The Finance Act, 2001 introduced Transfer Pricing Regulation in India by substituting existing Section 92 of the Act and introducing new sections 92 to 92F w.e.f April, 2001 (from AY 2002-03). Rule 10A to 10E with reference these sections 92 have been notified subsequently. Transfer pricing provisions were earlier restricted to international transactions only. With effect from 1.4.2013 , the scope of transfer pricing provisions gets extended to specified domestic transactions (SDT) exceeding Rupees five crore in value. (later the limit was increased to 20Crore from FY 15-16)
Section 92E - Every person who has entered into an international transaction or SDT during a previous year shall obtain a report from an accountant and furnish such report on or before the specified due date (November 30th) in the prescribed form duly signed and verified in the prescribed manner by such accountant and setting forth such particulars as may be prescribed.
Rule 10E - The report from an accountant required to be furnished under section 92E by every person who has entered into an international transaction or SDT during a previous year, shall be in Form No. 3CEB and shall be verified in the manner indicated therein
Notification no. 41/2013 dated 10th June, 2013 has amended the FORM-3CEB1 i.e. report under section
92 E regarding international and specified domestic transaction should be filed mandatorily electronically. The amended Form No. 3CEB contains 25 clauses requiring disclosure of the details of the various international transactions and SDT. It is divided into the three parts:
Part A: requiring the taxpayer to provide general information about itself along with the aggregate value of international transactions and SDT. (Clauses 1-9)
Part B: requiring the taxpayer to provide the details of the international transactions entered into during the Financial Year. (Clauses 10-20)
Part C: requiring the taxpayer to provide the details of SDT entered into during the FY. (Clauses 21-25)
Provisions of international transaction (section 92B )
International transaction means a transaction between two or more associated enterprises, either or both of whom are non-residents. The transaction may be in the nature of purchase, sale of intangible or tangible property or provision of service or any other transaction having bearing on the profits, income, losses or assests of such enterprise.
Specified domestic transactions (section 92BA):-
Any expenditure in respect of which payment has been made to related party i.e. having substantial interest (more than 20% voting power) referred to in section 40 A(2)(b)
- In case of transactions between two related parties of goods and services, only the purchaser is to comply and not the seller
- Only expense side is covered and i.e. only revenue expenditure and not items of income
- any transaction referred to in section 80A (correspond to the market value/arms length price of such goods or services)
- any transfer of goods or services referred to in sub-section (8) of section 80-IA (interunit transfer of goods and services)
- any business transacted between the assessee and other person as referred to in sub-section (10) of section 80-IA (applies to transactions between the assessee and any other person which results in excessive profits in the hands of the assesse)
- any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which provisions of sub-section (8) or sub-section (10) of section 80-IA are applicable.
The above referred specific domestic transactions will be covered under domestic transfer pricing only if the aggregate value of all the above specified transactions exceeds the threshold limit of 20 crore (excluding international transaction)
Form 3CEB requires comments of the Independent Chartered accountant on the following:
- Whether the tax payer has maintained the transfer pricing documentation as required by the legislation,
- Whether as per the transfer pricing documentation the prices of international/SDT transactions are at arm’s length, and
- Value of the international transactions/SDT are as per the books of account and as per the transfer pricing documentation are “true and correct”
In the following paragraphs, summary of each clause and check points for the auditors are mentioned for quick reference:
Part A – General details (Clause 1-9)
Clause 1: Name of assessee Full and complete name In case of change in name, write both new and old name
Clause 2: Address In case of foreign company, provide foreign address
Clause 3: PAN- Permanent Account Number
Clause 4: Nature of business or activities of the assessee Code for nature of business to be filled in as per instructions for filing Form ITR 6
Clause 5: Status Refers to the person defined under Section 2(31) of the Act i.e. Company in our case
Clause 6: Previous Year ended 31 March 2016
Clause 7: Assessment year 2016-17
Clause 8: Aggregate value of international transactions Refers to value of transactions as per books of accounts
Clause 9: Aggregate value of specified domestic transactions
Part-B International transactions
Clause 10: List of associated enterprises with whom the assessee has entered into international transactions.
- Correct legal name of the AE (to be verified from the website / annual report / other documents)
- Nature of relationship - to be specific; reference to clause of 92A(2), verification using shareholding pattern, investment schedule, notes to accounts, etc.
- Refer to register maintained under the companies act
- Details of common directors to evaluate the applicability of deemed AE.
Clause 11
Clause 11A: International transaction(s) in respect of purchase / sale of raw material, consumables or any other supplies for assembling or processing / manufacturing of goods or articles from / to associated enterprises
Clause 11B: International transaction(s) in respect of purchase / sale of traded / finished goods
Clause 11C - Purchase / sale / transfer of any other tangible property or lease of such property – fixed assets
- Verify value and quantitative details from notes to accounts (in addition to AS 18), invoices and ledger accounts
- Customs valuation in case of imports and Standard pricing policy of the group.
- Basis of arriving at the purchase / sale price – Global Pricing policy of the Group
- Verification, using fixed asset schedule.
- New Asset / used asset – Valuation report.
- In case of proprietary asset – basis of arriving at the cost and mark up charged, if any Customs valuation / independent valuer’s report in case of imports
Clause 12 : International transaction(s) in respect of purchase, sale, transfer, lease or use of intangible property including transactions specified in Explanation (i)(b) below section 92B(2)
- Relevant agreements / similar arrangements with other AEs / non AEs
- Computation of royalty as per existing agreement
- External comparables – data available on relevant databases
- Withholding tax certificate and IT Return of foreign enterprise
- Any foreign inward remittance / repatriation of funds certificate
Clause 13 : International transaction(s) in respect of services including transactions as specified in Explanation (i)(d) below section 92B(2)
- Review the agreement(s), invoices, debit notes raised
- Check for CUP i.e., whether services are provided to unrelated parties
- Profitability of the entity / division (AE and Non AE)
Services rendered / availed
Clause 14 : International transaction(s) in respect of lending or borrowing of money including any type of advance, payments, deferred payments, receivable, non-convertible preference shares / debentures or any other debt arising during the course of business as specified in Explanation (i)(c) below section 92B(2)
- Relevant agreement, Internal CUPs, existing borrowing terms, etc
- Rate of interest on independent borrowings by AEs
- Purpose for lending, source of funds in case of lending, i.e. Internal accruals, foreign borrowings, etc
- External CUP - PLR, LIBOR, US FED rates, quotations, etc
Clause 15: International transaction(s) in the nature of guarantee
- Whether guarantee provided in similar manner for other group entities - Check for internal / external CUPs i.e., whether guarantee provided to AEs / non AEs, received from banks- what is the guarantee fees?
- Computation of guarantee fee in case guarantee issued for part of the year
- Even if it is a shareholder guarantee (free of cost), disclosure is mandatory as it is a specific clause.
Clause 16: International transaction(s) in respect of purchase or sale of marketable securities or issue of equity shares including transactions specified in Explanation (i)(c) below section 92B(2)
- Changes in shareholding structure to be closely scrutinised
- Requisite share valuation report
- Certificate of foreign inward remittance / share certificate, etc
- Details of board minutes, shareholders meeting, etc
- Receipt / payment of Share application money also needs to be reported and disclosure is mandatory
Clause 17 : International transaction with an associated enterprise or enterprises by way of 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
- Verification of basis for cost-sharing (relevant agreement), cost details, etc with or without markup
- Whether similar basis applied consistently for other group entities
- Audit certificate for cost allocation if any, obtained by the AE
- Documentary evidence to demonstrate services received / rendered, benefits derived
Clause 18 : International transaction(s) arising out / being part of any business restructuring or reorganization entered into by it with the associated enterprise or enterprises as specified in Explanation (i)(e) below section 92B(2) and which has not been specifically referred to in any other clauses
- Business restructuring is not just merger/amalgamation it could also be change in the business operations, remuneration methodologies, structuring of IP’s etc.
- Verification of basis for restructuring (relevant agreement), reorganisation details, etc.
- Cost benefit analysis (whether restructuring commensurate with benefits derived) Profitability of AE
/ non AE before restructuring, etc
Clause 19: Any other international transaction(s) including a transaction having a bearing on the profits, income, losses or asset but not specifically referred to above, with associated enterprises
- Reimbursements / recovery of expenses
- Goods / services received free of cost
- Other residual transactions not covered in any other clauses
- Other items such as prior period income, reversals of earlier years figures may be covered with special emphasis on ‘Notes’ to explain the same
- Reimbursement / recovery of expenses are at actual cost and do not involve any service, else need to disclose them under relevant clauses
- Verify sample invoices.
Clause 20 : Deemed international transaction -Any transaction with a person other than an AE (third party) in pursuance of a prior agreement in relation to the relevant transaction between such other person and the associated enterprise
- Third party need not be a non-resident it can also be a resident (finance Act, 2015)
- Evidence regarding influence of AE on price, terms of transactions, etc
- Details of prior arrangements / agreements • Details of invoices, debit notes, etc
- Check for CUP i.e., whether goods / services are provided to unrelated parties
Part C- Specified Domestic transactions
Clause 21: List of associated enterprises with whom the assessee has entered into specified domestic transactions
- Correct legal name of the related party (to be verified from the website / annual report) along with PAN details, etc
- Nature of relationship - to be specific; reference to clause of 92BA r.w.s 40A(2)(b), (in addition to AS
18):
- verification using shareholding pattern, investment schedule
- Cross verification with the tax audit 40A(2)(b) clause
Clause 22 : Specified domestic transaction(s) being any expenditure in respect of which payment has been made or is to be made to any person referred to in section 40A(2)(b)
- Verify value and quantitative details from notes to accounts (in addition to AS 18), tax audit report, invoices and ledger accounts, fixed assets schedule, etc
- Service / employment contracts / agreements
- Minutes of board meetings for managerial remuneration
Other relevant documents substantiating expenditure
Clause 23: Specified domestic transaction(s) in the nature of transfer or acquisition of any goods or services by an undertaking or unit or enterprise or eligible business of the assessee [as referred to in section 80A(6), 80IA(8) or section 10AA)] to any other business carried on by the assessee]
- Verify value and quantitative details from notes to accounts (in addition to AS 18), invoices and ledger accounts, fixed assets schedule, etc
- Review the agreement(s), invoices, debit notes raised
- Check for CUP i.e., whether services are provided to unrelated parties
- Profitability of the entity / division (related party / non-related party)
- Inter unit cost allocations are equivalent to ‘expenditure’
Clause 24 : Specified domestic transaction (s) in the nature of any business transacted which has resulted in more than ordinary profits to an eligible business to which section 80IA(10) or section 10AA applies
- Verify value and quantitative details from notes to accounts (in addition to AS 18),
- invoices and ledger accounts, fixed assets schedule, etc
- Review the agreement(s), invoices, debit notes raised
- Check for CUP i.e., whether services are provided to unrelated parties
- Profitability of the entity / division (related party and Non related party)
Clause 25 : Any other specified domestic transaction(s) not specifically referred to above in any other clauses, with an associated enterprise
- Residuary clause – can be used for reimbursement payments
- 80IA claiming (selling) entities to third parties etc
Concluding remarks:
It is regular phenomenon that most of the auditors use CUP method and disclose transactions, without verifying the facts and bench marking analysis. It would be better that it is made a practice to verify the rule 10D documentation and analyse the bench marking and then conclude on the certification or filing of the form 3CEB.The following transactions are often subjected to TP litigation, which the companies and auditors filing form 3CEB have to take care:
- Advertisement, Marketing and Promotion
- Sale/Issue of shares
- Loan / Receivables / Corporate Guarantee -
- Royalty /Management fees
Deemed international transactions
