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Indian Transfer Pricing Guidelines: Problem and Solution

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A large share of world trade consists of transfer of goods, intangibles and services within multinational enterprises (MNEs) . From a financial perspective, transfer pricing is probably the most important international tax issue in the world. Over 2/3 of international trade is carried out within multinational enterprises. Commercial transactions between different parts of a multinational group may not be subject to the same market forces shaping relations between two independent firms. Transfer prices- payments from one part of a multinational enterprise for goods or services provided by another- may diverge from market prices for reasons of marketing or financial policy, or to minimize tax.

After liberalization of Indian economy in 1992, participation of multinational groups in economic activities in the country has given rise to new and complex issues emerging from transactions entered into between two or more enterprises belonging to the same multinational group. The profits derived by such enterprises carrying on business in India can be controlled by the multinational group, by manipulating the prices charged and paid in such intra-group transactions, thereby, leading to erosion of tax revenues.

In India, there were no detailed provisions to deal with transfer pricing issues. The Finance Act, 2001 has substituted the existing section 92 of the Income-tax Act by new sections 92 and 92 A to 92F. The TP provisions came into force with effect from April 1, 2002 and are, accordingly, applicable to the assessment year 2002-03 and subsequent years. These new provisions lay down that income arising from an international transaction between associated enterprises shall be computed having regard to the arm's length price . The term 'associated enterprise' has been defined in section 92A . SECTION 92B defines an international transaction between two or more associated enterprises. The provisions contained in section 92C provide for methods to determine the arm's length price in relation to an international transaction, and the most appropriate method to be followed out of the specified methods. While the primary responsibility of determining and applying an arm's length price is on the assessee, sub-section (3) of section 92C empowers the Assessing officer to determine the arm's length price and compute the total income of the assessee accordingly, subject to the conditions provided therein. Section 92D provides for certain information and documents required to be maintained by persons entering into international transactions, and section 92E provides for a report of an accountant to be furnished along with the return of income. The Board have prescribed rules 10A to 10E in the Income-Tax Rules, 1962, giving the manner and the circumstances in which different methods would be applied in determining arm's length price and the factors governing the selection of the most appropriate method. The form of the report of the accountant and the documents and information required to be maintained by the assesses have also been prescribed. The aforesaid provisions have been enacted with a view to provide a statutory framework which can lead to computation of reasonable, fair and equitable profit and tax in India so that the profits chargeable to tax in India do not get diverted elsewhere by altering the prices charged and paid in intra-group transactions leading to erosion of our tax revenues.

Thus, detailed provisions were made for the first time to check erosion of Indian tax revenue. Like the world over, the law on the subject is still evolving in India. The CBDT has also accepted this position as below

"However, this is new legislation. In the initial years of its implementation, there may be room for different interpretations leading to uncertainties with regard to determination of arm's length price of an international transaction. While it would be necessary to protect out tax base, there is a need to ensure that the taxpayers are not put to avoidable hardship in the implementation of these regulations."

During the previous decade, the position of law on transfer pricing changed dramatically world over. Even the judiciary find it difficult to reconcile on many issues. Still the Indian Tax Tribunal has done a remarkable job to fill the gaps of the statutory provisions. So, the TP Provisions were amended from time to time to keep pace with the judicial pronouncements and international developments.

Applicability of TP Provision

In order to proceed with evaluation of transfer pricing implication of inter-company receivables, it is essential to understand that the Indian TP provisions as given under the Income-tax Act, 1961 ('the Act') are applicable, if following conĀ¬ditions are satisfied:

(i) There should be two or more AE's (as defined under section 92A of the Act); and

(ii) These AE's enter into international transacĀ¬tion (as defined under section 92B of the Act).

Definition & Analysis of term 'international transaction'

Section 92B(1) of the Act defines 'international transaction' as

"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 enter-prises, 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".

Thus, based on the above definition, it can be interpreted that the only plausible way to bring receivables overdue from AE's within the purview of TP provision is residuary clause in the definition of 'international transaction' i.e., any other transaction having a bearing on the profits, income, losses or assets of such enterprises. If the rule of ejusdem generis is applied to interpret the residuary clause of section 92B(1), then it becomes



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