The Income Tax 1961 of India deals with taxation of
international transactions and transfer pricing issues in India. The
objective of these provisions is to curb tax evasion on the part of
taxable entities and individuals.
However, the provisions of the Income Tax Act, 1961
in the past proved to be inadequate and ineffective to curb tax
evasions, especially long term capital gains, arising out of foreign
transactions having Indian ramifications.
One such incidence involves the company Vodafone
where there is a present tax dispute between the company and Indian
government. In fact, Vodafone
may invoke arbitration for fresh tax demands by India.
Vodafone
taxation, parliament, international treaty and taxation issues of
India need a fresh outlook on the part of our Parliament
and Indian government.
We at Perry4Law
and Perry4Law’s
Techno Legal Base (PTLB) have provided a research report
titled Global
Taxation and Anti Competition Regulatory Issues In 2012 And
Projections Report for 2013 by Perry4Law that is
discussing these issues. The report highlights global taxation issues
including the recent allegations of tax avoidance labeled against
Amazon,
Google and Starbucks regarding UK Tax Laws.
Even the foreign direct investment (FDI) are strict
actions have been initiated by Indian government. After canceling the
telecom licenses of many telecom companies, now Indian
government would ascertain beneficiary in Walmart probe to
ascertain possible violation of Indian laws. The Competition
Commission of India (Procedure in Regard to the Transaction of
Business Relating to Combinations) Regulations, 2011 have
also been formulated by the Competition Commission of India in 2011
to regulate anti competition combinations. The same may be pressed
more frequently in the year 2013.
It is obvious that transfer pricing laws in India
and laws pertaining to international transactions and arm’s length
dealing in India need a total rejuvenation. The present provisions
incorporated in the Income Tax Act, 1961 are inadequate in this
regard.
Computation Of Income From International
Transaction Having Regard To Arm’s Length Price
Section 92(1) of the Act prescribes that any income
arising from an international transaction shall be computed having
regard to the arm’s length price. The explanation to Section 92(1)
provides that the allowance for any expense or interest arising from
an international transaction shall also be determined having regard
to the arm’s length price.
Section 92(2) of the Act prescribes that where in an
international transaction, two or more associated enterprises enter
into a mutual agreement or arrangement for the allocation or
apportionment of, or any contribution to, any cost or expense
incurred or to be incurred in connection with a benefit, service or
facility provided or to be provided to any one or more of such
enterprises, the cost or expense allocated or apportioned to, or, as
the case may be, contributed by, any such enterprise shall be
determined having regard to the arm’s length price of such benefit,
service or facility, as the case may be.
Section 92(3) of the Act prescribes that the
provisions of this section shall not apply in a case where the
computation of income under sub-section (1) or the determination of
the allowance for any expense or interest under that sub-section, or
the determination of any cost or expense allocated or apportioned,
or, as the case may be, contributed under subsection (2), has the
effect of reducing the income chargeable to tax or increasing the
loss, as the case may be, computed on the basis of entries made in
the books of account in respect of the previous year in which the
international transaction was entered into.
Associated Enterprise Under Indian Tax Laws
Section 92A (1) of the Act provides that for the
purposes of this section and sections 92, 92B, 92C, 92D, 92E and 92F,
“associated enterprise”, in relation to another enterprise, means
an enterprise—
(a) Which participates, directly or indirectly, or
through one or more intermediaries, in the management or control or
capital of the other enterprise; or
(b) In respect of which one or more persons who
participate, directly or indirectly, or through one or more
intermediaries, in its management or control or capital, are the same
persons who participate, directly or indirectly, or through one or
more intermediaries, in the management or control or capital of the
other enterprise.
Section 92A (2) of the Act provides that for the
purposes of sub-section (1), two enterprises shall be deemed to be
associated enterprises if, at any time during the previous year:
(a) One enterprise holds, directly or indirectly,
shares carrying not less than twenty-six per cent of the voting power
in the other enterprise; or
(b) Any person or enterprise holds, directly or
indirectly, shares carrying not less than twenty-six per cent of the
voting power in each of such enterprises; or
(c) A loan advanced by one enterprise to the other
enterprise constitutes not less than fifty-one per cent of the book
value of the total assets of the other enterprise; or
(d) One enterprise guarantees not less than ten per
cent of the total borrowings of the other enterprise; or
(e) More than half of the board of directors or
members of the governing board, or one or more executive directors or
executive members of the governing board of one enterprise, are
appointed by the other enterprise; or
(f) More than half of the directors or members of
the governing board, or one or more of the executive directors or
members of the governing board, of each of the two enterprises are
appointed by the same person or persons; or
(g) The manufacture or processing of goods or
articles or business carried out by one enterprise is wholly
dependent on the use of know how, patents, copyrights, trade-marks,
licences, franchises or any other business or commercial rights of
similar nature, or any data, documentation, drawing or specification
relating to any patent, invention, model, design, secret formula or
process, of which the other enterprise is the owner or in respect of
which the other enterprise has exclusive rights; or
(h) Ninety per cent or more of the raw materials and
consumables required for the manufacture or processing of goods or
articles carried out by one enterprise, are supplied by the other
enterprise, or by persons specified by the other enterprise, and the
prices and other conditions relating to the supply are influenced by
such other enterprise; or
(i) The goods or articles manufactured or processed
by one enterprise, are sold to the other enterprise or to persons
specified by the other enterprise, and the prices and other
conditions relating thereto are influenced by such other enterprise;
or
(j) Where one enterprise is controlled by an
individual, the other enterprise is also controlled by such
individual or his relative or jointly by such individual and relative
of such individual; or
(k) Where one enterprise is controlled by a Hindu
undivided family, the other enterprise is controlled by a member of
such Hindu undivided family or by a relative of a member of such
Hindu undivided family or jointly by such member and his relative; or
(l) Where one enterprise is a firm, association of
persons or body of individuals, the other enterprise holds not less
than ten per cent interest in such firm, association of persons or
body of individuals; or
(m) There exists between the two enterprises, any
relationship of mutual interest, as may be prescribed.
Meaning Of International Transaction Under Indian Tax Laws
Section 92B (1) of the Act provides that for the
purposes of this section and sections 92, 92C, 92D and 92E,
“international transaction” means a transaction between two or
more associated enterprises, either or both of whom are
non-residents, in the nature of purchase, sale or lease of tangible
or intangible property, or provision of services, or lending or
borrowing money, or any other transaction having a bearing on the
profits, income, losses or assets of such enterprises, and shall
include a mutual agreement or arrangement between two or more
associated enterprises for the allocation or apportionment of, or any
contribution to, any cost or expense incurred or to be incurred in
connection with a benefit, service or facility provided or to be
provided to any one or more of such enterprises.
Section 92B (2) of the Act provides that a
transaction entered into by an enterprise with a person other than an
associated enterprise shall, for the purposes of sub-section (1), be
deemed to be a transaction entered into between two associated
enterprises, if there exists a prior agreement in relation to the
relevant transaction between such other person and the associated
enterprise, or the terms of the relevant transaction are determined
in substance between such other person and the associated enterprise.
Computation Of Arm’s Length Price Under Indian Tax Laws
Section 92C (1) of the Act prescribes the procedure
to calculate the arm’s length price for an international
transaction. As per Section 92C (1) the arm’s length price in
relation to an international transaction shall be determined by any
of the following methods, being the most appropriate method, having
regard to the nature of transaction or class of transaction or class
of associated persons or functions performed by such persons or such
other relevant factors as the Board may prescribe, namely:
(a) Comparable uncontrolled price method;
(b) Resale price method;
(c) Cost plus method;
(d) Profit split method;
(e) Transactional net margin method;
(f) Such other method as may be prescribed by the
Board.
Section 92C (2) of the Act provides that the most
appropriate method referred to in sub-section (1) shall be applied,
for determination of arm’s length price, in the manner as may be
prescribed.
The proviso to Section 92C (2) provides that where
more than one price is determined by the most appropriate method, the
arm’s length price shall be taken to be the arithmetical mean of
such prices, or, at the option of the assessee, a price which may
vary from the arithmetical mean by an amount not exceeding five per
cent of such arithmetical mean.
Section 92C (3) of the Act provides that where
during the course of any proceeding for the assessment of income, the
Assessing Officer is, on the basis of material or information or
document in his possession, of the opinion that-
(a) The price charged or paid in an international
transaction has not been determined in accordance with sub-sections
(1) and (2); or
(b) Any information and document relating to an
international transaction have not been kept and maintained by the
assessee in accordance with the provisions contained in sub-section
(1) of section 92D and the rules made in this behalf; or
(c) The information or data used in computation of
the arm’s length price is not reliable or correct; or
(d) The assessee has failed to furnish, within the
specified time, any information or document which he was required to
furnish by a notice issued under sub-section (3) of section 92D,
the Assessing Officer may proceed to determine the
arm’s length price in relation to the said international
transaction in accordance with sub-sections (1) and (2), on the basis
of such material or information or document available with him:
Provided that an opportunity shall be given by the
Assessing Officer by serving a notice calling upon the assessee to
show cause, on a date and time to be specified in the notice, why the
arm’s length price should not be so determined on the basis of
material or information or document in the possession of the
Assessing Officer.
Section 92C (4) of the Act provides that where an
arm’s length price is determined by the Assessing Officer under
subsection (3), the Assessing Officer may compute the total income of
the assessee having regard to the arm’s length price so determined:
Provided that no deduction under section 10A [or
section 10AA] or section 10B or under Chapter VI-A shall be allowed
in respect of the amount of income by which the total income of the
assessee is enhanced after computation of income under this
sub-section:
Provided further that where the total income of an
associated enterprise is computed under this sub-section on
determination of the arm’s length price paid to another associated
enterprise from which tax has been deducted [or was deductible] under
the provisions of Chapter XVIIB, the income of the other associated
enterprise shall not be recomputed by reason of such determination of
arm’s length price in the case of the first mentioned enterprise.
Reference To Transfer Pricing Officer
Section 92CA (1) of the Act provides that where any
person, being the assessee, has entered into an international
transaction in any previous year, and the Assessing Officer considers
it necessary or expedient so to do, he may, with the previous
approval of the Commissioner, refer the computation of the arm’s
length price in relation to the said international transaction under
section 92C to the Transfer Pricing Officer.
Section 92CA (2) of the Act provides that where a
reference is made under sub-section (1), the Transfer Pricing Officer
shall serve a notice on the assessee requiring him to produce or
cause to be produced on a date to be specified therein, any evidence
on which the assessee may rely in support of the computation made by
him of the arm’s length price in relation to the international
transaction referred to in sub-section (1).
Section 92CA (3) of the Act provides that on the
date specified in the notice under sub-section (2), or as soon
thereafter as may be, after hearing such evidence as the assessee may
produce, including any information or documents referred to in
sub-section (3) of section 92D and after considering such evidence as
the Transfer Pricing Officer may require on any specified points and
after taking into account all relevant materials which he has
gathered, the Transfer Pricing Officer shall, by order in writing,
determine the arm’s length price in relation to the international
transaction in accordance with sub-section (3) of section 92C and
send a copy of his order to the Assessing Officer and to the
assessee.
Section 92CA (3A) of the Act provides that where a
reference was made under sub-section (1) before the 1st day of June,
2007 but the order under sub-section (3) has not been made by the
Transfer Pricing Officer before the said date, or a reference under
sub-section (1) is made on or after the 1st day of June, 2007, an
order under sub-section (3) may be made at any time before sixty days
prior to the date on which the period of limitation referred to in
section 153, or as the case may be, in section 153B for making the
order of assessment or reassessment or recomputation or fresh
assessment, as the case may be, expires.
Section 92CA (4) of the Act provides that On receipt
of the order under sub-section (3), the Assessing Officer shall
proceed to compute the total income of the assessee under sub-section
(4) of section 92C in conformity with the arm’s length price as so
determined by the Transfer Pricing Officer.
Section 92CA (5) of the Act provides that with a
view to rectifying any mistake apparent from the record, the Transfer
Pricing Officer may amend any order passed by him under sub-section
(3), and the provisions of section 154 shall, so far as may be, apply
accordingly.
Section 92CA (6) of the Act provides that where any
amendment is made by the Transfer Pricing Officer under subsection
(5), he shall send a copy of his order to the Assessing Officer who
shall thereafter proceed to amend the order of assessment in
conformity with such order of the Transfer Pricing Officer.
Section 92CA (7) of the Act provides that the
Transfer Pricing Officer may, for the purposes of determining the
arm’s length price under this section, exercise all or any of the
powers specified in clauses (a) to (d) of sub-section (1) of section
131 or sub-section (6) of section 133.
The Explanation to Section 92CA provides that for
the purposes of this section, “Transfer Pricing Officer” means a
Joint Commissioner or Deputy Commissioner or Assistant Commissioner
authorised by the Board to perform all or any of the functions of an
Assessing Officer specified in sections 92C and 92D in respect of any
person or class of persons.
Maintenance And Keeping Of Information And
Document By Persons Entering Into An International Transaction
Section 92D (1) of the Act provides that every
person who has entered into an international transaction shall keep
and maintain such information and document in respect thereof, as may
be prescribed.
Section 92D (2) of the Act provides that without
prejudice to the provisions contained in sub-section (1), the Board
may prescribe the period for which the information and document shall
be kept and maintained under that sub-section.
Section 92D (3) of the Act provides that the
Assessing Officer or the Commissioner (Appeals) may, in the course of
any proceeding under this Act, require any person who has entered
into an international transaction to furnish any information or
document in respect thereof, as may be prescribed under sub-section
(1), within a period of thirty days from the date of receipt of a
notice issued in this regard:
Provided that the Assessing Officer or the
Commissioner (Appeals) may, on an application made by such person,
extend the period of thirty days by a further period not exceeding
thirty days.
Report From An Accountant To Be Furnished By
Persons Entering Into International Transaction
Section 92E of the Act provides that every person
who has entered into an international transaction during a previous
year shall obtain a report from an accountant and furnish such report
on or before the specified date in the prescribed form duly signed
and verified in the prescribed manner by such accountant and setting
forth such particulars as may be prescribed.
Definitions Of Certain Terms Relevant To
Computation Of Arm’s Length Price, Etc
Section 92F of the Act provides that in sections 92,
92A, 92B, 92C, 92D and 92E, unless the context otherwise requires-
(i) “Accountant” shall have the same meaning as
in the Explanation below sub-section (2) of section 288;
(ii) “Arm’s length price” means a price which
is applied or proposed to be applied in a transaction between persons
other than associated enterprises, in uncontrolled conditions;
(iii) “Enterprise” means a person (including a
permanent establishment of such person) who is, or has been, or is
proposed to be, engaged in any activity, relating to the production,
storage, supply, distribution, acquisition or control of articles or
goods, or know-how, patents, copyrights, trade-marks, licences,
franchises or any other business or commercial rights of similar
nature, or any data, documentation, drawing or specification relating
to any patent, invention, model, design, secret formula or process,
of which the other enterprise is the owner or in respect of which the
other enterprise has exclusive rights, or the provision of services
of any kind, [or in carrying out any work in pursuance of a
contract,] or in investment, or providing loan or in the business of
acquiring, holding, underwriting or dealing with shares, debentures
or other securities of any other body corporate, whether such
activity or business is carried on, directly or through one or more
of its units or divisions or subsidiaries, or whether such unit or
division or subsidiary is located at the same place where the
enterprise is located or at a different place or places;
(iiia) “Permanent establishment”, referred to in
clause (iii), includes a fixed place of business through which the
business of the enterprise is wholly or partly carried on;
(iv) “Specified date” shall have the same
meaning as assigned to “due date” in Explanation 2 below
sub-section (1) of section 139;]
(v) “Transaction” includes an arrangement, understanding or action in concert,
(a) Whether or not such arrangement, understanding or action is formal or in writing; or
(b) Whether or not such arrangement, understanding
or action is intended to be enforceable by legal proceeding.
Perry4Law and PTLB hope this research work would prove useful to all concerned.
