INTERNATIONAL TRANSFER PRICING AUDITING
In the present age, it is a universal phenomenon that Multinational Companies (MNCs) have branches/subsidiaries/divisions operating in more than one country. So, it is common for MNCs to transfer goods produced or services by a branch in one tax jurisdiction to an associate branch operating in another tax jurisdiction. It is an internationally accepted practice that such transfer pricing should be at Arm’s Length Principle (ALP) i.e. the transaction between the branches or associates should be priced in the same way as a transaction between independent enterprises.
As per Section 92B, an Intenational Transaction means a transaction between two or more associated enterprises, either or both of whom are non residents and the transaction is in nature of
• sale/purchase/lease of tangible or intangible property; or
• provision of services; or
• lending/borrowing money; or
• any other transaction having a bearing on profits, income, losses or assets of such enterprises; or
• mutual agreement or arrangement between two or more associated.
Transfer prices are prices at which an enterprise enters into an transaction with its associated enterprises.
As per Section 92A, Two entities are associated enterprises if one of the entity directly or indirectly participates in the management, control or capital of the other entity or if both entities are under common control.
Specified domestic transaction means any of the transactions as specified in section 92BA but shall not be treated as specified domestic transaction in case the aggregate of such transactions entered into by the assessee in the previous year does not exceed a sum of Rs.20 crore.
Meaning of ARM’S LENGTH PRINCIPLE
Arm’s Length Price of a transaction between two associated entities is the price that would be paid if the transaction had taken place between two comparable independent and unrelated parties, where the consideration is only commercial and there is no conflict of interest in the transaction.
Importance of Arm’s length principle
Parity between MNCs and independent enterprises:
Arm’s Length Price provides parity of tax treatment for MNCs and independent enterprises since it puts them on a more equal footing for tax purposes and avoids the creation of tax advantages and disadvantages that would otherwise distort the relative competitive positions of these entities.
Minimization of double taxation:
Since Arm’s length price is an internationally accepted principle, the potential for double taxation is minimized. This is because adjustment to the transfer price in one tax jurisdiction requires a corresponding adjustment in the other tax jurisdiction.
Determines real taxable profits:
The transfer price adopted by a multinational has a direct bearing on the proportional profit it derives in each country in which it operates .If inadequate or excessive consideration is paid for the transfer of goods, services between the entities, the income calculated will be inconsistent with their relative contributions. The Arm’s length price is required to determine taxable profits in each country
Section 92D: Records to be maintained in case of transfer pricing:
It is the documentation maintained to review transfer pricing arrangements for transactions taking place between different entities of the same group.
Following information and documents are required to be kept and maintained by the assessee:
1. Ownership structure of the assesse entity with details of shares held therein by other entity
2. Description of business and industry in which both entities operates.
3. Nature and terms of international transactions entered into with each of the associated enterprise
4. Description of the functions performed, risks assumed and assets employed or to be employed by the assessee and the other entities
5. Record of economic and market analyses, forecasts, budgets or any other financial estimates prepared by assessee
6. Record of actual working carried out for determining the arm’s length price, including details of comparable data and financial information.
7.The assumptions, policies and price negotiations, if any, which have affected the arm’s length price.
Supporting Documents:
The information provided should be supported by authentic documents.
It may include
01
official publications, reports, studies,
02
report of market research studies,
03
price publications including stock exchange quotations,
04
agreements and contracts entered into with associates entities,
05
letters documenting any terms negotiated between entities,
Audit under section 92E
Every person who enters into an international transaction during a previous year is required to obtain a report from a Chartered Accountant and furnish such report on or before 31st October of the Assessment Year.
The Auditor’s Report shall be in Form No. 3CEB. It requires the auditor to state that he has examined the accounts and records of assessee relating to international transactions entered into by the assessee during the relevant year.
He has also to give his opinion whether the prescribed information and documents relating to above transactions have been kept by the assessee.
The particulars relating to general information and international transactions should be reported in Annexure to the report of CA. These particulars include list of associated enterprises, particulars and description of transactions relating to purchase, sales, provisions of service, loans, advances, etc.
Penalties:
Stringent penalties are provided in various sections for non-compliances.
Penalty for failure to report any international transaction:
Under Section 270A, penalty @50% of tax payable on under-reported income is leviable. However, the amount of under-reported income represented by any addition made in accordance with arm’s length price would not be included in under reported income, where the assessee had maintained information and documents, declared all the international transactions and disclosed all material facts relating to the transaction.
Further, failure to report any international transaction or any transaction deemed to be an international transaction or specified domestic transaction would constitute ‘misreporting of income’, in respect of which penalty @200% would be attracted.
Penalty for failure to keep and maintain information and documentation:
Penalty @2% of the value of each international transaction entered into by assessee, if the person fails to maintain or report any document and information required or maintains or furnishes any incorrect information.
Failure to furnish a report from an accountant as required under section 92E: Rs. 1 lakh.
Failure to furnish information or document as required by Assessing Officer or CIT (A) within 30 days from the date of receipt of notice or extended period not exceeding 30 days, as the case maybe: Penalty @2% of the value of each international transaction.
