The Finance Act, 2001 introduced transfer pricing regulations in India by inserting new Sections (92A to Section 92F) and the relevant Rules (10A to 10E). Transfer pricing applies to both domestic and global transactions above a certain threshold of deal values. It stipulates that transactions between ‘related parties’ have to be comparable to transactions between ‘unrelated parties’.
Section 92E of the Income Tax Act tells you that you need to get an audit from a Chartered Accountant (CA) for such transactions. Read along to know about the requirements for getting such reports.
Under transfer pricing regulations, anyone who took part in an international transaction or certain domestic transactions in the previous year has to get a report from an accountant. The accountant must be a Chartered Accountant (CA) with a valid certificate of practice and specified qualifications under Chartered Accountants Act, 1949.
As per Section 92E, you have to furnish such a report in Form 3CEB at least one month before the due date of filing Income Tax Returns (ITR) under Section 139. For Section 92E, the due date is October 31 of the relevant assessment year. All CAs involved in making the report must sign it, verify it, and include all required details.
The taxpayer must send a letter of appointment to the CA to conduct an audit u/s 92E. This appointment letter must bear the signatures of persons who can verify the return of income or someone authorised by the company to make the appointment.
Provisions of Section 92E apply to international transactions between two or more Associated Enterprises (AE). Either one or both parties involved in such transactions must be non-residents. Section 92E of the Income Tax Act also applies to specified domestic transactions (SDT) from AY 2013-14.
The Finance Act 2012 has clarified all sorts of arrangements that count as international transactions. The following are some of these transactions:
Under Section 92(3), provisions of Section 92E do not apply for cases where it leads to an increase in losses or reduction in income taxes in India. The Finance Act of 2009 framed safe harbour rules where tax authorities would accept the taxpayer’s declared transfer price.
Safe harbour provisions also apply for certain specified domestic transactions. This includes the tariff w.r.t supply, transmission and wheeling of electricity, and purchase of milk/milk products referred to in Rule 10THB.
The following definitions are applicable for Associated Enterprises (AE) under Section 92E:
Under Rule 10D of the IT Act, a person owning an enterprise needs to maintain the following documents:
Section 92E of the Income Tax Act stipulates that anyone entering into international transactions needs to obtain and furnish an audit report from a CA. Provisions of Section 92E apply to two or more AEs, of which at least one should be a non-resident. The Section is also applicable for Specified Domestic Transactions, as mentioned in Section 92BA.
Ans: Yes, under Section 271BA, failure to furnish a CA report through Form 2CEB results in a penalty for the defaulter. Any person who has entered into a transaction defined under Section 92B and Section 92BA needs to mandatorily furnish this report before the due date. Otherwise, the Assessing Officer (AO) may impose a penalty of up to Rs. 1,00,000 u/s 271BA.
Ans: Anyone entering into international or specified domestic transactions covered under Section 92E needs to submit Form 3CEB. This is a report made by a Chartered Accountant after audits and contains details of value and other details of international transactions or SDT. You need to submit it electronically with DSC (Digital Signature Certificates).
Ans: The following are some of the categories of international transactions:
Software development and ITeS
Intra-group loan to Wholly Owned Subsidiary (WOS)
Corporate guarantee to WOS
Loans advanced to AE
Specified contract R&D services for generic pharmaceutical drugs
Manufacture/export of auto components
Specified contract R&D services for software development
Ans: Any transaction covered under Section 80A is treated as specified domestic transaction (SDT). It refers to business transactions referred to in Section 80IA(10), Section 10AA or Section 115BAB(4) or transfer of goods/services u/s 80IA (8). To claim deductions under various sections, taxpayers must carry out these transactions with AE at fair market value.
Ans: Arm’s length price the price at which independent companies engage in financial transactions. Such prices are determined by market forces outside anyone’s control. Section 92F(ii) of the IT Act defines this price, which is to be applied to persons in uncontrolled transactions.
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