India's Transfer Pricing Guidelines

The transfer price restrictions in India are discussed, as well as the master file and CbCR criteria. This article is divided into 4 criteria.

Intra group transactions between AEs are not susceptible to market aspects, so transfer pricing refers to the prices of "controlled transactions" between cross-border associated enterprises (AE), which might also take place under circumstances different from those taking place between independent enterprises. It's usually done to save money on taxes by putting money in AEs in tax havens.

The value connected to exchanges of goods, services, and technologies between related businesses, as well as benefits related to exchanges between unrelated parties with common ownership or control, is referred to as "transfer pricing." The Income Tax Act of 1961 in India codifies the legislation on transfer pricing.

Income from 'foreign transactions' between 'related firms' must be calculated using the 'arm's-length pricing' approach, according to India. In addition, any provision for expenses or interest incurred as a result of an overseas transaction must be calculated using the arm's-length pricing.

Regulations governing transfer pricing in India have a long history

With the liberalisation of India's economy in 1991, the country's market began to draw FDI as well as interest from multinational corporations (MNCs).

Existing provisions to address tax reduction through transfer pricing were declared insufficient by a standing committee tackling the issue in 1991.

Following that, in 1999, an expert group within the Central Bureau of Direct Taxes (CBDT) proposed that section 92 of the Income Tax Act of 1961 be completely overhauled.

In April 2001, the Income Tax Act, 1961 was amended to implement Indian transfer pricing regulations (TPR)by Article 9 of the Organisation for Economic Co-operation and Development (OECD) guidelines on transfer pricing, in answer to advice on preventing erosion of India's tax base.

The amendment also provides a broad definition of international trade, documentation requirements, and related enterprises. These rules, which took effect in 2002, mostly applied to intra-group cross-border transactions.

The provisions were expanded to certain domestic transactions between linked firms beginning in April 2013.

As a result, India's transfer pricing rule pertains to both domestic and international transactions that are over a certain threshold in terms of the transaction value. It is governed under section(s) 92A-F of the Income Tax Act of 1961, as well as related Rule(s) 10A-E of the Income Tax Rules of 1962.  

Transfer pricing provisions are included in the 1961 Income Tax Act

Section 92: Income must be evaluated on an arm's-length basis.

• Any income deriving from an overseas transaction must be computed using the arm's-length price, according to Section 92(1).

• Cost-sharing arrangements are covered by Section 92(2).

• The use of the transfer pricing regulations, according to Section 92(3), should not result in a reduction in the income determined based on books of account.

Associated enterprise (Section 92A)

If two or more businesses are linked together, they are referred to as connected businesses.

• One of them has a stake in another's management, control, or capital; alternatively

• Few people are in charge of common management, control, or capital.

International Transactions (Section 92B)

A buy, selling, or lease of property or provision of services, lending or borrowing money, and any other operation that affects profits, income, losses, or assets, including cost contribution arrangements, are all examples of international transactions.

A transaction between an enterprise and an unconnected third party (whether situated in India or abroad) is considered to be an international transaction if there is a prior agreement between the AE and the third party, according to Section 92B.

In addition, if the AE sets the terms of such deals with unrelated parties, the deal will be called international.

As a result, transfer pricing rules in India will apply to these transactions.

Section 92C: Arm's-length price calculation

A price that is imposed on transactions between individuals other than AEs in unregulated settings is referred to as an arm's-length price, as specified by section 92F. Section 92C lays out the steps for calculating the arm's-length price and stipulates that the most appropriate method will be selected.

For the computation of arm's-length price, five approaches were initially prescribed:

• The Comparable Uncontrolled Price (CUP) approach,

• The Resale Price Method (RPM), 

• Cost Plus Method (CPM), 

• The Profit Split Method (PSM),

• The Transactional Net Margin Method  (TNMM). 

A sixth technique, known as the "Other Method," was announced in 2012 and is outlined in Rule 10AB of the Income Tax Rules of 1962. Another Approach could be any strategy that considers the price charged or paid, or would be charged or paid, for a nearly identical uncontrolled transaction with or between two parties under similar circumstances, taking into consideration all relevant information.

Documentation (Section 92D)

This section outlines how to keep documents up to date as required. This is necessary for calculating the arm's-length pricing. The documents that must be kept are listed in Rule 10B. As a constituent entity of an international group, taxpayers must also keep track of such documents.

Accountant's report (Section 92E)

According to this provision, the company executing an international transaction or a specified local transaction shall produce an audit report from the auditor in the required format. This article, which must be presented with the income tax return, have to ensure the kind and amount of the transaction. For this, you'll need to fill out Form 3CEB. Must

Definitions in Section 92F

This section contains definitions for terms such as accountant, arm's[1]length price, enterprise, transaction, and so on that are related to the computation of arm's-length price.

Regulations for Safe Harbour

In the context of transfer pricing, safe harbour compliance with all relevant to specific laws that decrease obligation for taxpayers if such criteria are met, as they can provide for situations in which a specific group of taxpayers can comply with a system of regulations that instantly acknowledge transfer prices by the tax authority.

These rules simplify the administrative process while easing compliance and litigation obligations. The detail, among other things, taxpayer approval criteria, eligible international transactions, the goal operating margin, procedural elements, and audit schedules.

Stipulated domestic transaction 

Until the fiscal year 2011-12, domestic transactions were not liable to transfer pricing restrictions.

The Finance Act of 2012 expanded the operation of transfer pricing laws to domestic transactions, nicknamed "Specified Domestic Transactions," by inserting section 92BA into the Income Tax Act of 1961. This change will take effect beginning in FY 2012-13.

If the overall sum of the transactions surpasses INR 200 million (US$2.69 million), specified domestic transactions comprise the following transactions with connected domestic groups:

• Any transaction covered by section 80A of the Income Tax Act of 1961;

• Any transfer of goods or services covered by section 80-IA's sub-section (8). Section 80-IA(8) contain inter-unit transfers of goods and benefits by an entity asserting a reduction under section 80-IA; 

• Every transaction related to in any other section under Chapter VI-A or section 10AA to which the regulations of sub-section (8) or sub-section (10) of section 80-IA apply; 

• Every business transactions between the individuals referred to in sub-section (6) of section 115BAB; or

• Each other transaction as may be specified.

• Every business transacted between the assessee and other individual as pertained to in sub-section (10) of section 80-IA;

The Master File has now become accessible, as well as Country-by-Country Reporting (CbCR)

The OECD's BEPS plan has recommended "minimum requirements" to be applied under several Action Plans, such as Action 13's Country-by-Country Reporting (CbCR). MNCs with total revenues of approximately 890 million dollars or more Large multinational corporations are required to submit an annual return that breaks down important financial statement elements by jurisdiction under the CbC reporting requirement.

India is dedicated to the BEPS programme, including Action 13 implementation. The Central Board of Direct Taxes (CBDT) has established multi-layered transfer pricing paperwork requirements, including standards for keeping and providing the Master File and CbCR for an international organisation.

The CBDT amended the Income Tax Rules, 1962, with new rules – Rule 10DA and Rule 10DB – and new forms – From CEBA to Form 3CEBE – in October 2017. The CBDT further reduced these Master File and CbCR regulations in April 2021 by amending the Income Tax Rules, which will apply to the assessment year (AY) 2021-22. The table below summarises the important changes made to Rules 10DA and 10DB.

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