Budget 2011: Proposals relating to transfer pricing regulations and transactions with persons in notified jurisdiction

5% Range – Section 92C

Currently as per the provisions of section 92C, if more than one price is determined by the chosen transfer pricing method, then the arm’s length price shall be taken to be the arithmetical mean of such prices. However, as per provisio to section 92C(2), if the variation between the transaction price and the mean arm’s length price does not exceed 5 % of the transactional price,then  no adjustment would be made and the actual price shall be treated as the arm’s length price.

Through Finance Bill 2011, it is proposed that instead of “5%” variation as allowed currently in section 92C, the Central Government will notify “certain percentage” through official gazette. We understand that there are possibilities that the Central Government may come-up with the variations based on type of business activity, industry or nature of international transactions. For e.g. it may be 5% for Auto Ancillary and 10% for ITeS.

This amendment is proposed to take effect from 1^st April 2012.

Power of Transfer Pricing Officer (‘TPO’)

Computation of arm’s length price of International Transaction

As per the existing provisions of section 92CA, the TPO cannot determine the arm’s length price of an international transaction, which has not been referred to him by the Assessing Officer. The same is also upheld by the Delhi Bench of Income Tax Appellate Tribunal in case of Amadeus India Pvt. Ltd. (2011-TII-22-ITATDEL-TP).   Accordingly, during the course of transfer pricing audit, if some international transaction is identified by the TPO, which is not the one referred by the Assessing Officer, then in such a case the TPO  cannot compute the arms length price of such international transaction.

In order to overcome this administrative weakness, it is proposed to introduce “sub-section (2A)” of 92CA after “sub-section (2)” of 92CA,. The same will grant  power to the TPO to compute the arm’s length price of the  newly identified international transactions even though they may not be referred by the Assessing Officer for computation of arm’s length price.

Power of Survey

It is proposed to amend sub-section (7) of 92CA to give additional power to the TPO to conduct the survey as embedded under section 133A of the Act.

These amendments are proposed to take effect from 1^st June 2011.

Report under section 92E and Due date of Return under section 139

Section 139 of the Act stipulates that 30^th September of the assessment year is the due date for filing return of income in case of corporate taxpayer. In addition to filing return of income, the taxpayer having international transactions during the year is also required to file  a report from Chartered Accountant under section 92E in Form 3CEB on or before due date of filing of return of income.

One should appreciate that the Government recognized the practical difficulty faced by the taxpayer in “accessing” the “contemporary comparable data” and to furnish a report under Form 3CEB before 30^th September of the relevant assessment year. It is therefore proposed to amend section 139 and to extend the due date of filing return of income and filing of report under Form 3CEB of such taxpayer to 30^th November.

To our mind, now it would be important that the transfer pricing document, along with the comparability analysis, prepared by the taxpayer should be based on the current year data instead of previous year data.

This amendment is proposed to take effect from 1^st April 2011.

Transaction with the person in notified jurisdiction and applicability of transfer pricing provisions

It is proposed to insert a new section 94A in the Act to specifically deal with the transactions undertaken by the resident taxpayer with a person located in a jurisdiction or country which does not effectively exchange information with India. It is proposed:

• That Central Government will notify such jurisdiction or country
• That if a taxpayer enters into a transaction, where one of the parties to the  transaction is a person located in a notified jurisdiction or country, then all the parties to the transaction shall be deemed to be the associated enterprises and the transaction will be deemed to be the international transaction and accordingly transfer pricing regulation would be applicable
• That no deduction in respect of a payment made to any financial institution shall be allowed unless the taxpayer furnishes the authorization to the tax authorities to seek relevant information from the financial institution
• That in order to claim expenditure or allowance (including depreciation) arising from a  transaction with the  person in notified area, the taxpayer shall maintain the prescribed document/ information
• That if the taxpayer receives some money/ sum from the person in notified area, then the  taxpayer must satisfy the source of fund in the hands of that person or it will be deemed to be the income of the taxpayer
• That rate of TDS shall be 30% or the rate in force or rate as per the Act, which ever is higher

This amendment is proposed to take effect from 1^st June 2011.

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Best Regards

Gaurav Garg

JGarg Economic Advisors

New Delhi, India

(M) +91 9899994934

(E) gaurav@jgarg.com