Transfer Pricing

​ ​​​​​1.1-'TRANSFER PRICE" AND "TRANSFER PRICING"​​

The expression "Transfer Price" is used in the Act in section 92CE and in Explanation to section 92CB of the Income-Tax Act, 1961 (hereinafter referred to as 'the Act'). The expressions "Transfer Pricing" is used in section 92CA as part of the term "Tran​sfer Pricing Officer". Though these two terms are used in Chapter X of the Act, they are not defined in the Act. The Income-Tax Rules, 1962 ('the Rules') also do not define these terms.

Transfer Price is the actual price charged in a transaction between related entities which are part of the same Multi National Enterprises (MNE) group. The tax rates vary from country to country. So, there is incentive for MNE group to set transfer prices for transactions between its group members such that tax liability for the group as a whole is minimized. This involves setting transfer prices in such a way that less profits are booked in countries with higher tax rates. For example, a company which is a member of group manufactures products in a high tax country. The company would sell them at a low price/ profit to its affiliates/associates in tax haven countries at lower prices/ profits. These prices are lower than the prices that would have obtained had these enterprises been unrelated and dealt at "arm's length" and erode the tax revenues of the host country. Thus, transfer pricing refers to tax avoidance practiced by MNE groups by setting transfer prices of intra group transactions such that these differ from the prices that would be obtained had the group members been unrelated entities dealing at arm's length.

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​​​​2.1-WHEN IS ASSESSEE REQUIRED TO COMPLY WITH TRANSFER PRICING PROVISIONS?

An assessee is required to comply with TP provisions when:

 (i) He has entered into an international transaction [See Para 5] with his associated enterprise [See Para 4] or

 (ii) He enters into a transaction where one of the parties to the transaction is a person located in a notified jurisdictional area (NJA) or

(iii) He enters into a specified domestic transaction (SDT) [See Para​ 6]

2.2-COMPARISON BETWEEN APPLICABILITY OF TRANSFER PRICING PROVISIONS TO INTERNATIONAL TRANSACTIONS AND SDTS

The following are the differences as regards the applicability of Chapter X to International Transactions and Specified Domestic transactions :

Sr No.	Applicability of TP provisions to International Transactions	Applicability of TP provisions to Specified Domestic Transactions
(1)	Applicable to all international transactions irrespective of amount involved.	Applicable to SDTs where aggregate SDTs exceed ₹ 20 crores in a financial year.
(2)	Sections 92 to 92F, except section 92BA, and section 94B are applicable to international transactions.	Sections 92, 92BA, 92C, 92CA, 92D, 92E and 92F applicable to SDTs.
(3)	Section 92CE dealing with secondary adjustment is applicable to ITs.	Section 92CE is not applicable to SDTs
(4)	Advance Pricing Agreements applicable to international transactions	Advance Pricing Agreements are not applicable to SDTs
(5)	Related parties for which TP provisions applicable to international transactions are AEs as defined in section 94A.	Related parties for which TP provisions applicable to SDTs will vary from SDT to SDT and shall be as defined in Rule 10A(a).
(6)	TPO can deal with any international transaction not referred to him by AO but which comes to his notice during the course of the proceedings before him as if the international transaction was referred to him by AO.	In respect of SDTs, TPO's powers under section 92CA are confined to SDTs referred to him by AO.
(7)	TPO can deal with any international transaction not reported in audit report under section 92E but which comes to his notice during the course of the proceedings before him as if the international transaction was referred to him by AO.	TPO cannot deal with any SDT not referred to him by AO notwithstanding that assessee did not report it in audit report under section 92E.
(8)	Where audit report under section 92E not furnished in respect of international transaction, income shall be deemed to have escaped assessment.	Where audit report under section 92E not furnished in respect of any SDT, there is no deeming provision whereby income shall be deemed to have escaped assessment.
(9)	Lending or borrowing money between two associated enterprises comes within the ambit of international transaction and whether the same is at arm's length price has to be considered	Lending or borrowing money between resident 'specified persons' or resident 'associated enterprises' is not SDT. Therefore, notional interest on money loaned by resident assessee to resident 'specified person' or resident 'associated enterprise' is not taxable in terms of transfer pricing provisions.
(10)	Thin capitalisation rules in section 94B apply to International Transactions.	Section 94B has no application to SDTs.

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​3.1-COMPUTATION OF INCOME/EXPENSE ARISING FROM INTERNATIONAL TRANSACTION [SUB-SECTION(1) OF SECTION 92]

Section 92(1) of the Act provides that "Any income arising from an international transaction shall be computed having regard to the arm's length price".

Section 92(1) further clarifies that "the allowance for any expense or interest arising from an international transaction shall also be determined having regard to the arm's length price."

The following points emerge from section 92(1):

  1. All that section 92(1) says is if income arises in an international transaction, the amount of such income will be computed with reference to the Arm's Length price. Section 92 nowhere states that if there is a difference between arm's length price and transaction price in any international transaction, the difference will be deemed to be an income.

  2. Whether income arises or not in an international transaction has to be determined by other provisions of the Act.

  3. If in the light of other provisions of the Act, income arises in an international transaction, Chapter X shall apply and the amount of such income shall be quantified with respect to Arm's Length Price.

  4. If no income arises from an IT or income arising from IT is tax-free under the Act or under any DTAA, TP shall not apply.

  5. TP provisions also apply to computing the allowance for any expense or interest arising from an international transaction. Such allowance shall be determined having regard to Arm's Length Price

  6. "Arm's Length Price" is defined by section 92F

3.1-1-TP provisions not applicable on international transaction being Premium on issue of shares [Instruction No. 2/2015​]

In view of points 1 to 3 above, the Bombay High Court held in Vodafone India Services (P.) Ltd. v. UOI [2015] 53 taxmann.com 286/231 Taxman 645 (Bom.) that the premium on share issue was on account of a capital account transaction and does not give rise to income and, hence, not liable to transfer pricing adjustment.

CBDT has accepted the above decision in Vodafone (supra) vide Instruction No. 2/2015, dated 29-1-2015. CBDT clarified as under:

"In reference to the above cited subject, I am directed to draw your attention to the decision of the High Court of Bombay in the case of Vodafone India Services Pvt. Ltd. for A.Y. 2009-10, wherein the Court has held, inter alia, that the premium on share issue was on account of a capital account transaction and does not give rise to income and, hence, not liable to transfer pricing adjustment.

The Board has accepted the decision of the High Court of Bombay in the above mentioned Writ Petition. In view of the acceptance of the above judgment, it is directed that the ratio decidendi of the judgment must be adhered to by the field officers in all cases where this issue is involved."

3.2-TP PROVISIONS ALSO APPLY TO INCOME/EXPENSE ARISING FROM SDT[SECTION​ 92(2A)]

Section 92(2A) provides that any allowance for an expenditure or interest or allocation of any cost or expense or any income in relation to the specified domestic transaction shall be computed having regard to the arm's length price. Thus, section 92(2A) extends the principle in section 92(1) above which applies to ITs to SDTs also.

3.3-APPORTIONMENT/ALLOCATION OF COST/EXPENSE IN IT/SDT AS PER MUTUAL AGREEMENT/ARRANGEMENT BETWEEN ASSOCIATED ENTERPRISES

Sometimes in an international transaction or specified domestic transaction, two or more associated enterprises enter into a mutual agreement or arrangement for cost sharing. This would be in connection with sharing between AEs of 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 enterprise. Such mutual agreement/arrangement may provide sharing by way of 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 enterprise. In such a case, section 92(2) provides that the cost or expense allocated or apportioned to, or, as the case may be, contributed by, any such enterprise shall be determined having regard to the arm's length price of such benefit, service or facility, as the case may be.

3.4-TP PROVISIONS WILL NOT APPLY WHERE APPLICATION OF ARM'S LENGTH PRICE RESULTS IN REDUCTION OF TAXABLE INCOME

Section 92(3) provides that the provisions shall not apply in a case where the application of arm's length price results in reduction of income chargeable to tax in India. In other words, transfer pricing provisions of section 92 shall be invoked only where it benefits the Revenue and not where it benefits the assessee.

CBDT's Circular No. 8/2002 clarifies that the provisions of section 92 would not be applicable in a case where the application of arm's length price results in reduction of income chargeable to tax in India.

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​​​​4.1-DEFINITION OF 'ENTERPRISE'

In order to satisfy the definition of "Associated Enterprise", the concerned entity and organisation should first satisfy the definition of "enterprise". If it does not satisfy the definition of "enterprise", it cannot be an "associated enterprise"

According to section 92F(iii), "enterprise" means a person (including a permanent establishment of such person) who is, or has been, or is proposed to be, engaged in any of the following activities :

  ♦  any activity, relating to the production, storage, supply, distribution, acquisition or control of articles or goods, or 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

  ♦  the provision of services of any kind, or

  ♦  in carrying out any work in pursuance of a contract, (e.g. construction contract), or

  ♦  in investment, or

  ♦  providing loan, or

  ♦  in the business of acquiring, holding, underwriting or dealing with shares, debentures or other securities of any other body corporate.

Note the following:

  ♦  It does not matter whether such activity or business is carried on, directly or through one or more of its units or divisions or subsidiaries.

  ♦  Also, it does not matter whether such unit or division or subsidiary is located at the same place where the enterprise is located or at a different place or places.

  ♦  According to section 92F(iiia) of the Act, "permanent establishment" includes a fixed place of business through which the business of the enterprise is wholly or partly carried on.

4.2-DEFINITION OF ASSOCIATED ENTERPRISE(AE)

According to section 92A(1), two enterprises are said to be associated enterprises in terms of section 92A(1) if :

(a) One of them participates in the control or management or capital of the other. Such participation may be direct or indirect or through an intermediary [section 92A(1)(a)]; or

(b) Same person(s) participate in the management or control or capital of both the enterprises. Such participation may be directly or indirectly or through one or more intermediaries [section 92A(1)(b)].

The following situations can arise under section 92A(1)(b) :

  ♦  Same person(s) participate directly in one and indirectly in another

  ♦  Participation by the same person(s) in both the enterprises are direct.

  ♦  Participation by the same person(s) in both the enterprises are indirect.

  ♦  Participation by the same person(s) in both the enterprises are through intermediaries.

Section 92A(1)(a) provides for a linear structure. For example, holding company and its subsidiary are AEs. Section 92A(1)(b) provides for a lateral structure. For example, fellow subsidiaries or co-subsidiaries (i.e. subsidiaries of a common holding company) are AEs.

4.3-WHEN WILL TWO ENTERPRISES BE DEEMED TO BE ASSOCIATED ENTERPRISES

The word "deemed to be something" in law means "will be treated as that something for legal purposes even if it is in fact not so".

In terms of section 92A(2), for the purposes of section 92A(1), two enterprises will be deemed to be associated enterprises if any of the conditions in clauses (a) to (m) in section 92A(2) are fulfilled any time during the previous year. It means two enterprises will be treated as AEs if they satisfy any of the criteria in clauses (a) to (m) of section 92A(2) at any time during the previous year even if they do not satisfy the definition in section 92A(1) as discussed in Para 4.1 above

The CBDT has vide Circular No. 8/2002 clarified section 92A(2) as under:

"50.3.1 The Finance Act, 2002 has amended sub-section (2) of section 92A to clarify that where any of the criteria specified in sub-section (2) is fulfilled, two enterprises shall be deemed to be associate enterprises."

4.3-1-26% shareholding with voting rights[Clause(a) of section 92A(2)]

Two enterprisers are AEs if one enterprise holds, directly or indirectly, shares carrying 26% or more of the total voting power of the other enterprise at any time during the previous year [section 92A(2)(a)],

Example 1 - ABC Inc of USA holds 30% of voting power in XYZ (India) Pvt. Ltd. Both these companies are AEs in terms of section 92A(2)(a).

Example 2 - ABC Ltd. of India holds 27% of voting power in PQR plc of UK. Both companies are AEs.

4.3-2-Same person or enterprise holds 26% voting rights in both enterprises[Clause(b) of section 92A(2)]

If any person or enterprise holds, directly or indirectly, shares carrying 26% or more of voting power in both enterprises, then both are associated enterprises [section 92A(2)(b)].

For this clause to apply—

  ♦  both the investee enterprises have to be companies.

  ♦  one person or enterprise simultaneously holds shares carrying 26% or more voting power in each of them.

  ♦  both the enterprises need not hold any shares in each other if they have common 26% or more voting right holders.

  ♦  shareholding may be direct or indirect

Example - ABC Inc of USA holds 30% of voting power in ABC India Ltd. and 34% of voting power in ABC Plc of UK. ABC India Ltd. and ABC Plc. are AEs by virtue of section 92A(2)(b). ABC Inc of USA and ABC India Ltd. are AEs as per section 92A(2)(a). ABC Inc and ABC Plc. are AEs as per section 92A(2)(a).

4.3-3-Lender who advances loan to the extent of 51% or more of the book value of assets of the borrower[Clause(c) of section 92A(2)]

A loan advanced by one enterprise to the other is 51% or more of the book value of the total assets of the other at any time during the previous year, then the borrowing enterprise and lender enterprise are associated persons [section 92A(2)(c)]. The test is whether the loan advanced is 51% or more of the book value of assets of the borrower enterprise and not ​51% or more of the market value of assets of the borrower-enterprise. In this case, 2 otherwise independent enterprises are deemed to be AEs.

Example: XYZ Private Limited, a recently incorporated entity, has obtained a loan of ₹5 crores from PQR Bank for setting up the manufacturing facility. The book value of total assets of XYZ Private Limited is ₹9 crores. XYZ Private Limited is not related to PQR Bank in any way. The loan advanced by PQR Bank (one enterprise)to XYZ Private Limited (the other enterprise) constitutes 55.55% (i.e. more than 51%) of the book value of the total assets of XYZ Private Limited (the other enterprise). Thus, PQR Bank and XYZ Private Limited are deemed to be Associated Enterprises because the extent of loan exceeds 51% of the book value of the assets of XYZ Private Limited.

4.3-4-Substantial guarantor of other enterprise [Clause(d) of section 92A(2)]

If at any time during the previous year, one enterprise guarantees 10% or more of the total borrowings of the other enterprise, both enterprises are associated enterprises.

4.3-5-One enterprise appoints more than 50% of the Board/Governing body of the other enterprises[Clause(e) of section 92A(2)]

If any of the following two conditions are satisfied at any time during the previous year, both enterprises are AEs enterprises :

  ♦  One enterprise appoints more than 50% of directors or members of the Board/Governing body of the other.

  ♦  One enterprise appoints one or more executive directors/executive members of the board/governing body of the other.

The following points are important :

  ♦  Merely having the power to appoint (50% of directors/one or more executive directors) is not enough. Actual exercise of the power is necessary to make both enterprises associated enterprises.

  ♦  It is the enterprise which appoints directors/executive director(s)/ member(s) in the other enterprise here. One of the directors of one enterprise does not make these appointments in the other.

Example - If enterprise A appoints 5 directors on the Board of Enterprise B Ltd. The Board strength of enterprise B Ltd. is 9 directors. Then Enterprise A and Enterprise B Ltd. are associated enterprises.

But if enterprise A only has the power to appoint 50% or more directors in B Ltd. but does not actually exercise that power, then enterprises A and B Ltd. are not associated enterprises.

4.3-6-Same persons appoint more than 50% of directors or any executive director in both enterprises [Clause (f) of section 92A(2)]

If, at any time during the previous year, if same person or persons appoint—

 (a) More than 50% of the directors or members of the governing body in each of the two enterprises; or

 (b) One or more executive directors or executive members of governing body in each of the two enterprises.

In either case, both the enterprises are associated enterprises.

The above gives rise to the following possibilities:

 (a) Same person(s) appoint 50% or more of the directors or members of governing body in each of the two enterprises.

 (b) Same person(s) appoint one or more executive directors or executive members in the board/governing body of each of the two enterprises.

4.3-7-One enterprise is 100% dependent on the exclusive rights of the other [Clause (g) of section 92A(2)]

Both enterprises are deemed to be AEs in relation to each other if :

  ♦  at any time during the previous year,

  ♦  the manufacturing or processing of goods or articles or business of one enterprise is wholly dependent on the intangible assets of the other.

In other words, one enterprise is wholly dependent on the use of knowledge, patents, copyrights, trade mark, licenses, franchises or similar business or commercial rights or any data, documentation, drawings or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or over which the other enterprise has exclusive rights. Section 92A(2)(g) applies only if the manufacture or processing of or business carried out by one enterprise is wholly dependent upon the intangible assets of the other. That is, if an enterprise manufactures more than one article or thing and it uses the know-how of the other for one article or thing, manufacture of all the articles or goods carried out by the first enterprise is not wholly dependent on the intangible asset of the other enterprise and hence section 92A(2)(g) does not apply here.

4.3-8-90% supply coupled with price influence[Clause (h) of section 92A(2)]

Both enterprises are deemed to be AEs in relation to each other if, at anytime during the previous year,

  ♦  90% or more the raw materials and consumables required by one enterprise for manufacturing/processing carried out by it are supplied by the other enterprise or by persons specified by the other enterprise and

  ♦  prices and other conditions relating to supply are influenced by the other enterprise.

For this clause to apply, both conditions must be fulfilled :

(a) 90% or more of the raw materials and consumables required for manufacturing or processing by an enterprise are supplied by :

   ♦  the other enterprise or

   ♦  persons specified by the other enterprise; and

(b) the other enterprise influences prices and other conditions related to supply.

4.3-9-Customer who influences the price and other conditions[Clause (i) of section 92A(2)]

Both enterprises are deemed to be AEs in relation to each other if, at any time during the previous year : (i) the goods or articles manufactured or processed by one enterprise, are sold to the other enterprise or persons specified by the other enterprise, and (ii) the prices and other conditions relating thereto are influenced by such other enterprise.

Note the following:

  ♦  Sale of manufactured or processed goods is only covered by this clause. Sale of traded goods is not covered

  ♦  If the enterprise, which buys the goods manufactured or processed by another, influences the price and other terms of the transaction, both enterprises are associated enterprises.

4.3-10-Enterprises controlled by an individual or his relatives [Clause (j) of section 92A(2)]

Both enterprises are deemed to be AEs in relation to each other if, at anytime during the previous year, one enterprise is controlled by an individual, the other enterprise is also controlled by such individual or his relatives or jointly by such individual and relative of such individual. This clause covers the following situations :

  (i) One enterprise is controlled by an individual and the other is also controlled by that individual.

 (ii) One enterprise is controlled by an individual. His relatives control the other enterprise.

(iii) One enterprise is controlled by an individual. The other is jointly controlled by that individual and his relative/(s).

Relative means the husband, wife, brother, sister, any linear ascendant or descendant of an individual [section 2(41) of the Act].

4.3-11-Control by HUF and its members and their relatives[Clause (k) of section 92A(2)]

Both enterprises are deemed to be AEs in relation to each other if,

  ♦  at any time during the previous year,

  ♦  one enterprise is controlled by a Hindu Undivided Family,

  ♦  the other enterprise is controlled by (i) a member of such HUF, or (ii) by a relative of a member of such HUF, or (iii) jointly by such member and his relative.

4.3-12-Enterprise holds 10% or more interest in a firm/AOP/BOI[Clause (l) of section 92A(2)]

Both enterprises are deemed to be AEs in relation to each other if, at anytime during the previous year, if one enterprise is a firm/AOP/BOI and the other enterprise holds 10% or more interest in such firm/AOP/BOI.

The following points are important:

  ♦  For this purpose, it may be noted that as per section 2(23) of the Act, "firm" includes limited liability partnership registered under the LLP Act, 2008 (i.e. Indian LLP).

  ♦  This clause will not apply to foreign LLPs - i.e. LLPs incorporated abroad.

4.3-13-Prescribed Mutual Interest [Clause (m) of section 92A(2)]

There exists between two enterprises, any relationship of mutual interest, as may be prescribed (by CBDT) [Section 92A(2)(m)]. So far, no relationship of mutual interest has been prescribed by CBDT for the purposes of clause(m).

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​​​​5.1-DEFINITION OF INTERNATIONAL TRANSACTION [SECTION 92B]

Section 92B defines "international transaction". The definition of "international transaction" in section 92B(1) has the following ingredients:

  ♦  It is a "transaction" as defined in section 92F(v) [Para 5.2]

  ♦  The transaction is between two or more Associated Enterprises(AEs) as defined in section 92A[Para​ 4] or is deemed to be between 2 or more AEs under the provisions of section 92B(2)[Para 5.4]

  ♦  Either or both of these associated enterprises should be non-residents.[Para 5.3]

  ♦  Transaction should be in the nature of :

   (i) Purchase, sale or lease of tangible property [Para 5.6]

  (ii) Purchase, sale or lease of intangible property [Para 5.7]

  (iii) Provision of services [See Para 5.8]

 (iv) Lending or borrowing of money [Para 5.9]

  (v) Any other transaction having a bearing on profits, incomes, losses or assets of such enterprises

 (vi) A mutual arrangement or agreement between two or more enterprises for allocation or apportionment of or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service, facility provided or to be provided to any one or more of such enterprises. [Para 5.10]

Section 92B(2) provides as to when a transaction with an independent party shall be deemed to be a transaction between two AEs - i.e. where an independent third party may be interposed between two associated enterprises to avoid the transfer pricing provisions of the Act [Para 5.4]

The Explanation to section 92B inserted with retrospective effect from 1-4-2002 by Finance Act, 2012 brings certain transactions within the scope of 'international transactions' and also defines the expression 'intangible property' [Para 5.5]

As can be seen from the definition in section 92B(1), "international transaction "means a transaction between two or more associated enterprises. Hence, a transaction with an overseas company will not be an international transaction if assessee and that overseas company are not AEs and the transaction would not be subject to Transfer Pricing provisions of chapter X.

5.2-DEFINITION OF TRANSACTION

The definition of the word 'transaction' in section 92F(v is an inclusive one. The term "transaction" includes an arrangement, understanding or action in concert, irrespective whether it is formal or in writing; or whether or not it is intended to be enforceable by legal proceedings.

The definition of 'transaction' in section 92F(v) is an inclusive definition. Therefore, its normal connotation in ordinary commercial parlance is not excluded by the definition. In its ordinary commercial parlance, transaction involves a dealing between two distinct persons. No person can deal with himself. Therefore, an inter-branch 'transaction' is not a transaction much less an international transaction,

5.3-TRANSACTION BETWEEN TWO OR MORE AEs EITHER OR BOTH ARE NON-RESIDENTS

In order to qualify as 'international transaction' :

  ♦  the transaction should be between 2 or more associated enterprises or the transaction should be deemed to be between 2 or more AEs; and

  ♦  either or both or all of them (associated enterprises) should be non-resident.

Where both assessee and its AEs with whom it had undertaken transactions were residents in terms of Indian tax laws, any transaction between them would not constitute international transaction.

5.4-'DEEMED INTERNATIONAL TRANSACTION' [SECTION 92B(2)]

Sometimes, an independent third party may be interposed between 2 associated enterprises to avoid the transfer pricing provisions of the Act. Section 92B(2) is intended to cover such cases.

According to section 92B(2), a transaction between an enterprise and a person other than an associated enterprise (i.e. independent third party)shall be deemed to be an international transaction entered into between associated enterprises in the following circumstances:

 (a) if there exists a prior arrangement in relation to the transaction between such other person and the associated enterprise; or

 (b) the terms of the relevant transaction are determined, in substance, between such other person and the associated enterprise.

Example 1

LMN Group, a MNE group, is very particular about the quality of their products. To maintain the quality, they have designated (third party) "authorized vendors" who provide the raw material of standard quality. The terms in respect of quality, quantity and price are pre-negotiated and pre-decided by LMN Group centrally. LMN India purchases the raw material from the authorized vendors. In this case, the actual transaction is between LMN India and Third Party authorized vendor. However, since the terms of the transaction are determined in substance between the authorized vendors (such other person) and LMN Group (the Associated Enterprise), such purchases would be deemed an international transaction by virtue of section 92B(2).

In order for a transaction falling within section 92B(2) to qualify as international transaction, independent third party should be interposed between 2 AEs either or both of whom are non-residents. If both AEs are resident, merely because independent third party is interposed between them as envisaged in section 92B(2) will not make the transaction an international transaction.

For the operation of section 92B, it is not necessary that the terms and conditions of the relevant transactions are finalized in all respects in the prior agreement. So long as the terms of the relevant transaction are determined "in substance" between such other person and the associated enterprise it is sufficient. The words "in substance" indicate quite clearly that each transaction would have to be considered on its own facts. In other words, the authorities would have to consider whether the terms and conditions of a particular relevant transaction were determined "in substance" between the other person and the associated enterprise.

5.5-THE SCOPE OF THE EXPLANATION TO SECTION 92B CLARIFYING 'INTERNATIONAL TRANSACTION'

The Finance Act, 2012 inserted new Explanation (i) with retrospective effect from 1-4-2002 to clarify the meanings of 'international transaction'.

The said new Explanation (i) reads as under:

'Explanation.—For the removal of doubts, it is hereby clarified that—

  (i) the expression "international transaction" shall include—

  (a) the purchase, sale, transfer, lease or use of tangible property including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing;

  (b) the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know-how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature;

  (c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;

  (d) provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service;

  (e) a transaction of business restructuring or reorganisation, entered into by an enterprise with an associated enterprise, irrespective of the fact that it has bearing on the profit, income, ​losses or assets of such enterprises at the time of the transaction or at any future date;

5.6-TRANSACTIONS IN TANGIBLE PROPERTY WHICH ARE EXPRESSLY INCLUDED WITHIN THE SCOPE OF "INTERNATIONAL TRANSACTION"

In terms of Explanation (i)(a), "international transaction" shall include "the purchase, sale, transfer, lease or use of tangible property including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing".

Thus, following transactions relating to tangible property fall within the ambit of the expression "international transaction":

  ♦  purchase of tangible property

  ♦  sale of tangible property

  ♦  transfer of tangible property

  ♦  lease of tangible property

  ♦  use of tangible property

Tangible property includes:

  ♦  building,

  ♦  transportation vehicle,

  ♦  machinery,

  ♦  equipment,

  ♦  tools,

  ♦  plant,

  ♦  furniture,

  ♦  commodity or

  ♦  any other article, product or thing.

The definition of 'tangible property' is an inclusive definition and not exhaustive.

The items listed above are specifically included in the definition of "tangible property". In addition, "tangible property" would cover all such things covered in its common connotation.

In common parlance, Tangible means having or possessing physical form, capable of being ​touched and seen. Computer data, software, and systems do not have or possess physical form and are therefore not tangible property.

5.7-INTANGIBLE PROPERTY TRANSACTIONS WHICH ARE INTERNATIONAL TRANSACTIONS

In terms of Explanation (i)(b) "international transaction" shall include "the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know-how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature".

Thus, following transactions relating to intangible property fall within the ambit of the expression "international transaction":

  ♦  purchase of intangible property

  ♦  sale of intangible property

  ♦  transfer of intangible property

  ♦  lease of intangible property

  ♦  use of intangible property

  ♦  the transfer of ownership or the provision of use of rights regarding:

   _ brand,

   _ commercial secret,

   _ copyrights,

   _ customer list,

   _ exterior design or practical and new design or

   _ franchises,

   _ industrial property right,

   _ know-how,

   _ land use,

   _ licences,

   _ marketing channel,

   _ patents,

   _ trademarks,

   _ any other business or commercial rights of similar nature.

Clause (ii) of Explanation inserted by Finance Act, 2012 with retrospective effect from 1-4-2002 defines 'intangible property'. Accordingly, 'intangible property' shall include the following as per the Table given below:

Sr No	Intangible property	Examples
(a)	marketing related intangible assets	♦  brand names,   ♦  logos   ♦  trade names,   ♦  trademarks
(b)	technology related intangible assets	♦  patent applications,   ♦  process patents,   ♦  technical documentation such as laboratory notebooks,   ♦  technical know-how
(c)	artistic related intangible assets	♦  copyrights   ♦  engravings,   ♦  literary works and copyrights,   ♦  maps,   ♦  musical compositions,
(d)	data processing related intangible assets	♦  automated databases,   ♦  integrated circuit masks and masters,   ♦  proprietary computer software,   ♦  software copyrights,
(e)	engineering related intangible assets	♦  blueprints,   ♦  engineering drawing and schematics,   ♦  industrial design,   ♦  product patents,   ♦  proprietary documentation,   ♦  trade secrets
(f)	customer related intangible assets	♦  customer lists,   ♦  customer contracts,   ♦  customer relationship,   ♦  open purchase orders,
(g)	contract related intangible assets	♦  favourable supplier   ♦  contracts,   ♦  licence agreements,   ♦  franchise agreements,   ♦  non-compete agreements,
(h)	human capital related intangible assets	♦  employment agreements,   ♦  trained and organised work force   ♦  union contracts
(i)	location related intangible assets	♦  air rights,   ♦  easements,   ♦  leasehold interest,   ♦  mineral exploitation rights,   ♦  water rights,
(j)	goodwill related intangible assets	♦  celebrity goodwill,   ♦  general business going concern value,   ♦  institutional goodwill,   ♦  personal goodwill of professional,   ♦  professional practice goodwill,
(k)	methods, systems, procedures etc	♦  campaigns,   ♦  estimates,   ♦  forecasts,   ♦  methods,   ♦  procedures,   ♦  programmes,   ♦  studies,   ♦  surveys   ♦  systems,   ♦  technical data
(l)	other similar items	any other similar item that derives its value from its intellectual content rather than its physical attributes.

5.8-DEFINITION OF PROVISION OF SERVICES

According to Explanation (i)(d), "international transaction" shall include provision ​of services, including provision of:

  ♦  Accounting service,

  ♦  Administration,

  ♦  Agency,

  ♦  Consultation,

  ♦  Design,

  ♦  Legal service,

  ♦  Market development,

  ♦  Market research,

  ♦  Marketing management,

  ♦  Repairs,

  ♦  Scientific research,

  ♦  Technical service.

Thus, the definition of provision of services in Explanation (i)(d) is not exhaustive. The expression 'services' have neither been defined under the Act nor under the Rules. Therefore, the expression 'services' will also cover everything which is a service in its ordinary common connotation. In common parlance, service is any economic activity that does not result in production of a tangible commodity. Thus, the chief characteristic of 'service' is its intangible character.

5.9-BORROWING OR LENDING OF MONEY

In terms of section 92B(1), borrowing or lending of money is an international transaction provided ingredients of section 92B(1) are satisfied. By virtue of Explanation (i)(c), "international transaction" shall include :

  ♦  capital financing, including any type of long-term or short-term borrowing, lending or guarantee,

  ♦  purchase or sale of marketable securities or

  ♦  any type of advance, payments or deferred payment or receivable or

  ♦  any other debt arising during the course of business

5.10-COST CONTRIBUTION AGREEMENTS (CCA)

Section 92B(1) of the Act refers to:

  ♦  a mutual arrangement or agreement

  ♦  between two or more enterprises

  ♦  for allocation or apportionment of or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service, facility provided or to be provided to any one or more of such enterprises.

5.11-TRANSACTION OF BUSINESS RESTRUCTURING OR REORGANISATION

According to Explanation (i)(e) to section 92B​, "International Transaction" shall include a transaction of business restructuring or reorganisation, entered into by an enterprise with an associated enterprise. This is irrespective of whether it has bearing on the profit, income, ​losses or assets of such enterprises at the time of the transaction or at any future date.

​

​​​​​7.1-ARM'S LENGTH PRICE - STATUTORY DEFINITION​

Arm's Length Price is defined as:

  ♦  a price applied or proposed to be applied

  ♦  in a transaction between persons other than associated enterprises

  ♦  in uncontrolled conditions.

[Section 92F(ii)].

Computation of ALP by a prescribed method under section 92C and justifying that it is the Most Appropriate Method and is correctly applied, is very cumbersome and tedious. To enable ease of doing business, there is what is known as Advance Price Agreements for international transactions. This facility is not available for SDTs.

The Explanatory Memorandum to the Finance Bill, 2012 explains the concept of Advance Pricing as under:

"Advance Pricing Agreement is an agreement between a taxpayer and a taxing authority on an appropriate transfer pricing methodology for a set of transactions over a fixed period of time in future. The APAs offer better assurance on transfer pricing methods and are conducive in providing certainty and unanimity of approach."

Where taxpayer has entered into APA, the ALP will be as agreed in APA. In other cases, taxpayer will have to justify that method he has chosen for computing ALP is the Most Appropriate Method

7.2-METHODS FOR DETERMINATION OF ALP

According to section 92C(1), the arm's length price in relation to an international transaction or specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe( Rules 10A, 10AB, 10B, 10C and 10CA), namely

  (i) Comparable Uncontrolled Price Method (CUP method) [Para 7.5]

 (ii) Resale Price Method (RPM) [Para 7.6]

(iii) Cost Plus Method (CPM) [Para 7.7]

(iv) Profit Split Method (PSM) [Para 7.8]

 (v) Transactional Net Margin Method (TNMM) [Para 7.9]

(vi) Any other method prescribed by CBDT. - CBDT has specified" any other method" by notifying rule 10AB w.e.f. 23-5-2012 [Para 7.10]

Thus,

(a) ALP for international transaction/SDT has to be computed in accordance with any of the six prescribed methods as above .

(b) The method chosen should be the most appropriate method having regard to:

  ♦  the nature of transaction or class of transaction or

  ♦  class of associated persons or functions performed by such persons or

  ♦  such other relevant factors as the CBDT may prescribe( Rules 10A, 10AB, 10B, 10C and 10CA)

Section 92C(2) provides as under:

  ♦  the most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed :

  ♦  where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices [first proviso to section 92C(1)]

  ♦  if the variation between the arm's length price so determined and price at which the international transaction or specified domestic transaction has actually been undertaken does not exceed such percentage not exceeding three per cent of the latter, as may be notified by the Central Government in the Official Gazette in this behalf, the price at which the international transaction or specified domestic transaction has actually been undertaken shall be deemed to be the arm's length price prices [second proviso to section 92C(1)]

Notification S.O.2777(E) No.70/2022, dated 26-6-2023, specifies SHR for Assessment year 2022-23. Accordingly, where the variation between the arm's length price determined under section 92C of the said Act and the price at which the international transaction or specified domestic transaction has actually been undertaken does not exceed one per cent. of the latter in respect of wholesale trading and three per cent of the latter in all other cases, the price at which the international transaction or specified domestic transaction has actually been undertaken shall be deemed to be the arm's length price for assessment year 2023-2024.

For the purposes of this notification, "wholesale trading" means an international transaction or specified domestic transaction of trading in goods, which fulfils the following conditions, namely:-

  ♦  purchase cost of finished goods is eighty per cent. or more of the total cost pertaining to such trading activities; and

  ♦  average monthly closing inventory of such goods is ten per cent. or less of sales pertaining to such trading activities.

  ♦  Where more than one price is determined by the most appropriate method, the arm's length price in relation to an international transaction or specified domestic transaction undertaken on or after the 1st day of April, 2014, shall be computed in such manner as may be prescribed and accordingly the first and second proviso shall not apply. [third proviso to section 92C(1)]

The third proviso as above provides for the Range Concept for determination of Arm's Length Price. Accordingly, where more than one price is determined by the most appropriate method, the arm's length price in relation to an international transaction or specified domestic transaction undertaken on or after the 1st day of April, 2014, shall be computed in such manner as may be prescribed and accordingly the first and second proviso shall not apply.

The salient features of Rule 10CA dealing with range concept are as follows:

  (i) The "Range" concept shall be used only in case the method used for determination of ALP is Transactional Net Margin Method (TNMM),Resale Price Method (RPM) or Cost Plus Method (CPM).

 (ii) The following steps would be required to construct the range:—

  (a) A minimum of 6 entities are required to be selected as comparable entities of the tested party, based on the similarity of their functions, assets and risks (FAR) with that of the tested party;

  (b) 3-year data of these 6 entities (or more) would be considered and the weighted average of such 3-year data of each company would be used to construct the data set. In certain circumstances, data of 2 out of 3 years could also be used. Thus, the data set or series would have a minimum of 6 data points;

  (c) For calculating the weighted average, the numerator and denominator of the chosen Profit Level Indicator (PLI) would be aggregated for all the years for every comparable entity and the margin would be computed thereafter; and

  (d) The data points lying within the 35th to 65th percentile of the data set of series would constitute the range.

(iii) If the transfer price of the tested party falls outside the range as constructed above, the median of the range would be taken as ALP and adjustment to transfer price shall be made. If the transfer price is within the range no adjustment shall be made. There shall not be two different data sets - one for testing and one for making adjustments.

(iv) In cases where 'range' concept does not apply, the arithmetic mean concept shall continue to apply along with benefit of tolerance range. Further, in cases where multiple year data is to be used, the same would apply whether "range" concept is used or arithmetic mean is used for determining the ALP. Therefore, in such cases the arithmetic mean of the multiple year data of comparable will be considered for computation of ALP.

Rule 10CA deals with use of 'range' concept for determining ALP under RPM, CPM and TNMM methods If in respect of an international transaction or a specified domestic transaction, the application of the most appropriate method referred to in sub-section (1) of section 92C results in determination of more than one price, then the arm's length price in respect of such international transaction or specified domestic transaction shall be computed in accordance with the provisions of this rule.[Rule 10CA(1)]

A dataset shall be constructed by placing the prices referred to in sub-rule(1) in an ascending order and the arm's length price shall be determined on the basis of the dataset so constructed. [Rule 10CA(2)]

In a case referred to in clause (i) of sub-rule (5) of rule 10B, where the comparable uncontrolled transaction has been identified on the basis of data relating to the current year and the enterprise undertaking the said uncontrolled transaction, [not being the enterprise undertaking the international transaction or the specified domestic transaction referred to in sub-rule (1)], has in either or both of the two financial years immediately preceding the current year undertaken the same or similar comparable uncontrolled transaction then,—

  (i) the most appropriate method used to determine the price of the comparable uncontrolled transaction undertaken in the current year shall be applied in similar manner to the comparable uncontrolled transaction or transactions undertaken in the aforesaid period and the price in respect of such uncontrolled transactions shall be determined; and

 (ii) the weighted average of the prices, computed in accordance with the manner provided in sub-rule (3), of the comparable uncontrolled transactions undertaken in the current year and in the aforesaid period preceding it shall be included in the dataset instead of the price referred to in sub-rule (1) [1st Proviso to Rule 10CA(2)]

In a case referred to in clause (ii) of sub-rule (5) of rule 10B, where the comparable uncontrolled transaction has been identified on the basis of the data relating to the financial year immediately preceding the current year and the enterprise undertaking the said uncontrolled transaction,[not being the enterprise undertaking the international transaction or the specified domestic transaction referred to in sub-rule (1)], has in the financial year immediately preceding the two financial years undertaken the same or similar comparable uncontrolled transaction then,—

 (i) the price in respect of such uncontrolled transaction shall be determined by applying the most appropriate method in a similar manner as it was applied to determine the price of the comparable uncontrolled transaction undertaken in the financial year immediately preceding the current year; and

(ii) the weighted average of the prices, computed in accordance with the manner provided in sub-rule (3), of the comparable uncontrolled transactions undertaken in the aforesaid period of two years shall be included in the dataset instead of the price referred to in sub-rule (1) [2nd Proviso to Rule 10CA(2)]

Where the use of data relating to the current year in terms of the proviso to sub-rule (5) of rule 10B establishes that,—

 (i) the enterprise has not undertaken same or similar uncontrolled transaction during the current year ; or

(ii) the uncontrolled transaction undertaken by an enterprise in the current year is not a comparable uncontrolled transaction, then, irrespective of the fact that such an enterprise had undertaken comparable uncontrolled transaction in the financial year immediately preceding the current year or the financial year immediately preceding such financial year, the price of comparable uncontrolled transaction or the weighted average of the prices of the uncontrolled transactions, as the case may be, undertaken by such enterprise shall not be included in the dataset. [3rd Proviso to Rule 10CA(2)]

Where an enterprise has undertaken comparable uncontrolled transactions in more than one financial year, then for the purposes of sub-rule(2) the weighted average of the prices of such transactions shall be computed in the following manner, namely:—

 (i) where the prices have been determined using the method referred to in clause (b) of sub-rule (1) of rule 10B, the weighted average of the prices shall be computed with weights being assigned to the quantum of sales which has been considered for arriving at the respective prices;

(ii) where the prices have been determined using the method referred to in clause (c) of sub-rule (1) of rule 10B, the weighted average of the prices shall be computed with weights being assigned to the quantum of costs which has been considered for arriving at the respective prices;

(iii) where the prices have been determined using the method referred to in clause (e) of sub-rule (1) of rule 10B, the weighted average of the prices shall be computed with weights being assigned to the quantum of costs incurred or sales effected or assets employed or to be employed, or as the case may be, any other base which has been considered for arriving at the respective prices. [Rule 10CA(3)]

Sub-rules (4) to (6) of Rule 10CA deal with Arm's Length Range Concept as under:

  ♦  Where the most appropriate method applied is a method other than the method referred to in clause (d) or clause (f) of sub-section (1) of section 92C and the dataset constructed in accordance with sub-rule (2) consists of six or more entries, an arm's length range beginning from the thirty-fifth percentile of the dataset and ending on the sixty-fifth percentile of the dataset shall be constructed and the arm's length price shall be computed in accordance with sub-rule (5) and sub-rule (6). [Rule 10CA(4)]

  ♦  If the price at which the international transaction or the specified domestic transaction has actually been undertaken is within the arm's length range as above, then, the price at which such international transaction or the specified domestic transaction has actually been undertaken shall be deemed to be the arm's length price. [Rule 10CA(5)]

  ♦  If the price at which the international transaction or the specified domestic transaction has actually been undertaken is outside the arm's length range as above, the arm's length price shall be taken to be the median of the dataset. [Rule 10CA(6)]

Rule 10CA(8) defines the terms "35th percentile", "65th percentile" and "median" as under :

(a) "the thirty-fifth percentile" of a dataset, having values arranged in an ascending order, shall be the lowest value in the dataset such that atleast thirty-five per cent of the values included in the dataset are equal to or less than such value :

If the number of values that are equal to or less than the aforesaid value is a whole number, then the thirty-fifth percentile shall be the arithmetic mean of such value and the value immediately succeeding it in the dataset;

(b) "the sixty-fifth percentile" of a dataset, having values arranged in an ascending order, shall be the lowest value in the dataset such that atleast sixty five per cent of the values included in the dataset are equal to or less than such value.

If the number of values that are equal to or less than the aforesaid value is a whole number, then the sixty-fifth percentile shall be the arithmetic mean of such value and the value immediately succeeding it in the dataset;

(c) "the median" of the dataset, having values arranged in an ascending order, shall be the lowest value in the dataset such that at least fifty per cent of the values included in the dataset are equal to or less than such value :

If the number of values that are equal to or less than the aforesaid value is a whole number, then the median shall be the arithmetic mean of such value and the value immediately succeeding it in the dataset.

The application of the above methods and selection of the most appropriate method to compute shall be in accordance with Rules 10A to 10C :

Rule	Deals with
10A	Meaning of expressions used in computation of arm's length price
10AB	Other method
10B	Determination of arm's length price under section 92C​ (methods of computation of ALP)
10C	Most Appropriate Method

The following points are noteworthy:

  ♦  Rule 10B(1) elaborates on the application of the methods for determining ALP. [See Paras 7.5 to 7.10]. For applying the methods, comparable uncontrolled transactions need to be identified. [See Para 7.3]

  ♦  Rule 10B(2) specifies criteria for judging comparability of uncontrolled question with international transaction or SDT in question.[See Para 7.4]

  ♦  Rule 10B(3) specifies when an uncontrolled transaction shall be regarded as comparable to an international transaction or SDT.[Para 7.4]

  ♦  Rule 10B(4) deals with data to be used in analyzing comparability of transaction. [Para 7.4]

  ♦  Sub-rules (2) to (4) of rule 10B as above deal with what is termed as 'comparability analysis'

  ♦  Rule 10C specifies the criteria for selecting the Most Appropriate Method from methods at (i) to (vi) above for calculation of ALP. [See Para 7.11]

7.3-UNCONTROLLED TRANSACTION

  ♦  According to Rule 10A(ab), "uncontrolled transaction" means a transaction between enterprises other than associated enterprises, whether resident or non-resident.

  ♦  According to Rule 10A(d), "transaction" includes a number of closely linked transactions.

Thus,

  ♦  an uncontrolled transaction is a transaction between independent enterprises.

  ♦  Such independent enterprise may be resident or non-resident.

Thus, uncontrolled transaction can be between:

  ♦  a resident enterprise and a non-resident enterprise,

  ♦  two resident enterprises,

  ♦  two non-resident enterprises.

Uncontrolled transaction will cover :

  ♦  transaction between non-AEs (i.e. between related/independent/arm's length enterprises); and

  ♦  transaction between an associated enterprise and an unrelated/independent/non-associated enterprise.

Example : A and B are associated enterprises. C and D are independent parties(non-associated). Transaction between C and D is uncontrolled transaction as both A and B are concerned. Transaction between A and C/A and D are uncontrolled transactions as far as B is concerned. Transaction between B and C/B and D are uncontrolled transactions as far as A is concerned.

7.4-COMPARABILITY ANALYSIS

Comparability analysis is the process of comparing economically relevant characteristics in a related party transaction with those in independent party transactions (uncontrolled transactions). This involves an examination of the factors affecting the related party transaction that are non-existent in transactions between independent parties and vice versa. After analysing these differences, adjustments will have to be made to the price of uncontrolled transaction . These adjustments for differences are known as comparability adjustments.

Rule 10B(2) provides that for the purposes of sub-rule (1) (i.e. application of methods for determination of ALP), comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:—

(a) the specific characteristics of the property transferred or services provided in either transaction;

(b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions (i.e. FAR Analysis)

(c) 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;

(d) 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) provides that an uncontrolled transaction shall be comparable to an international transaction or a specified domestic transaction if—

  ♦  none of the differences, if any, 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.

The following points emerge:

  ♦  If there are no differences in the above respects or differences are not material in terms of their likely effect on prices/costs and profits, the transactions are straightway comparable.

  ♦  If there are material differences, which can be adjusted with reasonable accuracy, then transactions are comparable subject to adjustments

  ♦  If differences cannot be adjusted with reasonable accuracy, the uncontrolled transaction is to be ignored and fresh search for a comparable uncontrolled transaction would begin all over again.

Rule 10B(4) provides that the data to be used in analysing the comparability of an uncontrolled transaction with an international transaction or a specified domestic transaction shall be the data relating to the financial year[(hereafter in this rule and in rule 10CA referred to as the 'current year')] in which the international transaction or the specified domestic transaction has been entered into:

Rule 10B(5) provides that in a case where the most appropriate method for determination of the arm's length price of an international transaction or a specified domestic transaction, entered into on or after the 1st day of April, 2014, is RPM, CPM or TNMM, then, notwithstanding anything contained in sub-rule (4), the data to be used for analysing the comparability of an uncontrolled transaction with an international transaction or a specified domestic transaction shall be,—

  (i) the data relating to the current year ; or

 (ii) the data relating to the financial year immediately preceding the current year, if the data relating to the current year is not available at the time of furnishing the return of income by the assessee, for the assessment year relevant to the current year:

However, where the data relating to the current year is subsequently available at the time of determination of arm's length price of an international transaction or a specified domestic transaction during the course of any assessment proceeding for the assessment year relevant to the current year, then, such data shall be used for such determination irrespective of the fact that the data was not available at the time of furnishing the return of income of the relevant assessment year.

7.5-COMPARABLE UNCONTROLLED PRICE METHOD(CUP METHOD)

According to Rule 10B(1)(a), the application of CUP method involves the following steps:

  (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified;

 (ii) such price is adjusted to account for differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market;

(iii) adjusted price arrived at in (ii) above is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction ⁹²[or the specified domestic transaction

7.6-RESALE PRICE METHOD(RPM)

According to rule 10B(1)(b), the RPM method involves the following steps:

  (i) Identify the price at which the property/services are purchased or obtained from associated enterprise are resold/provided to an unrelated party.

 (ii) Deduct the normal gross profit margin i.e. the margin that the enterprise would earn if the same/similar product were purchased from an unrelated party and resold to an unrelated party or if the same/similar service were provided to an unrelated party.

(iii) Deduct the expenses incurred in connection with purchase of property/obtaining of services from the result B (i) & (ii) above.

(iv) Make adjustments - to (iii) above for differences between the uncontrolled transaction and international transaction between the enterprises involved. These differences could be for functional/other differences including differences in accounting practices. To merit adjustment, these differences should be such as would materially affect the gross margin in the open market.

7.7-COST PLUS METHOD(CPM)

Cost plus method is a transfer pricing method where a comparable gross mark up is added to the costs incurred by the supplier of goods or services in a related party transaction to arrive at the arm's length price of that transaction.

Arm's length price as per CPM = Direct costs + Indirect costs + Adjusted GP margin.

This method [Rule 10B(1)(c)] involves the following —

  (i) Determine the direct and indirect costs incurred by the enterprise in respect of property transferred/services provided to associated enterprise.

 (ii) Add a normal gross profit mark-up. This will be the gross profit (GP) arising from transfer of same or similar property or services by the enterprise in a comparable uncontrolled transaction or a number of uncontrollable transactions (internal comparable). Alternatively, ​GP on transfer of same or similar property or services by an unrelated enterprise in a comparable uncontrolled transaction or a number of such transactions may be taken (external comparable).

(iii) The normal GP mark up in (ii) above should be adjusted for functional and other differences between the international transaction and the comparable or between the enterprises involved in both the transactions. Adjustment is to be made only if such differences would materially affect GP margin in open market.

(iv) The sum arrived at after making adjustments in (ii) and (iii) to the cost in (i) above is the arm's length price.

7.8-PROFIT SPLIT METHOD(PSM)

The profit split method identifies the aggregate profit (combined profit)to be split for the associated enterprises from a controlled transaction or controlled transactions and then splits those profits between the associated enterprises on an economically valid basis that approximates the division of profits that would have been made at arm's length between independent enterprises.

There are two alternative approaches to the PSM permitted in rule 10B(d)—

 (a) A one-stroke (single stroke) allocation method.

 (b) A two-stage or two-tier allocation approach.

One stroke allocation approach

 (a) Determine the combined net profit of the associated enterprises arising from the international transaction or SDT in which they are involved.

 (b) Evaluate the relative contribution made by each of them to the earning of such combined net profit. This evaluation is done based on the following factors:

   (i) functions performed;

  (ii) assets employed/to be employed;

 (iii) risks assumed by each enterprise; and

 (iv) how such contribution would be evaluated by unrelated enterprises performing comparable functions in similar circumstances.

(c) Split the combined net profit amongst the enterprises in proportion to their relative contribution as per evaluation in (b) above.

(d) Use the profit thus apportioned to the assessee to arrive at arm's length price.

Two-tier approach residual analysis

Steps (a) and (b) will be same as in the one stroke approach.

(c) Partially allocate the combined net profit in the first instance to each enterprise as to provide it with a basic return appropriate for the type of international transaction in which it is engaged, with reference to market returns achieved in similar transactions by independent enterprises.

(d) The residual profit after allocation in (c) above may be split among the enterprises as indicated in step (c) of one stroke approach.

(e) The aggregate of net profit arrived at by allocation in (c) and (d)which pertains to an enterprise will be taken as its net profit from the international transaction.

7.9-TRANSACTIONAL NET MARGIN METHOD(TNMM) Transactional net margin method ("TNMM") is a transfer pricing method that compares the PLI (Profit Level Indicator) that is attained by a taxpayer from a related party transaction to that of comparable independent parties. Net profit indicator (or profit level indicator) is the ratio of net profit to an appropriate base (for example, costs, sales, assets) as used ​in the transactional net margin method.

This method involves the following steps:

  (i) Compute the net margin realized by an enterprise from an international transaction with associated enterprise. The computation may be in relation to costs incurred or sales effected or assets employed or any other relevant base.

Some of the ratios for determining net margin i.e. Profit Level Indicators (PLIs)

  (a) net profit before tax to sales

  (b) cash profit to sales

  (c) net profit before interest and tax (EBIT)/sales

  (d) operating cost to operating revenue

  (e) net profit before interest and tax to assets

  (f) net profit before tax to shareholder funds

 (ii) The net profit margin realized by the enterprise or by an unrelated enterprise from comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base.

(iii) The net profit margin in (ii) above is adjusted for differences between the transactions/enterprises involved if the differences could materially affect the amount of net profit margin in the open market.

(iv) the net profit margin realised by the enterprise and referred to in (i) above is established to be the same as the net profit margin referred to (iii) above;

 (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction or the specified domestic transaction

7.10-ANY OTHER METHOD-RULE 10AB

In terms of Rule 10AB, any other method other than CUP, RPM, CPM, PSM and TNMM the can also be used for the determination of ALP in an international transaction or SDT provided the method satisfies the arm's length principle i.e. meets the following conditions:

  (i) The method takes into account the price which has been charged or would have been charged or paid for the same or similar uncontrolled transactions under similar circumstances.

 (ii) Such uncontrolled transactions are :

    _ with non-associated enterprises (i.e. between an associated enterprise and a non-associated enterprise) or

    _ between non-associated enterprises

(iii) All relevant facts are considered as regards comparability of international transaction or SDT with uncontrolled transactions.

A few examples of any other method are:

  1. Arm's length valuation of intangibles by Income method or capitalization method (Discounted Cash Flow Methods)

  2. Valuation of unlisted shares which are transferred

  3. Bona fide offers/bid may not be technically considered as CUP as CUP requires the identification of actual transaction. However, such offers/ bids may be considered as "Other Method" provided the bona fide offer and the controlled transactions are similar and circumstances are also similar.

7.11-SELECTION OF MAM-FACTORS TO BE TAKEN INTO ACCOUNT

Rule 10C(1) provides that the method to be selected should satisfy two conditions:—

(a) It should be the one best suited to the facts and circumstances of each international transaction or SDT; and

(b) It provides the most reliable measure of the arm's length price.

The conditions (a) and (b) above are cumulative.

According to Rule 10C(2), in selecting the most appropriate method, the following factors shall be taken into account:

(a) the nature and class of international transaction or SDT;

(b) the class/classes of associated enterprises entering into the transaction and the functions performed by them taking into account asset employed/to be employed and risks involved;

(c) the availability, coverage and reliability of data necessary for the application of method;

(d) the degree of comparability between international transaction or SDT and the uncontrolled transaction and between the enterprises involved;

(e) the extent to which accurate adjustments for differences can be made to make uncontrolled transaction comparable; and

(f) the nature, extent and reliability of the assumptions involved in the method.

​

​​​​​8.1-POWER OF AO TO COMPUTE ALP IN RESPECT OF INTERNATIONAL TRANSACTIONS/ SDTS

Section 92C(3) provides that where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that—

(a) the price charged or paid in an international transaction/SDT has not been determined in accordance with sub-sections (1) and (2); or

(b) any information and document relating to an international transaction/SDT have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf; or

(c) the information or data used in computation of the arm's length price is not reliable or correct; or

(d) the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D, ​the Assessing Officer may proceed to determine the arm's length price in relation to the said international transaction in accordance with sub-sections(1) and (2), on the basis of such material or information or document available with him.

However, para 3.7 of CBDT's Instruction No. 3/2016, dated 10-3-2016 stipulates that for administering the Transfer Pricing Regime in an efficient manner, the determination of ALP should not be carried out at all in a case where reference is not made to TPO. In such cases, Assessing Officer should record in the body of the assessment order that Transfer Pricing issue has not been examined in view of CBDT's Instruction in the matter.

8.2-POWER OF AO TO MAKE A REFERENCE TO TPO

Section 92CA(1) provides that :

  ♦  where any person, being the assessee, has entered into an international transaction or specified domestic transaction in any previous year,

  ♦  and the Assessing Officer considers it necessary or expedient so to do,

  ♦  he may, with the previous approval of the Commissioner, refer the computation of the arm's length price in relation to the said international transaction or specified domestic transaction to the Transfer Pricing Officer.

CBDT's Instruction No. 3/2016, dated 10-3-2016 lays down the following guidelines as regards reference to TPO:

(1) All cases selected for scrutiny, either under the Computer Assisted Scrutiny Selection [CASS] system or under the compulsory manual selection system (in accordance with the CBDT's annual instructions in this regard), on the basis of transfer pricing risk parameters, have to be referred to the TPO by the AO, after obtaining the approval of the jurisdictional Principal Commissioner of Income-tax (PCIT) or Commissioner of Income-tax (CIT). The fact that a case has been selected for scrutiny on a TP risk parameter becomes clear from a perusal of the reasons for which a particular case has been selected and the same are invariably available with the jurisdictional AO. Thus, if the reason or one of the reasons for selection of a case for scrutiny is a TP risk parameter, then the case has to be mandatorily referred to the TPO by the AO, after obtaining the approval of the jurisdictional PCIT or CIT.

(2) Cases selected for scrutiny on non-transfer pricing risk parameters but also having international transactions or specified domestic transactions, shall be referred to TPOs only in the following circumstances:

  (a) where the AO comes to know that the taxpayer has entered into international transactions or specified domestic transactions or both but the taxpayer has either not filed the Accountant's report under section 92E at all or has not disclosed the said transactions in the Accountant's report filed;

  (b) where there has been a transfer pricing adjustment of Rs. 10 crore or more in an earlier assessment year and such adjustment has been upheld by the judicial authorities or is pending in appeal; and

  (c) where search and seizure or survey operations have been carried out under the provisions of the Income-tax Act and findings regarding transfer pricing issues in respect of international transactions or specified domestic transactions or both have been recorded by the Investigation Wing or the AO.

(3) For cases to be referred by the AO to the TPO in accordance with (1) and (2) above, in respect of transactions having the following situations, the AO must, as a jurisdictional requirement, record his satisfaction that there is an income or a potential of an income arising and/or being affected on determination of the ALP of an international transaction or specified domestic transaction before seeking approval of the PCIT or CIT to refer the matter to the TPO for determination of the ALP:

  ♦  where the taxpayer has not filed the Accountant's report under section 92E of the Act but the international transactions or specified domestic transactions undertaken by it come to the notice of the AO;

  ♦  where the taxpayer has not declared one or more international transaction or specified domestic transaction in the Accountant's report filed under section 92E of the Act and the said transaction or transactions come to the notice of the AO; and

  ♦  where the taxpayer has declared the international transactions or specified domestic transactions in the Accountant's report filed under section 92E of the Act but has made certain qualifying remarks to the effect that the said transactions are not international transactions or specified domestic transactions or they do not impact the income of the taxpayer.

In the above three situations, the AO must provide an opportunity of being heard to the taxpayer before recording his satisfaction or otherwise. In case no objection is raised by the taxpayer to the applicability of Chapter X [Sections 92 to 92F] of the Act to these three situations, then AO should refer the international transaction or specified domestic transaction to the TPO for determining the ALP after obtaining the approval of the PCIT or CIT. However, where the applicability of Chapter X [Sections 92 to 92F] to these three situations is objected to by the taxpayer, the AO must consider the taxpayer's objections and pass a speaking order so as to comply with the principles of natural justice. If the AO decides in the said order that the transaction in question needs to be referred to the TPO, he should make a reference after obtaining the approval of the PCIT or CIT.

(3A) The arm’s length price, as determined in relation to the international transaction or the specified domestic transaction by TPO for any previous year, shall be applicable to similar international transactions or specified domestic transactions for the two immediately succeeding previous years, subject to the fulfillment of the following conditions, namely:—

1. the assessee exercises an option or options to this effect for the said two consecutive previous years;
2. such option or options are exercised in the prescribed form, manner, and within the prescribed time period; and
3. the Transfer Pricing Officer, within one month from the end of the month in which such option or options are exercised, shall, by an order in writing, declare such option or options to be valid, subject to the prescribed conditions:

However, this provisions shall not be applicable to any proceedings under Chapter XIV-B.

(4) In addition to the cases to be referred as per (1) and (2) above, a case involving a transfer pricing adjustment in an earlier assessment year that has been fully or partially set aside by the ITAT, High Court or Supreme Court on the issue of the said adjustment shall invariably be referred to the TPO for determination of the ALP.

(5) Since the provisions of section 92CA of the Act, inter alia, refer to the computation of the ALP of the international transaction or specified domestic transaction, it is imperative for the AO to ensure that all international transactions or relevant specified domestic transactions or both, as the case may be, are explicitly mentioned in the letter through which the reference is made to the TPO. In this regard, guidelines as under may be followed:

  (a) If a case has been selected for scrutiny on a TP risk parameter pertaining to international transactions only, then the international transactions shall alone be referred to the TPO;

  (b) If a case has been selected for scrutiny on a TP risk parameter pertaining to specified domestic transactions only, then the specified domestic transactions shall alone be referred to the TPO; and

  (c) If a case has been selected for scrutiny on the basis of TP risk parameters pertaining to both international transactions and specified domestic transactions, then the international transactions and the specified domestic transactions shall together be referred to the TPO.

(6) Since international transactions may be benchmarked together at the entity level due to the inter-linkages amongst them, if a case has been selected for scrutiny on a TP risk parameter pertaining to one or more international transactions, then all the international transactions entered into by the taxpayer- except those about which the AO has decided not to make a reference as per (3) above - shall be referred to the TPO.

Para 3.1 of Circular clarifies that AO shall, for proper administration of the Income-tax Act, make a reference to the TPO only under the circumstances laid out in this Instruction.

8.3-ROLE OF TRANSFER PRICING OFFICER (TPO)

Paras 4.1 to 4.5 of CBDT's Instruction No. 3/2016, dated 10-3-2016 set out the role of TPO as under :

  ♦  The role of the TPO begins after a reference is received from the AO. In terms of section 92CA, this role is limited to the determination of the ALP in relation to international transactions or specified domestic transactions referred to him by the AO. However, if any other international transaction comes to the notice of the TPO during the course of the proceedings before him, then he is empowered to determine the ALP of such other international transactions also by virtue of section 92CA(2A) and (2B). The transfer price has to be determined by the TPO in terms of section 92C. The price has to be determined by using any one of the methods stipulated in subsection(1) of section 92C and by applying the most appropriate method referred to in sub-section (2) thereof. There may be occasions where application of the most appropriate method provides results which are different but equally reliable. In all such cases, further scrutiny may be necessary to evaluate the appropriateness of the method, the correctness of the data, weight given to various factors and so on. The selection of the most appropriate method will depend upon the facts of the case and the factors mentioned in Rule 10C. The TPO, after taking into account all relevant facts and data available to him, shall determine the ALP and pass a speaking order.

  ♦  The TPO's order should contain details of the data used, reasons for arriving at a certain price and the applicability of methods. It may be emphasised that the application of method including the application of the most appropriate method, the data used, factors governing the applicability of respective methods, computation of price under a given method will all be subjected to judicial scrutiny. It is, therefore, necessary that the order of the TPO contains adequate reasons on all these counts. Copies of the documents or the relevant data used in arriving at the arm's length price should be made available to the AO for his records and the use at subsequent stages of appellate or penal proceedings.

  ♦  The TPO, being an Additional/Joint CIT, shall obtain the approval of the jurisdictional CIT (Transfer Pricing) before passing the order. On the other hand, the TPO, being a Deputy/Assistant CIT, shall obtain the approval of the jurisdictional Additional/Joint CIT before passing the order. The jurisdictional CIT (TP) should assign a limited number of important and complex cases, not exceeding 50, to the Additional/Joint CIT (TPOs) working in the same jurisdiction. For the selection of such important and complex cases by the CsIT (TP), the concerned CCsIT (International Taxation) shall frame appropriate guidelines.

  ♦  In addition to the above, the TPO is required to carry out the Compliance Audit of the Advance Pricing Agreements (APAs) entered into by the Board and the taxpayers in accordance with Rule 10P of the Income-tax Rules.

  ♦  The TPO is also required to play an important role in respect of Safe Harbour provisions. Whenever a reference is made to the TPO under sub-rule(4) or sub-rule (10) of Rule 10TE of the Income-tax Rules, the TPO has to carefully examine all the facts and circumstances of the taxpayer's exercise of an option for Safe Harbour and pass an order in writing as mandated in sub-rule (6) or sub-rule (11) of the said Rule, respectively.

Further, where the Transfer Pricing Officer has declared an option exercised by the assessee as valid option under section 92CA(3B), he shall examine and determine the arm’s length price in relation to such similar transaction for two consecutive previous years immediately following such previous year, in the order referred to in section 92CA(3) and on receipt of such order, the Assessing Officer shall proceed to recompute the total income of the assessee for the said two consecutive previous years as per the provisions of sub-section (21) of section 155.

8.4-ROLE OF THE AO AFTER DETERMINATION OF ALP BY THE TPO

Under sub-section (4) of section 92C (read with sub-section (4) of section 92CA), the AO has to compute the total income of the assessee in conformity with the ALP determined by the TPO under sub-section (3) of section 92CA.

8.5-TPO TO ISSUE A NOTICE TO ASSESSEE ON REFERENCE MADE BY AO

Section 92CA(2) provides that where a reference is so made, the Transfer Pricing Officer shall serve a notice on the assessee requiring him to produce or cause to be produced on a date to be specified therein, any evidence on which the assessee may rely in support of the computation made by him of the arm's length price in relation to the international transaction/SDT referred to him by AO as above.

8.6-POWER OF TPO IN RELATION TO INTERNATIONAL TRANSACTIONS NOT REFERRED TO HIM BY AO

Sub-section (2A) of section 92CA provides that where any other international transaction or specified domestic transaction [other than an international transaction or specified domestic transaction referred to him by AO under sub-section (1)] comes to the notice of the Transfer Pricing Officer during the course of the proceedings before him, the provisions of this Chapter (Chapter X) shall apply as if such other international transaction is an international transaction or specified domestic transaction referred to him by AO under sub-section (1).

8.7-EXAMINATION BY TPO OF INTERNATIONAL TRANSACTIONS NOT REPORTED BY THE ASSESSEE IN AUDIT REPORT U/S 92E

Sub-section (2B) provides that where in respect of an international transaction or specified domestic transaction, the assessee has not furnished the report under section 92CA and such transaction comes to the notice of the Transfer Pricing Officer during the course of the proceeding before him, the provisions of this Chapter shall apply as if such transaction is an international transaction or specified domestic transaction referred to him by AO under sub-section (1). Sub-section (2B), although retrospective, shall not apply to proceedings completed before 1-7-2012 and there will be no reopening of such proceedings only on account of the retrospectivity of sub-section (2B). Sub-section (2C) provides that nothing contained in sub-section (2B) shall empower the Assessing Officer either to assess or reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any ​assessment year, proceedings for which have been completed before the 1st day of July, 2012.

Sub-sections (2A) to (2C) shall have no application to SDTs. In other words, TPO's powers under section 92CA, as far as SDTs are concerned, are confined to SDT referred by AO to him and he cannot deal with any other SDT that comes to his notice during the course of the proceedings before him.

8.8-PROCEDURE TO BE FOLLOWED BY TPO ON REFERENCE

  ♦  Section 92CA(3) provides that on the date specified in the notice under sub-section (2), or as soon thereafter as may be, after hearing such evidence as the assessee may produce, including any information or documents referred to in sub-section (3) of section 92D.

  ♦  After considering such evidence as the Transfer Pricing Officer may require on any specified points and after taking into account all relevant materials which he has gathered, the Transfer Pricing Officer shall, by order in writing, determine the arm's length price in relation to the international transaction/SDT in accordance with sub-section(3) of section 92C and send a copy of his order to the Assessing Officer and to the assessee.

8.9-WHETHER TPO'S DETERMINATION OF ALP BINDING ON AO?

Sub-section (4) of section 92CA provides that on receipt of the order of TPO under sub-section (3), the Assessing Officer shall proceed to compute the total income of the assessee under sub-section (4) of section 92C in conformity with the arm's length price as so determined by the Transfer Pricing Officer in respect of international transaction or SDT.

8.10-TRANSFER PRICING DISPUTE RESOLUTION MECHANISM FOR INTERNATIONAL TRANSACTIONS U/S 144C

Section 144Cof the Act provides for TP dispute resolution by DRP as under:

Definition and composition of DRP

"Dispute Resolution Panel" means a collegium of three Principal Commissioners or Commissioners of Income-tax constituted by the Board[CBDT]for the purposes of section 144C. Section 144C​ provides for reference to Dispute Resolution Panel in case of "eligible assessees".

Definition of eligible assessee

"eligible assessee" means,—

  (i) any person in whose case the variation prejudicial to the interests of the taxpayer arises as a consequence of the order of the Transfer Pricing Officer passed under sub-section (3) of section 92CA; and

 (ii) any non-resident not being a company, or any foreign company.

Provided that such eligible assessee shall not include person referred to in sub-section (1) of section 158BA or other person referred to in section 158BD.

The provisions of section 144C shall not apply to any proceedings under Chapter XIV-B.

AO to forward draft assessment order to eligible assessee if he proposes to make variations prejudicial to eligible assessee

The Assessing Officer (AO) shall, in the first instance, forward a draft of the proposed order of assessment("the draft order") to the eligible assessee if he proposes to make any variation which is prejudicial to the interest of such assessee.

Right of eligible assessee to file his objections to DRP against proposed variations in draft order

On receipt of the draft order, the eligible assessee shall, within thirty days of the receipt by him of the draft order,—

 (a) file his acceptance of the variations to the AO; or

 (b) file his objections, if any, to such variation with,(i)the DRP; and (ii)the AO.

Finalisation of assessment by AO, if assessee does not file objections to draft order with DRP & AO within the 30-day period

The AO shall complete the assessment on the basis of the draft order, if—

 (a) the assessee intimates to the Assessing Officer the acceptance of the variation; or

 (b) no objections are received within the 30 days period as above.

The AO shall pass the assessment order within one month from the end of the month in which,—

 (a) the acceptance is received; or

 (b) The 30 days period of filing of objections expires(and assessee does not file any objections within the 30 days period).

Procedure to be followed by DRP and AO where assessee objects to variations in draft order

Where any objection is received to the draft order from the asseessee under sub-section (2),the DRP shall issue such directions, as it thinks fit, for the guidance of the Assessing Officer to enable him to complete the assessment. Every direction issued by DRP shall be binding on the AO.

The principles and procedures to be followed by DRP in issuing directions to AO are as under:

  ♦  No direction shall be issued by DRP unless an opportunity of being heard is given to the assessee and the AO on such directions which are prejudicial to the interest of the assessee or the interest of the revenue, respectively.

  ♦  No direction shall be issued by DRP after nine months from the end of the month in which the draft order is forwarded to the eligible assessee.

  ♦  The DRP may, before issuing any directions,—(a)make such further enquiry, as it thinks fit; or(b)cause any further enquiry to be made by any income-tax authority and report the result of the same to it.

  ♦  The DRP shall issue the directions after considering the following, namely:—(a)draft order;(b)objections filed by the assessee;(c)evidence furnished by the assessee;(d)report, if any, of the Assessing Officer, Valuation Officer or Transfer Pricing Officer or any other authority;(e)records relating to the draft order;(f)evidence collected by, or caused to be collected by, it; and(g)result of any enquiry made by, or caused to be made by, it.

  ♦  The DRP may confirm, reduce or enhance the variations proposed in the draft order. The power of the Dispute Resolution Panel to enhance the variation shall include and shall be deemed always to have included the power to consider any matter arising out of the assessment proceedings relating to the draft order whether such matter was raised or not by the eligible assessee.

  ♦  However, DRP shall not set aside any proposed variation or issue any direction for further enquiry and passing of the assessment order.

  ♦  If the members of the Dispute Resolution Panel differ in opinion on any point, the point shall be decided according to the opinion of the majority of the members.

AO to finalise assessment as per DRP's directions without any further opportunity of being heard to the assessee

Upon receipt of DRP's directions, the AO shall, in conformity with the directions, complete the assessment without providing any further opportunity of being heard to the assessee, within one month from the end of the month in which such direction is received.

​

​​​​​​9.1 "SAFE HARBOUR RULES" - CONCEPT

"Safe Harbour" means circumstances in which the income-tax authorities shall accept the transfer price declared by the assessee. Thus, 'safe harbour rules' means binding rules laid down under law which obliges income-tax authorities to accept the transfer price declared by the assessee.

A 'safe harbour', in a TP regime, is a provision that applies to a defined category of taxpayers or transactions and that relieves eligible taxpayers from certain obligations otherwise imposed by a jurisdiction's general TP rules. It substitutes simpler obligations for those under the general TP regime. Often, eligible taxpayers complying with the safe harbour provision will be relieved from burdensome compliance obligations, including some or all associated TP documentation requirements.

In view of section 92CB, the determination of income referred to in section 9(1)(i) or ALP u/s 92C/92CA shall be subject to safe harbour rules. As per Explanation to section 92CB, "safe harbour" means circumstances in which the income-tax authorities shall accept the transfer price or income deemed to accrue or arise u/s 9(1)(i), as the case may be, declared by the assessee.

For the above purpose, CBDT has notified Rules 10TA to 10TG (see para 9.3) in relation to safe harbour rules for international transaction; and Rules 10TH to 10THD (see para 9.4) in relation to safe harbour rules for specified domestic transactions.

9​.1-1 Benefits of safe harbour provisions [OECD TP Guidelines] - The basic benefits of safe harbours are:—

(1) Simplifying compliance and reducing compliance costs for eligible taxpayers in determining and documenting appropriate conditions for qualifying controlled transactions. Especially in areas where TP risks are small, and the burden of compliance and documentation is disproportionate to the TP exposure such a trade-off may be mutually advantageous to taxpayer and tax administrations.

(2) Providing certainty to eligible taxpayers that the price charged or paid on qualifying controlled transactions will be accepted by the tax administrations that have adopted the safe harbour with a limited audit or without an audit beyond ensuring the taxpayer has met the eligibility conditions of, and complied with, the safe harbour provisions.

(3) Permitting tax administrations to redirect their administrative resources from the examination of lower risk transactions to examinations of more complex or higher risk transactions and taxpayers. This may also increase the level of compliance among small taxpayers that may otherwise believe their TP practices will escape scrutiny.

9.2 POWER OF CBDT TO MAKE SAFE HARBOUR RULES

Section 92CB provides that the determination of arm's length price under section 92C or shall be subject to safe harbour rules and empowers CBDT to make safe harbour rules.

CBDT's Circular No. 5/2010, dated 3-6-2010 explains the objectives of section 92CB as under:

40.2 In order to reduce the number of transfer pricing audits and prolonged disputes a new section 92CB has been inserted to provide that the determination of arm's length price under section 92C or section 92CA shall be subject to safe harbour rules.

Pursuant to the powers conferred on it by section 92CB of the Act, the CBDT has notified section 44AD-like safe harbour rules - Rules 10TA to 10TG for international transactions. The CBDT has also notified Safe Harbour Rules for Specified Domestic Transactions - Rules 10THA to 10THD.

9.3 SAFE HARBOUR RULES FOR INTERNATIONAL TRANSACTIONS [RULES 10TA TO 10TG]

9.3.1 Who are 'eligible assessees'? [Rule 10TB] - The "eligible assessee" means a person who has exercised a valid option for application of safe harbour rules in accordance with Rule 10TE, and:—

  (i) is engaged in providing software development services or information technology enabled services or knowledge process outsourcing services, with insignificant risk, to a non-resident associated enterprise (hereinafter referred as "foreign principal");

 (ii) has made any intra-group loan;

(iii) has provided a corporate guarantee;

(iv) is engaged in providing contract research and development services wholly or partly relating to software development, with insignificant risk, to a foreign principal;

 (v) is engaged in providing contract research and development services wholly or partly relating to generic pharmaceutical drugs, with insignificant risk, to a foreign principal;

(vi) is engaged in the manufacture and export of core or non-core auto components and where ninety per cent or more of total turnover during the relevant previous year is in the nature of original equipment manufacturer sales;

(vii) is in receipt of low value-adding intra-group services from one or more members of its group.

For the purposes of identifying an eligible assessee, with insignificant risk, referred to in (i) above, the AO or the TPO, as the case may be, shall have regard to the following factors, namely:—

(a) the foreign principal performs most of the economically significant functions involved, including the critical functions such as conceptualisation and design of the product and providing the strategic direction and framework, either through its own employees or through its other associated enterprises, while the eligible assessee carries out the work assigned to it by the foreign principal;

(b) the capital and funds and other economically significant assets including the intangibles required, are provided by the foreign principal or its other associated enterprises, and the eligible assessee is only provided a remuneration for the work carried out by it;

(c) the eligible assessee works under the direct supervision of the foreign principal or its associated enterprise which not only has the capability to control or supervise but also actually controls or supervises the activities carried out through its strategic decisions to perform core functions as well as by monitoring activities on a regular basis;

(d) the eligible assessee does not assume or has no economically significant realised risks, and if a contract shows that the foreign principal is obligated to control the risk but the conduct shows that the eligible assessee is doing so, the contractual terms shall not be the final determinant;

(e) the eligible assessee has no ownership right, legal or economic, on any intangible generated or on the outcome of any intangible generated or arising during the course of rendering of services, which vests with the foreign principal as evident from the contract and the conduct of the parties.

For the purposes of identifying an eligible assessee, with insignificant risk, referred to in (iv) and (v) above, the AO or the TPO, as the case may be, shall have regard to the following factors, namely:—

(a) the foreign principal performs most of the economically significant functions involved in research or product development cycle, including the critical functions such as conceptualisation and design of the product and providing the strategic direction and framework, either through its own employees or through its other associated enterprises while the eligible assessee carries out the work assigned to it by the foreign principal;

(b) the foreign principal or its other associated enterprises provides the funds or capital and other economically significant assets including intangibles required for research or product development and also provides a remuneration to the eligible assessee for the work carried out by it;

(c) the eligible assessee works under the direct supervision of the foreign principal or its other associated enterprise which has not only the capability to control or supervise but also actually controls or supervises research or product development, through its strategic decisions to perform core functions as well as by monitoring activities on a regular basis;

(d) the eligible assessee does not assume or has no economically significant realised risks, and if a contract shows that the foreign principal is obligated to control the risk but the conduct shows that the eligible assessee is doing so, the contractual terms shall not be the final determinant;

(e) the eligible assessee has no ownership right, legal or economic, on the outcome of the research which vests with the foreign principal and is evident from the contract as well as the conduct of the parties.

9.3.2 Which are 'eligible international transactions'? [Rule 10TC] - "Eligible international transaction" means an international transaction between the eligible assessee and its associated enterprise, either or both of whom are non-resident, and which comprises of:—

  (i) provision of software development services by the eligible assessee;

 (ii) provision of information technology enabled services by the eligible assessee;

(iii) provision of knowledge process outsourcing services by the eligible assessee;

(iv) advance of intra-group loan by the eligible assessee;

 (v) provision of corporate guarantee by the eligible assessee, where the amount guaranteed,—

  (a) does not exceed Rs. 100 crores; or

  (b) exceeds Rs. 100 crores, and the credit rating of the associated enterprise, done by an agency registered with the SEBI, is of the adequate to highest safety;

(vi) provision of contract research and development services wholly or partly relating to software development by the eligible assessee;

(vii) provision of contract research and development services wholly or partly relating to generic pharmaceutical drugs by the eligible assessee;

​ (viii) manufacture and export of core auto components by the eligible assessee;

(ix) manufacture and export of non-core auto components by the eligible assessee;

 (x) receipt of low value-adding intra-group services from one or more members of its group by the eligible assessee.

9.3.2.1 "SOFTWARE DEVELOPMENT SERVICES", DEFINED [RULE 10TA(m)] - "Software development services" means,—

  (i) business application software and information system development using known methods and existing software tools;

 (ii) support for existing systems;

(iii) converting or translating computer languages;

(iv) adding user functionality to application programmes;

 (v) debugging of systems;

(vi) adaptation of existing software; or

(vii) preparation of user documentation,

but does not include any research and development services whether or not in the nature of contract research and development services.

9.3.2.2 "INFORMATION TECHNOLOGY ENABLED SERVICES", DEFINED [RULE 10TA(e)] - "Information technology enabled services" means the following business process outsourcing services provided mainly with the assistance or use of information technology, namely:—

  (i) back office operations;

 (ii) call centres or contact centre services;

(iii) data processing and data mining;

(iv) insurance claim processing;

 (v) legal databases;

(vi) creation and maintenance of medical transcription excluding medical advice;

(vii) translation services;

​ (viii) payroll;

(ix) remote maintenance;

 (x) revenue accounting;

(xi) support centres;

(xii) website services;

(xiii) data search integration and analysis;

(xiv) remote education excluding education content development; or

(xv) clinical database management services excluding clinical trials,

but does not include any research and development services whether or not in the nature of contract research and development services.

9.3.2.3 "KNOWLEDGE PROCESS OUTSOURCING SERVICES", DEFINED [RULE 10TA(g)] - "Knowledge process outsourcing services" means the following business process outsourcing services provided mainly with the assistance or use of information technology requiring application of knowledge and advanced analytical and technical skills, namely:—

 (i) geographic information system;

(ii) human resources services;

(iii) engineering and design services;

(iv) animation or content development and management;

 (v) business analytics;

(vi) financial analytics; or

​ (vii) market research,

but does not include any research and development services whether or not in the nature of contract research and development services.

9.3.2.4 "INTRA-GROUP LOAN", DEFINED [RULE 10TA(f)] - "Intra-group loan" means loan advanced to wholly owned subsidiary being a non-resident, where the loan:—

  (i) is sources in Indian rupees;

 (ii) is not advanced by an enterprise, being a financial company including a bank or a financial institution or an enterprise engaged in lending or borrowing in the normal course of business; and

(iii) does not include credit line or any other loan facility which has no fixed term for repayment.

9.3.2.5 "CORPORATE GUARANTEE", DEFINED [RULE 10TA(c)] - "Corporate guarantee" means explicit corporate guarantee extended by a company to its wholly owned subsidiary being a non-resident in respect of any short-term or long-term borrowing. For this purpose, explicit corporate guarantee does not include letter of comfort, implicit corporate guarantee, performance guarantee or any other guarantee of similar nature.

9.3.2.6 "CONTRACT RESEARCH AND DEVELOPMENT SERVICES WHOLLY OR PARTLY RELATING TO SOFTWARE DEVELOPMENT", DEFINED [RULE 10TA(aa)] - "Contract research and development services wholly or partly relating to software development" means the following, namely:—

  (i) research and development producing new theorems and algorithms in the field of theoretical computer science;

 (ii) development of information technology at the level of operating systems, programming languages, data management, communications software and software development tools;

(iii) development of Internet technology;

(iv) research into methods of designing, developing, deploying or maintaining software;

 (v) software development that produces advances in generic approaches for capturing, transmitting, storing, retrieving, manipulating or displaying information;

(vi) experimental development aimed at filling technology knowledge gaps as necessary to develop a software programme or system;

(vii) research and development on software tools or technologies in specialised areas of computing (image processing, geographic data presentation, character recognition, artificial intelligence and such other areas); or

​ (vi​ii) upgradation of existing products where source code has been made available by the principal, except where the source code has been made available to carry out routine functions like debugging of the software.

9.3.2.7 "GENETIC PHARMACEUTICAL DRUG", DEFINED [RULE 10TA(d)] - "Generic pharmaceutical drug" means a drug that is comparable to a drug already approved by the regulatory authority in dosage form, strength, route of administration, quality and performance characteristics, and intended use.

9.3.2.8 "CORE AUTO COMPONENTS", DEFINED [RULE 10TA(b)] - "Core auto components" means,—

  (i) engine and engine parts, including piston and piston rings, engine valves and parts cooling systems and parts and power train components;

 (ii) transmission and steering parts, including gears, wheels, steering systems, axles and clutches;

(iii) suspension and braking parts, including brake and brake assemblies, brake linings, shock absorbers and leaf springs.

9.3.2.9 "NON-CORE AUTO COMPONENTS", DEFINED [RULE 10TA(h)] - "Non-core auto components" mean auto components other than core auto components.

9.3.2.10 "LOW VALUE-ADDING INTRA-GROUP SERVICES", DEFINED [RULE 10TA(ga)] - "Low value-adding intra-group services" means services that are performed by one or more members of a multinational enterprise group on behalf of one or more other members of the same multinational enterprise group and which,—

 (i) are in the nature of support services;

(ii) are not part of the core business of the multinational enterprise group, i.e., such services neither constitute the profit-earning activities nor contribute to the economically significant activities of the multinational enterprise group;

(iii) are not in the nature of shareholder services or duplicate services;

(iv) neither require the use of unique and valuable intangibles nor lead to the creation of unique and valuable intangibles;

 (v) neither involve the assumption or control of significant risk by the service provider nor give rise to the creation of significant risk for the service provider; and

(vi) do not have reliable external comparable services that can be used for determining their arm's length price, but does not include the following services, namely:—

  (1) research and development services;

  (2) manufacturing and production services;

  (3) information technology (software development) services;

  (4) knowledge process outsourcing services;

  (5) business process outsourcing services;

  (6) purchasing activities of raw materials or other materials that are used in the manufacturing or production process;

  (7) sales, marketing and distribution activities;

  (8) financial transactions;

  (9) extraction, exploration, or processing of natural resources; and

(10) insurance and reinsurance.

9.3.3 Procedure for exercise of option for safe harbour [Rule 10TE] - The following is the procedure for exercise of option for safe harbour:—

Step 1 - For the purposes of exercise of the option for safe harbour, the assessee shall furnish a Form No. 3CEFA, complete in all respects, to the AO on or before the due date specified in Explanation 2 below section 139(1) for furnishing the return of income for:—

  (i) Relevant assessment year—in case the option is exercised only for that AY; or

 (ii) First of the assessment years—in case the option is exercised for more than one AY.

Further, the return of income in both the above cases is also to be furnished by the assessee on or before the due date of furnishing of Form No. 3CEFA.

Step 2 - On receipt of Form No. 3CEFA, the AO shall verify whether the assessee exercising the option is an eligible assessee, and whether the transaction in respect of which the option is exercised is an eligible international transaction, before the option for safe harbour by the assessee is treated to be validly exercised.

Where the AO doubts the valid exercise of the option for the safe harbour by an assessee, he shall make a reference to the TPO, within a period of 2 months from the end of the month in which Form No. 3CEFA is received by him, for determination of the eligibility of the assessee or the international transaction or both for the purposes of the safe harbour. For this purpose, the TPO may require the assessee, by notice in writing, to furnish such information or documents or other evidence as he may consider necessary, and the assessee shall furnish the same within the time specified in such notice. If the AO does not make a reference within the period specified above, then the option for safe harbour exercised by the assessee shall be treated as valid.

Step 3 - In the following cases, the TPO shall, by order in writing, within a period of 2 months from the end of the month in which the reference from the AO is received by him, declare the option exercised by the assessee to be invalid, after giving an opportunity of being heard to the assessee, and cause a copy of the said order to be served on the assessee and the AO:—

  (a) Where the assessee does not furnish the information or documents or other evidence required by the TPO; or

  (b) Where the TPO finds that the assessee is not an eligible assessee; or

  (c) Where the TPO finds that the international transaction in respect of which the option has been exercised is not an eligible international transaction.

If the TPO does not pass an order within the period specified above, then the option for safe harbour exercised by the assessee shall be treated as valid.

Step 4 - If the assessee objects to the order of the TPO declaring the option to be invalid, he may file his objections with the Commissioner, to whom the TPO is subordinate, within 15 days of receipt of the order of the TPO.

Step 5 - On receipt of the objection in Step 4, the Commissioner shall, after providing an opportunity of being heard to the assessee, pass appropriate orders, within a period of 2 months from the end of the month in which the objection filed by the assessee is received by him, in respect of the validity or otherwise of the option exercised by the assessee and cause a copy of the said order to be served on the assessee and the AO. If the Commissioner does not pass an order within the period specified above, then the option for safe harbour exercised by the assessee shall be treated as valid.

Step 6 - In a case where option exercised by the assessee has been held to be valid, the AO shall proceed to verify whether the transfer price declared by the assessee in respect of the relevant eligible international transactions is in accordance with the circumstances specified in Rule 10TD(2A) and, if it is not in accordance with the said circumstances, the AO shall adopt the operating profit margin or rate of interest or commission specified in Rule 10TD(2A).

Step 7 - Where the facts and circumstances on the basis of which the option exercised by the assessee was held to be valid have changed and the AO has reason to doubt the eligibility of an assessee or the international transaction for any assessment year other than the initial assessment year falling within the period for which the option was exercised by the assessee, he shall make a reference to the TPO for determination of eligibility of the assessee or the international transaction or both for the purpose of safe harbour. For this purpose, the TPO may require the assessee, by notice in writing, to furnish such information or documents or other evidence as he may consider necessary, and the assessee shall furnish the same within the time specified in such notice. The facts and circumstances include:—

(a) functional profile of the assessee in respect of the international transaction;

(b) the risks being undertaken by the assessee;

(c) the substantive contractual conditions governing the role of the assessee in respect of the international transaction;

(d) the conduct of the assessee as referred to in Rule 10TB(2) or 10TB(3); or

(e) the substantive nature of the international transaction.

Step 8 - The TPO, on receipt of above reference, shall, by an order in writing, within a period of 2 months from the end of the month in which the reference from the AO is received by him, determine the validity or otherwise of the option exercised by the assessee for the relevant year after providing an opportunity of being heard to the assessee and cause a copy of the said order to be served on the assessee and the AO. If the TPO does not pass an order within the period specified above, then the option for safe harbour exercised by the assessee shall be treated as valid.

Step 9 - If the assessee objects to the order of the TPO declaring the option to be invalid, he may file his objections with the Commissioner, to whom the TPO is subordinate, within 15 days of receipt of the order of the TPO.

Step 10 - On receipt of the objection in Step 9, the Commissioner shall, after providing an opportunity of being heard to the assessee, pass appropriate orders in respect of the validity or otherwise of the option exercised by the assessee and cause a copy of the said order to be served on the assessee and the AO.

Other relevant points to be noted are:—

(1) Where no option for safe harbour has been exercised by an eligible assessee in respect of an eligible international transaction entered into by the assessee or the option exercised by the assessee is held to be invalid, the ALP in relation to such international transaction shall be determined in accordance with the provisions of sections 92C and 92CA without having regard to the profit margin or the rate of interest or commission as specified in Rule 10TD(2A).

(2) It has been explicitly clarified the power of AO to make a reference u/s 92CA in respect of international transaction (other than the eligible international transaction) is not affected by this Rule.

9.3.4 Safe harbour rules [Rule 10TD] - Where an eligible assessee has entered into an eligible international transaction and the option exercised by the said assessee is not held to be invalid under Rule 10TE, for the assessment years 2020-21, 2021-22 and 2022-23, the transfer price declared by the assessee in respect of such transaction shall be accepted by the income-tax authorities, if it is in accordance with the circumstances specified below in respect of the eligible international transaction [Rule 10TD(1) & (2A)]:—

S. No.	Eligible international transaction	Circumstances
(1)	Provision of software development services	Where the value of international transaction does not exceed Rs. 100 crores	Operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense incurred is not less than 17%
		Where the value of international transaction exceeds Rs. 100 crores but does not exceed Rs. 200 crores	Operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense incurred is not less than 18%
(2)	Provision of information technology enabled services	Where the aggregate value of such transactions entered into during the PY does not exceed Rs. 100 crores	Operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense is not less than 17%
		Where the aggregate value of such transactions exceeds Rs. 100 crores but does not exceed Rs. 200 crores	Operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense is not less than 18%
(3)	Provision of knowledge process outsourcing services	The value of international transaction does not exceed Rs. 200 crores and the operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense is—	(i) Not less than 24% and the employee cost in relation to the operating expense is at least 60%
			(ii) Not less than 21% and the employee cost in relation to the operating expense is between (and including) 40% and (but not including) 60%
			(iii) Not less than 18% and the employee cost in relation to the operating expense does not exceed 40%
(4)	Advancing of intra-group loans where the amount of loan is denominated in Indian Rupees (INR)	The interest rate declared in relation to the eligible international transaction is not less than the 1-year marginal cost of funds lending rate of SBI as on 1st April of the relevant previous year plus—	(i) Where the associated enterprise has credit rating between AAA to A or its equivalent—175 basic points or 1.75%
			(ii) Where the associated enterprise has credit rating of BBB-, BBB or BBB+ or its equivalent—325 basic points or 3.25%
			(iii) Where the associated enterprise has credit rating between BB to B or its equivalent—475 basic points or 4.75%
			(iv) Where the associated enterprise has credit rating between C to D or its equivalent—625 basic points or 6.25%
			(v) Where credit rating of the associated enterprise is not available and the amount of loan advanced to the associated enterprise including loans to all associated enterprises in Indian Rupees does not exceed Rs. 100 crores in the aggregate as on 31st March of the relevant previous year—425 basic points or 4.25%
(5)	Advancing of intra-group loans referred to in clause (iv) of rule 10TC where the amount of loan is denominated in foreign currency	The interest rate declared in relation to the eligible international transaction is not less than the reference rate of the relevant foreign currency as on 30th September of the relevant previous year plus,	(a) If amount of loan advanced to the associated enterprise including loans to all associated enterprises does not exceed a sum equivalent to two hundred and fifty crore Indian rupees in the aggregate as on 31st March of the relevant previous year:
			(i) 150 basis points, where the associated enterprise has a credit rating of AAA, AA+, AA, AA-, A+, A, A- or equivalent;
			(ii) 300 basis points, where the associated enterprise has credit rating of BBB+, BBB, BBB- or equivalent;
			(iii) 400 basis points, where the associated enterprise has a credit rating of BB+, BB, BB-, B+, B, B-, C+, C , C-, D or equivalent or where the credit rating of the associated enterprise is not available;
			(b) If amount of loan advanced to the associated enterprise including loans to all associated enterprises exceeds a sum equivalent to two hundred and fifty crore Indian rupees in the aggregate as on 31st March of the relevant previous year: (i) 150 basis points, where the associated enterprise has a credit rating of AAA, AA+, AA, AA-, A+, A, A- or equivalent; (ii) 300 basis points, where the associated enterprise has credit rating of BBB+, BBB, BBB- or equivalent; (iii) 450 basis points, where the associated enterprise has a credit rating of BB+, BB, BB-, B+, B, B- or equivalent; (iv) 600 basis points, where the associated enterprise has credit rating of C+, C , C-, D or equivalent or where the credit rating of the associated enterprise is not available
(6)	Providing corporate guarantee	Commission or fee declared in relation to the eligible international transaction is not less than 1% per annum on the amount guaranteed
(7)	Provision of contract research and development services wholly or partly relating to software development	Where the value of the international transaction does not exceed Rs. 200 crores—Operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense incurred is not less than 24%
(8)	Provision of contract research and development services wholly or partly relating to generic pharmaceutical drugs	Where the value of the international transaction does not exceed Rs. 200 crores—Operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense incurred is not less than 24%
(9)	Manufacture and export of core auto components	Operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense is not less than 12%
(10)	Manufacture and export of non-core auto components	Operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense is not less than 8.5%
(11)	Receipt of low value-adding intra-group services	Entire value of the international transaction, including a mark-up not exceeding 5%, does not exceed Rs. 10 crores provided that the method of cost pooling, the exclusion of shareholder costs and duplicate costs from the cost pool and the reasonableness of the allocation keys used for allocation of costs to the assessee by the overseas associated enterprise, is certified by an accountant

It has further been provided that:—

  (i) No comparability adjustment and allowance under the proviso to Rule 10CA(7) shall be made to the transfer price declared by the eligible assessee and accepted above [Rule 10TD(4)].

 (ii) Provisions ofsections 92D and 92E in respect of an international transaction shall apply irrespective of the fact that the assessee exercises his option for safe harbour in respect of such transaction [Rule 10TD(5)].

9.3.4.1 "OPERATING PROFIT MARGIN", DEFINED [RULE 10TA(l)] - "Operating profit margin", in relation to operating expense, means the ratio of operating profit, being the operating revenue in excess of operating expense, to the operating expense expressed in terms of percentage.

9.3.4.1.1 "Operating revenue", defined [Rule 10TA(k)] - "Operating revenue" means the revenue earned by the assessee in the previous year in relation to the international transaction during the course of its normal operations including costs relating to Employee Stock Option Plan (ESOP) or similar stock-based compensation provided for by the associated enterprises of the assessee to the employees of the assessee but not including the following, namely:—

  (i) interest expense;

 (ii) income arising on account of foreign currency fluctuations;

(iii) income on transfer of assets or investments;

(iv) refunds relating to income-tax;

 (v) provisions written back;

(vi) extraordinary incomes; and

​ (vii) other incomes not relating to normal operations of the assessee.

9.3.4.2 "OPERATING EXPENSE", DEFINED [RULE 10TA(j)] - "Operating expense" means the costs incurred in the previous year by the assessee in relation to the international transaction during the course of its normal operations including costs relating to Employee Stock Option Plan (ESOP) or similar stock-based compensation provided for by the associated enterprises of the assessee to the employees of the assessee, reimbursement to associated enterprises of expenses incurred by the associated enterprises on behalf of the assessee, amounts recovered from associated enterprises on account of expenses incurred by the assessee on behalf of those associated enterprises and which relate to normal operations of the assessee and depreciation and amortisation expenses relating to the assets used by the assessee, but not including the following, namely:—

  (i) interest expense;

 (ii) provision for unascertained liabilities;

(iii) pre-operating expenses;

(iv) loss arising on account of foreign currency fluctuations;

(v) extraordinary expenses;

(vi) loss on transfer of assets or investments;

(vii) expense on account of income-tax; and

​ (viii) other expenses not relating to normal operations of the assessee.

It is to be noted that reimbursement to associated enterprises of expenses incurred by the associated enterprises on behalf of the assessee, and amounts recovered from associated enterprises on account of expenses incurred by the assessee on behalf of those associated enterprises and which relate to normal operations of the assessee, shall be at cost.

9.3.4.3 "EMPLOYEE COST", DEFINED [RULE 10TA(ca)] - "Employee cost" includes,—

  (i) salaries and wages;

 (ii) gratuities;

(iii) contribution to Provident Fund and other funds;

(iv) the value of perquisites as specified in section 17(2);

 (v) employment related allowances, like medical allowance, dearness allowance, travel allowance and any other allowance;

(vi) bonus or commission by whatever name called;

(vii) lump sum payments received at the time of termination of service or superannuation or voluntary retirement, such as gratuity, severance pay, leave encashment, voluntary retrenchment benefits, commutation of pension and similar payments;

(viii) expenses incurred on contractual employment of persons performing tasks similar to those performed by the regular employees;

(ix) outsourcing expenses, to the extent of employee cost, wherever ascertainable, embedded in the total outsourcing expenses. Where the extent of employee cost embedded in the total outsourcing expenses is not ascertainable, 80% of the total outsourcing expenses shall be deemed to be the employee cost embedded in the total outsourcing expenses;

 (x) recruitment expenses;

(xi) relocation expenses;

(xii) training expenses;

(xiii) staff welfare expenses; and

​ (xiv) any other expenses related to employees or the employment.

9.3.4.4 "RELEVANT PREVIOUS YEAR", DEFINED [RULE 10TA(la)] - "Relevant previous year" means the previous year relevant to the assessment year in which the option for safe harbour is validly exercised.

9.3.4.5 "ACCOUNTANT", DEFINED [RULE 10TA(a)] - "Accountant" means an accountant referred to in the Explanation below section 288(2) and includes any person recognised for undertaking cost certification by the Government of the country where the associated enterprise is registered or incorporated or any of its agencies, who fulfils the following conditions, namely:—

 (I) If he is a member or partner in any entity engaged in rendering accountancy or valuation services—Entity or its affiliates have presence in more than two countries; and annual receipt of the entity in the year preceding the year in which cost certification is undertaken exceeds Rs. 10 crores;

(II) If he is pursuing the profession of accountancy individually or is a valuer—his annual receipt in the year preceding the year in which cost certification is undertaken, from the exercise of profession, exceeds Rs. 1 crore; and he has professional experience of not less than 10 years.

9.3.5 Non-applicability of safe harbour rules [Rule 10TF] - Nothing contained in Rules 10TA to 10TE shall apply in respect of eligible international transactions entered into with an associated enterprise located in any country or territory notified u/s 94A or in a no tax or low tax country or territory.

9.3.5.1 "NO TAX OR LOW TAX COUNTRY OR TERRITORY", DEFINED [RULE 10TA(i)] - "No tax or low tax country or territory" means a country or territory in which the maximum rate of income-tax is less than 15%.

9.3.6 Non-applicability of mutual agreement procedure (MAP) [Rule 10TG] - Where transfer price in relation to an eligible international transaction declared by an eligible assessee is accepted by the income-tax authorities u/s 92CB, the assessee shall not be entitled to invoke MAP under an agreement for avoidance of double taxation entered into with a country or specified territory outside India as referred to in section 90/90A.

9.4 SAFE HARBOUR RULES FOR SPECIFIED DOMESTIC TRANSACTIONS [RULES 10TH TO 10THD]

9.4.1 Who are 'eligible assessees'? [Rule 10THA] - The "eligible assessee" means a person who has exercised a valid option for application of safe harbour rules in accordance with the provisions of Rule 10THC, and—

 (i) is a Government company [as defined in section 2(45) of the Companies Act, 2013] engaged in the business of generation, supply, transmission or distribution of electricity; or

(ii) is a co-operative society engaged in the business of procuring and marketing milk and milk products.

9.4.2 Which are 'eligible specified domestic transactions'? [Rule 10THB] - "Eligible specified domestic transaction" means a specified domestic transaction undertaken by an eligible assessee and which comprises of:—

  (i) supply of electricity; or

 (ii) transmission of electricity; or

(iii) wheeling of electricity; or

(iv) purchase of milk or milk products by a co-operative society from its members.

9.4.3 Procedure for exercise of option for safe harbour [Rule 10THD] - The following is the procedure for exercise of option for safe harbour:—

Step 1 - For the purposes of exercise of the option for safe harbour, the assessee shall furnish a Form No. 3CEFB, complete in all respects, to the AO on or before the due date specified in Explanation 2 below section 139(1) for furnishing the return of income for the relevant assessment year. Further, the return of income is also to be furnished by the assessee on or before the due date of furnishing of Form No. 3CEFB.

Step 2 - On receipt of Form No. 3CEFB, the AO shall verify whether the assessee exercising the option is an eligible assessee, and whether the transaction in respect of which the option is exercised is an eligible specified domestic transaction, before the option for safe harbour by the assessee is treated to be validly exercised. Where the AO doubts the valid exercise of the option for the safe harbour by an assessee, he may require the assessee, by notice in writing, to furnish such information or documents or other evidence as he may consider necessary, and the assessee shall furnish the same within the time specified in such notice.

Step 3 - In the following cases, the AO shall, by order in writing, within a period of 3 months from the end of the month in which Form No. 3CEFB is received by him, declare the option exercised by the assessee to be invalid, after giving an opportunity of being heard to the assessee, and cause a copy of the said order to be served on the assessee:—

(a) Where the assessee does not furnish the information or documents or other evidence required by the AO; or

(b) Where the AO finds that the assessee is not an eligible assessee; or

(c) Where the AO finds that the specified domestic transaction in respect of which the option has been exercised is not an eligible specified domestic transaction; or

(d) Where the tariff is not in accordance with the circumstances specified in Rule 10THC(2).

If the AO does not pass an order within the time specified above, then the option for safe harbour exercised by the assessee shall be treated as valid.

Step 4 - If the assessee objects to the order of the AO declaring the option to be invalid, he may file his objections with the PCIT/CIT/PDIT/DIT, as the case may be, to whom the AO is subordinate, within 15 days of receipt of the order of the AO.

Step 5 - On receipt of the objection in Step 4, the PCIT/CIT/PDIT/DIT, as the case may be, shall, after providing an opportunity of being heard to the assessee, pass appropriate orders, within a period of 2 months from the end of the month in which the objection filed by the assessee is received by him, in respect of the validity or otherwise of the option exercised by the assessee and cause a copy of the said order to be served on the assessee and the AO. If the PCIT/CIT/PDIT/DIT, as the case may be, does not pass an order within the period specified above, then the option for safe harbour exercised by the assessee shall be treated as valid.

Note: The CBDT vide Notification No. 1/2024-25, dated 24-06-2024, has specified that Form 3CEFB shall be furnished electronically and shall be verified in the manner prescribed under sub-rule (1) of Rule 131.

9.4.4 Safe harbour rules [Rule 10THC] - Where an eligible assessee has entered into an eligible specified domestic transaction in any PY relevant to an AY and the option exercised by the said assessee is treated to be validly exercised under Rule 10THD, the transfer price declared by the assessee in respect of such transaction for that AY shall be accepted by the income-tax authorities, if it is in accordance with the circumstances specified below in respect of the eligible specified domestic transaction [Rule 10THC(1) & (2)]:—

S. No.	Eligible specified domestic transaction	Circumstances
(1)	Supply of electricity	The tariff in respect of supply of electricity, transmission of electricity, wheeling of electricity, as the case may be, is determined or the methodology for determination of the tariff is approved by the Appropriate Commission in accordance with the provisions of the Electricity Act, 2003 (36 of 2003)
	Transmission of electricity
	Wheeling of electricity
(2)	Purchase of milk or milk products by a co-operative society from its members	The price of milk or milk products is determined at a rate which is fixed on the basis of the quality of milk, namely, fat content and Solid Not Fat (SNF) content of milk; and— (a) the said rate is irrespective of,—   (i) the quantity of milk procured;   (ii) the percentage of shares held by the members in the co-operative society;   (iii) the voting power held by the members in the society; and (b) such prices are routinely declared by the co-operative society in a transparent manner and are available in public domain

It has further been provided that:—

 (i) No comparability adjustment and allowance under the proviso to Rule 10CA(7) shall be made to the transfer price declared by the eligible assessee and accepted above [Rule 10THC(3)].

(ii) Provisions of sections 92D and 92E​ in respect of a specified domestic transaction shall apply irrespective of the fact that the assessee exercises his option for safe harbour in respect of such transaction [Rule 10THC(4)].

​

​​​​​​​10.1-SECONDARY ADJUSTMENTS - CONCEPT

"Secondary adjustment" means an adjustment in the books of account of the assessee and its associated enterprise to reflect that the actual allocation of profits between the assessee and its associated enterprise are consistent with the transfer price determined as a result of primary adjustment, thereby removing the imbalance between cash account and actual

profit of the assessee

10.2-SECONDARY ADJUSTMENT IN CERTAIN CASES... SECTION 92CE

Section 92CE(1) provides that an assessee shall be required to carry out secondary adjustment where :

  ♦  the primary adjustment to transfer price, has been made suo motu by the assessee in his return of income; or

  ♦  made by the Assessing Officer has been accepted by the assessee; or

  ♦  is determined by an advance pricing agreement entered into by the assessee under section 92CC, on or after 01-04-2017; or

  ♦  is made as per the safe harbour rules framed under section 92CB; or

  ♦  is arising as a result of resolution of an assessment by way of the mutual agreement procedure under an agreement entered into under section 90 or 90A.

"Primary adjustment" to a transfer price means the determination of transfer price in accordance with the arm's length principle resulting in an increase in the total income or reduction in the loss, as the case may be, of the assessee. Primary Adjustment is known in common parlance as Transfer Pricing Adjustment or TP Adjustment.

"Secondary adjustment" means an adjustment in the books of account of the assessee and its associated enterprise to reflect that the actual allocation of profits between the assessee and its associated enterprise are consistent with the transfer price determined as a result of primary adjustment, thereby removing the imbalance between cash account and actual profit of the assessee.

First proviso to section 92CE(1) provides that Secondary adjustment shall not be carried out if,

  ♦  the amount of primary adjustment made in the case of an assessee in any previous year does not exceed one crore rupees or

  ♦  the primary adjustment is made in respect of an assessment year commencing on or before 1st April, 2016.

Section 92CE(2​) provides that where as a result of primary adjustment to the transfer price, there is an increase in the total income or reduction in the loss, as the case may be, of the assessee, the excess money or part thereof which is available with its associated enterprise shall be repatriated to India within the time as maybe prescribed (within the 90 days time-limit as prescribed by Rule 10CB)​.

"Excess money" means the difference between the arm's length price determined in primary adjustment and the price at which the international transaction has actually been undertaken.

Sub-sections (2A) to (2D) of section 92CE provide that in a case where the excess money or part thereof has not been repatriated in time, the assessee will have the option to pay additional income-tax at the rate of 18% on such excess money or part thereof. The additional tax shall be increased by a surcharge of 12%.

Sub-sections (2A) to (2D) provide as under:

  ♦  Where the excess money or part thereof has not been repatriated within the prescribed time, the assessee may, at his option, pay additional income-tax at the rate of 18% on such excess money or part thereof, as the case may be.

  ♦  The tax on the excess money or part thereof so paid by the assessee as above shall be treated as the final payment of tax in respect of the excess money or part thereof not repatriated.

  ♦  No further credit therefor shall be claimed by the assessee or by any other person in respect of the amount of tax so paid.

  ♦  No deduction under any other provision of this Act shall be allowed to the assessee in respect of the amount on which tax has been paid in accordance with the provisions of sub-section (2A).

  ♦  Where the additional income-tax as above is paid by the assessee, he shall not be required to make secondary adjustment and compute interest from the date of payment of such tax.

  ♦  If not so repatriated, such excess money shall be deemed to be an advance made by the assessee to such associated enterprise and the interest on such advance, shall be computed as the income of the assessee, in the manner as may be prescribed.

​

​​​​11.1-OBLIGATION OF ASSESSEE TO MAINTAIN TRANSFER PRICING DOCUMENTATION

Sub-section (1) of the new substituted section 92D provides as under:

 (i) every person who has entered into an international transaction or specified domestic transaction shall keep and maintain such information and document in respect thereof as may be prescribed[clause (i) of sub-section (1) of section 92D] ; and

(ii) every person being a constituent entity of an international group, shall keep and maintain such information and document in respect of an international group as may be prescribed. [clause (ii) of subsection(1) of section 92D]

Sub-section (4) of section 92D provides that the person referred to in clause (ii) of sub-section (1) shall furnish the information and document referred therein to the authority prescribed under sub-section (1) of section 286, in such manner, on or before such date, as may be prescribed.

Rule 10DA prescribes requirements for clause(ii) of section 92D(1) and section 92D(4).

Rule 10D(1) and 10D(3) prescribe information and documentation requirements in respect of international transactions and SDTs to be complied with by every person who enters into international transactions/SDTs. Rule 10D(2) provides that information and documentation requirements in Rule 10D(1) shall not apply only where the aggregate value, as recorded in the books of account, of international transactions entered into by the assessee exceeds one crore rupees. However, the assessee shall be required to substantiate, on the basis of material available with him, that income arising from international transactions entered into by him has been computed in accordance with section 92.

Every person who has entered into SDTs aggregating to more than ₹20crores in a financial year [Section 92D(1)(i) read with section 92BA] SDT will be SDT within the meaning of section 92BA only if aggregate SDTs in a financial year exceed ₹ 20 crores.

11.2-INFORMATION AND DOCUMENTS TO BE KEPT AND MAINTAINED UNDER SECTION 92D IN RESPECT OF INTERNATIONAL TRANSACTIONS OR SDTs - RULE 10D

Rule 10D(1) provides that every person who has entered into an international transaction or SDT shall keep and maintain the following information and documents, namely:—

(a) a description of the ownership structure of the assessee enterprise with details of shares or other ownership interest held therein by other enterprises;

(b) a 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 of the enterprises comprised in the group with whom international transactions or specified domestic transactions, as the case may be, have been entered into by the assessee, and ownership linkages among them;

(c) a broad description of the business of the assessee and the industry in which the assessee operates, and of the business of the associated enterprises with whom the assessee has transacted;

(d) the nature and terms (including prices) of international transactions or specified domestic transactions entered into with each associated enterprise, details of property transferred or services provided and the quantum and the value of each such transaction or class of such transaction;

(e) FAR Analysis- Functions, Assets and Risks Analysis- a 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 or the specified domestic transaction;

(f) a 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 ¹²[or the specified domestic transactions] entered into by the assessee;

(g) a record of uncontrolled transactions taken into account for analysing their comparability with the international transactions or the specified domestic 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 or specified domestic transactions, as the case may be;

(h) comparability analysis -a record of the analysis performed to evaluate comparability of uncontrolled transactions with the relevant international transaction ¹²[or specified domestic transaction]

(i) a description of the methods considered for determining the arm's length price in relation to each international transaction or specified domestic transaction or class of transaction, the method selected as the most appropriate method along with explanations as to why such method was so selected, and how such method was applied in each case;

(j) a 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

   ♦  adjustments, if any, which were made to account for differences between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions;

(k) the assumptions, policies and price negotiations, if any, which have critically affected the determination of the arm's length price;

(l) 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;

(m) 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.

Rule 10D(2A) provides that nothing contained in sub-rule (1), in so far as it relates to an eligible specified domestic transaction referred to in rule 10THB, shall apply in a case of an eligible assessee mentioned in rule 10THA and—

(a) the eligible assessee, referred to in clause (i) of rule 10THA, shall keep and maintain the following information and documents, namely:—

  (i) a description of the ownership structure of the assessee enterprise with details of shares or other ownership interest held therein by other enterprises;

  (ii) a broad description of the business of the assessee and the industry in which the assessee operates, and of the business of the associated enterprises with whom the assessee has transacted;

(iii) the nature and terms (including prices) of specified domestic transactions entered into with each associated enterprise and the quantum and value of each such transaction or class of such transaction;

(iv) a record of proceedings, if any, before the regulatory commission and orders of such commission relating to the specified domestic transaction;

 (v) a record of the actual working carried out for determining the transfer price of the specified domestic transaction;

(vi) the assumptions, policies and price negotiations, if any, which have critically affected the determination of the transfer price; and

(vii) any o​ther information, data or document, including information or data relating to the associated enterprise, which may be relevant for determination of the transfer price;

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(b) the eligible assessee, referred to in clause (ii) of rule 10THA, shall keep and maintain the following information and documents, namely:—

  (i) a description of the ownership structure of the assessee co-operative society with details of shares or other ownership interest held therein by the members;

 (ii) description of members including their addresses and period of membership;

(iii) the nature and terms (including prices) of specified domestic transactions entered into with each member and the quantum and value of each such transaction or class of such transaction;

(iv) a record of the actual working carried out for determining the transfer price of the specified domestic transaction;

 (v) the assumptions, policies and price negotiations, if any, which have critically affected the determination of the transfer price;

(vi) the documentation regarding price being routinely declared in transparent manner and being available in public domain; and

(vii) any other information, data or document which may be relevant for determination of the transfer price.]

Rule 10D(3) provides that the information specified in sub-rules (1) and (2A) shall be supported by authentic documents, which may include the following :

(a) official publications, reports, studies and data bases from the Government of the country of residence of the associated enterprise, or of any other country;

(b) reports of market research studies carried out and technical publications brought out by institutions of national or international repute;

(c) price publications including stock exchange and commodity market quotations;

(d) published accounts and financial statements relating to the business affairs of the associated enterprises;

(e) agreements and contracts entered into with associated enterprises or with unrelated enterprises in respect of transactions similar to the international transactions;

(f) letters and other correspondence documenting any terms negotiated between the assessee and the associated enterprise;

(g) documents normally issued in connection with various transactions under the accounting practices followed.

Rule 10D(4) provides that the information and documents specified under sub-rules (1), (2) and (2A), should, as far as possible, be contemporaneous and should exist latest by the specified date referred to in clause (iv) of section 92F. Where an international transaction or a specified domestic transaction continues to have effect over more than one previous year, fresh documentation need not be maintained separately in respect of each previous year, unless there is any significant change in the nature or terms of the international transaction or the specified domestic transaction, as the case may be, in the assumptions made, or in any other factor which could influence the transfer price, and in the case of such significant change, fresh documentation as may be necessary under sub-rules (1), (2) and (2A) shall be maintained bringing out the impact of the change on the pricing of the international transaction or the specified domestic transaction.

Rule 10D(5) provides that The information and documents specified in sub-rules (1), (2) and (2A) shall be kept and maintained for a period of eight years from the end of the relevant assessment year.

11.3-MAINTENANCE AND FURNISHING OF INFORMATION AND DOCUMENT BY CERTAIN PERSON UNDER SECTION 92D

Rule 10DA provides for maintenance and furnishing of information and document by certain person under Section 92D(1)(ii).

Rule 10DA(1) provides that every person, being a constituent entity of an international group shall,—

 (i) if the consolidated group revenue of the international group, of which such person is a constituent entity, as reflected in the consolidated financial statement of the international group for the accounting year, exceeds five hundred crore rupees; and

(ii) the aggregate value of international transactions,—

(A) during the accounting year, as per the books of account, exceeds fifty crore rupees, or

(B) in respect of purchase, sale, transfer, lease or use of intangible property during the accounting year, as per the books of accounts, exceeds ten crore rupees, ​keep and maintain the following information and documents of the international group, namely:—

(a) a list of all entities of the international group along with their addresses;

(b) a chart depicting the legal status of the constituent entity and ownership structure of the entire international group;

(c) a description of the business of international group during the accounting year including,—

  (I) the nature of the business or businesses;

 (II) the important drivers of profits of such business or businesses;

(III) a description of the supply chain for the five largest products or services of the international group in terms of revenue and any other products including services amounting to more than five per cent of consolidated group revenue;

(IV) a list and brief description of important service arrangements made among members of the international group, other than those for research and development services;

 (V) a description of the capabilities of the main service providers within the international group;

(VI) details about the transfer pricing policies for allocating service costs and determining prices to be paid for intra-group services;

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 (VII) a list and description of the major geographical markets for the products and services offered by the international group;

(VIII) a description of the functions performed, assets employed and risks assumed by the constituent entities of the international group that contribute at least ten per cent of the revenues or assets or profits of such group; and

(IX) a description of the important business restructuring transactions, acquisitions and divestments;

 (d) a description of the overall strategy of the international group for the development, ownership and exploitation of intangible property, including location of principal research and development facilities and their management;

 (e) a list of all entities of the international group engaged in development and management of intangible property along with their addresses;

 (f) a list of all the important intangible property or groups of intangible property owned by the international group along with the names and addresses of the group entities that legally own such intangible property;

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 (g) a list and brief description of important agreements among members of the international group related to intangible property, including cost contribution arrangements, principal research service agreements and license agreements;

 (h) a detailed description of the transfer pricing policies of the international group related to research and development and intangible property;

  (i) a description of important transfers of interest in intangible property, if any, among entities of the international group, including the name and address of the selling and buying entities and the compensation paid for such transfers;

 (j) a detailed description of the financing arrangements of the international group, including the names and addresses of the top ten unrelated lenders;

(k) a list of group entities that provide central financing functions, including their place of operation and of effective management;

(l) a detailed description of the transfer pricing policies of the international group related to financing arrangements among group entities;

(m) a copy of the annual consolidated financial statement of the international group; and

(n) a list and brief description of the existing unilateral advance pricing agreements and other tax rulings in respect of the international group for allocation of income among countries.

Rule 10DA(2) provides that the information and document specified under sub-rule (1) shall be furnished to the Joint Director referred to in sub-rule (1) of rule 10DB, in Form No. 3CEAA on or before the due date for furnishing the return of income as specified under sub-section (1) of section 139.

Rule 10DA(3) provides that the constituent entity shall furnish Part A of Form No. 3CEAA even if the conditions specified under sub-rule (1) are not satisfied.

Rule 10DA(4) provides that where there are more than one constituent entities of an international group required to file the information and document under sub-rule (2), the Form No. 3CEAA may be furnished by any one constituent entity, if, —

(a) the international group has designated such entity for this purpose; and

(b) the information has been conveyed in Form No. 3CEAB to the Joint Director referred to in sub-rule (1) of rule 10DB, in this behalf thirty days before the due date of furnishing the Form No. 3CEAA.

Rule 10DA(5) provides that the Principal Director General of Income-tax (Systems) or Director General of Income-tax (Systems), as the case may be, shall specify the procedure for electronic filing of Form No. 3CEAA and Form No. 3CEAB and shall also be responsible for evolving and implementing appropriate security, archival and retrieval policies in relation to the information furnished under this rule.

Rule 10DA(6) provides that the information and documents specified in sub-rule (1) shall be kept and maintained for a period of eight years from the end of the relevant assessment year.

Rule 10DA(7) provides that the rate of exchange for the calculation of the value in rupees of the consolidated group revenue in foreign currency shall be the telegraphic transfer buying rate of such currency on the last day of the accounting year.

For the purposes of this rule,—

(A) "telegraphic transfer buying rate" shall have the same meaning as assigned in the Explanation to rule 26;

(B) the terms 'accounting year', 'consolidated financial statement' and 'international group' shall have the same meaning as assigned in sub-section (9) of section 286

11.4-PENALTY FOR FAILURE TO KEEP AND MAINTAIN INFORMATION AND DOCUMENTATION IN RESPECT OF CERTAIN TRANSACTIONS [SECTION 271AA]

Section 271AA(1) provides that if any person in respect of an international transaction ⁴⁰[or specified domestic transaction,—

  (i) fails to keep and maintain any such information and document as required by sub-section (1) or sub-section (2) of section 92D;

 (ii) fails to report such transaction which he is required to do so; or

(iii) maintains or furnishes an incorrect information or document, the Assessing Officer or Commissioner (Appeals) may direct that such person shall pay, by way of penalty, a sum equal to two per cent of the value of each international transaction ⁴¹[or specified domestic transaction] entered into by such person.

Section 271AA(2) provides that If any person fails to furnish the information and the document as required under sub-section (4) of section 92D, the prescribed income-tax authority referred to in the said sub-section may direct that such person shall pay, by way of penalty, a sum of five hundred thousand rupees.

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​​​​​​​12.1-OBLIGATION OF A PERSON WHO ENTERS INTO INTERNATIONAL TRANSACTION/SDT

Every person who has entered into an international transaction or specified domestic transaction] during a previous year shall obtain a report from an accountant(CA) and furnish such report on or before the specified date in the prescribed form duly signed and verified in the prescribed manner by such accountant and setting forth such particulars as may be prescribed.

Prescribed form for report from accountant is Form No. 3CEB. Under proviso to rule 12(2) audit report shall be furnished electronically.

"Specified date" means the date one month prior to the due date for furnishing the return of income under sub-section (1) of section 139 for the relevant assessment year.[Section 92F(iv)] As due date for ITR in transfer pricing cases is 30^th November of the relevant assessment year, specified date is 31^St October. Report from accountant(CA) will have to be furnished on or before 31^st October of relevant assessment year

12.2-PENALTY FOR FAILURE TO FURNISH REPORT UNDER SECTION 92E[SECTION 271BA]

If any person fails to furnish a report from an accountant as required by section 92E, the Assessing Officer may direct that such person shall pay, by way of penalty, a sum of one hundred thousand rupees.

12.3- PENALTY FOR FAILURE TO FURNISH INFORMATION OR DOCUMENT UNDER SECTION 92D. [SECTION 271G]

If any person who has entered into an international transaction ¹[or specified domestic transaction] fails to furnish any such information or document as required by sub-section (3) of section 92D, the Assessing Officer or the Transfer Pricing Officer as referred to in section 92CA or the Commissioner (Appeals) may direct that such person shall pay, by way of penalty, a sum equal to two per cent of the value of the international transaction or specified domestic transaction for each such failure.

12.4- POWER OF AO/CIT(A) TO IMPOSE PENALTY ON AUDITOR FOR FURNISHING INCORRECT INFORMATION IN REPORTS OR CERTIFICATES

Section 271J of the Act provides for Penalty for furnishing incorrect information in reports or certificates. Section 271J provides that where the Assessing Officer or the Commissioner (Appeals), in the course of any proceedings under the Income Tax Act, 1961, finds that an accountant has furnished incorrect information in any report or certificate furnished under any provision of Income Tax Act or the rules made thereunder, the Assessing Officer or the Commissioner (Appeals) [or Joint Commissioner (Appeals) wef 01.04.2023] may direct that such accountant, shall pay, by way of penalty, a sum of ten thousand rupees for each such report or certificate. Thus, furnishing of incorrect information in transfer pricing audit report or any other report or certificate under the Act or the Rules may result in penalty of Rs 10000 per such report or certificate being imposed on tax auditor.

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​​​​13.1-SALIENT FEATURES OF THIN CAP ADJUSTMENT PROVISIONS UNDER SECTION 94B

Under the initiative of the G-20 countries, the Organization for Economic Co-operation and Development (OECD) in its Base Erosion and Profit Shifting (BEPS) project had taken up the issue of base erosion and profit shifting by way of excess interest deductions by the MNEs in Action plan 4. The OECD has recommended several measures in its final report to​ address this issue. In view of the above, the Finance Act, 2017 inserted section 94B in the Act ​in line with the recommendations of OECD BEPS Action Plan 4.

The highlights of section 94B are as under:

  ♦  It provides that deduction claimed in respect of interest expenses paid by an entity to its associated enterprises shall be restricted to 30% of its earnings before interest, taxes, depreciation and amortization(EBITDA) or interest paid or payable to associated enterprise, whichever is less.

  ♦  The provision shall be applicable to an Indian company, or a permanent establishment of a foreign company being the borrower who pays interest in respect of any form of debt issued to a non-resident or to a permanent establishment of a non-resident and who is an 'associated enterprise' of the borrower.

  ♦  Further, the debt shall be deemed to be treated as issued by an associated enterprise where it provides an implicit or explicit guarantee to the lender or deposits a corresponding and matching amount of funds with the lender.

  ♦  The provisions shall allow for carry forward of disallowed interest expense to eight assessment years immediately succeeding the assessment year for which the disallowance was first made and deduction against the income computed under the head "Profits and gains of business or profession" to the extent of maximum allowable interest expenditure.

  ♦  In order to target only large interest payments, section 94B provides for a threshold of interest expenditure of one crore rupees exceeding which the provision would be applicable.

  ♦  Banks and Insurance companies have been excluded from the ambit of the said provisions keeping in view of special nature of these businesses. Thin cap provisions of section 94B shall not apply to any Indian company or permanent establishment of foreign company engaged in business of banking or insurance. The Finance Act, ​2023 has amended section 94B(3) with effect from AY 2024-25 to also exempt from section 94B such class of non-banking financial companies as may be notified by the Central Government in the Official Gazette in this behalf.

13.2-INGREDIENTS OF THIN CAP PROVISIONS OF SECTION 94B

The following ingredients of section 94B are noteworthy

  (i) Section 94B(1) provides for a Limitation of interest deduction in respect of any debt issued by a non-resident upto the limit stipulated sub-section (2) [see para 13.2-1].

 (ii) The limitation of interest deduction in (i) above shall apply to Indian company, or a permanent establishment of a foreign company in India, being the borrower.

(iii) The debt [see para 13.2-2] referred to in (i) above is issued by a non-resident, being an associated enterprise of such borrower.

(iv) The limitation in (i) shall apply in respect of "any expenditure incurred by way of interest or of similar nature exceeding one crore rupees which is deductible in computing income chargeable under the head "Profits and gains of business or profession".

 (v) The provisions of section 94B shall not apply to an Indian company or a permanent establishment of a foreign company which is engaged in the business of banking or insurance.

(vi) The limitation shall apply notwithstanding anything contained in this Act.

13.2-1 It is "limitation of deduction" and not "disallowance"

  ♦  Section 94B provides for "limitation of interest deduction in certain cases".

  ♦  The deduction of expense in the form of interest or similar expense payable on debt in computing "profits and gains from business or profession" shall be limited to 30% of earnings before interest, taxes, depreciation and amortisation of the borrower in the previous year or interest paid or payable to associated enterprises for that previous year, whichever is less.

  ♦  The excess of interest over 30% as aforesaid shall be carried forward to the following assessment year or assessment years, and it shall be allowed as a deduction against the profits and gains, if any, of any business or profession carried on by it and assessable for that assessment year to the extent of maximum allowable interest expenditure (i.e. 30% of EBITDA).

  ♦  The limitation of deduction is in respect of "any expenditure by way of interest or of similar nature exceeding one crore rupees which is deductible in computing income chargeable under the head "Profits and gains of business or profession".

The thin cap adjustment will be limiting deduction to 30% as above incurrent year and carrying forward balance for availing in next 8 years. No secondary adjustment under section 92CE will be required on account of thin cap adjustment as above.

13.2-2-Debt

"Debt" means any loan, financial instrument, finance lease, financial derivative, or any arrangement that gives rise to interest, discounts or other finance charges that are deductible in the computation of income chargeable under the head "Profits and gains of business or profession".

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​​ Statutory background

 

14.1 In order to provide tax certainty and unanimity in approach in international transactions between associated enterprises, sections 92CC and 92CD have been inserted to provide for Advance Pricing Agreement (APA). The APA process is voluntary and supplements appeal and other DTAA mechanism for resolving transfer pricing dispute. Further, since the attribution of profits to the PE of a non-resident u/s 9(1)(i) also results in avoidable disputes in a number of cases, thus, in order to provide certainty, the provision has been amended to cover determination of attribution to PE within the scope of APA.

The substantive and procedural provisions relating to APA are discussed in the ensuing paras.

14.2 Advance pricing agreements

14.2.1 Introduction - An APA is an agreement between the CBDT and any person, which determines, in advance, the ALP or specifics the manner of the determination of ALP (or both), in relation to an international transaction. Hence, once APA has been entered into with respect to an international transaction, the ALP with respect to that international transaction, for the period specified in the APA, will be determined only in accordance with the APA. The APA process is voluntary and will supplement appeal and other DTAA mechanism for resolving transfer pricing dispute. The term of APA can be a maximum of 5 years.

The APA scheme notifies three types of APA - unilateral, bilateral and multilateral. The choice is on the applicant to choose a particular type of APA at the time of making the application.

As per Rule 10F(k), "unilateral agreement" means an agreement between the Board (CBDT) and the applicant which is neither a bilateral nor multilateral agreement. As per Rule 10F(c), "bilateral agreement" means an agreement between the Board (CBDT) and the applicant, subsequent to, and based on, any agreement referred to in Rule 44GA between the competent authority in India with the competent authority in the other country regarding the most appropriate transfer pricing method or the arm's length price. As per Rule 10F(h), "multilateral agreement" means an agreement between the Board (CBDT) and the applicant, subsequent to, and based on, any agreement referred to in Rule 44GA between the competent authority in India with the competent authority in the other countries regarding the most appropriate transfer pricing method or the arm's length price.

For the above purpose, as per Rule 10F(d), "competent authority in India" means an officer authorised by the Central Government for the purpose of discharging the functions as such for matters in respect of any agreement entered into u/s 90/90A. Further, as per Rule 10F(g), "most appropriate transfer pricing method" means any of the transfer pricing method, referred to in section 92C(1), being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or function performed by such persons or such other relevant factors prescribed by the Board under Rules 10B &10C.

14.2.2 Persons eligible toapply for APA [Rule 10G] - The following persons shall be eligible to enter into an APA:-

 (a) Any person who has undertaken an international transaction; or

 (b) Any person who is contemplating to undertake an international transaction.

14.2.3 Transactions covered under APA [section 92CC(1)] - The CBDT, with the approval of the Central Government, may enter into an advance pricing agreement (APA) with any person for the following transactions:-

 (1) In relation to all international transaction to be entered into by that person - For determining the ALP, or specifying the manner in which the ALP is to be determined; or

 (2) In relation to a transaction carried out by a non-resident u/s 9(1)(i) - For determining the income referred to in section 9(1)(i), or specifying the manner in which said income is to be determined, as is reasonably attributable to the operations carried out in India by or on behalf of that person.

14.2.3.1 MANNER OF DETERMINATION OF ALP OR INCOME REFERRED TO IN SECTION 9(1)(i) [SECTION 92CC(2) &(3)] - The manner of determining the ALP in relation to an international transaction, or income in relation to section 9(1)(i) as is reasonably attributable to the operations carried out in India by or on behalf of that non-resident may include any of the 6 methods prescribed u/s 92C r​/w Rules 10AB with such adjustments or variations as may be expedient or necessary so to do.

However, the ALP or income referred to in section 9(1)(i), in respect of which APA has been entered into, shall be determined only in accordance with the provisions of the APA so entered between the parties disregarding the provisions of section 92C/92CA or the methods provided by the 1962 Rules.

14.2.4 Pre-filing consultation [Rule 10H] - Any eligible person proposing to enter into an APA may, by an application in writing, make a request for a pre-filing consultation to the DGIT (International Taxation) in Form No. 3CEC. On receipt of such Form, the team (consisting of income-tax authorities) shall hold pre-filing consultation with such eligible person. Furthermore, the competent authority in India (or his representative) shall be associated in pre-filing consultation involving bilateral or multilateral agreement.

The pre-filing consultation shall, inter alia, determine the scope of the APA; identify transfer pricing issues: determine the suitability of international transaction for the agreement; and discuss broad terms of such APA.

It is pertinent to note that such consultation shall neither bind the CBDT nor the person to enter into the agreement or initiate the agreement process, and such consultation shall not be deemed to mean that the person has applied for entering into an APA.

14.2.4.1 APA TEAM - There are two different set-ups for processing of APA and to help the Board to enter into an APA. First set-up comprises of the competent authority of India [which is Joint Secretary (FT&TR-I) in the Ministry of Finance], and his representative (i.e., one Director and two Under Secretaries).

The second set-up is the APAteam which is defined in Rule 10F(j). "Team" means advance pricing agreement team consisting of income-tax authorities as constituted by the Board and including such number of experts in economics, statistics, law or any other field as may be nominated by the DGIT (International Taxation). At present the APA team, constituted by the CBDT, consists of one Commissioner, 4 Additional Commissioners and 4 Deputy Commissioners. The Board may include more officers in future in this team. The APA team reports to DGIT (International Taxation). DGIT may include experts in economics, statistics, law or any other field in the team who would be drawn from the Government Departments. CBDT may constitute more APA teams in future depending on the workload.

14.2.5 Application for entering info APA [Rule 10-I​] - An application shall be made in Form No. 3CED which shall be furnished to the:-

(1) DGIT (International Taxation) - in case of unilateral agreement; and

(2) Competent authority in India - in case of bilateral or multilateral agreement.

Such application may be filed by the eligible person in the following manner:-

(i) In respect of transactions which are of a continuing nature from dealings that are already occurring - At any time before the 1st day of the PY relevant to the 1st AY for which such application is made; or

(ii) In respect of remaining transactions - At any time before undertaking the transactions.

The above application shall be accompanied with the requisite fee payable and the proof of payment of such fees. The requisite fees are as follows:-

S. No.	Amount of international transaction entered into (or proposed to be undertaken) in respect of which APA is proposed during the proposed period of APA	Fees (Amount)
(1)	Amount not exceeding Rs. 100 crores	Rs. 10 lakhs
(2)	Amount not exceeding Rs. 200 crores	Rs. 15 lakhs
(3)	Amount exceeding Rs. 200 crores	Rs. 20 lakhs​

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Here, it is pertinent to note that as per Rule 10T(1), mere filing of an application shall not prevent the operation of Chapter X [containing sections 92 to 94B] for determination of ALP till the agreement is entered into.

As per section 92CC(10), where all application is made by the eligible assessee, the proceeding shall be deemed to be pending in the case of such assessee for the purposes of the 1961 Act.

14.2.6 Withdrawal of application [Rule 10J] - The applicant may withdraw the application for APA at any time by filing Form No. 3CEE before the finalisation of the terms of such agreement. However, the fee paid [i.e., Rs. 10/15/20 lakhs, as the case may be] shall not be refunded onsuch withdrawal.

14.2.7 Processing of application [Rules 10K &10L] - Every application filed in Form No. 3CED shall be complete in all respects and accompanied by requisite documents. However, if any defect is noticed in the application, or if any relevant document is not attached thereto, or the application is not in accordance with understanding reached in any pre-filing consultation [referred to in Rule 10H], then the DGIT (International Taxation), in case of unilateral agreement, and the competent authority in India, in ease of bilateral or multilateral agreement shall serve a deficiency letter on the applicant before the expiry of 1 month from the date of receipt of such application. In such a case, the applicant shall remove the deficiency or modify the application within a period of 15 days from the date of service of the deficiency letter or within such further period which, on an application made in this behalf, may be extended, so however, that the total period of removal of deficiency or modification does not exceed 30 days.

Consequently, the DGIT (International Taxation) or the competent authority in India, as the case may be, may pass an order, after providing an opportunity of being heard, providing that the application shall not be allowed to be proceeded with if the application is still defective and the defect is still not removed by such applicant. However, the fee paid by such applicant shall be refunded if such application shall not be allowed to be proceeded with.

If the application has been allowed to be proceeded with, then the team (consisting of income-tax authorities) or the competent authority in India (or his representative) shall process the same in consultation and discussion in the following manner:-

 (1) It shall be competent for the team (consisting of income-tax authorities) or the competent authority in India (or his representative) to:-

  (i) hold meetings with the applicant on such time and date as it deems fit;

 (ii) call for additional document or information or material from the applicant;

(iii) visit the applicant's business premises; or

(iv) make such inquiries as it deems fit in the circumstances of the case.

 (2) The applicant may also provide further document and information for consideration of the team (consisting of income-tax authorities) or the competent authority in India (or his representative).

 (3) For bilateral or multilateral agreement, the competent authority shall forward the application to DGIT (International Taxation) and shall also invoke the procedure provided in Rule 44GA. Such DGIT shall assign it to one of its team which shall carry out the enquiry and prepare a draft report which shall be forwarded by the DGIT to the competent authority in India.

(4) The DGIT (International Taxation) or the competent authority in India, as the case may be, and the applicant shall prepare a proposed mutually agreed draft agreement enumerating the result of the process (including the formal MAP arrangement with the competent authority in other country(ies) which has been accepted by the applicant within 30 days of such arrangement being communicated). It is pertinent to note that as per Rule 10T(2), any negotiation between the competent authority in India and the competent authority in other country(ies) shall be carried out as per DTAA entered into between India and that country.

(5) The APA shall be entered into by the CBDT with the applicant after its approval by the Central Government and then the DGIT (International Taxation) or the competent authority in India, as the case may be, cause a copy of such APA to be sent to the CIThaving jurisdiction over the assessee.

14.2.8 Amendment of application [Rule 10N] - An applicant may request, in writing, for an amendment to an application at any stage but before the finalisation of the terms of the APA.

The DGIT or the competent authority in India, as the case may be, may allow such amendment if that amendment does not have the effect of altering the nature of the application as originally filed by the applicant. Such amendment shall be given effect to only if it is accompanied by the additional fee if necessitated by such amendment in accordance with Rule 10-I [i.e., Rs. 10/15/20lakhs, as the case may be].

14.2.9 Terms of an APA [Rule 10M(1)] - An APA may, inter alia, include the following:-

(a) International transactions covered by such APA;

(b) Agreed transfer pricing methodology, if any, and definition of any relevant term to be used therein;

(c) Determination of ALP, if any, and definition of any relevant term to be used therein;

(d) Critical assumptions [i.e., the factors and assumptions that are so critical and significant that neither party entering into an agreement will continue to be bound by the agreement, if any of the factors or assumptions is changed];

(e) Rollback provisions [referred to in Rule 10MA];

(f) Any other conditions, if any.

14.2.9.1 BINDING EFFECT OF AN APA [SECTION 92CC(5) & (6); & RULE 10M(2) to (7)] - The APA entered into between the CBDT and any eligible person shall be binding on the following:-

(1) On the person in whose case, and in respect of the transaction in relation to which, the agreement has been entered into; and

(2) On the PCIT/CIT, and the income-tax authorities subordinate to him, in respect of the said person and the said transaction.

The binding effect of all APA shall cease only if any party has given due notice to the concerned other party(ies). However, such APA shall not be binding on the above persons if there is a change in law or facts having bearing on the agreement so entered. Again, it has been reiterated that the APA shall not be binding on the CBDT or the assessee if there is a change in any of the critical assumptions, or failure to meet conditions subject to which the APA has been entered into and in such a case, the APA can be revised [Rule 10Q] or cancelled [Rule 10R],as the case may be.

In this regard, the assessee shall give a notice, in writing, of such change in any of the critical assumptions or failure to meet conditions to the DGIT (International Taxation) as soon as practicable to do so. Additionally, the CBDT shall also give such a notice to the assessee as soon as it comes to their knowledge.

14.2.10 Validity period of an APA [section 92CC(4)] - An APA shall be valid for such period as may be specified in such agreement but such period shall not exceed 5 consecutive PYs.

14.3 Giving effect to anAPA

14.3.1 Statutory provisions [section 92CD] - Overriding the provisions of section 139, where any person has entered into an APA and prior to the date of entering into the agreement, any return of income has been furnished u/s 139 for any AY relevant to a PY to which such agreement applies, then such person shall furnish a modified return in accordance with and limited to the agreement within a period of 3 months from the end of the month in which the said agreement was entered into. In this connection, all other provisions of the 1961 Act shall apply accordingly as if modified return is a return furnished u/s 139.

If the assessment or reassessment proceedings for an AY relevant to a PY to which the APA applies have been completed before the expiry of period allowed for furnishing of modified return, then the AO shall, in a case where modified return is filed as stated above, pass an order modifying the total income of the relevant AY determined in such assessment or reassessment, as the case may be, having regard to and in accordance with the agreement. Notwithstanding anything containe​d in section 153/153B/144C, such order by the AOshall be passed within a period of 1 year from the end of the FY in which the modified return is furnished.

On the other hand, where the assessment or reassessment proceedings [or an AY relevant to the PY to which the agreement applies are pending on the date of filing ofmodified return, the AO shall proceed to complete the assessment or reassessment proceedings in accordance with the agreement taking into consideration the modified return so furnished. Notwithstanding anything contained in section 153/153B/144C, the period of limitation for completion of pending assessmentor reassessment proceedings shall be extended by a period of 12 months.

For the above purposes, it has been clarified that the assessment or reassessment proceedings for an AY shall be deemed to have been completed where an assessment or reassessment order has been passed, or where no notice has been issued u/s 143(2) till the expiry of the limitation period provided therein.

14.3.2 Furnishing of Annual Compliance Report [Rule 10-O] - The assessee shall furnish an Annual Compliance Report in Form No. 3CEF, in quadruplicate (i.e., 4 copies), to the DGIT (International Taxation) for each of the year covered in the APA at the later of the following dates:-

(1) Within 30 days of the due date of filing the return of income for that year; or

(2) Within 90 days of entering into all APA.

Such DGIT shall send 1 copy each of the annual compliance report to the competent authority in India, to the CIT who has the jurisdiction over the assessment of such assessee, and to the TPO having the jurisdiction over the assessee.

In view of Rule 131 read with Notification No. 3/2022 [F. No. DGIT(S)-ADG(S)-3/E-FILING NOTIFICATION/FORMS/2022/3813], dated 16-7-2022, Form No. 3CEF shall be furnished electronically under digital signature (if the return of income is required to be furnished under digital signature) or through EVC (in any other case).

14.3.3 Compliance audit of the APA [Rule 10P] - The TPO having the jurisdiction over the assessee shall carry out the compliance audit of the APA for each of the year covered in the agreement and for such audit, the TPO may require the assessee to:-

(a) Substantiate the compliance with the terms of the agreement (including satisfaction of the critical assumptions, correctness of the supporting data or information and consistency of the application of the transfer pricing method);

(b) Submit any information, or document, to establish that the terms of the agreement has been complied with.

The compliance audit report, for each year covered in the APA, shall be furnished by the TPO, within 6 months from the end of the month in which the Annual Compliance Report is received by him, to the DGIT (International Taxation) or the competent authority in India, as the case may be, mentioning therein his findings as regards compliance by the assessee with terms of the agreement. In case, if there is a finding with regard to the assessee's non-compliance with the terms of the agreement and, consequently, cancellation of APA is required, then the DGIT (International Taxation) shall forward the report to the CBDT.

However, the regular audit of the covered transactions [i.e.,international transaction(s) for which agreement has been entered into] shall not be undertaken by the TPO if an APA has been entered into under Rule 10L, except where the APA has been cancelled under Rule 10R.

Vide Circular No. 10/2015, dated 10-6-2015, it has been clarified that since rollback provisions are for past years, ALP for the rollback years would be agreed after full examination of all the facts, including validation of critical assumptions. Hence, compliance audit for the rollback years would primarily be to check if the agreed price or methodology has been applied in the modified return.

Rollback provisions in an APA [section 92CC(9A) & Rule 10MA]

14.4 The rollback provision relating to anAPA is contained in the provisions of section 92CC(9A) which provides that the APA may provide for determining the ALP or specify the manlier in which the ALP shall be determined, or income referred to in section 9(1)(i) or specifying the manner in which the said income is to be determined as is reasonably attributable to the operations carried out in India by or onbehalf of a non-resident, during any period not exceeding 4 PYs preceding the 1st of the PYs out of the 5 consecutive PYs as specified in section 92CC(4) for which an APA is entered into and the ALP or such income shall be determined in accordance with the said APA. In this regard, it is to be clarified that the ALP could be different for different years. However, the manner of determination of ALP (including choice of method, comparability analysis and tested party) would be same.

The APA shall contain the rollback provision in respect of an international transaction subject to the compliance of the following conditions [Rule 10MA(2)]:-

(a) International transaction is same as the international transaction to which the agreement (other than the rollback provision) applies. In this regard, it has been clarified vide Circular No.10/2015, dated 10-6-2015 that the term "same international transaction" implies that the transaction in the rollback year must be of same nature and undertaken with the same AE(s), as proposed to be undertaken in the future years and in respect of which agreement has been reached. In the context of FAR analysis, the restriction would operate to ensure that rollback provisions would apply only if the FAR analysis of the rollback year does not differ materiallyfrom the FAR validated for the purpose of reaching an agreement in respect or international transactions to be undertaken in the future years for which the agreement applies.

(b) Return of income for the relevant rollback year has been, or is, furnished by the applicant before the due date specified in Explanation 2 to section 139(1). In this regard, it has been clarified vide Circular No. 10/2015, dated 10-6-2015 that if return is filed u/s 139(5) (i.e., revised return) before the due date specified in Explanation 2, then applicant can apply for rollback. However, rollback will not be available if return is filed as belated return u/s 139(4).

(c) Report in respect of the international transaction had been furnished in accordance with section 92E.

(d) Applicability or rollback provision, in respect of an international transaction, has been requested by the applicant for all the rollback years in which the said international transaction has been undertaken by the applicant. In this regard, it has been clarified vide Circular No. 10/2015, dated 10-6-2015that the applicant does not have the option to choose the years for which it wants to apply for rollback. The applicant has to either apply for all the 4 years or not apply at all. However, if the covered international transaction(s) did not exist in a rollback year or there is some disqualification in a rollback year, then the applicant can apply for rollback for less than 4 years. Accordingly, if the covered international transaction(s) were not in existence during any of the rollback years, the applicant can apply for rollback for the remaining years. Similarly, if in any of the rollback years for the covered international transaction(s), the applicant fails the test of the rollback conditions contained in various provisions, then it would be denied the benefit of rollback for that rollback year. However, for other rollback years, it can still apply for rollback.

(e) Applicant has made an application seeking rollback in Form No. 3CEDA with proof of payment of an additional fee of Rs.5 Iakhs.

Where the rollback provision specifies the manner in which ALP shall be determined in relation to an international transaction undertaken in any rollback year, then such manner shall be the same as the manner which has been agreed to be provided for determination of ALP of the same international transaction to be undertaken in any PY to which the agreement applies (not being a rollback year) [Rule 10MA(4)].

However, the rollback provision shall not be provided in respect of an international transaction for a rollback year in the following cases [Rule 10MA(3)]:-

(1) If the determination of ALP of the said international transaction for the said year has been subject matter of an appeal before the ITAT and the ITAT has passed an order disposing of such appeal at any time before signing of the agreement. In this regard, it has been clarified vide Circular No. 10/2015, dated 10-6-2015 that the reason for not allowing rollback for the international transaction for which ITAT has passed an order disposing of an appeal is that it is the final fact-finding authority and, hence, on factual issues, the matter has already reached finality in that year. However, if the ITAT has not decided the matter and has only set aside the order for fresh consideration of the matter by the lower authorities with full discretion at their disposal, the matter shall not be treated as one having reached finality and, hence, benefit of rollback can still be given; or

(2) If the application of rollback provision has the effect of reducing the total income or increasing the loss, as the case may be, of the applicant as declared in the return of income of the said year. In this regard, it has been clarified vide Circular No. 10/2015, dated 10-6-2015 that in case the terms of rollback provisions contain specific agreement between the CBDT and the applicant that the agreed determination of ALP or the agreed manner of determination of ALP is subject to the condition that the ALP would get modified to the extent that it does not result in reducing the total income or increasing the total loss, as the case may be, of the applicant as declared in the return of income of the said year, the rollback provisions could be applied. For example, if the declared income is Rs. 100, the income as adjusted by the TPO is Rs. 120, and the application of the rollback provisions results in reducing the income to Rs. 90, then the rollback for that year would be determined in a manner that the declared income Rs. 100 would be treated as the final income for that year.

Vide Circular No. 10/2015, dated 10-6-2015, it has been clarified that if MAP has been already concluded for any of the international transactions in any of the rollback year under APA, rollback provisions would not be allowed for those international transactions for that year but could be allowed for other years, or for other international transactions for that year, subject to fulfilment of specified conditions specified in Rules 10MA and 10RA. However, if MAP request is pending for any of the rollback year under ALP, upon the option exercised by the applicant, either MAP or application for rollback shall be proceeded with for such year.

14.4.1 Withdrawal of rollback provision, clarification - Vide Circular No. 10/2015, dated 10-6-2015, it has been clarified that the applicant has an option to withdraw its rollback application even while maintaining the APA application for the future years. However, it is not possible to accept the rollback results without accepting the APA for the future years. It may also be noted that the fee of Rs. 5 Iakhs, specified under Rule 10MA, shall not be refunded even where a rollback application is withdrawn.

14.4.2 Giving effect to rollback provision in an APA [Rule 10RA] - The applicant shall furnish the modified return of income [referred to in s. 92CD] in respect of a rollback year to which the APA applies along with the proof of payment of any additional tax arising as a consequence of and computed in accordance with the rollback provision. Such modified return shall be furnished along with the modified return to be furnished in respect of 1st of the PYs for which the APA has been requested for in the application.

In case, if any appeal is filed by the applicant and is pending before the CIT(A) or ITAT or the High Court for a rollback year on the issue which is the subject matter or the rollback provision for that year, then the said appeal to such extent of the subject covered under the APA shall be withdrawn by the applicant before furnishing the modified return for the said year. Similarly, if any appeal is filed by the AO/PCIT/CIT and is pending before the ITAT or the High Court for the aforesaid period, then the said appeal to such extent of the subject covered under the APA shall be withdrawn by the relevant authority within 3 months of filing of modified return by the applicant.

The applicant or the AO/PCIT/CIT shall inform the Dispute Resolution Panel (DRP)/CIT(A)/ITAT/High Court, as the case may be, the fact of an agreement containing rollback provision having been entered into along with a copy of the same as soon as it is practicable to do so.

In case, effect cannot be given to the rollback provision of an agreement in accordance with the above provisions for any rollback year to which it applies on account of failure on the part of applicant, then the entire agreement shall be cancelled. This is so because the rollback provision has been introduced for the benefit of the applicant and is applicable at its option. Accordingly, if the rollback provision cannot be given effect to for any of the rollback years on account of the applicant not taking the actions specified above, then the entire agreement gets vitiated and will have to be cancelled.

14.4.3 Eligibility of rollback provision in case of merger/demerger, clarification - Vide Circular No. 10/2015, dated 10-6-2015, it has been clarified that in case of merger of companies, where one or more of those companies are APA applicants, principle to be followed is that the person (company) who makes the APA application would only be entitled to enter into the agreement and be entitled for the rollback provisions in respect of international transactions undertaken by it in rollback years. Other persons (companies) who have merged with this person (company) would not be eligible for the rollback provisions. To illustrate, if A, B and C merge to form C and C is the APA applicant, then the agreement can only be entered into with C and only C would be eligible for the rollback provisions. A and B would not be eligible for the rollback provisions. To illustrate further, if A and B merge to form a new company C and C is the APA applicant, then nobody would be eligible for rollback provisions.

In case of demerger of an APA applicant or signatory into two or more companies, same principles will apply as applied in case of merger. To illustrate, if A has applied for or entered into an APA and, subsequently, demerges into A and B, then only A will be eligible for rollback [or international transactions covered under the APA. As B was not in existence in rollback years, availing or grant of rollback to B does not arise.

Revision of an APA [Rule 10Q]

14.5 An APA may be revised by the CBDT either suomotu or on request of the assessee or the competent authority in India or the DGIT (International Taxation).

The CBDT may revise suomotu in the following circumstances:-

(a) If there is a change in critical assumptions or failure to meet a condition subject to which the agreement has been entered into; or

(b) If there is a change in law that modifies any matter covered by the agreement but is not of the nature which renders the agreement to be non-binding; or

(c) If there is a request from competent authority in the other country requesting revision of agreement, in case of bilateral or multilateral agreement. It is pertinent to note that as per Rule 10T(2), any negotiation between the competent authority in India and the competent authority in other country(ies) shall be carried out as per DTAA entered into between India and that country.

In such suomotu revision by the CBDT, an opportunity of being heard has to be provided to the assessee and the assessee should be in agreement of such revision, otherwise, the proposed revision may be cancelled as per Rule 10R.

In case of revision on the request of the assessee, if the CBDT is not in agreement with the request of assessee, then the CBDT shall reject the request, in writing, giving reason for such rejection.

For the purpose of arriving at the agreement for the proposed revision, the procedure provided under Rule 10L may be followed, so far as they apply.

The revised agreement shall include the date till which the original agreement is to apply and the date from.which the revised agreement is to apply.

Cancellation of an APA [Rule 10R]

14.6 An APA shall be cancelled by the CBDT, after giving an opportunity of being heard to the assessee, for any of the following reasons:-

(1) If the compliance audit has resulted in the finding of failure on the part of the assessee to comply with the terms of the APA;

(2) If the assessee has failed to file the Annual Compliance Report in time;

(3) If the Annual Compliance Report furnished by the assessee contains material errors;

(4) If the APA is to be cancelled in case the assessee is not in agreement with the proposed revision of APA under Rule 10Q;

(5) If the APA is to be cancelled in case effect cannot be given to the rollback provisions of an APA in accordance with Rule 10RA, for any rollback year to which it applies, on account of failure on the part of applicant.

In case of bilateral or multilateral agreement, the competent authority in India shall communicate with the competent authority in the other country(ies)) and provide reason for the proposed cancellation of the agreement. It is pertinent to note that as per Rule 10T(2), any negotiation between the competent authority in India and the competent authority in other country(ies) shall be carried out as per DTAA entered into between India and that country.

The order of cancellation of the APA shall:-

(a) be in writing;

(b) provide reasons for cancellation and for non-acceptance of assessee's submission, if any; and

(c) specify the effective date of cancellation of such APA, where applicable.

Such order shall be intimated to the AO and the TPO, having jurisdiction over such assessee.

Declaring APA void ab initio and its consequences [section 92CC(7) & (8)]​

14.7 The CBDT may, with the approval of the Central Government, by an order, declare an agreement to be void ab initio if it finds that the agreement has been obtained by the person by fraud or misrepresentation of facts. Rule 10R(6) further provides that the order declaring the APA as void ab initio on account of misrepresentation of facts shall be, in writing, and shall provide reason for such declaration and for non-acceptance of assessee's submission, if any.

As a result of such, the following consequences shall follow:-

(a) All the provisions of the 1961 Act shall apply to the person as if such APA had never been entered into; and

(b) Notwithstanding anything contained in the 1961 Act, for the purpose of computing the period of limitation, the period beginning with the date or such agreement and eliding on the date of order declaring agreement void ab initio shall be excluded. However, if immediately after the exclusion of the aforesaid period, the period of limitation is less than 60 days, then such remaining period shall be extended to 60 days and the aforesaid period of limitation shall be deemed to be extended accordingly.

Renewal of an APA [Rule 10S]

14.8 Request for renewal of an APA may be made as a new application for agreement using the same procedure as outlined above in Rules 10F to 10R [except Rule 10H relating to pre-filing consultation].

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