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?
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, 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.