India

1. In your jurisdiction, are taxpayers obliged to maintain transfer pricing documentation? Does this obligation apply to all taxpayers, or only to certain categories (e.g. taxpayers with turnover or assets exceeding a particular threshold)?

Yes, in India, every person who has entered into an international transaction or specified domestic transaction must keep and maintain information and documents as specified in Rule 10D of the Income Tax Rules (“Tax Rules”) (as discussed below).

However, if the aggregate value of international transactions as recorded in the books of account of the assessee does not exceed one crore rupees (approximately EUR 137,000) then the documents and information prescribed under Rule 10 are not required to be kept.

Documents and information relating to international transactions must be maintained for a period of eight years from the end of the relevant assessment year.

Section 271AA of the [Indian] Income Tax Act (“Tax Act”) prescribes the penalty for not maintaining information and documents in respect of international transactions and specified domestic transactions.

Under section 271AA of the Tax Act, any person who fails to keep and maintain information in respect of an international transaction or specified domestic transaction, or who fails to report such a transaction, will be liable to pay a penalty of two percent of the value of each international transaction entered into by such person.

2. What is the content of the documentation that must be prepared?

The Tax Rules, by Rule 10D, require the following information and documents to be maintained by person(s) who have entered into international transactions:

  • Description of the ownership structure of the assessee enterprise with details of the shares or other ownership interests held therein by other enterprises;
  • Profile of the multinational group of which the assessee enterprise is a part, along with the name, address, legal status and country of tax residence of each group enterprise with which the assessee has entered into international transactions, and the ownership linkages between them;
  • Broad description of the business of the assessee and the industry in which it operates, and of the business of the associated enterprises with which the assessee has transacted;
  • Nature and terms (including prices) of international transactions entered into with each associated enterprise, details of the property transferred or services provided and the quantum and the value of each such transaction or each class of such transactions;
  • Description of the functions performed, risks assumed and assets employed or to be employed by the assessee and by the associated enterprises involved in the international transaction;
  • Record of the economic and market analyses, forecasts, budgets or any other financial estimates prepared by the assessee for the business as a whole and for each division or product separately, which may have a bearing on the international transactions entered into by the assessee;
  • Record of uncontrolled transactions taken into account for analysing their comparability with the international transactions entered into, including a record of the nature, terms and conditions relating to any uncontrolled transaction with third parties which may be of relevance to the pricing of the international transactions;
  • Record of the analysis performed to evaluate comparability of uncontrolled transactions with the relevant international transaction;
  • Description of the methods considered for determining the arm’s length price in relation to each international transaction or class of transaction and the method selected as the most appropriate, along with explanations as to why it was selected and how it was applied in each case;
  • Record of the actual working carried out for determining the arm’s length price, including details of the comparable data and financial information used in applying the most appropriate method, and the adjustments, if any, which were made to account for differences between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions;
  • Assumptions, policies and price negotiations, if any, which have critically affected the determination of the arm’s length price;
  • Details of the adjustments, if any, made to transfer prices to align them with arm’s length prices determined under these rules and consequent adjustment made to the total income for tax purposes; and
  • Any other information, data or document, including information or data relating to the associated enterprise, which may be relevant for determination of the arm’s length price.

The information mentioned above must be supported by authentic documents as specified below:

  • Official publications, reports, studies and databases from the government of the country of residence of the associated enterprise, or any other country;
  • Reports of market research studies carried out and technical publications brought out by institutions of national or international repute;
  • Price publications including stock exchange and commodity market quotations;
  • Published accounts and financial statements relating to the business affairs of the associated enterprises;
  • Agreements and contracts entered into with associated enterprises or with unrelated enterprises in respect of transactions similar to the international transactions;
  • Letters and other correspondence documenting any terms negotiated between the assessee and the associated enterprise; and
  • Documents normally issued in connection with the various transactions under the accounting practices followed.

a) Which transactions must be documented (all transactions with associated enterprises, or only those which exceed a particular threshold)?

As mentioned above, if the aggregate value of international transactions as recorded in the books of account of the assessee does not exceed one crore rupees (approximately EUR 137,000) then the documents and information prescribed under Rule 10D are not required to be kept.
In such a case the assessee must be able to substantiate, on the basis of material available to it, that the income arising from international transactions it has entered into has been computed in accordance with transfer pricing regulations as prescribed in the Tax Act.

b) What is the definition of “associated enterprises” for the purposes of this requirement?

Section 92A of the Tax Act defines “associated enterprise” as follows:
“… ‘associated enterprise’, in relation to another enterprise,
means an enterprise –

  • which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; or
  • 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.

For the purposes of sub-section (1), two enterprises shall be deemed to be associated enterprises if, at any time during the previous year, –]

  • one enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in the other enterprise; or
  • 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
  • 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
  • one enterprise guarantees not less than ten per cent of the total borrowings of the other enterprise or
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • there exists between the two enterprises, any relationship of mutual interest, as may be prescribed.”

c) For EU countries, is the content of the documentation similar to that described in the EU Code of Conduct on transfer pricing documentation for associated enterprises (“EU TPD”)? If not, are taxpayers entitled to choose between the local requirements and the EU TPD?

Not applicable.

d) Do taxpayers which are not established in your jurisdiction need to undertake to provide any specific information upon request? Can your tax authorities require the taxpayer in your jurisdiction to provide information which is located in another state?

In appropriate circumstances, the Indian tax authorities may issue notice to a non-resident where income chargeable to tax has escaped assessment but has subsequently come to the notice of the assessing officer in the course of proceedings.

In the case of Coca Cola India Inc. v. Assistant CIT, (2009) 1 Comp LJ 460, the High Court of Punjab and Haryana has upheld the validity of a notice issued to a company incorporated under the laws of the USA, requiring it to produce evidence on which the arm’s length price could be determined.

To obtain information located in another country, the Indian tax authorities can request the assistance of foreign tax authorities under the exchange of information provisions of the applicable tax treaty.

e) If comparable studies are to be provided, do the tax authorities generally accept regional benchmark studies (e.g. pan-European benchmark studies)?

Rule 10A of the Tax Rules lays down the principles for comparability of an international transaction with an uncontrolled transaction. An “uncontrolled transaction” means a transaction between enterprises other than associated enterprises, whether resident or non-resident.

In the case of Sony India (P) Limited v. Deputy CIT, [2008]114ITD 448 (Delhi), it was laid down that “the first step in the determination of arms length price is to analyse the specific characteristics of the controlled transaction whether it relates to transfer of goods, services or intangibles. Without proper study of specific characteristics of controlled transaction, no meaningful comparison or location of comparable is possible”.

Therefore, comparables for determining arms length price will depend upon the characteristics of the transaction between associated enterprises.

The comparability of an international, i.e. uncontrolled transaction and a controlled transaction is to be judged under Rule 10B(2) of the Tax Rules with reference to the following:

  • The specific characteristics of the property transferred or services provided in either transaction;
  • The functions performed, taking into account the assets employed or to be employed and the risks assumed, by the respective parties to the transactions;
  • The contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; and
  • Conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail.

Rule 10B(3) of the Tax Rules provides that an uncontrolled transaction will be comparable to an international transaction if –
None of the differences between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or
Reasonably accurate adjustments can be made to eliminate the material effects of such differences.

Pursuant to the selection of comparables, the best method of determining arm’s length price is selected as per the provisions of the Tax Act.

f) What language(s) are to be used by taxpayers in submitting the transfer pricing documentation?

The Tax Rules provide that the report submitted to the assessing officer should be in the English language.

3. What is the deadline or timescale for providing transfer pricing documentation to the tax authorities (is it to be provided for example upon filing of the tax returns, at the beginning of a tax audit, or on the specific request of the tax authorities)?

Under section 92E of the Tax Act, every person who has entered into an international transaction during a previous year must obtain a report from an accountant and furnish such report to the assessing officer. The report must be duly signed and verified by such accountant and must be submitted to the assessing officer in Form 3CEB on or before 30 November.

However, section 92D(3) of the Tax Act also provides that the assessing officer or commissioner (appeals) may, in the course of any proceedings under the Tax Act, require any person who has entered into an international transaction or specified domestic transaction to furnish any information or document with respect to the same.

Pursuant to the notice being received from the assessing officer or commissioner (appeals), the person must submit the information or document required within a period of 30 days from the date of receipt of notice. However, the assessing officer or commissioner (appeals) may, at its sole discretion, grant a further extension of 30 days.

4. In the event that the documentation is not provided within the applicable timescale, or is incomplete, do documentation-related penalties apply in your jurisdiction? If so, please detail the penalties and the circumstances in which they do and do not apply.

Yes, in India there are penalties relating to failure to provide and / or concealment of appropriate documentation within a specified timescale.

Set out below are the penalties imposed upon the assessee for failure to submit documents pertaining to transfer pricing:

  • Concealment of particulars: Section 271 of the Tax Act provides that any person who has concealed the particulars of his income or has furnished inaccurate particulars of such income will be liable for a penalty equal to a sum of three times the amount of tax sought to be evaded by reason of concealment of particulars of his income or furnishing of inaccurate particulars of such income.
  • It is pertinent to note that further explanation to section 271 of the Tax Act provides that in the case of an international transaction or specified domestic transaction, where any amount is added or disallowed by the assessing officer in computing the total income of the assessee, such amount will be deemed to represent the income in respect of which particulars have been concealed or inaccurate particulars have been published. However, the assessee may prove that the computation was done in accordance with the transfer pricing regulations and in good faith and with due diligence.
  • Failure to submit report: Section 271BA of the Tax Act provides that any person who fails to submit a report in form 3CEB to the assessing officer, will be liable to a penalty of one lakh rupees (approximately EUR 1,351).
  • Failure to provide information required by the assessing officer or commissioner (appeals): Section 271G of the Tax Act provides that if any person who has entered into an international transaction or specified domestic transaction fails to furnish any information required by the assessing officer or commissioner (appeals), such person will be liable to pay a penalty of a sum equal to two percent of the value of the international transaction or specified domestic transaction for such failure.

5. Does the absence or incompleteness of documentation reverse the burden of the proof as regards the arm’s length character of the transactions?

Under the Tax Act, where during the course of any proceedings for the assessment of income, the assessing officer or transfer pricing officer (upon reference being made by assessing officer) is, on the basis of material or information or document in his possession, of the opinion that the information or data used in computation of the arm’s length price is not reliable or correct or the assessee has failed to furnish any information or document, the assessing officer may proceed to determine the arm’s length price in relation to the international transaction or specified domestic transaction.

It is pertinent to note that the burden of proof of establishing arm’s length price is primarily on the assessee.

In the case of Maruti Suzuki India Ltd. v. Additional CIT /TPO [2010] 328 ITR 210, the Delhi High Court has held that, “the onus is on the assessee to satisfy the Assessing Officer / TPO that the arm’s length price computed by it is in consonance with the provisions contained in section 92. The Assessing Officer / TPO can reject the price computed by the assessee and determine it only when he finds that the assessee has not discharged the onus placed on it or he finds that the data used by the assessee is unreliable, incorrect or inappropriate …”.

Also, in the case of Aztech Software and Technology Services Limited v. Additional CIT, [2007] 107 ITD 141 (Bang), the Income Tax Appellate Tribunal has held that, “Having regard to above statutory provisions, it is clear that burden to establish that international transaction was carried at ALP is on the taxpayer. He has also to furnish comparable transactions, apply appropriate method for determination of ALP and justify the same by producing relevant material and documents before the revenue authorities. In case revenue authorities are not satisfied with the ALP and the supporting documents / information furnished by the taxpayer, the authorities have ample power to determine the same and make suitable adjustments. In such a situation, as rightly admitted in the ground of appeal by the revenue, this responsibility of determination of ALP is shifted to the revenue authorities who are to determine the same in accordance with statutory regulations.”

6. In the event that the tax authorities (i) impose documentation-related penalties and (ii) make a transfer pricing reassessment, does the imposition of documentation-related penalties prevent the taxpayer from initiating any mutual agreement procedure which may be contained in an applicable tax treaty (or, for EU countries, the procedure contained in the EU Arbitration Convention) with a view to eliminating any double taxation resulting from the transfer pricing reassessment?

India has entered into various double taxation avoidance agreements making provision for a mutual agreement procedure (“MAP”). The MAP can be invoked by the assessee to contest an adjustment. Further, Rule 44 of the Tax Rules lays down the procedure which will be followed by the Central Board of Direct Taxes (which is the competent authority in India and is referred to as the “Board”) for receiving references from the competent authority outside India and resolution of any case under any agreement with regard to any action taken by any income tax authority in India.

In addition to the MAP, which is a post-assessment process, there is now a provision in the Tax Act (Section 92CC) which enables the Board, with the approval of the Central Government of India, to enter into an advance pricing agreement (“APA”) with any person, determining the arm’s length price or specifying the manner in which arm’s length price is to be determined, in relation to an international transaction to be entered into by that person.

An APA scheme may be unilateral, bilateral or multilateral, as explained below:

  • Unilateral – APA entered into between a taxpayer and the tax administration of the country where it is subject to taxation
  • Bilateral – APA entered into between the taxpayers, the tax administration of the host country and the foreign tax administration.
  • Multilateral – APA entered between the taxpayers, the tax administration of the host country and more than one foreign tax administrations. The Indian APA rules allow for all the three types of APAs.

An APA provides certainty on the pricing and / or the transfer pricing methodology to be adopted for the covered inter-company transactions. Further, a bilateral / multilateral APA also eliminates the risk of potential double taxation arising from controlled transactions.
The key advantages of APAs can be summarised as:

  • Certainty with respect to outcome of covered transactions during the APA term
  • Low annual reporting cost
  • Reduction in risk / cost associated with audits and appeals over the APA term
  • Flexibility in developing practical approaches for complex transfer pricing issues
  • APA renewal provides an excellent leverage of time and efforts expended during negotiations for the original APA.

Authors

Rahul R. Mahajan
Fortitude Law Associates