Section 92E of the Income Tax Act: Meaning, About & Applicability
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.
About Section 92E of the Income Tax Act
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.
Applicability of Section 92E of the Income Tax Act
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:
- Purchasing, selling or leasing any tangible or intangible property
- Mutual agreement between two or more Associated Enterprises for allocation towards costs/expenses for any benefit, service or facility
- Lending or borrowing money
- Any transaction leading to profit, loss, income or gain/loss of assets
- Transaction between a company and someone other than an AE with prior agreement
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.
Understanding the Meaning of Associated Enterprises u/s 92E
The following definitions are applicable for Associated Enterprises (AE) under Section 92E:
- Where the same people are directly or indirectly involved in administration, capital or control in two or more enterprises
- An enterprise takes part in the operations and management of another enterprise
- There is a link in mutual interest between two companies
- One person owns at least 26% voting power in both businesses
- An individual owns one company while his/her relative owns another one solely or jointly with him/her
- If one company holds 26% of the voting power of another company
- Where same persons appoint over 50% of directors or members of the governing body
- One company guarantees a minimum of 10% of the total borrowings of another company
- Loans made to another company represent 51% or more of its entire assets’ book value
- One person appoints over 50% of two enterprises’ Board of Directors or one or more Executive Directors
- One enterprise owns 10% of another enterprise
- 90% of one enterprise’s raw materials and consumables are supplied by another enterprise
- Where prices and other terms of items/articles produced by one company are set by another one
- A business is completely dependent on the copyright, patent or know-how of another business
Information and Documents Required to Maintain for International Transactions
Under Rule 10D of the IT Act, a person owning an enterprise needs to maintain the following documents:
- Profile of MNC group, including its name, country of tax residence, address and legal status
- The ownership structure of all AEs with details of shares and ownership
- Details and value of services provided and property transferred
- Nature and terms of international transactions and SDT for all AEs
- Description of taxpayer’s and AE’s businesses and industries
- Records of uncontrolled transactions
- Records of budgets, forecasts, market analyses and other financial estimates of both taxpayer and AEs
- Details of both enterprise’s functions, risks, and assets
- Methods employed to determine arm’s length price of specified transactions
- Details regarding adjustment of transfer prices
- Policies, assumptions, and price negotiations to determine said price
- Details of actual arm’s length price
- Any other data and document used to determine arm’s length price
Final Word
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.
FAQs on Section 92E of the Income Tax
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
KPO services
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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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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