Regulatory Framework and Compliance Requirements
In India, Section 92 of the Income-tax Act requires that transactions between associated enterprises be conducted at arm’s length. Provisions exclude determination of allowances if they lead to tax reduction or increased losses. The threshold for specified domestic transactions (SDTs) increased to INR 200 million for FY 2015-16.
References to International Standards
India’s transfer pricing regulations refer to Section 92A and 286 of the Income-tax Act 1961, Rule 10D of the Income Tax Rule 1962, Section 92C, and Section 92B.
Defining Related Party
India’s Income-tax Act 1961 defines related parties as enterprises participating directly or indirectly in management, control, or capital. It also includes common control, capital, or management through another enterprise and various other relationships.
Nature of Transfer Pricing Documentation
India requires individuals involved in international transactions to maintain documentation substantiating the arm’s length price with master files, local files, and country-by-country reports.
Tax Havens & Blacklists
India is considering a list that includes low tax jurisdictions to discourage business dealings with such countries. However, it currently doesn’t have an official tax haven list.
Advance Pricing Agreement (APA)
APAs are available only for international transactions, not SDTs. They can be unilateral, bilateral, or multilateral and have a maximum validity of 5 years, with a rollback mechanism for up to 4 prior years. Pre-filing consultations are allowed, and taxpayers must file an Annual Compliance Report.
The tax authorities may conduct audits to assess TP documentation compliance. Various factors influence their decision, with an emphasis on high-value transactions and complex arrangements.
Transfer Pricing Documentation
India requires a local file, which remains unchanged post-BEPS Action 13. The documentation must be prepared and maintained by November 30 of the relevant year. Rule 10D of the Income Tax Rule 1962 specifies the information needed.
Choice of Transfer Pricing Method
India doesn’t prioritize specific methods. The “Most Appropriate Method” is chosen based on transaction nature, data availability, reliability, and adjustability.
Economic Analysis – Benchmark Study
A benchmark study is required, with a preference for local comparables. International comparables may be used based on circumstances.
Inter-company (IC) Legal Agreement
Legal agreements formalizing financial relationships have a lower ranking in line with the OECD 2017 Guidelines, emphasizing the “conduct of parties.”
Companies must include financial statements in TP documentation.
Production Process for TP Relevant Returns, Documents, Forms, and Financials
Filing requirements, formats, deadlines, thresholds, and languages are outlined for CIT, master files, local files, CbCR, local forms, annual accounts, and segmented P&L documentations.
TP documentation must be in English.
The intimation should be submitted at least two months before the CbC report due date, with a deadline of January 31 for each fiscal year.
Relevant documentation must be maintained for 8 years from the fiscal year’s end in which the tax return is filed.
Penalties and Interest Charges
Penalties apply for non-compliance, including daily fines for not furnishing reports or providing inaccurate information and substantial penalties for various non-compliance instances.