 92C of Income Tax Act – Calculation of Arm’s Length Price
Section 92C of Income Tax Act mentions methods for determining the arm’s length price and mandates the calculation of such a price with the most appropriate method.
As such, it prescribes 5 methods for this purpose:
- Resale price method (RPM)
- Comparable uncontrolled price (CUP)
- Cost plus method (CPM)
- Transactional net margin method (TNMM)
- Profit split method (PSM)
Besides these, this section also brought an ‘Other method’ in 2021. This falls under the rule 10AB of the Income Tax Rules.
Section 92D of Income Tax Act – Documentation Related to International Transactions
The amendment of Section 92 of Income Tax Act saw the insertion of yet another section, which mentions the maintenance of documents. According to this section, it is compulsory for every taxpayer undertaking an international transaction to maintain certain documents and information with that respect.
This information and document features a mention in Rule 10D of Income Tax Rules. Note that any failure to retain such information could result in a penalty. This fine could go up to 2% of each international transaction’s value.
Section 92E of Income Tax Act – Audit under Transfer Pricing
As per this section, each person undertaking an international transaction must submit a report from an accountant. That person must submit this report in a prescribed form, with signature and verification by the accountant. Further, it should be furnished before the specified date.
This report should mention the nature and sum of the transaction and should be filled along with the IT return.
Section 92F of Income Tax Act – Definitions
Upon the amendment of Section 92 of Income Tax Act, the government introduced Section 92F, which defines certain terms, such as the computation of arm’s length price.
Final Word
Section 92 of Income Tax Act specified the calculation of income from international transactions. However, the amendment in this section in 2001 proved to be fruitful, considering the increasing rate of foreign direct investment in the country.
FAQs on Section 92 of Income Tax Act
In India, the Finance Act introduced the transfer pricing law in 2001. As a result, the previous provisions under Section 92 of Income Tax Act saw replacement with newly added sections. The provisions under these new sections are applicable for all accounting periods ending after or on March 31 2002.
The documentation and information that taxpayers need to pay must be simultaneous and should exist by the due date of income tax return filing. Thus, one should furnish these documents and information before November 30 of that particular financial year.
A person or enterprise must maintain and keep the information and documents pertaining to transfer pricing for a period of at least eight years. Note that this should be done from the end of the relevant AY.
According to Rule 10D of the Income Tax Rules 1962, taxpayers must submit 13 mandatory documents with respect to transfer pricing rules. Some of these documents are generic in nature, while the others are specific to the exact nature of international transactions.
There are no exceptions to transfer pricing rules in India. Thus, every taxpayer indulging in international transactions must know the provisions under Section 92A to Section 92F of Income Tax Act and abide by the same.
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
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