India
Ashish Bairagra
by Ashishkumar Bairagra
India introduced transfer pricing (TP) regulations as early as 2001. The main objective of TP regulations was clearly defined to be “special provisions relating to avoidance of tax”. The regulations were meant to serve as a tool to prevent the erosion of India’s tax base, and, with the growing presence of foreign companies in the manufacturing and services industries, to ensure that India received its fair share of taxes. India was happy to be the global factory for the world, but did not want to become one at the cost of its tax revenue.
Between 2001 and now, India has constantly reviewed its TP regulations, adopted changes early on, and in many cases has led tax authorities around the world to tax international transactions which previously would not have taxed in other countries – the most famous example being the indirect transfer case of Vodafone in India. Concepts of Advance Pricing Mechanism, Safe Harbour Rules, use of multiple year data, adoption of BEPS Action Plan 13, providing for secondary adjustments, and the angel tax, to name a few, were adopted by India early on when these were introduced internationally. In fact, India also applies TP regulations to “specified domestic transactions” to keep domestic tax evasion and tax planning in check, between taxable and tax-free incomes.
a. Transfer pricing rules
India has adopted the principle of “arm’s length price” (ALP), and TP regulations revolve around comparing, rather than justifying, the actual price and the ALP for all international transactions between “associated enterprises”, and for all specified domestic transactions. The determination of ALP is heavily dependent on benchmarking analysis which should be conducted as per the TP regulations and TP documentation rules. TP regulations apply to every single international transaction between associated enterprises with no minimum threshold, hence even low value transactions or a single transaction between associated enterprises is covered by TP regulations.
b. Transfer pricing methods
India recognises the globally accepted and used methods for determining the ALP:
Comparable uncontrolled price method (CUP);
Resale price method (RPM);
Cost plus method (CPM);
Profit split method (PSM);
Transactional net margin method (TNMM); and
Any other such appropriate method as may be prescribed by India’s Central Board of Direct Taxes.
The last method provides some flexibility to justify the price actually charged/paid with the price that would have been charged/paid for the same or a similar uncontrolled transaction between non-associated enterprises under similar circumstances, and considering all the facts. The choice of selecting the “most appropriate method” is also required to be justified as part of the ALP determination.
c. OECD guidance
Though India is not a member of the OECD, and Indian TP regulations do not mention the OECD TP guidelines, India’s TP principles and regulations are based on the OECD TP guidelines and BEPS Action Plan. In various disputes, where clear indications were not available in TP regulations or where there were no precedence cases, judicial rulings have placed reliance on the OECD TP guidelines or judicial rulings in other countries based on OECD TP guidelines.
d. Reporting requirements
Every taxpayer who has entered into “international transactions” or a “specified domestic transaction” is required to obtain a report from a chartered accountant every year (the format of such a report is defined in Form 3CEB), which provides details of all such transactions and the ALP of such transactions, and which is certified by the chartered accountant. This is generally referred to as a Transfer Pricing Report. This report must be filed electronically for each financial year (which ends on 31 March every year) on or before 31 October – in other words, within 7 months of the end of the fiscal year.
Generally, the basis of the TP report is TP documentation maintained by the taxpayer, and is mandatory if the aggregate value of international transactions exceeds INR 10 million, or if specified domestic transactions exceed INR 200 million. Though it is not a reporting requirement, invariably, tax authorities will require TP documentation to be submitted at the time of an assessment.
In cases where country-by-country reporting (CbCR) applies, the master file should be filed electronically in Form 3CEAA on or before 30th November every year too.
a. Preparation of transfer pricing documentation
Rule 10(D) of the Income-tax Rules, 1962, prescribes the extent of information and documents which form part of TP documentation. These include, but are not limited to, the ownership structure of the group, profile of the group with a list of all entities, industry analysis and outlook, details of transactions undertaken in India, broad terms of the agreement and comparability with uncontrolled transactions, detailed Functions, Assets, and Risk (FAR) analysis, justification for selecting the most appropriate method, benchmarking analysis with details of the various filters, and numeric tables of comparables selected after each filter.
b. Master file and local file
A master file is required to be filed with the Indian tax authorities if the group’s consolidated global turnover exceeds INR 5 billion and international transactions in India exceed INR 500 million (INR 100 million in case of intangibles). Over and above the TP documentation, the master file information should include: key drivers of profits; entities involved in R&D; entities holding intangibles; a description of the supply chain; details of financing arrangements; and the groups’ consolidated financial statements.
For the local file, the maintenance of TP documentation described above is considered sufficient.
c. Penalties
Indian tax authorities have always been harsh on non-compliance and hence penalties form part of the TP regulations too. The penalties/fines for the following items are as follows:
1. Failure to maintain specified information/documents, failure to report transactions in Form no. 3CEB and TP documentation, maintenance of incorrect information, and failure to submit information during assessment:
2% of the value of international or domestic transaction
2. Failure to file Form no. 3CEB:
INR 100,000
3. Failure to furnish master file:
INR 500,000
4. Failure to furnish CbCR by due date:
INR 5,000 per day for one month; INR 15,000 per day after one month;
INR 50,000 per day after the date of service of penalty order
5. Failure to produce information before the prescribed authority for the purposes of filing the CbCR:
INR 5,000 per day for one month: INR 50,000 per day after the date of service of penalty order
6. Concealment of income or furnishing inadequate particulars of income with respect to the arm’s length price (ALP) adjustments:
100% to 300% of the tax sought to be evaded
7. Underreporting or misreporting of income:
50% of tax amount in cases of underreporting; and 200% of tax amount in case of misreporting
It is important to note that these penalties can be waived where one is able to demonstrate reasonable cause either to support a position or for the delay in filings. An appeal can also be filed before the appellate authorities against an order imposing a penalty.
Indian tax authorities place a lot of relevance, first, on the FAR analysis to determine whether the international transactions can be compared to uncontrolled transactions, and, second, on the benchmarking analysis to determine whether the selection of comparables and the publicly available information on these comparables has been adequately considered at the time of preparing the TP documentation. In practice, the tax authorities will independently conduct the benchmarking analysis on a reputed benchmarking TP database. FAR concepts bright line test for advertising and marketing; and significant economic presence is commonly used in India to justify the ALP, and used by tax authorities in tax litigations.
India has a robust mechanism for dispute avoidance and resolution. The APA programme was introduced as early as 2012, and offers validity for 5 prospective years with an additional rollback option for 4 previous years. It also provides for unilateral, bilateral, or multilateral APAs, and there are no value thresholds to apply for an APA.
In line with India’s growing trade in certain sectors, Safe Harbour Rules prescribe a detailed list of transactions and the percentages for each of these transactions which form the tolerable limits for variance between the actual price and the ALP determined.
Last but not the least, India also recognises Mutual Agreement Procedures (MAP), taking cues from the OECD guidelines and BEPS Action Plan 14.
Ashishkumar Bairagra has been in practice and a partner of the firm since 2001. He handles international taxation matters, inbound and outbound investments, and consulting assignments. He offers consulting services to various family businesses and HNIs on transition, expansion, exits, and entrepreneurship. Ashishkumar is the global vice chair of GGI’s International Taxation Practice Group (ITPG).Contact Ashish.
GGI member firm M L Bhuwania and Co LLP is an organisation dedicated to offering professional services by employing the industry’s brightest minds. Their services range from collaborative audit, consulting, and financial advisory to risk management and tax services. The firm’s diversified client profile across industries has improved its ability to advise clients on the dynamic and challenging environments in which they do business.
GGI member firmM L Bhuwania and Co LLPMumbai, IndiaT: +91 98194 33693
Advisory, Auditing & Accounting, Corporate Finance, Fiduciary & Estate Planning, Tax
