Transfer Pricing

1
TRANSFER PRICING
LEARNING OUTCOMES
After studying this chapter, you would be able to -

 appreciate the need for incorporation of transfer pricing provisions in
the Income-tax Act, 1961;
 examine the meaning and significance of arm’s length principle and the
practical difficulties in application of arm’s length principle;
 appreciate the meaning and significance of the terms “associated
enterprise”, “international transaction”;
 analyze the functions performed, assets used and risks assumed to
determine the arm’s length price of an international transaction;
 determine the arm’s length price of an international transaction using
the most appropriate method;
 pinpoint the responsibilities of a person entering into an international
transaction to keep and maintain prescribed information and
documents;
 examine the country-by-country reporting requirements and related
matters incorporated in the income-tax law in compliance with BEPS
Action Plan 13;
© The Institute of Chartered Accountants of India

1.2 INTERNATIONAL TAXATION
 identify the circumstances when the Assessing Officer can invoke the
power to determine the arm’s length price;
 identify the cases where secondary adjustments have to be made;
 appreciate the mechanisms for dispute resolution in transfer pricing
cases, including filing of objections before Dispute Resolution Panel,
filing of appeal, adoption of safe harbour and entering into advance
pricing agreements;
 appreciate the specific anti-avoidance measures incorporated in the
Income-tax Act, 1961 in respect of transactions with persons located in
notified jurisdictional areas;
 appreciate the provisions incorporated in the Income-tax Act, 1961
restricting interest deduction claimed by an entity in respect of borrowings
from an associated enterprise in line with BEPS Action Plan 4;
 integrate, analyse and apply the relevant provisions to make
computations and address issues relating to transfer pricing.

TRANSFER PRICING 1.3
1.1 INTRODUCTION
Transactions between related entities may have inherent advantage as compared to transactions
between unrelated entities. Such advantage may be by means of price concessions, extended
credit period, reduced interest rates, lower logistics expenses, etc. With the advent of
globalization, multinational companies (MNCs) have established presence in all parts of the world
and are conducting business seamlessly. They can enjoy the privileges of doing business with
related parties whereas companies which deal with unrelated parties in an open market are not
able to exploit such benefits. Therefore, in order to ensure safe and fair dealing among all
companies and markets, the need to introduce regulations for transfer pricing was felt.
In addition to price related benefits, MNCs may
also bear in mind the goal of minimizing tax
burden and maximizing profits but the two tax
jurisdictions/countries also need to ensure that
they are not losing their fair share of tax revenue
in such cases. This has given rise to an
internationally accepted practice that such
‘transfer pricing’ should be governed by the Arm’s
Length Principle (ALP) and the transfer price should be the price applicable in case of a
transaction of arm’s length. In other words, the transaction between associates should be priced in
the same way as a transaction between independent enterprises. Today, transfer pricing is one of
the most important issues faced by MNCs as they attempt to fairly distribute their profits amongst
the companies within the group. While on the other hand, the tax authorities implement transfer
pricing regulations and strengthen the enforcement in order to prevent a loss of revenue for each
regime where these companies are incorporated. The net result of this dichotomy is that transfer
pricing has become a major tax issue for the companies.
The principles governing the taxation of MNCs are embodied in the OECD Model Tax Convention
of Income and Capital (OECD Model Convention), which serves as the basis for the bilateral
income-tax treaties between Organization of Economic Cooperation and Development (OECD)
member countries and between OECD member and non-OECD member countries. According to
these guidelines, “Transfer prices” are the prices at which an enterprise transfers physical
goods and intangible property or provides services to associated enterprises. Two
enterprises are “associated enterprises” if one of the enterprises participates directly or indirectly
in the management, control or capital of the other or if both enterprises are under common control.
Since international transfer pricing involves more than one tax jurisdiction, any adjustment to the
transfer price in one jurisdiction requires a corresponding adjustment in the other jurisdiction. If a
corresponding adjustment is not made, double taxation will result.

1.2 WHAT IS TRANSFER PRICING?

Transfer pricing as a concept traditionally began with the amount charged by one segment of an
enterprise for a product or service that it supplied to another segment of the same enterprise. With
the evolution of MNC concept, segments of the enterprise started spreading as independent
entities operating in various parts of the globe. Accordingly, the term has evolved to mean price
which is charged between two or more entities of a MNC [associated enterprises (AEs)]
operating in different countries.
For example, common business transactions between the AEs are in the nature of purchase and
sale of assets, raw materials, finished goods and provision of services. Due to the lack of a natural
conflict between the parties involved in commercial transactions in a group scenario, most MNCs,
given their wide geographical presence, have a possibility to use their position to arrange business
transaction to favourably exploit tax positions. By structuring transactions in a way which is most
beneficial to the MNC from a tax perspective, the MNC is basically able to steer and manage
where it books its profits and therefore also can influence actively the tax burden.
This, the tax administrators believe is unjust. Thus, to protect each country’s fair share in an
MNC’s total profit, the tax authorities have established principles under which it can be assumed
that related parties deal with each other as if they were independent and this principle is called the
arm’s length principle.
Example:
X Limited, a trader of goods, purchases and sells goods as below:
Particulars Related parties Unrelated parties
Purchases 8,00,000 5,00,000
Sales 10,00,000 10,00,000
Profits 2,00,000 5,00,000
By increasing the costs of purchases from related parties, X Ltd has reduced its taxable profits in
said jurisdiction.
1.3 MEANING OF THE TERM “ARM’S LENGTH PRINCIPLE”

The Arm’s Length Price (ALP) of a transaction between two associated enterprises is the price that
would be paid if the transaction had taken place between two comparable independent and
unrelated parties, where the consideration is only commercial.
The Arm’s Length Principle, in the context of taxation, is explained in the OECD Model Tax
Convention as under:
“Where conditions are made or imposed between two associated enterprises in their commercial
or financial relations which differ from those which would be made between independent
enterprises, then any profits which would, but for those conditions, have accrued to one of the

enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits
of that enterprise and taxed accordingly.”
The OECD transfer pricing guidelines provides guidance on the application of the arm’s length
principle in order to arrive at the proper transfer pricing range between associated enterprises.
Market forces determine business relations between independent parties. The arm’s length
principle seeks to adjust the profits between two associated enterprises by comparing the same as
if the transaction is carried out between two independent enterprises. It treats each enterprise as a
separate independent entity rather than as inseparable parts of a single unified business.
1.4 SIGNIFICANCE OF ARM’S LENGTH PRINCIPLE

There are several reasons as to why the OECD member countries and other countries have
adopted the arm’s length principle.
Parity between MNCs and independent enterprises – A major reason is that the ALP provides
broad parity of tax treatment for MNCs and independent enterprises. Since the ALP puts
associated and independent enterprises on a more equal footing for tax purposes, it avoids the
creation of tax advantages and disadvantages that would otherwise distort the relative competitive
positions of these entities. The ALP, thus promotes the growth of international trade and
investment by removing these tax considerations from economic decisions.
Determines real taxable profits - The transfer price adopted by a multinational has a direct
bearing on the proportional profit it derives in each country in which it operates. If inadequate or
excessive consideration is paid for the transfer of goods, services or intangible property between
the members of an MNC group, the income calculated for each of those members will be
inconsistent with their relative economic contributions. An ‘arm’s length’ price – a price two
independent firms operating at arm’s length would agree on – is needed to determine taxable
profits earned in each country. The arm’s length doctrine permits the taxing authorities to rectify
the accounts of the enterprise so as to reflect correctly the income that the establishment would
have earned if it were an independent enterprise.
Reduction of artificial price distortion - If the ALP is not followed, an MNC will sell goods/
provide services to a controlled entity in a high tax regime at a high price (which exceeds the
market price) and to an entity in a low-tax regime or a tax haven at a low price (which is lower
than the market price). This would result in extreme price distortion of goods and services in the
international market.
Minimization of double taxation – The ALP is an international concept and it represents the
international norm. The potential for double taxation is minimized, since in international transfer
pricing, adjustment to the transfer price in one tax jurisdiction requires a corresponding adjustment
in the other tax jurisdiction.
Accurate measurement of economic contribution – The ALP provides accurate measurement
of the fair market value of the economic contribution units of an MNC. The focus of the ALP is to

ensure that the proper amount of income is attributed to where it is earned. This result in each unit
of the MNC earning a return commensurate with its economic contribution and risk assumed.
1.5 PRACTICAL DIFFICULTIES IN APPLICATION OF ALP

There are, however, certain practical difficulties in applying the ALP, which are described
hereunder:
True comparison difficult in certain cases – The commercial and financial conditions governing
a transaction between independent enterprises are, by and large, never similar to those existing
between associated enterprises. As a result, there cannot be a true comparison. The economies of
scale and integration of various business activities of the associated enterprise may not be truly
appreciated by arm’s length principle. Further, associated enterprises may enter into transactions
which independent enterprises may not enter into, like say, licensing of valuable intangible or
sharing the benefits of research. The owner of an intangible may be hesitant to enter into licensing
arrangements with independent enterprises for fear of the value of the intangible being degraded.
In contrast, he may be prepared to offer terms that are less restrictive to associated enterprises
because the use of the intangible can be closely monitored. Further, there is no risk to the overall
group’s profit from a transaction of this kind between members of an MNC group. In such
situations, where independent enterprises seldom undertake transactions of the type entered into
by associated enterprises, the ALP is difficult to apply because there is little or no direct evidence
of what conditions would have been established by independent enterprises.
Availability of data and reliability of available data – There may be difficulty in getting adequate
and reliable information and data in order to apply arm’s length principle. The comparison of
controlled and uncontrolled transactions between associated and independent enterprises usually
requires a large quantum of data. Easily accessible information may be incomplete and difficult to
interpret while the relevant and required information may be difficult to obtain due to geographical
constraints or secrecy and confidentiality aspects. In other cases, information about an independent
enterprise which could be relevant may not exist at all. Due to these difficulties, the tax administration
and tax payers may have to exercise reason and judgment when applying the ALP.
Absence of market price - There must be a reasonably reliable and comparable uncontrolled
market price. The ALP does not meet this condition because of the nature of the market place. A
market price is an outcome of unique negotiations. It may be possible to know the price range, but
it is very difficult to know the actual market price unless a market transaction actually takes place.
Absence of comparable market price for “intangible” transactions - The ALP reaches a
comparable uncontrolled market price that is reasonably reliable for standard transactions where
the price range is narrow and market price is certain. However, the ALP generally fails to achieve
a comparable market price for transactions involving intangibles because they are unique. The
unique nature of these transactions creates a very wide price range.
Administrative burden - In certain cases, the arm’s length principle may result in an

administrative burden for both the taxpayer and the tax administrations of evaluating significant
numbers and types of cross-border transactions.
Time lag - Although an associated enterprise normally establishes the conditions for a transaction
at the time it is undertaken, at some point the enterprise may be required to demonstrate that
these are consistent with the arm’s length principle. The tax administration may also have to
engage in the verification process perhaps some years after the transactions have taken place. It
may result in substantial cost being incurred by the tax payer and the tax administration. It is also
difficult to appreciate the business realities which prevailed at the time when the transactions were
entered into. This may lead to bias against the tax payer.
In spite of the practical difficulties listed above, OECD member countries are of the view that the ALP
does provide a sound basis to appreciate the transfer pricing between associated enterprises. It has so
far provided acceptable solutions to both taxpayers and the tax administrations. The experience gained
so far should be effectively used to remove the practical difficulties and improve the administration.
1.6 EVOLUTION OF TRANSFER PRICING IN INDIA

Post the globalization/ liberalization in 1991, the enhanced presence of MNCs in India and their
ability to allocate profits in different jurisdictions by controlling prices in intra-group transactions,
made the issue of transfer pricing a matter of serious concern for the Indian exchequer. Just like
their global counterparts, the Indian tax authorities presumed the ability/intention of the MNCs to
resort to transfer pricing as tool to shift profits and thereby erode the Indian tax base. This
presumption ultimately laid to the evolution of the transfer pricing regulations in India.
Pre 2001 scenario: Prior to the introduction of comprehensive transfer pricing regulations by
the Finance Act, 2001, certain basic provisions existed under the income-tax and the customs and
excise legislation. While provisions like erstwhile Section 92 and Rule 10 did exist in law (which
empowered the Assessing Officers to examine inter-company transactions of MNC group),
however, given their restricted scope/ methodology, it was felt over a period of time that the same
were not sufficient enough to prevent the erosion of the Indian tax base on account of inter-
company transactions undertaken by MNC members. There was no detailed statute on transfer
pricing. Further, the term “related parties” found mention under the company law and the anti-trust
legislation.
In Mazagaon Dock Ltd v. CIT, the concept of transfer pricing was considered by the Supreme
Court with reference to section 42 of the Indian Income-tax Act, 1922, when the law relating to
transfer pricing was in its rudimentary stage. The question before the Supreme Court was whether
the transaction between the non-resident British companies and the Indian company were at arm’s
length. If not, whether it is covered within the scope set out under section 42(2) of the Indian
Income-tax Act, 1922. It was observed that section 42 states that it is not the question of the non-
residents carrying on business in the abstract but of their carrying on business with the resident.
The arrangement has to be looked into and decided on the taxability.

The Apex court rejected the contentions of the Indian company and held that profits, if any
foregone, must be taxed. The court expressed the view that the fact, that the dealings were such
as to yield no profit, was immaterial.
Section 42(2) in the Indian Income-tax Act, 1922 dealt with the situation concerning ‘Transfer pricing’.
On the enactment of the Income-tax Act, 1961 (the Act), the provisions of section 42(2) were
incorporated in this Act in the form of section 92 with minor changes to bring out the purport of the
section more clearly. Section 92 was backed by Rule 10 and 11 of the Income-tax Rules, 1962.
For invoking section 92, certain requisite conditions had to exist. These were:
(i) The business was transacted between a resident and a non-resident.
(ii) There was a close connection between the two.
(iii) On the account, the course of business was so arranged that the business produces either no
profit or less than normal profit to the resident.
If the conditions at (i) to (iii) were found to exist, the Assessing Officer was empowered under the
Act to:
• determine the amount of profits, which may reasonably be deemed to have been derived from
such business; and
• include such amount in the total income of the resident.
Rules 10 and 11 provided the methodology for working out the normal profit to be included in the
income of the resident assessee in the circumstances mentioned earlier. The normal profit could
be calculated:
(i) at such percentage of the turnover so accruing or arising as the Assessing Officer may
consider to be reasonable, or
(ii) on any amount which bears the same proportion to the total profits and gains of the business
of such person, as the receipts so accruing or arising bear to the total receipts of the
business, or
(iii) in such other manner as the Assessing Officer may deem suitable.
Section 92 as it existed prior to its amendment, was not sufficient to deal with complex cases of
transfer pricing. Its primary shortcomings were:
• The section applied only to ‘businesses’ between a resident and a non-resident. Since
business demands a continuity of relationship, isolated transactions were outside its purview.
• The section was not wide enough in its scope to cover cases of transfer of services or
intangibles.
• The section was not applicable in the case where a non-resident entered into a transaction
with another non-resident. Therefore, business transactions between a permanent

establishment of a non-resident company and a non-resident were not covered.

• The section provided for adjustment of profits instead of adjustment of prices and the rules
prescribed for estimating profits were not scientific.
• The concept of ‘close connection’ was not defined, leading to arbitrariness in applying the
said provisions.
• No detailed rules for necessary documentation were prescribed to defend actions by the
Revenue authorities.
In March 1999, the Standing Committee on Finance realised that the existing transfer pricing policy
framework may not be effective to curb transfer pricing abuse in India. In view of the above, the
Central Board of Direct Taxes (CBDT) set up an Expert Group on Transfer Pricing in November,
1999 to determine whether any amendments were necessary in the Act and if so to suggest a
regulatory framework for the same.
The Group submitted its report in January, 2001 to the CBDT. The Ministry of Finance after
considering the report introduced exhaustive legislative framework to deal with transfer pricing
issues vide the Finance Act, 2001.
Post 2001 scenario: The Finance Act, 2001 introduced Transfer Pricing Regulations for curbing
tax avoidance and manipulation of intra-group transactions by abusing transfer pricing.
Specifically, the memorandum to the Finance Act, 2001 stated that:
“The increasing participation of multinational groups in economic activities in the country has given
rise to new and complex issues emerging from transactions entered into between two or more
enterprises belonging to the same multinational group. The profits derived by such enterprises
carrying on business in India can be controlled by the multinational group, by manipulating the
prices charged and paid in such intra-group transactions, thereby, leading to erosion of tax
revenues. With a view to provide a statutory framework which can lead to computation of
reasonable, fair and equitable profits and tax in India, in the case of such multinational enterprises,
new provisions are proposed to be introduced in the Income-tax Act.”
Accordingly, sections 92 to 92F had been included in Chapter X of the Income-tax Act, 1961,
through the Finance Act, 2001, providing for a transfer pricing mechanism based on computation
of income from cross-border transactions. The following conditions must be satisfied in order to
attract the special provisions of Chapter X relating to avoidance of tax:
(i) There must be an international transaction;
(ii) Such international transaction should be between two or more associated enterprises either
or both of whom are non-residents;
(iii) Such international transaction should be in the nature of:
(a) purchase, sale or lease of tangible or intangible property; or

(b) provision of service; or

(c) lending or borrowing money; or
(d) any other transaction having a bearing on the profits, income, losses or assets of such
enterprise.
(iv) Further, such transaction may also involve allocation or apportionment of, or any contribution
to any cost or expenses incurred or to be incurred in connection with a benefit, service or
facility provided or to be provided to any one or more of the associated enterprises on the
basis of mutual agreement or arrangement between such associated enterprises.
(v) Such international transaction must be done at arm’s length price and if such international
transaction has been done at less than the arm’s length price, it shall require determination of
income or apportionment of cost or expense on the basis of arm’s length price.
(vi) The above adjustment should either result in an increase of income or decrease of loss
returned by the assessee. In other words, the adjustment should not have the effect of
reducing the income chargeable to tax or increasing the loss.
The provisions of Chapter X apply to international transactions entered into with effect from 1st April,
2001. Rules 10A to 10E have been inserted in the Income-tax Rules, 1962 by a notification dated
21st August, 2001. These sections and rules of the Income-tax Act, 1961 and the Income-tax Rules,
1962 respectively, will affect all non-corporate and corporate assessees who have dealings with non-
residents for import or export of goods, properties or services. In other words, price paid for import of
goods, properties or services and price received for export of goods, properties or services will be
subject to scrutiny by the Assessing Officer. Therefore, it is necessary to make a detailed study of
these provisions. All assessees who have such dealings with non-residents will have to keep detailed
records as prescribed under the Rules and will have to furnish audit report every year with the return
of income about their international transactions.
1.7 COMPUTATION OF INCOME FROM TRANSACTION

WITH NON-RESIDENT [SECTION 92]
Section 92 provides that any income arising from an “international transaction” shall be computed
having regard to “the arm’s length price”. For this purpose the allowance for any expense or
interest shall be determined on the basis of arm’s length price. The section further provides that in
an international transaction between two or more ‘associated enterprises” when there is a mutual
agreement or arrangement for the allocation or apportionment of, or any contribution to, any cost
or expenses in connection with a benefit, service or facility provided to any one or more of such
enterprises, the allocation of cost, expenses etc. shall be determined having regard to arm’s length
price of such benefit, service or facility. Similarly, the price received for exports and amounts
received for services rendered to associated enterprise will be determined on the basis of arm’s
length price. It will be noticed that in the international transaction, the income or expense will have

to be at arm’s length price, if the transaction is between associated enterprises.

The objective of transfer pricing provisions is to protect the tax base of India and to ensure that
due to inter-company transactions, there is no reduction in the taxable profits or the taxes paid by
the Indian taxpayer. The reverse, however, does not hold true.
Section 92(3) provides that the transfer pricing provisions contained in Section 92 shall not apply if
the same has the effect of reducing the income chargeable to tax or increasing the loss of the
assessee for the year under consideration.
The same can be understood with the help of the following example:
Example:
Case Income as Income Expenses Expenses Profit/ Profit/ Has TP Will TP
determined as per claimed by as per ALP Loss as Loss after resulted provisions
by ALP assessee per applying in apply?
assessee assessee TP reduction
provisions of taxable
income/
increase
of
losses?
1 100 150 70 70 30 80 No Yes
2 100 90 70 70 30 20 Yes No
3 100 90 110 110 (10) (20) Yes No
4 100 100 70 110 30 (10) Yes No
1.8 ASSOCIATED ENTERPRISES

Associated enterprises are those which are owned or controlled by the same or common entity/ person.
Section 92A of the Act defines the term ‘Associated Enterprises’ for the purpose of provisions relating to
Transfer Pricing. As per Section 92A(1) of the Act, associated enterprise refers to:
a) an enterprise which participates, directly or indirectly, or through one or more intermediaries, in:
• management of the other enterprise, or
• control of the other enterprise, or
• capital of the other enterprise.

Enterprise which
participates, directly
or indirectly, or
through one or more
intermediaries, in
Management of Control of the Capital of the

the other OR other enterprise
OR other enterprise
enterprise
Both Enterprises are Associated Enterprises
Example: A Ltd. directly participates in management of B Ltd.
A B
Therefore, both A Ltd. & B Ltd. are associated enterprises.
Now, consider a situation where A Ltd. directly participates in management of B Ltd. and B
Ltd. directly participates in management of C Ltd. In such situation, A Ltd. has direct
participation in management of B Ltd. but has an indirect participation in management of C
Ltd.
A B C
Therefore, in such scenario, C Ltd. is also an associated enterprise of A Ltd.
b) If one or more persons participates, directly or indirectly, or through one or more
intermediaries in:
• management of the two different enterprises
• control of two different enterprises
• capital of two different enterprises
Then, those two enterprises are associated enterprises.

Example: Mr. A directly has control in A Ltd. and B Ltd. In such a scenario, both A Ltd. & B
Ltd. are associated enterprises since they have a common person i.e. Mr. A, who controls
both entities A Ltd. & B Ltd.
Deemed Associated Enterprises
Two enterprises are deemed to be associated enterprises if they fall under any one or more of the
situations contained in section 92A(2). This section provides 13 such situations during which
associated enterprise relationship is deemed to be established. Two enterprises are deemed to be
associated enterprise if:
(i) Enterprise ownership - One enterprise holds 26% or more of the voting power, directly or
indirectly, in the other enterprise.
Example: A Ltd. holds 33% of voting power in B Ltd. and B Ltd. holds 40% voting power in C
Ltd.
33% 40%
A B C
In above situation, A Ltd. holds 33% of voting power in B Ltd. directly and 40% of voting
power in C Ltd. indirectly (i.e. through B Ltd.). Therefore, both B Ltd. & C Ltd. are deemed
associated enterprises of A Ltd.
(ii) Voting power by common person - Any person or enterprise holds 26% or more of the
voting power, directly or indirectly, in each of two different enterprises.
Example: Mr. A holds 40% of voting power in both X Ltd. and Y Ltd. where neither X Ltd. has
any holding in Y Ltd. nor Y Ltd. has any holding in X Ltd.
Mr. A
40% 40%
X Ltd. Y Ltd.
In this situation, since Mr. A directly holds 40% of voting power in both X Ltd. and Y Ltd., X
Ltd. & Y Ltd. will be deemed associated enterprises.
(iii) Lender - One enterprise advances loan to the other enterprise of an amount of 51% or more
of the book value of the total assets of such other enterprise.
Example: Book value of total assets of Y Ltd. is ` 100 crores. X Ltd. advances loan of ` 60
crores to Y Ltd.

Since, in this case, X Ltd. advances loan of ` 60 Crores to Y Ltd, which is 60% of the book
value of total assets of Y Ltd. Hence, X Ltd. & Y Ltd. are deemed associated enterprises.
(iv) Guarantor - One enterprise guarantees 10% or more of the total borrowings of the other
enterprise.
Example: P Inc. has total loan of 1 million dollars from XYZ Bank of America. Out of that, A Ltd.,
an India company, guarantees 20% of total borrowings in case of any default made by P Inc.
In such scenario, since, A Ltd. guarantees 20% of total borrowings of P Inc., P Inc. and A Ltd.
are deemed associated enterprises.
(v) Appointment of Board by other enterprise - One Enterprise appoints more than half of the
board of directors or members of the governing board, or one or more executive directors or
executive members of the governing board of another enterprise, or
Example: X Ltd. has 15 directors on its Board. Out of that, Y Ltd. has appointed 8 directors.
In such case, X Ltd. and Y Ltd. are deemed associated enterprises.
(vi) Appointment of Board of two different enterprises by same person(s) - More than half of
the directors or members of the governing board, or one or more of the executive directors or
members of the governing board, of each of the two enterprises are appointed by the same
person or persons.
Example: Mr. A appointed 9 directors out of 15 directors of X Ltd. and appointed 2 executive
directors on the board of Y Ltd. In such case, since a common person i.e. Mr. A appointed
more than half of the directors in X Ltd. and appointed 2 executive directors in Y Ltd., both X
Ltd. and Y Ltd. are deemed associated enterprises.
(vii) Dependence on intangibles - The manufacture or processing of goods or articles or
business carried out by one enterprise is wholly dependent (i.e. 100%) on the know-how,
patents, copyrights, trade-marks, licenses, 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 entity is the
owner or in respect of which the other enterprise has exclusive rights.
(viii) Dependence on supply in manufacturing process - 90% or more of raw materials and
consumables required for the manufacture or processing of goods or articles or business
carried out by one enterprise, are supplied by the other enterprise, or by persons specified by
the other enterprise, where the prices and other conditions relating to the supply are
influenced by such other enterprise.
(ix) Dependence on sale - The goods or articles manufactured or processed by one enterprise,
are sold to the other enterprise or to persons specified by the other enterprise, and the prices
and other conditions relating thereto are influenced by such other enterprise.
(x) Individual control - Where one enterprise is controlled by an individual, the other enterprise

is also controlled by such individual or his relative or jointly by such individual and his
relatives.
Example: Mr. A and Mr. B are relatives. Mr. A has control over X Ltd. and Mr. B has control
over Y Ltd. Therefore, both X Ltd. and Y Ltd. will be deemed associated enterprises.
Relatives
Mr. A Mr. B
Control Control
X Ltd. Y Ltd.
X Ltd. & Y Ltd. are deemed to be associated enterprises
(xi) Control by Hindu Undivided Family - Where one enterprise is controlled by a Hindu
undivided family (HUF) and the other enterprise is controlled by a member of such HUF or by
relative of a member of such HUF or jointly by such member and his relative
Member of HUF/Relative
HUF
of member of such HUF
Control Control
A Ltd. A Ltd. & B Ltd. are associated enterprises B Ltd.
(xii) Holding in a firm, association of persons or body of individuals – Where one enterprise
is a firm, association of persons or body of individuals, the other enterprise holds 10% or
more interest in firm/AOPs/BOIs.
(xiii) Mutual interest relationship - There exists between the two enterprises, any relationship of
mutual interest, as may be prescribed.
Meaning of Enterprise: The term “enterprise” is defined in section 92F(iii) to mean a person
(including its certain specified Permanent Establishment) who is, or has been, or is proposed to
be, engaged in any activity,
• relating to the production, storage, supply, distribution, acquisition or control of articles or

goods, or know-how, patents, copy rights, 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, 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,
whether such activity or business is carried on, directly or through one or more of its units or
divisions or subsidiaries, or 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.
For this purpose, the term “Permanent establishment” is defined in section 92F(iiia) to include a
fixed place of business through which the business of the enterprise is wholly or partly carried on.
1.9 INTERNATIONAL TRANSACTION

(1) International transaction [Section 92B(1)]
As per section 92B of the Act, an international transaction means:
(i) a transaction between two or more associated enterprises, either or both of whom are non-
residents; and
(ii) transaction in the nature of:
(a) sale/ purchase/ lease of tangible property; or
(b) sale/ purchase/ lease of intangible property; or
(c) provision of services; or
(d) lending/ borrowing money; or
(e) any other transaction having a bearing on profits, income, losses or assets of such
enterprises; or
(f) mutual agreement or arrangement between two or more associated enterprise for 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 enterprises.
(2) Deemed international transaction [Section 92B(2)]
Where, in respect of a transaction entered into by an enterprise with a person other than an
associated enterprise (hereinafter referred to as “other person”),

♦ there exists a prior agreement in relation to the relevant transaction between the other
person and the associated enterprise or,
♦ where the terms of the relevant transaction are determined in substance between such other
person and the associated enterprise; and
♦ either the enterprise or the associated enterprise or both of them are non-residents,
then such transaction entered into between the enterprise and the other person shall be deemed
to be an international transaction entered into between two associated enterprises, whether or
not such other person is a non-resident.
Example:
If A Ltd., an Indian company, has entered into an agreement for sale of product X to Mr. B, an
unrelated party, on 1/6/2018 and Mr. B has entered into an agreement for sale of product X with C
Inc., a non-resident entity, which is a specified foreign company in relation to A Ltd., on 30/5/2018,
then, the transaction between A Ltd. and Mr. B shall be deemed to be an international transaction
entered into between two associated enterprises, irrespective of whether or not Mr. B is a non-
resident.
A Ltd Mr. B C Inc.

(Unrelated (Associated
party) Enterprise
of A Ltd.)
Agreement for sale of Agreement for sale of

Product X entered into product X entered into
on 1/6/2018 on 31/5/2018
Transaction between A Ltd. and Mr. B is deemed to be an

international transaction between associated enterprises,
whether or not Mr. B is a non-resident.
Note – C Inc. is deemed to be an associated enterprise of A Ltd. since it is a specified foreign

company in relation to A Ltd., which means that A Ltd. holds 26% or more in the nominal value of
the equity share capital of C Inc.

(3) The scope of “international transaction” shall include:

Transactions Amplification of scope of terms used
(1) Purchase, sale, transfer, Tangible property includes -
lease or use of tangible • building,
property • transportation vehicle,
• machinery, equipment, tools, plant,
• furniture,
• commodity or
• any other article, product or thing;
(2) Purchase, sale, transfer, “Use of certain rights” refer to –
lease or use of intangible • land use,
property, including • copyrights, patents, trademarks, licences, franchises,
transfer of ownership or
the provision of use of • customer list, marketing channel, brand, commercial
certain rights secret,
• know-how,
• industrial property right,
• exterior design or practical and new design or
• any other business or commercial rights of similar
nature.
(3) Capital financing • 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.
(4) Provision of services • provision of market research,
• market development,
• marketing management,
• administration,
• technical service,
• repairs,
• design,
• consultation,
• agency,
• scientific research,
• legal or accounting service.

(5) Business restructuring or All such transactions are included in the definition of
reorganization entered “international transaction”, whether or not it has bearing on
into by an enterprise with the profit, income, losses or assets of such enterprises at
an associated enterprise the time of the transaction or at any future date.
(4) Further, the expression “intangible property” shall include

Type of intangible asset Examples of each type of intangible asset
in relation to
(1) Marketing • Trademarks
• trade names
• brand names
• logos
(2) Technology • Process patents
• patent applications
• technical documentation such as laboratory notebooks
• technical know-how
(3) Artistic • literary works and copyrights
• musical compositions
• copyrights
• maps
• engravings
(4) Data processing • proprietary computer software
• software copyrights
• automated databases
• integrated circuit masks and masters
(5) Engineering • industrial design
• product patents
• trade secrets
• engineering drawing and schematics
• blueprints
• proprietary documentation
(6) Customer • customer lists
• customer contracts
• customer relationship

• open purchase orders

(7) Contract • favourable supplier
• contracts,
• licence agreements
• franchise agreements
• non-compete agreements
(8) Human • trained and organised work force
• employment agreements
• union contracts
(9) Location • leasehold interest
• mineral exploitation rights
• easements
• air rights
• water rights
(10) Goodwill • institutional goodwill
• professional practice goodwill
• personal goodwill of professional
• celebrity goodwill
• general business going concern value
(11) methods, programmes, systems, procedures, campaigns, surveys, studies, forecasts,
estimates, or technical data;
(12) any other similar item that derives its value from its intellectual content rather than its
physical attributes.
(5) Meaning of Transaction

As per section 92F(v) of the Act, “transaction” includes an arrangement, understanding or action in
concert –
(a) whether or not such arrangement, understanding or action is formal or in writing; or
(b) whether or not such arrangement, understanding or action is intended to be enforceable by legal
proceeding.
Section 92F(v) provides an inclusive definition of the term “transaction”. Based on the reading of
the section, it is evident that it is not necessary that for a transaction undertaken between two
enterprises there needs to be a formal written agreement between them. It is only relevant whether
a transaction has been entered into in substance. The section also negates the requirement as to
the legal enforceability of agreement or understanding.

1.10 SPECIFIED DOMESTIC TRANSACTIONS

It is common knowledge that the under invoicing of sales and over invoicing of expenses is
ordinarily revenue neutral in case of a domestic transaction. However, shifting of profits from a
profit making entity to related entity which is into losses or from one group entity to another to take
undue advantage of tax incentive (tax holiday or any other), can create unwarranted situation of
significant revenue loss to the Government.
To understand such situations in a greater detail, following examples can be referred to:
Example 1: Profit shifting from a domestic tariff area (DTA) unit to a tax holiday unit
Actual situation
Particulars Tax Holiday Unit DTA Unit
Tax Rate - 30%
Income from related party transaction (‘RPT’) 100 -
Other income 300 300
Expenses in relation to RPT - 100
Other expenses 200 50
Profit / (loss) 200 150
Tax 0 45 (i.e. 150 * 30%)
Shifting of profits
Particulars Tax Holiday Unit DTA Unit

Tax Rate - 30%
Profit / (loss) 350 0
Tax 0 0

Example 2: Profit shifting from a profit making entity to a related loss making concern.
Actual situation
Particulars ABC Ltd. XYZ Ltd.
Tax Rate 30% 30%
Profit / (loss) (300) 150
Tax 0 45 (i.e. 150 * 30%)
Tax planning to shift profits
Particulars ABC Ltd. XYZ Ltd.
Tax Rate 30% 30%
Profit / (loss) (150) 0
Tax 0 0
In order to provide objectivity in determination of income from domestic related party transactions
and determination of reasonableness of expenditure between related domestic parties, the
provisions of section 92 have been extended to include within its ambit the specified domestic
transactions.
The transfer pricing provisions and other related provisions pertaining to Specified Domestic
Transaction are discussed in detail in “Chapter 3: Transfer pricing and other provisions to check
avoidance of tax” of Module 4: Part II- International Taxation of Paper 7: Direct Tax Laws and
International Taxation.
1.11 COMPUTATION OF ARM’S LENGTH PRICE

(SECTION 92C)
“Arm’s length price” is defined in section 92F(ii) to mean price which is applied or proposed to be
applied in a transaction between persons other than associated enterprises in uncontrolled
conditions.
Section 92C deals with the method for determining arm’s length price and the factors which are to be
considered for applicability or non-applicability of a particular method to a given situation. The factors

as well as methods incorporated in this section are not exhaustive and the CBDT may prescribe
further factors and methods.
It provides that the arm’s length price in relation to an international 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, namely -
(a) comparable uncontrolled price method;
(b) resale price method;
(c) cost plus method;
(d) profit split method;
(e) transactional net margin method;
(f) such other method as may be prescribed by the Board.
Accordingly, the Board has prescribed a method which takes into account the price which has
been charged or paid, or would have been charged or paid, for the same or similar
uncontrolled transaction, with or between non-associated enterprises, under similar
circumstances, considering all the relevant facts. [Rule 10AB]
Out of the above, the most appropriate method shall be selected and applied for determination of
arm’s length price, in the manner as may be prescribed.
Transfer Pricing Methods
Traditional Transaction Transactional Profit

Methods Other Methods
Methods
Comparable Uncontrolled Profit Split Method Any other method as

Price Method provided in Rule 10AB
Resale Price Transactional Net

Method Margin Method
Cost Plus Method
Rule 10B(1) provides for determination of arm’s length price under section 92C. This rule explains
how the arm’s length price under the five methods as stated in above diagram is to be determined
in respect of any goods, property or services purchased or sold under any international
transaction.

(1) Comparable uncontrolled price method:

A comparable uncontrolled price is the price agreed between unconnected parties for the
transaction of goods or services under similar circumstances.
Mechanism to determine CUP is as follows:
(i) Identification of price charged or paid for property transferred or services provided under any
comparable uncontrolled transaction(s).
(ii) Such price is adjusted to account for differences, if any, between the international transaction
and comparable uncontrolled transactions or between the enterprises entering into such
transactions which could materially affect the price in the open market can be made.
(iii) Adjusted price arrived above taken to be as arm’s length price in respect of the property
transferred or services provided in the international transaction.
Meaning of “Uncontrolled transaction”: Uncontrolled transaction means a transaction between
enterprises other than associated enterprises, whether resident or non-resident.
The comparable uncontrolled price method requires a high degree of comparability of products,
services and functions and such comparability can be improved by carrying out necessary
reasonable adjustments, in respect of differences arising on account of various factors such as
quality of the product or service, contractual terms, credit terms, transport terms, level of the
market (i.e. wholesale, retail, etc.), geographic market in which the transaction takes place, etc.
A Comparable uncontrolled price can be determined as follows:

Transaction between AE1 and AE2 are subject to transfer pricing. Transaction #1 and #2 are
internal transaction since it is entered by AEs with unrelated parties and Transaction #3 is external
transaction since it is entered between unrelated parties. Hence, controlled transaction need to be
compared with either Transaction #1 (If AE1 is the tested party) or Transaction #2 (If AE2 is the
tested party) or Transaction #3.
In the given example, AE1 and AE2 are parties to a controlled transaction. Assume, AE1 provides
back office support services to AE 2 (i.e. engaged in manufacturing of goods). The functions
performed, assets deployed and risk assumed for back office support services is less complex vis-
à-vis the functions performed, assets deployed and risk assumed in manufacturing activities.
Hence, AE1 must be selected as tested party which has least complex functional profile.
Accordingly, controlled transaction need to be compared with Transaction #1 i.e., between
unrelated party and AE1.
ILLUSTRATION 1
US Ltd., a US company has a subsidiary, IND Ltd. in India. US Ltd. sells computer monitors to IND
Ltd. for resale in India. US Ltd. also sells computer monitors to CMI Ltd., another computer
reseller. It sells 50,000 computer monitors to IND. Ltd. at ` 11,000 per unit. The price fixed for CMI
Ltd. is ` 10,000 per unit. The warranty in case of sale of monitors by IND Ltd. is handled by IND
Ltd. However, for sale of monitors by CMI Ltd., US Ltd. is responsible for the warranty for 3
months. Both US Ltd. and IND Ltd. offer extended warranty at a standard rate of ` 1,000 per
annum. On these facts, how is the assessment of IND Ltd. going to be affected?
SOLUTION
US Ltd., the foreign company and IND Ltd., the Indian company are associated enterprises since US
Ltd. is the holding company of IND Ltd. US Ltd. sells computer monitors to IND Ltd. for resale in
India. US Ltd. also sells identical computer monitors to CMI Ltd., which is not an associated
enterprise. The price charged by US Ltd. for a similar product transferred in comparable uncontrolled
transaction is, therefore, identifiable. Therefore, Comparable Uncontrolled Price (CUP) method for
determining arm’s length price can be applied.
While applying CUP method, the price in comparable uncontrolled transaction needs to be
adjusted to account for difference, if any, between the international transaction (i.e. transaction
between US Ltd. and IND Ltd.) and uncontrolled transaction (i.e. transaction between US Ltd. and
CMI Ltd.) and the price so adjusted shall be the arm’s length price for the international transaction.
For sale of monitors by CMI Ltd., US Ltd. is responsible for warranty for 3 months. The price
charged by US Ltd. to CMI Ltd. includes the charge for warranty for 3 months. Hence arm's length
price for computer monitors being sold by US Ltd. to IND Ltd. would be:
Particulars No. `
Sale price charged by US Ltd. to CMI Ltd. 10,000

Less: Cost of warranty included in the price charged to CMI Ltd.

(` 1,000 x 3 /12) 250
Arm's length price 9,750
Actual price paid by IND Ltd. to US Ltd. 11,000
Difference per unit 1,250
No. of units supplied by US Ltd. to IND Ltd. 50,000
Addition required to be made in the computation of total income of
IND Ltd. (` 1,250 × 50,000) 6,25,00,000
No deduction under chapter VI-A would be allowable in respect of the enhanced income of ` 6.25
crores.
Note: It is assumed that IND Ltd. has not entered into an advance pricing agreement or opted to be
subject to Safe Harbour Rules.
(2) Resale price method

The resale price method (RPM) is a method which compares the gross margins (i.e. gross profit
over sales) earned in transactions between related and unrelated parties for the determination of
the ALP. The RPM requires high level of functional comparability and is mainly applicable
where the controlled party is a distributor.
The RPM evaluates whether the amount charged in a controlled transaction is at arm’s length by
reference to the gross margin realised in comparable uncontrolled transactions. RPM can be
computed as follows:
(i) Identification of resale price by tested party i.e., the price at which property purchased or
services obtained by the enterprise from an associated enterprise is resold or provided to an
unrelated enterprise.
(ii) Resale price is reduced by normal gross profit margin with reference to uncontrolled
transaction(s).
(iii) Such price reduced by expenses incurred (customs duty etc.) in connection with purchase of
the product/ services.
(iv) This price may be adjusted to account for functional and other differences, if any, including
differences in accounting practices which could materially affect the gross profit margin in the
open market.
(v) Adjusted price arrived above taken to be as arm’s length price
RPM is generally used to test transactions involving distribution function, i.e. when the tested party
purchases products/ acquires services from related party and resells the same to independent

parties. The use of RPM is appropriate where the reseller does not add substantially to the value
of the product/ services. Where the transactions are not comparable in all ways and the
differences have a material effect on price, one has to make adjustments to eliminate the effect of
those differences. For this purpose, consideration of operating expenses associated with functions
performed and risks assumed may be necessary, because differences in functions performed are
often reflected in operating expenses.
Using RPM as the most appropriate method, ALP can be computed as follows:
AE2 has purchased goods from AE1 and re-sold to independent enterprise at USD 100. A similar
transaction is entered into by unrelated parties with resale price margin of USD 25. Thus, the
arm’s length price arrived at is USD 75 (i.e. market value of goods at which AE2 should have
purchased from AE1 (assuming no other costs for AE2 for simplicity purposes).
(3) Cost plus method

The Cost Plus Method (‘CPM’) determines an arm’s-length price by adding an appropriate gross
profit margin to an associated entity’s costs of producing goods or services. The gross profit
margin should reflect the functions performed by an entity and should include a return for capital
used and risks assumed by the entity.
Mechanism to compute ALP based on CPM is as follows:
(i) Identification of direct and indirect costs of production incurred by the enterprise in respect of
property transferred or services provided to an associated enterprise.
(ii) Determination of normal gross profit mark-up to such costs arising from the transfer or
provision of the same or similar property or services by the enterprise or by an unrelated
enterprise in comparable uncontrolled transaction or transactions.

(iii) The normal gross profit mark-up is adjusted to account for functional and other differences, if
any, which could materially affect such profit mark-up in the open market.
(iv) Adjusted gross profit mark-up added to total costs identified in (i). Sum arrived above is taken
to be arm’s length price
This method probably is most useful where semi-finished goods are sold between related parties,
where related parties have concluded joint facility agreements or long-term buy-and-supply
arrangements, or where the controlled transaction is the provision of services.
Using CPM as the most appropriate method, ALP can compute as follows:
AE2 has purchased manufactured goods from AE1. A similar transaction is entered into by
unrelated parties with gross profit margin of USD 250. Thus, the arm’s length price arrived at is
USD 750 i.e. market value of goods at which AE2 should have purchased from AE1.
If there are differences between the controlled and uncontrolled transactions that would affect the
gross profit mark-up, adjustments should be made to the gross profit mark-up earned in the
comparable uncontrolled transaction. For this purpose, consideration of the operating expenses
associated with the functions performed and risks assumed may be necessary, because
differences in functions performed are often reflected in operating expenses.
(4) Profit split method

This is a method which may be applicable mainly in international transactions involving transfer of
unique intangibles or in multiple international transactions which are so inter-related that they
cannot be evaluated separately for the purpose of determining the arm’s length price of any one
transaction.
The Profit Split Method (PSM) evaluates whether the allocation of the combined operating profit or
loss attributable to one or more controlled transactions is at arm’s length with reference to the
relative value of each controlled taxpayer’s contribution to that combined operating profit or loss.
The combined operating profit or loss must be derived from the most prominently identifiable

business activity of the controlled taxpayers for which data is available that includes the controlled
transactions (relevant business activity).
Profit shift method, generally, is applied as per following steps:
(i) Determination of combined net profit of the associated enterprises arising out of international
transaction in which they are engaged.
(ii) Evaluation of relative contributions by each enterprise to the earning of such combined net
profit on the basis of functions performed, risks assumed and assets employed by each
enterprise. This evaluation is to be made on the basis of reliable external market data which
can indicate how such contribution would be evaluated by unrelated enterprises performing
comparable functions in similar circumstances.
(iii) Splitting of combined net profit amongst the enterprises in proportion to their relative
contributions.
(iv) Profit thus apportioned to the tested party is used to arrive at the arm’s length price.
Allocation of profits must be made in accordance with one of the following allocation methods:
(a) Comparable profit split - Under this method, uncontrolled taxpayer’s percentage of the
combined operating profit or loss is used to allocate the combined operating profit or loss of
the relevant business activity.
(b) Residual profit split - Following the two-step process:
i. Allocate income to routine contributions
ii. Allocate residual profit
The following example explains the PSM:
Net Profits from all Transactions (USD 100M)
Minus functional/assets returns to each party based

on market benchmarks (USD 70M)
Residual Profit (USD 30M)
Residual Profit Share for Residual Profits split, based on

each party’s ownership of non-
Residual Profit Share for
Related Party X routine intangibles Related Party Y
(example network reach,
efficiency of sales and marketing
team, etc.)

Suppose in the above example, Net profit margins from all transactions were USD 100M.
Depending on the contribution of each AE, the net profit of USD 70M will be distributed to all AEs
(i.e. Allocate income to routine contributions). Further, after the respective contribution is allocated
specifically, the residual profit of USD 30M will be distributed among AEs based on various factors.
Total profit for Related Party X:
1. Income for specific contribution (suppose 40% by X and 60% by Y) made by X: USD 28M
(i.e. USD 70M x 40%)
2. Income as residual profit (i.e. 50:50) (allocated considering various factors): USD 15M
(i.e. 30M x 50%)
Total Arm’s length profit of related party X: USD 43M (USD 28M + USD 15M)
(5) Transactional net margin method
Under the Transactional net margin method (TNMM), an arm’s-length price is determined by
comparing the operating profit relative to an appropriate base (example costs, sales, assets) of the
tested party with the operating profit of an uncontrolled party engaged in comparable transactions.
The following steps are required to determine ALP using TNMM:
(i) Computation of net profit margin realized by the enterprise from the international transaction
with an AE having regard to costs incurred or sales effected or assets employed or having
regard to any other relevant base.
(ii) Computation of net profit margin realized by the enterprise or an unrelated enterprise in a
comparable uncontrolled transaction by applying the same base as above.
(iii) Net profit margin realized from uncontrolled transaction is adjusted to account for differences,
if any, which could materially affect the net profit margin in the open market.
(iv) The net profit thus established is taken into account to arrive at an arm’s length price for the
international transaction.
The following example explains the TNMM:

AE1 has purchased raw materials from its AE2 and manufactures goods for sale to third parties.
The similar transaction is entered into by unrelated parties with net margin of 5% of sale price.
Thus, if AE1 earns net margin of 5% of sale price, then its transaction of purchase of raw materials
from AE2 will be at arm’s length.
The following table summarises the application of method and its preferences on a general basis
(The below table is illustrative only and not binding – Applicability of methods can change
depending on the facts of each case):
Methods
Comparable Resale Cost- Transactional Profit
Transactions Uncontrolled Price plus Net Margin Split
Price Method Method Method Method
Method
Commodities/Oil √
Payment of Interest √
Distribution of goods √
Provision of Services √ √
Contract √ √
manufacturing
Manufacturing √ √
Payment of Royalty √
Multiple transactions √
involving intangibles
Management Charges No Specified Method
Benefit test and acceptable allocation
Sales of shares, No Specified Method
Intangible Assets Can rely on valuation report under the other method
(trademark, brand
name etc.)
(6) Other Method as may be prescribed by the CBDT

The Other method allows the use of ‘any method’ which takes into account
(i) the price which has been charged or paid or

(ii) would have been charged or paid for the same or similar uncontrolled transactions with or
between non-associated enterprises, under similar circumstances.
The various data which may possibly be used for comparability purposes under this method could
be third party quotations, valuation reports, tender/Bid documents, documents relating to the
negotiations, standard rate cards, commercial & economic business models; etc.
For applying the above methods, the comparability of the international transaction with an
uncontrolled transaction is to be judged with reference to the following factors:
(i) The specific characteristics of the property transferred or services provided in either
transaction;
(ii) The functions performed, taking into account assets employer or to be employer and the risks
assumed, by the respective parties to the transactions;
(iii) 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;
(iv) 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 also provides that an uncontrolled transaction shall be comparable to an international
transaction if none of the differences between the transactions being comparable or between the
enterprises entering into such transactions is 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.
Data to be used for analyzing the comparability of an uncontrolled transaction with an
international transaction
The data to be used for the comparison between an uncontrolled transaction and an international
transaction should relate to the financial year (current year) in which the international transaction
has been entered into.
In case the most appropriate method for determination of ALP of a transaction entered into on or
after 1.4.2014 is the resale price method or cost plus method or the transactional net margin
method, then, the data to be used for analyzing the comparability of an uncontrolled transaction
with an international transaction shall be –
(a) the data relating to the current year; or
(b) 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 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) Selection of tested party
The tested party will be the participant in the controlled transaction whose profitability/ pricing
attributable to the controlled transactions can be verified based on the most appropriate data and
requiring the fewest & most reasonable adjustments, and for which reliable data regarding
uncontrolled comparables can be located.
Consequently, in most cases the tested party will be the “least complex” of the controlled
taxpayers and will not own valuable intangible property or unique assets that distinguish it from
potential uncontrolled comparables.
In the given example, AE1 and AE2 are
parties to a controlled transaction. Assume,
AE1 provides back office support services to
AE 2 (i.e. engaged in manufacturing of
goods). The functions performed, assets
deployed and risk assumed for back office
support services is less complex vis-à-vis
the functions performed, assets deployed
and risk assumed in manufacturing
activities. Hence, AE1 must be selected as
tested party which has least complex
functional profile
(8) Selection of Profit Level Indicator

A profit level indicator (PLI) is selected to test the profitability of tested party. PLIs are ratios that
measure relationships between profits and costs incurred or resources employed. A variety of
PLI’s can be calculated in any given case.
PLI should always have an untainted base (denominator) like

adopting cost as base for export transactions and revenue as
base for import transactions

It is a practice to adopt the denominator of the PLI as being un-tainted or less-tainted. A tainted
income or expense would mean one that is received from an AE or paid to an AE and therefore
cannot be considered to be independent or at arm’s length. Untainted on the other hand would
mean revenue or costs which relate to transactions with independent third parties and are
therefore more reliable.
In above example, the revenue from back support services will be tainted because it is received
from related party. So, the PLI, in the above case, should be costs.
The following table briefly summarises the various PLIs used:
Overview of Various Profit Level Indicators
Return on Assets Operating profit divided by the operating assets (normally only
(ROA) tangible assets)
Return on Capital Operating profit divided by capital employed which is usually
Employed (ROCE) computed as the total assets minus cash and investments
Johnson Matthey India (P.) Ltd. Vs Deputy Commissioner of Income-
tax ([2016] 380 ITR 43 (Delhi)) – It was held that reliability of ROCE
as a PLI depends upon extent to which composition of assets/capital
deployed by tested party and their valuation is similar to that of
comparables and if balance sheet does not accurately reflect average
use of capital throughout year, ROCE would be less reliable.
Operating Margin Operating profit divided by sales
(OM)
Return on Total Costs Operating profit divided by total costs
(ROTC)
Return on Cost of Gross profit divided by cost of goods sold
Goods Sold
Berry Ratio Gross profit divided by operating expenses
(9) Most Appropriate Method

Rule 10C deals with the determination of most appropriate method. Under this Rule, the method
which is best suited to the facts and circumstances and which provides the most reliable measure
of an arm’s length price in relation to the international transaction will be considered to be the most
appropriate method.
For the purpose of selecting the most appropriate method, the following factors should be taken
into account.
(i) The nature and class of the international transaction;

(ii) The class, or classes of associated enterprises entering into the transaction and the
functions performed by them taking into account assets employed or to be employed and
risks assumed by such enterprises;
(iii) The availability, coverage and reliability of data necessary for application of the method;
(iv) The degree of comparability existing between the international transaction and the uncontrolled
transaction and between the enterprises entering into such transactions;
(v) The extent to which reliable and accurate adjustments can be made to account for
difference, if any, between the international transaction and the comparable uncontrolled
transaction or between the enterprises entering into such transactions;
(vi) The nature, extent and reliability of assumptions required to be made in application of a
method.
(10) Manner of computation of Arm’s length price (Applicable for international
transactions undertaken on or after 1.4.2014) [Third proviso to section 92C(2)]
In case of an international transaction undertaken on or after 1.4.2014, where more than one price
is determined by the most appropriate method, the ALP shall be computed in the prescribed
manner specified in Rule 10CA.
Computation of arm’s length price in certain cases (Rule 10CA)
Determination of arm’s length price using one of the

prescribed methods
As per range concept, if

prescribed conditions
Whether are satisfied (covered in
Yes a single No later sections),
The price thus price is
determined is the arm’s (or)
arrived
length price at? By applying Arithmetic
Mean in any other case

Rule 10CA(1) provides that where in respect of an international transaction, the application of the most
appropriate method referred to in section 92C(1) results in determination of more than one price, then,
the arm’s length price in respect of such international transaction has to be computed on the basis of
the dataset constructed by placing such prices in an ascending order as provided in Rule 10CA(2).
Application of multiple year data for construction of dataset
Multiple year data allowed only in cases where

determination of ALP is done using TNMM, RPM or CPM
Where the most appropriate method is the resale price method or cost plus method or
transactional net margin method and 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
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).
Further, where the most appropriate method is the resale price method or cost plus method or
transactional net margin method 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 said financial year 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).
Also, in such cases, where the use of data relating to the current year for determination of ALP
subsequently at the time of assessment 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.
Rule 10CA(3) provides that 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:-
Method used to Manner of computation of weighted average of the prices

determine the prices
(i) The resale price By assigning weights to the quantum of sales which has been
method considered for arriving at the respective prices
(ii) The cost plus method By assigning weights to the quantum of costs which has been
considered for arriving at the respective prices
(iii) The transactional net By assigning weights to the quantum of costs incurred or
margin method 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.
Range Concept: Rule 10CA(4) provides that where the most appropriate method applied is –
(i) a method other than the profit split method or a method prescribed by the CBDT under
section 92C(1)(d)/(f); and
(ii) 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.
If the price at which the international transaction has actually been undertaken is within the said
range, then, the price at which such international 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 has actually been undertaken is outside the said
arm's length range, the arm’s length price shall be taken to be the median of the dataset [Rule
10CA(6)].
• Most appropriate method selected is Comparable uncontrolled

When to apply range price method, resale price method, cost plus method or
concept? transactional net margin method and
• The dataset constructed has six or more entries.
• In case of RPM, CPM and TNMM, if enterprise has entered

uncontrolled transactions in more than one financial year then,
dataset to be constructed by using Weighted average of different
data. In case of CCPM, dataset to be constructed by placing the
prices.
How to apply? • Arrange the values in the dataset in the ascending order.
• Where the actual transaction price falls within 35th and 65th
percentile of the dataset, the value of transaction will be accepted
to be arm's length price.
• Where the transfer price does not fall within the above range, then
median of dataset shall be taken as the Arm's Length price.
Meaning of certain terms [Rule 10CA(8)]
Term Meaning
(a) the thirty-fifth The lowest value in the dataset such that at least 35% of the
percentile of a values included in the dataset are equal to or less than such
dataset (having value.
values arranged in However, if the number of values that are equal to or less than
an ascending order) 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 sixth-fifth The lowest value in the dataset such that at least 65% of the
percentile of a values included in the dataset are equal to or less than such
dataset (having value.
values arranged in However, if the number of values that are equal to or less than
an ascending order) 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 The lowest value in the dataset such that at least 50% of the
dataset (having values included in the dataset are equal to or less than such
values arranged in value.
an ascending order) However, 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.
Example 1: Where the data set comprises 7 data points (arranged in ascending order), and the
percentiles computed are not whole numbers
Percentile Formula Result Value to be selected
35th Total no. of data points in dataset x 2.45 3rd value*
35% = [7 x 35%]
65th Total no. of data points in dataset x 4.55 5th value*
65% = [7 x 65%]
Median Total no. of data points in datasets x 3.50 4th value*
50% = [7 x 0.5]
* Value referred to here is the place value in the data set as arranged in ascending order.
Example 2: Where the data set comprises 20 data points (arranged in ascending order), and the
percentiles computed are whole numbers.
Percentile Formula Result Value to be selected
35th Total no. of data points in 7 Mean of 7th & 8th value
dataset x 35% = [20 x 35%]
65th Total no. of data points in 13 Mean of 13th & 14th value
dataset x 65% = [20 x 65%]
Median Total no. of data points in 10 Mean of 10th & 11th value
datasets x 50% = [20 x 0.5]
If the transaction price falls within the range, then the same shall be deemed to be the ALP. If the
transaction price falls outside the range, the ALP shall be taken to be the Median of the data set.
Range concept not applicable:
In a case where the provisions of Rule 10CA(4) are not applicable, the arm's length price shall be the
arithmetical mean of all the values included in the dataset. However, 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
3% 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 [Rule 10CA(7)].

1.12 FUNCTIONS, ASSETS AND RISK (FAR) ANALYSIS

Functions, Assets and Risk (‘FAR’) analysis is an analysis of the functions performed, taking into
account assets used and risks assumed by associated enterprises (AEs) in controlled
transactions.
A method of finding and organizing facts about a business in terms of the functions performed,
assets used (including intangible property) and risks assumed by such business to:
 identify how they are divided among the AEs; and
 assess the importance of each function in the overall value chain.
FAR analysis is the starting point in determining the arm’s length price of an international
transaction.
Let us take an example. Can we compare a manufacturer with a logistic service provider? The
answer is “No”. Both of them will perform different functions, employ different kind of assets and
undertake different type of risks. How would one determine whether the entity is a manufacturer or
a logistic service provider? Simply, by undertaking FAR analysis.
Logistic service provider

Manufacturer

Cannot be compared
Manufacturer Manufacturer

Can be compared
Components of a FAR analysis
FAR Analysis
Functions Assets Risks

Performed Utilized Undertaken
The FAR analysis should direct the reader unambiguously to the correct conclusion about the
characterization of the entity. For understanding the FAR, it is important to understand the entire

value chain of the business that one is analyzing. A detailed discussion of the three elements of
the FAR is as under:
(a) Functions performed: Functions performed are the activities that are carried out by each of
the parties to the transaction. In performing functional analysis, important and significant
functions are considered. Such functions add more value to the transactions and therefore,
are expected to fetch higher returns for the entity performing such functions. Thus, the focus
should not only be on identifying the maximum number of functions but on identification of
critical functions performed by the related parties.
While functions performed depends on the facts of the case, some of the important functions
that are generally observed and examined in a transaction are:
• Research and development
• Budgeting
• Purchasing and materials management
• Manufacturing, production or assembly work
• Warehousing and inventory
• Marketing and distribution
• Business process management/ administrative functions
• Scheduling
• Supervision
The above may differ based on the kind of entity for which one is undertaking FAR analysis.
For example, in case of trading entity, the research & development related functions, or
manufacturing related functions may not be present.
Having identified the principle functions performed by the parties in the controlled transaction,
the next step is to compare the same with the functions performed in the uncontrolled
transactions to determine the extent of comparability.
(b) Assets employed: As regards assets employed, one needs to identify the assets (tangible
as well as intangible) used by the entities being compared in relation to the transaction under
consideration. The analysis of assets employed into tangible assets and intangible assets is
of vital importance.
The existence of intangible assets in the form of technical knowhow, trademarks, patents, etc.
contribute to the super normal growth in profits of an enterprise.
However, an entity which owns only tangible assets which are used in normal course of
operations such as computers, furniture & fixture, plant and machinery, etc. is expected to
earn routine/normal profits as earned by other companies engaged in similar business.

(c) Risks assumed: Risk study involves identification of various risks that are assumed by each
of the parties to the transaction. It is commonly understood that risk and return go hand in
hand. In the open market, more the risks assumed by an enterprise, higher the returns that it
expects. Conversely, in case where the risks undertaken by the enterprise in a transaction
are minimal, the returns expected to be generated from such transactions should also
normally be lower. An illustrative list of risks is provided below:
Nature of risks Description
Market risk Risk relating to increased competition and relative pricing
pressures, change in demand patterns and needs of
customers, inability to develop/penetrate in a market, etc.
Inventory risk Risk associated with management of inventory in case of
overstocking or slow/non-moving inventory. As a result, the
enterprise may be forced to bear a loss of margin on the
inventory, or incur additional costs to dispose-of the same.
Credit risk Risk relating to default in receivables by customers.
Product liability risk Risk associated with product failures including non-
performance to generally accepted or regulatory standards.
This could result in product recalls and possible injuries to
end-users.
Foreign exchange risk Risk relating to the potential impact on profits that may arise
because of changes in foreign exchange rates.
R&D risk Risk associated with loss incurred due to unsuccessful R&D
expenditure
Capacity Utilization risk Risk associated with loss of profits due to unutilized capacity
Attrition risk Risk associated with losing trained personnel which
contribute to the success of the enterprise
Risk study is an important exercise as it facilitates adjustments based on differences in risks
that are undertaken in a controlled transaction as compared to uncontrolled transactions. A
careful analysis of the risks assumed by the transacting entities would determine the true
characterization of each of the parties to the transaction. For instance, a distributor solely
engaged in purchasing goods for the purpose of resale without performing any value addition
may be characterized as a low risk distributor whereas a distributor who performs significant
value addition in terms of packing goods, holding inventory, incurring advertisement and
promotional expenditure, undertaking market risk, etc. may be characterized as a ‘full-
fledged distributor’.
Conclusion
In practice, one cannot compare all the functions, risks and assets employed. Hence, a crucial
step in the comparability analysis is the comparison of the “economically significant” functions
performed, risks assumed and assets employed (i.e. such functions, assets and risks that are
likely to have an impact on cost/expenses, prices, profits arising in a transaction) by the

associated enterprises with those by the independent parties which have been selected as
potentially comparable for benchmarking the arm’s length price of the controlled transactions.
To summarize, FAR analysis is central/core to the transfer pricing analysis. It helps in:
• Determining the nature of functions performed by the taxpayer and AE(s);
• On the basis of the above, determining true and correct characterization of the entities;
• Providing guidance on selection of most appropriate method for transfer pricing analysis; and
• Determining parameters for establishing comparability and undertaking economic
adjustments.
An illustrative list of functions, assets and risks for a different entities is provided below:
Type of entity Functions Assets Risks
Manufacturer - Budgeting - Intangibles – - Business risk
- Administration Patents, technical - Inventory risk
- Product strategy and knowhow, - Scheduling risk
design trademarks, etc. - Product liability risk
- R&D - Plant & Machinery - Credit and
- Purchasing - Storage/ collection risk
- Product manufacturing warehouse - Foreign exchange
- Quality control - Office equipment fluctuation risk
- Inventory management - Land & Building
- Logistics - Vehicles
- Marketing
- Sales
- Customer support
Trader - Budgeting - Storage/ - Business risk
- Administration warehouse - Inventory risk
- Purchasing - Office equipment - Credit and
- Inventory management - Land & Building collection risk
- Logistics - Vehicles - Foreign exchange
- Marketing fluctuation risk
- Sales
- Customer support
Service provider - Budgeting - Intangibles –, - Business risk
- Quality control trademarks, brand - Service liability risk
- Conceptualization and name, etc. - Utilization and idle
design of services - Office equipment time risk
- Project management - Land & Building - Credit and
- Training - Vehicles collection risk
- Invoicing - Foreign exchange
fluctuation risk

The above list is only illustrative and will depend totally on the facts of the case. There can be further
difference within the types of entities, such as Manufacturer (full-fledged manufacturer, contract
manufacturer, and toll manufacturer), Trader (full-fledged trader, limited risk distributor), etc.
1.13 CONCEPT OF COMPARABILITY ADJUSTMENTS

An uncontrolled transaction should be considered comparable to the controlled transaction only if
there are no material differences (in terms of functions, assets and risks) between the transactions
being compared or the enterprises entering into such transactions which would materially affect
the prices or costs charged or margins arising in such transactions in the open market.
Comparability adjustments can take various forms. Some examples of prevalent comparability
adjustments are provided below:
Nature of Description
comparable
adjustment
Working capital The levels of inventories, cash on hand, debtors, creditors, other current assets
adjustment and liabilities impact the level of free reserves that the company has to fulfill its
day-to-day working capital requirements and the consequent levels of
borrowings it needs to make to fund its working capital requirements.
The extent to which companies extend and receive credit in the form of
accounts payable and receivable affects their sales and cost of sales. The
selling price incorporates two elements: the price of the product and the time
value of money lent.
Presumably, if a company were to make all sales on a cash basis, it would be
willing to accept a slightly lower price for its products than if the company were
to allow its customers to pay at a later date. Of course, the argument works in
reverse for companies that hold accounts payable
For example, two companies sell the same product for the same base price,
but one company sells the product on a cash basis while the other extends
credit and charges a slightly higher price above the base price to cover the time
value of money lent to the customer.
Without an adjustment for the different terms of sale, it would appear that the
company that sold its product for cash earned a lower gross margin than the
other firm
When different terms of purchase and sale distort the cost of goods sold,
analysis of related party transactions can also be distorted. As a result, the cost
of goods sold and sales of the comparable companies needs to be adjusted so
that the terms of purchase and sale are same across all the companies
A working capital adjustment is undertaken to adjust the margins of the
comparable companies and align them with the tested party
Capacity This adjustment is to bring entities with different level of capacity utilization
Utilization at par with each other for comparison purpose. Capacity utilization by
adjustment enterprises is an essential factor affecting net profit margin in open market
because lower capacity utilization results in higher per unit cost, which, in

turn results in lower profits. For example, if an entity A Ltd. is utilizing 50%
of its capacity while entity B Ltd. is operating at full capacity, it may not be
appropriate to compare A Ltd. and B Ltd. without undertaking this
adjustment. The level of capacity utilization of the resources (plant and
machinery, fixed assets, etc.) impacts the direct and fixed costs of the
company. For example, if a company has high installed capacity but less
utilized capacity, it shall be incurring heavy fixed costs and not earning
proportionate revenue for the same. This in effect, impacts the profitability
of the company. A capacity utilization adjustment is undertaken to eliminate
such differences in the profitability of the tested party and the comparable
companies.
Risk Risk adjustment is mainly relevant in case of captive entities (entities
adjustments providing services or selling goods only to its associated enterprises) or
low risk bearing entities.
For comparison of tested party with comparable companies, risk profiles of
each of them should ideally be similar.
The comparables that would be identified might have different risk profiles
as compared to tested party and in case the difference is material,
adjustment would be required. Accordingly, risk adjustment is made to
adjust for the difference in the level of risks assumed by the tested party
and comparables.
Accounting This adjustment is carried out to bring the entity being compared at par with
adjustments the taxpayer in terms of differences in accounting policies being followed.
1.14 DOCUMENTATION AND COMPLIANCES

(1) Documentation requirement under the Income-tax Act, 1961
Transfer pricing documentation is the documentation maintained to review Transfer Pricing
arrangements for transactions taking place between different entities of the same group (also
known as intra-group transactions). The primary objective of the transfer pricing documentation is
to review the arm’s length (fair price) nature of the transactions taking place between different
entities of an Multi National Company.
Section 92D imposes responsibility on every person who enters into an international transaction to keep
and maintain such information and documents in respect thereof as may be prescribed by CBDT.
Further, a person, being a constituent entity of an international group, is required to also keep and
maintain the prescribed information and document in respect of an international group.
The Board is empowered to prescribe the period for which the information and documents shall be
kept and maintained. Further, the Assessing Officer or the Commissioner (Appeals) may, in the
course of any proceedings under the Income-tax Act, require any person who has entered into an
international transaction to furnish any such prescribed information or documents within a period of
thirty days from the date of receipt of a notice issued in this regard. The requisition period may, on

request, be extended further for a period not exceeding thirty days by the Assessing Officer or the
Commissioner (Appeals).
(2) Information and documents to be kept and maintained under section 92D (Rule 10D)
As per Rule 10D(1) of the Income-tax Rules, 1962, the transfer pricing documentation should
contain the following details:
(a) Ownership structure of the assessee with details of shares or

other ownership interest held therein by other enterprise;
(b) Profile of the multinational group and basic details of associated
enterprises with whom assessee has entered into international Entity
transaction;
Related
(c) Business description of the business of the assessee and
associated enterprises and the industry in which the assessee
operates;
(d) Nature and terms (including price) of the international
transactions, details of property transferred or services provided
and quantum and value of each such transaction;
(e) Description of functions performed, risks assumed and assets
employed by the assessee and associated enterprises;
(f) Records of economic and market analysis, budgets, forecasts,
financial estimates for the business as a whole and for each
division or product separately which may have a bearing on such
transaction;
(g) Record of uncontrolled transaction (if any) for analysing
comparability of international transaction with such uncontrolled
transaction(s); Price
(h) Record of the analysis performed to evaluate comparability of Related
uncontrolled transactions with the relevant international
transaction or specified domestic transactions.
(i) Description of method considered for determining ALP, most
appropriate method along with the explanations as to why such
method was selected and applied;
(j) Analysis performed to determine the arm’s length price of the
transactions between related parties, etc.
(k) Assumptions, policies and price negotiations, if any, which
critically affected the determination of the arm's length price;
(l) Details of transfer pricing adjustment(s) made (if any) and
consequent adjustment made to the total income for tax purposes. Transaction
(m) Any other information, data or document including information or Related
data relating to associated enterprise which may be relevant for
determining ALP.

Rule 10D(2) provides that in a case where the aggregate value of international transactions does
not exceed ` 1 crore, it will not be obligatory for the assessee to maintain the above information
and documents.
However, it is provided that in the above cases also the assessee will have to substantiate that the
income arising from the international transactions with associated enterprises, as disclosed by the
accounts, is in accordance with section 92. This will mean that, even if the aggregate value of the
international transactions is less than ` 1 crore, the assessee will have to maintain adequate
records and evidence to show that the international transactions with associated enterprises are
on the basis of arm’s length principle.
Information to be supported by authentic documents [Rule 10D(3)]
The information to be maintained by the assessee, is to be supported by authentic documents.
These documents may include the following:
(i) Official publications, reports, studies and data bases from the Government of the country of
residence of the associated enterprise, or of any other country;
(ii) Reports of market research studies carried out and technical publications brought out by
institutions of national or international repute;
(iii) Price publications including stock exchange and commodity market quotations;
(iv) Published accounts and financial statements relating to the business affairs of the associated
enterprises;
(v) Agreements and contracts entered into with associated enterprises or with unrelated
enterprises in respect of transactions similar to the international transactions;
(vi) Letters and other correspondence documenting any terms negotiated between the assessee
and the associated enterprise;
(vii) Documents normally issued in connection with various transactions under the accounting
practices followed.
It is also provided that the information and documents to be maintained should be
contemporaneous and should exist latest by the date specified for getting the audit report. In the
case of international transactions which continue to have effect over more than one financial year,
fresh documents will not be required to be maintained for each year if there are no significant
change which may affect the determination of arm’s length price. The above information and
documents are required to be maintained for a period of eight years from the end of the relevant
assessment year.

(3) Structure of Transfer Pricing documentation

The illustrative structure of Transfer Pricing Study can be summarized as below:
Executive Group Industry Functional Economic Conclusion
Summary Overview analysis analysis analysis
• Brief • Brief • Background • Functions • Search • High level
description description of of the performed process summary
of the the Group’s industry • Assets • Comparable of the
business business • Key drivers utilized details Transfer
profile of the activities/oper • Challenges • Risks Pricing
overall group ations/division • Future assumed study
• Brief • Brief overview outlook including
description of the nature transact-
of the of business tions
business operations of involving
profile of the the assesse Most
assesse • Factual appropriate
including AE informational method
with whom of the Group etc.
the company during
has relevant
undertaken period such
international as turnover,
taxation number of
• Overview of employees
international etc.
and specified • Information
domestic pertaining to
transactions various
products and
services
offered by the
group
• Significant
development
during the
year and etc.
(a) Executive Summary
The Executive summary section of the Transfer Pricing documentation captures high level analysis
of the entire Transfer Pricing documentation and summarizes the results of benchmarking analysis
performed to determine arm’s length price of the international transaction(s) undertaken during the
relevant period.

(b) Group Overview

This section includes a brief description of Group’s as well as the taxpayer’s business operations.
How to source the information?
• The annual report of the Group is considered to be the most reliable and authentic source for
information pertaining to nature of business operations, shareholding structure, products and
services offered, etc.
• In case of unavailability of annual report, reliance could be placed upon other sources such
as website of the Group, reference websites, publicly available databases like Prowess,
Capitaline, etc.
The Group overview could be illustrated by way of the following example:
Associated Enterprise 1, a bicycle manufacturer in Country 1, sells bicycles to Associated Enterprise 2
which resells the bicycles to the independent enterprise, an unrelated bicycle dealer in Country 2.
In the instant case, the Group overview would include the following broad headings:
Brief description of the business operations of the Group – including range of products/services
offered, geographical presence, sales trend during past years, etc.
Brief description of business operations of Associated Enterprise 1 and Associated Enterprise 2 –
including details of products/services offered, date of incorporation, regional presence,
shareholding pattern/structure, etc.
(c) Industry Overview
This section provides an understanding of the taxpayer/company’s relative positioning in the
industry vis-à-vis other players and overall justification of the taxpayer’s financial results. The key
objectives of industry overview are to:
• Determine taxpayer’s position within the industry;
• Provide information about the market share of the client;
• Establish linkage of industry overview with functional and economic analysis;
• Highlight the key growth drivers of the industry;
• Determining threats/challenges and opportunities pertaining to the industry; and
• Provide information about past trends and future projections of the industry.
The industry overview could be illustrated by way of following example:

Continuing the same example as above, where Associated Enterprise 1, a bicycle

manufacturer in Country 1, sells bicycles to Associated Enterprise 2 which resells the bicycles
to the independent enterprise, an unrelated bicycle dealer in Country 2, the following broad
heads could be included while drafting the industry overview:
Industry structure – Types of bicycles produced and sold in the market, market size,
demand-supply gap analysis, etc.
Characteristics of bicycle industry – Distribution channels, brief overview of legal
regulations affecting the industry, factors affecting demand, sales trend of each category of
bicycles relating to past 5-6 years, factors affecting demand, etc.
Key growth drivers of the industry and the potential regulatory as well as competitive
threats affecting the industry, complete SWOT (Strengths, Weaknesses, Opportunities and
Threats) analysis of the industry
Way forward – Future projections pertaining to industry growth and potential challenges
anticipated
(d) Functional Analysis

As discussed earlier in detail, for every international transaction, the following analysis needs to be
undertaken:
Identify which entity Identify

bears significant risks tangible and intangible Characterize entities
assets used based on the
functions performed
Determine
functions performed Determine
by the Indian entity Functional pricing mechanism/
and AE analysis strategy used
(e) Economic Analysis

Economic (or Benchmarking) analysis means analyzing or comparing the transfer price i.e. prices
set in controlled environment with that of uncontrolled environment. This would broadly involve the
following steps:

Selection Selection of Arm’s

Choice Selection Selection comparable length
of Tested
of PLI of MAM of database companies price
Party
The entire benchmarking process is illustrated with the help of following example:
Associated Associated
Unrelated Party
Enterprise 1 Enterprise 2
Facts of the case: AE 1, a bicycle manufacturer in Country 1, sells bicycles to AE 2 which resells
the bicycles to the independent enterprise, an unrelated bicycle dealer in Country 2.
Let AE 2 be selected as the tested party and TNMM be selected as the most appropriate method.
The most appropriate PLI is ‘Operating Profit/Sales’.
For benchmarking the international transaction pertaining to import of bicycle by AE 2, the
following steps need to be undertaken:
• Selection of time period: The Act prescribes the use of current year data in which the
transaction has been undertaken. However, if the data for current year is not available for
comparable companies at the time of furnishing return of income by the assesse for the
assessment year, the taxpayer may consider data relating to the financial year immediately
preceding the current year.
• Undertaking search for comparables: Assuming that in the above case study, Associated
Enterprise 2 i.e. the tested party is situated in India, the search for comparable companies
engaged in the business of distribution of bicycles could be undertaken by using databases
such as Prowess, Capitoline, etc. Illustratively, the selection of comparables would involve
application of common filters such as:
1. Selection of comparables having sales greater than ` 1 crore;
2. Selection of comparables having net worth greater than 0 (zero);
3. Selection of comparables having trading sales/total sales greater than 50%;
4. Selection of comparables having segment related to bicycle sales;
5. Rejection of comparables having Related party transactions/Sales > 25%; and/or
(Illustrative)
6. Qualitative criteria: Selection of comparables engaged in distribution of bicycles.

If required, the appropriate adjustments could be carried out to account for differences in the type
and quality of products, risk incurred, geographical factors, etc.
The process of selection of comparables can be illustrated as under:
Universe of comparable Final set of

companies comparable
companies
Application of quantitative and

qualitative filters such as Turnover, net
worth, sales vs services, related party
transactions, etc
(f) Conclusion
The Conclusion section of Transfer Pricing documentation captures high level summary of the
Transfer Pricing documentation, primarily including the transactions involved, most appropriate
method and PLI used and the results of the benchmarking analysis.
In case the tested party is incurring losses, the justification for the same is included in this section.
Summary of Transfer Pricing Documentation
Industry Group Functional

Inputs Overview Overview Analysis and
Selection of the tested party
Selection of the most appropriate method

Economic
analysis
Benchmarking/ Search process
Qualitative analysis/ Adjustment
Output Arm’s Length Price

(4) Audit Report [Section 92E]:

Under section 92E, every person who enters into an international transaction during a previous
year is required to obtain a report from a chartered accountant and furnish such report on or
before the specified date on the prescribed form.
Rule 10E provides that the auditor’s report shall be in Form No.3CEB. This report is in two parts.
The first part requires the auditor to state that he has examined the accounts and records of the
assessee relating to the international transactions entered into by the assessee during the relevant
year. He has also to give his opinion whether the prescribed information and documents relating
to the above transactions have been kept by the assessee. Further, he has to state that the
particulars stated in the Annexure to his report are true and correct.
In the second part of the report i.e. Annexure, the particulars about the international transactions
are required to be stated. Broadly stated these particulars include list of associated enterprises,
particulars and description of transactions relating to purchase, sales, provisions of service, loans,
advances, etc.
“Specified date” shall have the same meaning as assigned to due date in Explanation 2 below sub-
section (1) of section 139. The due date for filing of transfer pricing report under section 92E in
Form 3CEB is 30th November of the assessment year.
(5) Penalties
Stringent penalties are provided in various sections for non-compliance with the above provisions.
These are as under:
Penalty for failure to report any international transaction or any transaction deemed to be
an international transaction or specified domestic transaction: Under section 270A,
penalty@50% of tax payable on under-reported income is leviable. However, the amount of under-
reported income represented by any addition made in conformity with the arm’s length price
determined by the Transfer Pricing Officer would not be included within the scope of under-
reported income under section 270A, where the assessee had maintained information and
documents, as prescribed under section 92D, declared the international transactions under
Chapter X and disclosed all material facts relating to the transaction.
Failure to report any international transaction or any transaction deemed to be an international
transaction or specified domestic transaction to which the provisions of Chapter X applies would
constitute ‘misreporting of income’ under section 270A(9), in respect of which penalty@200%
would be attracted.
Penalty for failure to keep and maintain information and documentation [Section 271AA]: In
order to ensure compliance with the transfer pricing regulations, section 271AA provides that, the
Assessing Officer or Commissioner (Appeals) may direct the person entering into an international
transaction to pay a penalty@2% of the value of each international transaction entered into by him,
if the person:

(1) fails to keep and maintain any such document and information as required by section 92D(1)
and section 92D(2);
(2) fails to report such international transaction which is required to be reported; or
(3) maintains or furnishes any incorrect information or document.
Penalty for failure to furnish information or document under section 92D [Section 271G]
Section 271G provides that if any person who has entered into an international transaction or
specified domestic transaction fails to furnish any such information or document as required by
Assessing Officer or Commissioner (Appeals) within a period of 30 days from the date of receipt of
a notice issued in this regard, then such person shall be liable to a penalty up to 2% of the value of
each international transaction or specified domestic transaction.
Penalty for failure to furnish report under section 92E [Section 271BA]
If any person fails to furnish a report from an accountant, the Assessing Officer may direct that
such person shall pay, by way of penalty, a sum of ` 1 lakh.
The penalty under section 271AA shall be in addition and not in substitution of penalty under
section 271BA.
In all the above cases, if the assessee can show that there was reasonable cause for the failure,
no penalty will be leviable.
1.15 SPECIFIC REPORTING REQUIREMENTS – COUNTRY

BY COUNTRY REPORTING
(i) Requirements as per OECD report on Action 13 of BEPS Action Plan
The report provides for:
(a) revised standards for transfer pricing documentation; and
(b) a template for country-by-country reporting of income, earnings, taxes paid and certain
measure of economic activity.
(ii) Three-tier structure mandated by BEPS
The BEPS report recommends that countries adopt a standardised approach to transfer pricing
documentation; it mandates the following three-tier structure:-
Document Information
(1) Master File Standardised information relevant for all multinational enterprises
(MNE) group members
(2) Local file Specific reference to material transactions of the local taxpayer
(3) Country-by- Information relating to the global allocation of the MNE's income and
country report taxes paid; and
Indicators of the location of economic activity within the MNE group.

(iii) Advantages of the three tier structure [as per BEPS Report]:
(a) Taxpayers will be required to articulate consistent transfer pricing positions;
(b) Tax administrations would get useful information to assess transfer pricing risks;
(c) Tax administrations would be able to make determinations about where their resources can
most effectively be deployed, and, in the event audits are called for, provide information to
commence and target audit enquiries.
(iv) Country-by-country Report: Reporting Requirements of MNEs
The Country-by-Country (CbC) report has to be submitted by parent entity of an international
group to the prescribed authority in its country of residence. This report is to be based on
consolidated financial statement of the group.
(a) MNEs have to report annually and for each tax jurisdiction in which they do business:
(1) the amount of revenue;
(2) profit before income tax; and
(3) income tax paid and accrued.
(b) MNEs have to report their total employment, capital, accumulated earnings and tangible
assets in each tax jurisdiction.
(c) MNEs have to identify each entity within the group doing business in a particular tax
jurisdiction and provide an indication of the business activities each entity engages in.
(v) Master File: Objective & Features
(a) The master file would provide an overview of the MNE groups business, including:
(1) the nature of its global business operations,
(2) its overall transfer pricing policies, and
(3) its global allocation of income and economic activity
in order to assist tax administrations in evaluating the presence of significant transfer pricing risk.
(b) The master file is intended to provide a high-level overview in order to place the MNE group's
transfer pricing practices in their global economic, legal, financial and tax context.
(c) The master file shall contain information which may not be restricted to transaction
undertaken by a particular entity situated in particular country.
(d) Thus, information in master file would be more comprehensive than the existing regular
transfer pricing documentation.
(e) The master file shall be furnished by each entity to the tax authority of the country in which it operates.

(vi) Implementation of international consensus in India

India is one of the active members of BEPS initiative and part of international consensus. For the
purpose of implementing the international consensus, a specific reporting regime in respect of CbC
reporting and also the master file has been incorporated in the Income-tax Act, 1961. The
essential elements have been incorporated in the Income-tax Act, 1961 while remaining aspects
would be dealt with in detail in the Income-tax Rules, 1962.
(vii) Elements relating to CbC reporting requirement and related matters which have been
incorporated in the Income-tax Act, 1961 [Section 286]
(a) Threshold limit for applicability of CbC reporting [Sub-section (7)]: The reporting
provision shall apply in respect of an international group for an accounting year, if the total
consolidated group revenue as reflected in the consolidated financial statement (CFS) for the
accounting year preceding such accounting year is above a threshold to be prescribed i.e.,
` 5,500 crore.
Where the total consolidated group revenue of the international group, as reflected in the
consolidated financial statement, is in foreign currency, the rate of exchange for the
calculation of the value in rupees of such total consolidated group revue shall be the
telegraphic transfer buying rate (TTBR) of such currency on the last day of the accounting
year preceding the accounting year [Rule 10DB(7)].
(b) Time limit for furnishing CbC report [Sub-section (2)]: The parent entity of an international
group or the alternate reporting entity, if it is resident in India shall be required to furnish the report
in respect of the group to the Director General of Income-tax (Risk Assessment) for every
reporting accounting year, within a period of twelve months from the end of the said reporting
accounting year for which the report is being furnished, in the prescribed form and manner.
(c) Details to be furnished by constituent entity resident in India [Sub-section (1): Every
constituent entity resident in India, of an international group having parent entity that is not
resident in India, shall notify the Director General of Income-tax (Risk Assessment) at least
two months prior to the due date for furnishing Cbc report –
(1) whether it is the alternate reporting entity of the international group; or
(2) the details of the parent entity or the alternate reporting entity, if any of the international
group, and the country of territory of which the said entities are resident.
The report shall be furnished in prescribed manner and in the prescribed form
(d) Details/ information to be included in CbC report [Sub-section (3)]: It should contain
aggregate information in respect of:
(1) the amount of revenue,
(2) profit and loss before income-tax,

(3) amount of income-tax paid and accrued,

(4) details of stated capital, accumulated earnings, number of employees, tangible assets
other than cash or cash equivalent in respect of each country or territory along with
details of each constituent's incorporation country and residential status, nature and
detail of main business activity of each constituent entity and any other information as
may be prescribed.
This shall be based on the template provided in the OECD BEPS report on Action Plan 13.
(e) Furnishing of CbC report by resident constituent entity [Sub-section (4): A constituent
entity of an international group resident in India, other than the parent entity or the alternate
reporting entity, shall be required to furnish CbC report within the prescribed period to the
prescribed authority if the parent entity of the group is resident -
(1) in a country or territory in which it is not obligated to file report of the nature of CbC
report;
(2) in a country with which India does not have an arrangement for exchange of the CbC report;
or
(3) there has been a systemic failure of the country or territory i.e., such country is not
exchanging information with India even though there is an agreement and this fact has
been intimated to the entity by the prescribed authority.
(f) Nomination of one constituent entity for furnishing CbC report [Proviso to sub-section
(4)]: If there are more than one such constituent entity of the same group resident in India,
other than the parent entity or the alternate reporting entity, then the group can nominate
(under intimation in writing on behalf of the group to the prescribed authority), then, one
constituent entity that shall furnish the report on behalf of the group. This entity would then
furnish the report.
(g) No obligation to furnish CbC report in certain cases [Sub-section (5)]: If an international
group, having parent entity which is not resident in India, had designated an alternate entity
for filing its report with the tax jurisdiction in which the alternate entity is resident and such
alternate entity has furnished such report on or before the date specified by that country or
territory, then, the entities of such group operating in India would not be obliged to furnish
report if the report can be obtained under the agreement of exchange of such reports by
Indian tax authorities.
(h) Entity to furnish documents and information called for [Sub-section (6)]: The DGIT
(Risk Assessment) may call for such document and information from the entity furnishing the
report as it may specify in notice for the purpose of verifying the accuracy. The entity shall be
required to make submission within thirty days of receipt of notice or further period if
extended by the prescribed authority, but extension shall not be beyond a further period of 30
days.

(viii) Penalty for non-furnishing of the report by any reporting entity which is obligated to
furnish such report [Section 271GB(1) & (3)]
Period of delay/default Penalty
(a) Not more than a month ` 5,000 per day
(b) beyond one month ` 15,000 per day for the period
exceeding one month
(c) Continuing default even after service of order ` 50,000 per day of continuing failure
levying penalty either under (a) or under (b) beginning from the date of service of
order
(ix) Penalty for failure to produce information and documents within prescribed time
[Section 271GB(2) & (3)]
Default Penalty
(a) Failure to produce information ` 5,000 per day of continuing failure, from the day
before prescribed authority within immediately following the day on which the period for
the period allowed u/s 286(6) furnishing the information and document expires.
(b) Continuing default even after ` 50,000 per day for the period of default beyond
service of penalty order the date of service of penalty order.
(x) Penalty for submission of inaccurate information in the CBC report [Section 271GB(4)]
If the reporting entity has provided any inaccurate information in the report, the penalty would be
` 5,00,000 if ,-
(a) the entity has knowledge of the inaccuracy at the time of furnishing the report but does not
inform the prescribed authority; or
(b) the entity discovers the inaccuracy after the report is furnished and fails to inform the
prescribed authority and furnish correct report within a period of fifteen days of such
discovery; or
(c) the entity furnishes inaccurate information or document in response to notice of the
prescribed authority under section 286(6).
(xi) Non-levy of penalty if reasonable cause for failure is proved [Section 273B]
Section 273B provides for non-levy of penalty under various sections if the assessee proves that
there was reasonable cause for such failure. Section 271GB has been included within the scope of
section 273B. Therefore, the entity can offer reasonable cause defence for non-levy of penalties
mentioned above.
(xii) Maintenance and furnishing of Master file: Consequent amendments in the Income-tax
Act, 1961
Section Provision
(1) Proviso to A person being constituent of an international group shall, in addition to
section the information related to the international transaction required under
92D(1) section 92D(1), also keep and maintain such information and document

in respect of the international group to be prescribed by way of rules.

The rules shall, thereafter, prescribe the information and document as
mandated for master file under OECD BEPS Action 13 report;
(2) 92D(4) The information and document shall also be furnished to the prescribed
authority u/s 286(1) within such period as may be prescribed and the
manner of furnishing may also be provided for in the rules
(3) 271AA(2) For non-furnishing of the information and document to the prescribed
authority, a penalty of ` 5 lakh shall be leviable.
(4) 273B Reasonable cause defence against levy of penalty shall be available to
the entity.
(xiii) Information and documents to be kept and maintained [Rule 10DA]
Rule Particulars
10DA(1) Persons required to keep and maintain the information and documents:
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 ` 500
crore; and
(ii) the aggregate value of international transactions -
(A) during the accounting year, as per the books of accounts, exceeds
` 50 crore, 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 ` 10 crore.
Note – 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 (TTBR) of such currency on the last day of the accounting year. [Rule
10DA(8)]
Part A of Form No. 3CEAA (Master File), however, shall be furnished by every
person, being a constituent entity of an international group, whether or not the
above conditions are satisfied [Rule 10DA(3)].
Part B of Form No.3CEAA has to be furnished by a person, being a constituent entity of
an international group, in those cases where the above conditions are satisfied.
Information and documents required to be kept and maintained:
The constituent entity shall 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;
(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;
(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.
10DA(2) Due date for furnishing report:
The report of the information shall be furnished in Form No. 3CEAA and it shall be
furnished on or before the due date for furnishing the return of income specified
under section 139(1).
10DA(4)/ Furnishing of report in case of more than one constituent entity:
(5) Where there are more than one constituent entities resident in India of an
international group, then the report or information, as the case may be, may be
furnished by that constituent entity which has been designated by the international
group to furnish the said report or information, as the case may be, and the same
has been intimated by the designated constituent entity in Form 3CEAB.
Such intimation shall be made at least 30 days before the due date of filing the
report as specified in Rule 10DA(2).
10DA(7) Period for which such information and document to be kept or maintained:
The information and documents shall be kept and maintained for a period of eight
years from the end of the relevant assessment year.
(xiv) Meaning of certain terms [Section 286(9)]

Term Meaning
(a) Accounting Case Accounting year
year
In a case where the A previous year
parent entity or
alternate reporting
entity is resident in
India; or
In any other case An annual accounting period, with respect to
which the parent entity of the international
group prepares its financial statements under
any law for the time being in force or the

applicable accounting standards of the country

or territory of which such entity is resident
(b) Agreement A combination of all of the following agreements, namely –
(i) an agreement referred to in section 90(1) or section 90A(1); or
(ii) an agreement for exchange of the CbC report referred to in section
286(2) as may be notified by the Central Government.
(c) Alternate Any constituent entity of the international group that has been
reporting designated by such group, in the place of the parent entity, to furnish
entity the CbC report in the country or territory in which the said constituent
entity is resident on behalf of such group.
(d) Constituent (i) any separate entity of an international group that is included in
entity the consolidated financial statement of the said group for
financial reporting purposes, or may be so included for the said
purpose, if the equity share of any entity of the international
group were to be listed on a stock exchange;
(ii) any such entity that is excluded from the consolidated financial
statement of the international group solely on the basis of size or
materiality; or
(iii) any permanent establishment of any separate business entity of
the international group included in sub clause (i) or sub clause
(ii), if such business unit prepares a separate financial statement
for such permanent establishment for financial reporting,
regulatory, tax reporting or internal management control
purposes
(e) Group This includes a parent entity and all the entities in respect of which, for
the reason of ownership or control, a consolidated financial statement
for financial reporting purposes,—
(i) is required to be prepared under any law for the time being in
force or the accounting standards of the country or territory of
which the parent entity is resident; or
(ii) would have been required to be prepared had the equity shares
of any of the enterprises were listed on a stock exchange in the
country or territory of which the parent entity is resident.
(f) Consolidated The financial statement of an international group in which the assets,
financial liabilities, income, expenses and cash flows of the parent entity and the
statement constituent entities are presented as those of a single economic entity
(g) International Any group that includes,—
group (i) two or more enterprises which are resident of different countries
or territories; or
(ii) an enterprise, being a resident of one country or territory, which

carries on any business through a permanent establishment in

other countries or territories;
(h) Parent entity A constituent entity, of an international group holding, directly or
indirectly, an interest in one or more of the other constituent entities of
the international group, such that,—
(i) it is required to prepare a consolidated financial statement under
any law for the time being in force or the accounting standards of
the country or territory of which the entity is resident; or
(ii) it would have been required to prepare a consolidated financial
statement had the equity shares of any of the enterprises were
listed on a stock exchange,
and, there is no other constituent entity of such group which, due to
ownership of any interest, directly or indirectly, in the first mentioned
constituent entity, is required to prepare a consolidated financial
statement, under the circumstances referred to in sub clause (i) or sub
clause (ii), that includes the separate financial statement of the first
mentioned constituent entity.
(i) Permanent Meaning assigned to it in clause (iiia) of section 92F i.e., includes a
establishment fixed place of business through which the business of the enterprise is
wholly or partly carried on.
(j) Reporting The accounting year in respect of which the financial and operational
accounting results are required to be reflected in the report to be furnished every
year year by the parent entity or the alternate reporting entity, resident in
India, in respect of the international group of which it is a constituent
under section 286(2) or by a constituent entity of an international
group referred to in section 286(4).
(k) Reporting The constituent entity including the parent entity or the alternate reporting
entity entity, that is required to furnish a report referred to in section 286(2)
and 286(4).
(l) Systemic Systemic failure, with respect to a country or territory, means that the
failure country or territory has an agreement with India providing for
exchange of report of the nature referred to in section 286(2), but—
(i) in violation of the said agreement, it has suspended automatic
exchange; or
(ii) has persistently failed to automatically provide to India the report
in its possession in respect of any international group having a
constituent entity resident in India

1.16 TRANSFER PRICING ASSESSMENT

Transfer pricing assessment procedure in India is captured graphically as below:
(1) Power of Assessing Officer to determine ALP [Section 92C(3) & (4)]
Section 92C(3) and (4) gives power to the Assessing Officer to determine the arm’s length price
under the following circumstances and also empowers the Assessing Officer to re-compute total
income of the assessee having regard to arm’s length price determined by him. It also provides
that deduction under section 10AA and Chapter VI-A shall not be allowed from the additional
income computed by him.
For example, if the total income declared by the assessee in his return of income is, say ` 7 lakhs
and the total income computed by the Assessing Officer applying the arm’s length principle is, say
` 9 lakhs, the difference of ` 2 lakhs will not qualify for deduction under section 10AA or Chapter
VI-A.

The Assessing Officer may invoke the power to determine arm’s length price if during the course of
any proceeding, he is of the opinion that, on the basis of material or information or documents in
his possession:
(a) The price charged or paid in an international transaction has not been determined in
accordance with section 92C(1) and (2); or
(b) Any information and documents relating to an international transaction has not been kept and
maintained by the assessee in accordance with the provisions contained in section 92D(1)
and the rules made in this behalf (Rule 10D); 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 documents
which he was required to furnish by a notice issued under section 92D(3).
Before invoking the power to determine arm’s length price, an opportunity of being heard is to be
given to the assessee.
Second proviso to section 92C(4) provides that if the total income of an associated enterprise is
computed under this section on the determination of arm’s length price paid to another associated
enterprise, from which tax is deducted or deductible at source, the income of the other associated
enterprise shall not be recomputed on this count.
For example, if “A” Ltd. has paid royalty to “B” Ltd. (Non-Resident) @10% of sales and tax is
deducted at source, “B” Ltd. cannot claim refund if the Assessing Officer has determined 8% as
arm’s length price in the case of “A” Ltd. and disallowed 2% of the royalty amount.
(2) Reference to Transfer Pricing Officer [Section 92CA]

This section provides for a procedure for reference to a Transfer Pricing Officer (TPO) of any issue
relating to computation of arm’s length price in an international transaction. The procedure is as
under -
(i) The option to make reference to TPO is given to the Assessing Officer. He may make this
reference if he considers it necessary or expedient to do so. This option is not available to the
assessee.
(ii) The Assessing Officer has to take the approval of the Principal Commissioner of Income-tax
(PCIT)/Commissioner of Income-tax (CIT) before making such a reference.
(iii) Any Joint/ Deputy/ Assistant Commissioner of Income-tax, authorised by CBDT, can be
appointed as TPO.

(iv) When such reference is made, TPO can call upon the assessee to produce evidence in
support of the computation of arm’s length price made by him.
(v) The TPO can also determine the ALP of other international transactions identified
subsequently in the course of proceedings before him [Sub-section (2A)].
(vi) Where in respect of an international transaction, the assessee has not furnished the report
under section 92E and such transaction comes to the notice of the TPO during the course
of proceeding before him, the transfer pricing provisions shall apply as if such transaction
is referred to the TPO by the Assessing Officer under section 92CA(1) [Sub-section (2B)].
(vii) The TPO has to pass an order determining the arm’s length price after considering the
evidence, documents, etc. produced by the assessee and after considering the material
gathered by him. He has to send a copy of his order to Assessing Officer as well as the
assessee.
(viii) The order of the Transfer Pricing Officer determining the arm’s length price of an international
transaction is binding on the Assessing Officer and the Assessing Officer shall proceed to
compute the total income in conformity with the arm’s length price determined by the Transfer
Pricing Officer [Sub-section (4)].
(ix) In order to provide sufficient time to the Assessing Officer to complete the assessment in a
case where reference is made to the Transfer Pricing Officer, section 92CA(3A) provides
for determination of arm’s length price of international transactions by the Transfer Pricing
Officer at least 60 days before the expiry of the time limit under section 153 or section
153B for making an order of assessment by the Assessing Officer. This provision would
apply in a case where reference is made on or after 1.6.2007 or in a case where reference
is made before that date but the order of the Transfer Pricing Officer is pending on that
date [Sub-section (3A)].
(x) In many cases, it becomes necessary to seek information from foreign jurisdictions for the
purpose of determining the arm's length price by the TPO. At times, proceedings before the
TPO may also be stayed by a court order.
Taking into consideration such cases, it has been provided that where assessment
proceedings are stayed by any court or where a reference for exchange of information has
been made by the competent authority under an agreement referred to in section 90 or 90A,
the time available to the Transfer Pricing Officer for making an order after excluding the time
for which assessment proceedings were stayed or the time taken for receipt of information, as
the case may be, is less than 60 days, then, such remaining period shall be extended to 60
days.

(xi) The TPO has power to rectify his order under section 154 if any mistake apparent from the
record is noticed. If such rectification is made, the Assessing Officer has to rectify the
assessment order to bring it in conformity with the same.
(xii) The TPO can exercise all or any of the powers specified in clause (a) to (d) of section 131(1)
or section 133(6) or section 133A for determination of arm’s length price once the above
reference is made to him.
(3) Secondary adjustment [Section 92CE]
(i) Meaning of Primary Adjustment and Secondary Adjustment
“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.
"Secondary adjustment" means an adjustment in the books of accounts 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.
(ii) Forms of Secondary Adjustment - As per the OECD's Transfer Pricing Guidelines for
Multinational Enterprises and Tax Administrations (OECD transfer pricing guidelines),
secondary adjustment may take the form of constructive dividends, constructive equity
contributions, or constructive loans.
(iii) Alignment of economic benefit of the transaction with the arm’s length position - The
provisions of secondary adjustment are internationally recognised and are already part of the
transfer pricing rules of many leading economies in the world. Whilst the approaches to
secondary adjustments by individual countries vary, they represent an internationally
recognised method to align the economic benefit of the transaction with the arm's length
position.
(iv) Cases where secondary adjustment has to be made - In order to align the transfer pricing
provisions in line with OECD transfer pricing guidelines and international best practices,
section 92CE provides that the assessee shall be required to carry out secondary adjustment
where the primary adjustment to transfer price:
(a) has been made suo motu by the assessee in his return of income; or
(b) made by the Assessing Officer has been accepted by the assessee; or
(c) is determined by an advance pricing agreement entered into by the assessee under
section 92CC; or
(d) is made as per the safe harbour rules framed under section 92CB; or

(e) 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 for avoidance of
double taxation.
(v) Non-repatriation of excess money by the associated enterprise deemed to be an advance
- 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 which
is available with its associated enterprise, if not repatriated to India within the time as may be
prescribed, 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 prescribed manner.
“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 taken place.
Arms’ Length
Actual value of
Price in Excess
international
primary Money
transaction
adjustment
Rule 10CB(1) prescribes the time limit for repatriation of excess money i.e., on or before 90
days from the date given in column (3) in the cases mentioned in column (2) of the table below:
Case Date
(1) (2) (3)
(i) Where primary adjustments to transfer price has been the due date of filing
made suo-moto by the assessee in his return of income of return u/s 139(1)
(ii) If primary adjustments to transfer price as determined in the the date of the said
order of the Assessing Officer or the appellate authority has order
been accepted by the assessee
(iii) Where agreement for advance pricing has been entered the due date of filing
into by the assessee under section 92CD of return u/s 139(1)
(iv) Where option has been exercised by the assessee as per the due date of filing
the safe harbour rules under section 92CB of return u/s 139(1)
(v) Where agreement under the Mutual agreement procedure the due date of filing
under a DTAA has been entered into u/s 90 or 90A of return u/s 139(1)
Rule 10CB(2) prescribes the rate at which the per annum interest income shall be computed in
case of failure to repatriate the excess money within the above time limit. The interest would be

computed at the rates mentioned in column (3) in respect of the cases mentioned in column (2)
of the table below:
Case Rate
(1) (2) (3)
(i) Where the international At the one year marginal cost of fund lending
transaction is denominated in rate of SBI as on 1st April of the relevant
Indian rupee previous year + 3.25%
(ii) Where the international At six month London Interbank Offered Rate
transaction is denominated in (LIBOR) as on 30th September of the relevant
foreign currency previous year + 3.00%
(vi) No requirement of secondary adjustment in certain cases - Such secondary adjustment,
however, 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 ` 1 crore or the primary adjustment is made
in respect of A.Y.2016-17 or an earlier assessment year.
(4) Dispute Resolution Mechanism
The evolving tax dispute resolution mechanism in India consists of the following forums:
• Filing of objections before the Dispute Resolution Panel or Appeal before the Commissioner
of Income Tax (Appeals);
• Appeal before the Income Tax Appellate Tribunal;
• Appeal before the High Court / Supreme Court;
• Safe Harbour Rules;
• Advance Pricing Agreement; and
• Mutual Agreement Procedure
Each of the above dispute resolution mechanisms have been explained in the subsequent
paragraphs.
(i) Filing of objections before the Dispute Resolution Panel [Section 144C]
Key features of the DRP process is listed below:
• To facilitate expeditious resolution of disputes, a panel comprising three Principal
Commissioners or Commissioners of Income-tax has been constituted
• The following assessees are eligible for filing objections before the DRP:-
 Foreign Companies
 Any person in whose case variation on account of order of Transfer Pricing Officer

• The Assessing Officer shall, forward a draft order of assessment to the eligible assessee if he
proposes to make, on or after 1st October, 2009, any variation in the income or loss returned
which is prejudicial to the interest of such assessee.
• Assessee can file his acceptance to the Assessing Officer or can file his objections against
the draft assessment order with the DRP and the Assessing Officer within thirty days of the
receipt of the draft order.
• Upon acceptance by assessee or no objection received from assessee within the specified
time, the Assessing Officer, notwithstanding anything contained in section 153 or section
153B, shall complete the assessment and pass the assessment order within one month from
the end of the month in which the acceptance is received or 30 days expires.
• The Dispute Resolution Panel shall, in a case where any objections are received, issue such
directions, as it thinks fit, for the guidance of the Assessing Officer to enable him to complete
the assessment.
• After considering draft order, all objections, evidence etc., the DRP issues binding directions
to the Assessing Officer.
• The Dispute Resolution Panel may, before issuing any such directions make such further
enquiry, as it thinks fit; or cause any further enquiry to be made by any income tax authority
and report the result of the same to it.
• In a case where the proposed direction are prejudicial to the interest of the assessee or the
interest of the revenue, the direction cannot be issued without giving an opportunity of being
heard to the assessee and the Assessing Officer, as the case may be.
• The Dispute Resolution Panel may confirm, reduce or enhance the variations proposed in the
draft order. However, it cannot set aside any proposed variation or issue any direction for
further enquiry and passing of the assessment order.
• The power of the DRP to enhance the variation includes the power to consider any matter
arising out of the assessment proceeding relating to the draft order. This power to consider
any issue shall be irrespective of whether the matter was raised by the eligible assessee or
not.
• If the members of the DRP differ in opinion on any point, the point shall be decided according
to the opinion of the majority of the members.
• Every direction issued by the DRP shall be binding on the Assessing Officer.
• Such direction has to be issued within nine months from the end of the month in which the
draft order is forwarded to the eligible assessee.
• Upon receipt of such direction, the Assessing Officer has to complete the assessment in
accordance with the same, within one month from the end of the month in which the

direction is received. There is no requirement of providing any further opportunity of being

heard to the assessee.
• The order of the Assessing Officer is directly appealable before the Tribunal.
• The CBDT may make rules for the purpose of efficient functioning of the DRP and expeditious
disposal of the objections filed by the eligible assessee.
The procedure to be followed by the assessee under DRP route is depicted below:
AO to determine ALP Taxpayer to file DRP to pass

u/s 92C(3) objections with DRP directions
AO may also refer

determination of ALP AO to pass Draft AO to pass final
to the TPO with the order order
prior approval of
PCIT/CIT
Taxpayer to
AO to compute
substantiate transfer
taxable income AO order appealable
price as ALP to TPO
before Tribunal
Intimation to
TPO to determine
taxpayer & AO by
ALP by passing an
sending copy of
order
order
(ii) Appeal before the Commissioner of Income Tax (Appeals) – [Sections 246A, 249 & 250]
Key features of the appeal before CIT (A) is listed below:
• First Appellate Authority
• Appeal may be against the orders including:
 Assessment order passed u/s 143(3) or 144 of the Income-tax Act
 Intimation passed u/s 143(1)
 Reassessment order passed u/s 147 or 150 (re-computation)
 Assessment or reassessment of search cases u/s 153(A)
 Rectification Order made u/s 154
 Order of assessment or reassessment under section 92CD(3)

• Time Limit - Appeal has to be filed within 30 days of date of demand notice along-with
assessment order issued by the Assessing Officer
• Prescribed filing fee is to be paid at the time of filing appeal
• The CIT(A) cannot set-aside the order passed by the Assessing Officer
The following table enumerates the key differences between the DRP and the appeal process
before the CIT (A):
Aspect DRP CIT(A)
Constitution Case heard by 3 Principal Case heard by a single
Commissioner or Commissioners Commissioner
Time limit for Objections need to be filed along with An appeal filed within 30 days of
filing all necessary submissions within 30 date of demand notice along-with
objections/ days of receipt of the draft order. assessment order issued by the
appeal Assessing Officer
Condonation of No power to condone delay Discretion of CIT(A)
delay
Filing Fees No filing fees ` 250 to ` 1,000, depending upon
assessed income
Stay of demand Automatic stay of demand as the A stay application to be filed with
order is a draft order. the Income-tax Officer requesting
for a stay of demand. In case the
stay is rejected, the demand to be
paid off is decided by the Income-
tax Officer.
Time limit for To be completed within a period of 9 The Commissioner (Appeals) may
completion months from the end of the month in decide the appeal within a period of
which the draft order is forwarded to one year from the end of the
the assessee. financial year in which such appeal
is filed before him.
Penalty No penalty proceedings can be Typically penalty proceedings are
Proceedings initiated until the matter is disposed initiated by the ITO and a stay of
penalty would need to be filed.
Next steps on Once the order of the DRP is passed, Once the order of the CIT(A) is
completion of the same is sent to the assessing passed, the same is sent to the
proceedings officer who will pass a final assessing officer who will pass an
assessment order. order giving effect to the order of
the CIT(A).

The CBDT has issued a press release dated 30.12.2015 stating that as part of the endeavor of the
Income-tax Department to digitize various functions of the Department for providing efficient
taxpayer services, electronic filing of appeal before CIT(Appeals) is being made mandatory for
persons who are required to file the return of income electronically.
(iii) Appeal before the Income Tax Appellate Tribunal [Sections 253 & 254]
Key features of the appeal process before the Income Tax Appellate Tribunal is listed below:
• Once the order of the Assessing Officer after giving effect to DRP directions or CIT(A) are
issued, an appeal can be filed with the Income-tax Appellate Tribunal (‘the Tribunal’) within a
period of 60 days from the date on which the order sought to be appealed against is
communicated to the assessee.
• If the revenue authorities have filed an appeal on a matter where the CIT(A) has held in favor
of the assessee, then Principal Commissioner or Commissioner of Income-tax can direct
Assessing officer to file an appeal on order of CIT(A) filed before the Tribunal;
• In the case of an order arising pursuant to directions of the DRP, the demand becomes
payable and a stay application will need to be filed with the AO requesting for a stay of
demand;
• In case the stay application is rejected by the AO, the demand is to be paid by the assessee.
Alternatively, the assessee can prefer a stay application before the Tribunal;
• An order is passed by the Tribunal after hearing arguments from both the assessee and the
Revenue authorities.
• Once the order of the Tribunal is issued, an order giving effect will need to be passed by the
AO and consequential demands paid off /refunds issued.
(iv) Appeal before the High Court / Supreme Court [Sections 260A & 260B/ Sections 261 & 262]
Key features of the appeal process before the High Court is listed below:
• Appeal lies to High Court against decision given by Appellate tribunal
• Appeal can be filed by the aggrieved –
 Principal Chief Commissioner; or
 Chief Commissioner; or
 Principal Commissioner; or
 Commissioner; or
 Assessee
• Condition precedent
 Appeal shall be heard by not less than 2 judges of the High Court

 If HC satisfied that the case involves a ‘substantial question of law’

• Substantial Question of Law means:
 Issue must be debatable
 Not previously settled by Law of Land
 Should not be settled by a binding precedent
 Must have a material bearing on decision of the case
• Time Limit for filing an appeal - Appeal to be preferred within 120 days from the date of
receipt of the Tribunal’s order
• Filing Fee and Jurisdiction
 Fee is decided as per relevant court rules and Code of Civil Procedure
 Jurisdiction is decided on the basis of the location of AO who framed the disputed order
Key features of the appeal process before the Supreme Court is listed below:
• Appeal lies to Supreme Court against decision given by the High Court.
• Condition precedent
 High Court should certify that the case is fit for appeal
 If High Court refuses – application to Supreme Court can be made under Article 136 of
the Constitution for special leave
• Decision of Supreme Court becomes the Law of the Land
The monetary tax limits for Departmental appeal filing before ITATs, HCs and SCs are as follows:
Sr. No. Appeals in income-tax matters Monetary Limits (in `)
1. Before ITAT 20,00,000
2. Before High Court 50,00,000
3. Before Supreme Court 1,00,00,000
(v) Safe Harbour Rules

In order to reduce the increasing number of transfer pricing audits and prolonged disputes, the
Finance (No. 2) Act, 2009 with retrospective effect from 1.4.2009 inserted section 92CB to provide
that determination of arm’s length price under section 92C or Section 92CA shall be subject to
Safe Harbour rules. Section 92CB(2) empowers the CBDT to prescribe safe harbour rules.
Safe Harbour means circumstances in which the income-tax authorities shall accept the transfer
price declared by the assessee.

Accordingly, in exercise of the powers conferred by section 92CB read with section 295 of the
Income‐tax Act, 1961, the CBDT has, vide notification, prescribed safe harbour rules. These
rules are explained hereunder:
Safe Harbour Rules [Rule 10TD read with Rule 10TA, Rule 10TB and Rule 10TC]
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, 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 mentioned below:
S. Eligible
No. International Circumstances Definition
Transaction 1
[Rule 10TC] [Rule 10TD] [Rule 10TA]
(1) (2) (3) (4)
(i) Provision of The operating profit margin “Software development services”
software declared by the eligible means,-
development assessee from the eligible (i) business application software and
services international transaction in information system development
relation to operating using known methods and
expense incurred is- existing software tools;
Not less Where the (ii) support for existing systems;
than the value of
prescribed international (iii) Converting or translating
percentag transaction computer languages;
e entered (iv) adding user functionality to
17% does not application programmes;
exceed a sum (v) debugging of systems;
of ` 100 crore; (vi) adaptation of existing software; or
18% exceeds a sum (vii) preparation of user
of ` 100 crore documentation.
but does not
exceed ` 200 It, however, does not include any R&D
crore. services whether or not in the nature of
contract R&D services.
(ii) Provision of The operating profit margin “Information technology enabled
information declared by the eligible services” means the following business
technology assessee from the eligible process outsourcing services provided
enabled international transaction in mainly with the assistance or use of
1
Eligible international transaction means an international transaction between the eligible assesee and its
associated enterprise, either or both of whom are non-residents, and which comprises of the transactions
described in column (2) of the above table.

services relation to operating information technology, namely:‐

expense incurred is – (i) back office operations
Not less Where the (ii) call centres or contact centre
than the aggregate services
prescribed value of such
percentage transactions (iii) data processing and data mining
entered into (iv) i surance claim processing
during the (v) legal databases
previous year
(vi) creation and maintenance of
17% does not
medical transcription exclu ing
exceed a sum medical advice
of ` 100 crore;
(vii) translation services
18% exceeds a
sum of (viii) payroll
` 100 crore (ix) remote maintenance
but does not
(x) revenue accounting
exceed ` 200
crore. (xi) support centres
(xii) website services
(xiii) data search integration and
analysis
(xiv) remote education excluding
education content development
(xv) clinical database management
services excluding clinical trials
It, however, does not include any R & D
services whether or not in the nature of
contract R & D services.
(iii) Provision of The value of international “Knowledge process outsourcing
knowledge transaction does not exceed services” means the following business
process ` 200 crore and the operating process outsourcing services provided
outsourcing profit margin declared by the mainly with the assistance or use of
services eligible assessee from the information technology requiring
eligible international application of knowledge and advanced
transaction in relation to analytical and technical skills, namely:‐
operating expense is – (i) geographic information system
(ii) human resources services
(iii) engineering and design services
(iv) animation or content development
and management

Not less Employee v) business analytics

than the Cost in (vi) financial analytics
prescribed relation to
percentage the Operating (vii) market research
Expense It, however, does not include any R&D
24% at least 60%; services whether or not in the nature of
contract R&D services.
21% 40% or more
but less than
60%;
18% does not
exceed 40%.
(iv) Advancing of The interest rate declared in “Intra‐group loan” means loan advanced
intra‐group relation to the eligible to wholly owned subsidiary being a non-
loans where international transaction is resident, where the loan–
the amount of not less than the one-year (i) is sourced in Indian rupees
loan is marginal cost of funds
denominated lending rate of SBI as on 1st (ii) is not advanced by an enterprise,
in Indian April of the relevant previous being a financial company
Rupees (INR) year plus including a bank or a financial
institution or an enterprise
% CRISIL rating of engaged in lending or borrowing
Associated in the normal course of business;
Enterprise or its and
equivalent
(iii) does not include credit line or any
1.75% Between AAA to A other loan facility which has no
3.25% BBB-, BBB, BBB+ fixed term for repayment;
4.75% Between BB to B
6.25% C to D
4.25% Where no credit
rating is available
and the loan to AE
including loans to all
AEs in Indian rupees
does not exceed `
100 crore in
aggregate as on 31st
March of the
relevant P.Y.
Advancing of The interest rate declared in
intra‐group relation to the eligible
loans where international transaction is

the amount of not less than the six-month

loan is London Inter-Bank Offer Rate
denominated (LIBOR) of the relevant
in foreign foreign currency as on 30th
currency September of the relevant
previous year plus
% CRISIL rating of
Associated
Enterprise or its
equivalent
1.50% Between AAA to
A
3.00% BBB-, BBB,
BBB+
4.50% Between BB to B
6.00% C to D
4.00% Where no credit
rating is available
and the loan to
AE including
loans to all AEs
does not exceed
` 100 crore in
aggregate as on
31st March of the
relevant P.Y.
(v) Providing Where the The “Corporate guarantee” means explicit

corporate amount commission or corporate guarantee extended by a
guarantee guaranteed- fee declared in company to its wholly owned subsidiary
relation to the being a non‐resident in respect of any
eligible short‐term or long-term borrowing.
international Explicit corporate guarantee, however,
transaction is does not include–
at the rate not
(i) letter of comfort;
less than -
(ii) implicit corporate guarantee;
does not
1% p.a. on the (iii) performance guarantee; or
exceed
amount
` 100 crore. (iv) any other guarantee of similar
guaranteed
exceeds nature.
` 100 crore

and the
credit rating
of the
associated
enterprise
done by an
agency
registered
with the
SEBI is of
the
adequate to
the highest
safety
(vi) Provision of The operating profit margin “Contract research and development
contract R & declared by the eligible (R&D) services wholly or partly relating
D services assessee from the eligible to software development” means the
wholly or international transaction in following, namely:‐
partly relating relation to operating (i) R & D producing new theorems
to software expense incurred is not less and algorithms in the field of
development. than 24%, where the value theoretical computer science;
of the international
transaction does not exceed (ii) development of information
` 200 crore. 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) R & D on software tools or

technologies in specialized areas of
computing (image processing,
geographic data presentation,
character recognition, artificial
intelligence and such other areas);
or
(viii) 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.
(vii) Provision of The operating profit margin “Generic pharmaceutical drug” means a
contract R&D declared by the eligible drug that is comparable to a drug
services wholly assessee from the eligible already approved by the regulatory
or partly relating international transaction in authority in dosage form, strength, route
to generic relation to operating of administration, quality and
pharmaceutical expense incurred is not less performance characteristics, and
drugs than 24%, where the value intended use.
of the international
transaction does not exceed
` 200 crore.
(viii) Manufacture The operating profit margin “Core auto components” means ,
and export of declared by the eligible (i) engine and engine parts,
core auto assessee from the eligible including piston and piston rings,
components international transaction in engine valves and parts cooling
relation to operating systems and parts and power
expense is not less than train components;
12%.
(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;
(ix) Manufacture The operating profit margin “Non‐core auto components” mean auto
and export of declared by the eligible components other than core auto
non-core auto assessee from the eligible components.
components international transaction in
relation to operating

expense is not less than

8.5%.
(x) Receipt of low The entire value of the “Low value-adding intra group services”
value-adding international transaction, means services that are performed by
intra group including a mark-up not one or more members of a multinational
services from exceeding 5%, does not enterprise group on behalf of one or
one or more exceed a sum of ` 10 crore. more other members of the same
members of its However, the method of cost multinational enterprise group and
group pooling, the exclusion of which,
shareholder costs and (i) are in the nature of support
duplicate costs from the cost services;
pool and the reasonableness (ii) are not part of the core business of
of the allocation keys used for the multinational enterprise group,
allocation of costs to the i.e., such services neither constitute
assessee by the overseas the profit-earning activities nor
associated enterprise, is contribute to the economically
certified by an accountant. 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,
However, it does not include the
following services, namely:
(i) research and development
services;
(ii) manufacturing and production
services;
(iii) information technology (software
development) services;
(iv) knowledge process outsourcing
services;

(v) business process outsourcing

services;
(vi) purchasing activities of raw
materials or other materials that are
used in the manufacturing or
production process;
(vii) sales, marketing and distribution
activities;
(viii) financial transactions;
(ix) extraction, exploration, or
processing of natural resources;
and
(x) insurance and reinsurance;”
Meaning of certain terms:
Term Meaning
(i) Eligible “Eligible assessee” means a person who has exercised a valid option for
assessee application of safe harbor rules 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;
(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 non-resident associated enterprise;
(v) is engaged in providing contract research and development
services wholly or partly relating to generic pharmaceutical drugs,
with insignificant risk, to a non-resident associated enterprise;
(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; or
(vii) is in receipt of low value-adding intra-group services from one or
more members of its group
(ii) Operating The costs incurred in the previous year by the assessee in relation to
expense the international transaction during the course of its normal operations
including
- costs relating to Employee Stock Option Plan 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:
However, reimbursement to associated enterprises of expenses incurred
by the associated enterprises on behalf of the assessee shall be at cost.
Further, amounts recovered from associated enterprises on account of
expenses incurred by the assessee on behalf of the associated
enterprises and which relate to normal operations of the assessee shall
be at cost.
(iii) Operating The revenue earned by the assessee in the previous year in relation to
revenue the international transaction during the course of its normal
operations including costs relating to Employee Stock Option Plan 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 income;
(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
(iv) Operating In relation to operating expense, “operating profit margin” means the
profit ratio of operating profit, being the operating revenue in excess of
margin operating expense, to the operating expense expressed in terms of
percentage
(v) Accountant An accountant referred to in the Explanation below section 288(2) of the
Act 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 then,—
(i) the entity or its affiliates have presence in more than two
countries; and
(ii) the annual receipt of the entity in the year preceding the year
in which cost certification is undertaken exceeds ` 10 crore;
(II) if he is pursuing the profession of accountancy individually or is a
valuer then,—
(i) his annual receipt in the year preceding the year in which
cost certification is undertaken, from the exercise of
profession, exceeds ` 1 crore; and
(ii) he has professional experience of not less than 10 years.
(vi) Employee It includes,—
cost (i) salaries and wages;
(ii) gratuities;
(iii) contribution to Provident Fund and other funds;
(iv) the value of perquisites as specified in clause (2) of section 17;
(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:
However, 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.

(vii) No tax or A country or territory in which the maximum rate of income-tax is less than
low tax 15%.
country or
territory
(viii) Relevant The previous year relevant to the assessment year in which the option
previous for safe harbour is validly exercised.
year
Procedure [Rule 10TE]
Furnishing of Form 3CEFA
For exercising the option of safe harbor, the assessee has to furnish Form 3CEFA, complete in
all respects, to the Assessing Officer on or before the due date specified in Explanation 2 to
section 139(1) for furnishing the return of income for
- the relevant assessment year, in case the option is exercised only for that assessment year
or
- the first of the assessment years, in case the option is exercised for more than one
assessment year.
The return of income for the relevant assessment year or the first of the assessment years, as the
case may be, should be furnished on or before the date of submitting the Form 3CEFA.
The option for safe harbour validly exercised would continue to apply for the period specified in
the form or 3 years, whichever is less.
Verification by the Assessing Officer
Before treating the option for safe harbor by the assessee as validly exercised, the Assessing
Officer shall verify whether the assessee exercising the option is an eligible assessee and the
transaction in respect of which the option is exercised is an eligible international transaction.
Reference to Transfer Pricing Officer by the Assessing Officer in case of a doubt on validity
The Assessing Officer shall make a reference to the Transfer Pricing Officer for determination of
the eligibility of the assessee or the international transaction or both for the purposes of the safe
harbor, where he has doubts the valid exercise of the option for the safe harbour by an
assessee.
Time limit for reference to Transfer Pricing Officer by Assessing Officer
No reference shall be made to the Transfer Pricing Officer by the Assessing Officer after the expiry of
2 months from the end of the month in which Form 3CEFA is received by him.
Documents or information required by the Transfer Pricing Officer
Transfer Pricing Office may issue a notice to the assessee to furnish such information or
documents or other evidence as he may consider necessary. The assessee has to furnish the
same within the specified time in such notice.
Circumstances when option declared to be Invalid
The Transfer Pricing Office shall, by order in writing, declare the option exercised by the
assessee as invalid and cause a copy of the order has to be served on the assessee and the

Assessing Officer, if –
(i) the assessee does not furnish the information or documents or other evidence required by
the Transfer Pricing Office
(ii) the Transfer Pricing Office finds that the assessee is not an eligible assessee
(iii) the Transfer Pricing Office finds that the international transaction in respect of which option
has been exercised is not an eligible international transaction
Order by Transfer Pricing Officer
The Transfer Pricing Officer shall pass the order declaring the option exercised by the assessee
as invalid within a period of 2 months from the end of the month in which reference from the
Assessing Officer is received by him.
No order can be passed declaring the option exercised by the assessee invalid unless an
opportunity of being heard is given to him.
Filling of objections against the order of Transfer Pricing Officer by the assessee
If the assessee objects to the order of the Transfer Pricing Officer declaring the option to be invalid,
he may file his objections with the Commissioner to whom the Transfer Pricing Officer is subordinate,
within 15 days of receipt of the order of the Transfer Pricing Officer.
On receipt of objection, 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. A copy of the said order has to be served
on the assessee and the Assessing Officer.
If the Assessing Officer or the Transfer Pricing Officer or the Commissioner, as the case may
be, does not make a reference or pass an order within the specified time, then, the option for
safe harbour exercised by the assessee shall be treated as valid.
Notes:
(1) The second proviso to section 92C(2) provides that if the variation between the arm’s
length price determined and the price at which the transaction has been undertaken does
not exceed such percentage, not exceeding 3%, as may be notified by the Central
Government in the Official Gazette, the price at which the transaction has actually been
undertaken shall be deemed to be the arm’s length price. However, no comparability
adjustment and allowance under the second proviso to section 92C(2) shall be made to the
transfer price declared by the eligible assessee and accepted under the Safe Harbour
Rules given above.
(2) Section 92D requiring every person who has entered into an international transaction to
keep and maintain the prescribed information and documents and section 92E requiring
such person to obtain a report from an accountant and furnish such report on or before the
specified date in prescribed form and manner, shall apply irrespective of the fact that the
assessee exercises his option for safe harbor in respect of such transaction.
(3) Safe harbor rules shall not be applicable in respect of eligible international transaction
entered into with an associated enterprise located in any country or territory notified under
section 94A as notified jurisdictional area or in a no tax or low tax country or territory [Rule
10TF].

(4) The assessee would not be entitled to invoke mutual agreement procedure (MAP) under a
DTAA entered with a country outside India, if the transfer price in relation to eligible
international transaction declared by an eligible assessee is accepted by the income-tax
authority under safe harbour rules [Rule 10TG].
(vi) Advance Pricing Agreements

What is APA?
In order to gain certainty prior to entering into an international transaction with an AE, the
taxpayers have an option of applying for an Advance Pricing Agreement (APA) and obtaining
results before the transaction is actually undertaken. The same has the potential to reduce
litigation for the taxpayer and provide certainty for a longer period of time.
An APA is an agreement between a tax payer/ applicant and the
CBDT, which determines the arm's length price of future
intercompany transactions. It can also be used for existing
intercompany transactions. The tax payer /applicant mutually agree
on the transfer pricing methodology to be applied and its application,
in relation to the taxpayer’s international transactions for certain future
period of time.
The Finance Act, 2012 had inserted Section 92CC and Section 92CD in the Income-tax Act, 1961
introducing the provisions of APA. The Ministry of Finance notified the Rules 10F to 10T of the
Income-tax Rules, 1962 for this purpose.
Once an APA has been entered into with respect to an international transaction, the arm's length
price with respect to that international transaction, for the period specified in the APA, will be
determined only in accordance with the APA. The APA shall be binding on the person as well as
the Income-tax authorities for the specified transaction and period as covered in the APA.
Types of APA
The APA scheme envisages three types of APA’s, viz.
• Unilateral APA – Agreement between the assessee and CBDT
• Bilateral APA – Agreement between the assessee and CBDT subsequent to and based on
agreement between competent authorities of India with the competent authority in the other
country regarding appropriate transfer pricing method or the ALP
• Multilateral APA - Agreement between the assessee and CBDT subsequent to and based on
agreement between competent authorities of India with the competent authorities in the other
countries regarding appropriate transfer pricing method or the ALP
Request for bilateral or multilateral APA can be accepted by the Indian competent authority where:

• A tax treaty exists between India and other contracting state containing an article on ‘Mutual
Agreement Procedure’;
• The corresponding APA program exists in the other country.
[In case of international transactions leading to economic double taxation arising out of TP
adjustments; presently it seems Indian Competent Authority accepts bilateral/ multilateral
APA only if the said tax treaty contains provisions similar to article 9(2) of the OECD model
convention on ‘Associated Enterprises]
Advantages of APA program
The APA program is designed to:
• Provide certainty with regard to determination of ALP of the international transaction (viz.
transactions covered by the APA);
• Impart flexibility in developing practical approaches for complex transfer pricing issues;
• Reduce the risk of potential double taxation through bilateral and multi-lateral APA;
• Reduce compliance costs by eliminating the risk of transfer pricing audit and resolving long
drawn and time consuming litigation;
• Reduce the burden of record keeping, as the taxpayer knows in advance the required
documentation to be maintained to substantiate the agreed terms and conditions of the
agreement.
Applicability of APA
Section 92CC enables the Board (with the approval of the Central Government), to enter into an
APA with any person undertaking an international transaction.
(i) Purpose of APA: The APA shall relate to an international transaction to be entered into by
such person. The APA shall be entered into for the purpose of determination of the arm’s
length price or specifying the manner in which arm’s length price shall be determined, in
relation to such international transaction.
(ii) Manner of determination of Arm’s Length Price in APA: The manner for determination of
arm’s length price referred above may include methods referred to in section 92C(1) or any
other method with necessary adjustments or variations.
(iii) Non-applicability of section 92C or section 92CA: In case an APA has been entered into
in respect of any international transaction, the arm’s length price in relation to that transaction
shall be determined in accordance with that APA notwithstanding any contrary provisions
contained in section 92C or section 92CA i.e., the provisions of the APA shall apply
overriding the provisions of section 92C or section 92CA, which are normally applicable for
determination of arm’s length price.

(iv) Validity of APA: The APA shall be valid for such period as specified in the agreement, which
shall in no case exceed five consecutive previous years.
(v) Binding nature of APA: The APA so entered into shall be binding on:
(a) the person in whose case, and in respect of the transaction in relation to which, the APA
has been entered into; and
(b) the Principal Commissioner or Commissioner and the income-tax authorities
subordinate to him, in respect of the said person and the said transaction.
(vi) Not binding of APA: The APA shall not be binding if there is any change in law or facts
having bearing on such APA.
(vii) Conditions to declare APA as void ab initio: In case the Board finds that the APA so
entered into has been obtained by the person by way of fraud or misrepresentation of facts,
the Board is empowered to pass an order declaring any such APA to be void ab initio, with
the approval of Central Government.
(viii) Consequences of declaration of an APA as void ab initio: As a result of declaration of an
APA as void ab initio:
(a) all the provisions of the Act shall apply to such person as if such APA had never been
entered into.
(b) The period beginning with the date of such APA and ending on the date of order
declaring the APA as void ab initio, shall be excluded for the purpose of computation of
any period of limitation under this Act (for example period of limitation specified in the
section 153, 153B etc). This is irrespective of anything contained in any other provision
of the Act.
(c) In case the period of limitation after exclusion of the above mentioned period is less
than 60 days, such remaining period of limitation shall be extended to 60 days.
(ix) If an application is made by a person for entering into an APA, then, the proceeding, in
respect of such person for the purpose of the Act, shall be deemed to be pending.
(x) Prescribed scheme for APA: The Board is empowered to prescribe a scheme specifying the
manner, form, procedure and any other matter generally in respect of the APA.
Prescribed Advance Pricing Agreement Scheme for the purpose of section 92CC [Rule 10F
to 10T]: In exercise of the powers conferred in section 92CC(9) read with section 295 of the
Income-tax Act, 1961, the CBDT has prescribed rules specifying an Advance Pricing Agreement
(APA) Scheme. Some of the important provisions of the scheme are briefed hereunder –
(1) Persons eligible to apply [Rule 10G]: Any person who has undertaken an international
transaction or is contemplating to undertake an international transaction, shall be eligible to
enter into an agreement under these rules.

(2) Pre-filing Consultation [Rule 10H]:

(a) Any person proposing to enter into an agreement under these rules may, by an
application in writing, make a request for a pre-filing consultation in the prescribed form
to the Director General of Income-tax (International Taxation).
(b) The pre-filing consultation shall, among other things,-
(i) determine the scope of the agreement;
(ii) identify transfer pricing issues;
(iii) determine the suitability of international transaction for the agreement;
(iv) discuss broad terms of the agreement.
(c) The pre-filing consultation shall –
(i) not bind the Board or the person to enter into an agreement or initiate the
agreement process;
(ii) not be deemed to mean that the person has applied for entering into an
agreement.
(3) Application for advance pricing agreement [Rule 10-I]
(a) Any person who is eligible to apply may enter into agreement may, if such person desires
to enter into an agreement furnish an application in the prescribed form along with proof
of payment of requisite fee as specified, to the Director General of Income-tax
(International Taxation) in case of unilateral agreement and to the competent authority
in India in case of bilateral or multilateral agreement.
(b) The application may be filed at any time -
(i) before the first day of the previous year relevant to the first assessment year for
which the application is made, in respect of transactions which are of a continuing
nature from dealings that are already occurring; or
(ii) before undertaking the transaction in respect of remaining transactions.
Note - The applicant may withdraw the application for agreement at any time before the
finalisation of the terms of the agreement.
(4) Approval of Central Government: The agreement shall be entered into by the Board
with the applicant after its approval by the Central Government.
(5) Terms of the agreement [Rule 10M]
(a) An agreement may among other things, include –
(i) the international transactions covered by the agreement;

(ii) the agreed transfer pricing methodology, if any;

(iii) determination of arm's length price, if any;
(iv) definition of any relevant term to be used in item (ii) or (iii);
(v) 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;
(vi) rollback provision referred to in Rule 10MA;
(vii) the conditions, if any, other than provided in the Act or these rules.
(b) The agreement shall not be binding on the Board or the assessee if there is a change in
any of critical assumptions or failure to meet conditions subject to which the agreement
has been entered into.
(c) The binding effect of agreement shall cease only if any party has given due notice of the
concerned other party or parties.
(d) In case there is a change in any of the critical assumptions or failure to meet the
conditions subject to which the agreement has been entered into, the agreement can be
revised or cancelled, as the case may be.
(6) Furnishing of Annual Compliance Report [Rule 10-O]: The assessee shall furnish an
annual compliance report in quadruplicate in the prescribed form to Director General of
Income-tax (International Taxation) for each year covered in the agreement, within 30 days of
the due date of filing income-tax return for that year, or within 90 days of entering into an
agreement, whichever is later.
(7) Compliance Audit of the agreement [Rule 10P]:
(a) The Transfer Pricing Officer having the jurisdiction over the assessee shall carry out the
compliance audit of the agreement for each of the year covered in the agreement. For
this purpose, the Transfer Pricing Officer may require –
(i) the assessee to substantiate 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;
(ii) the assessee to submit any information, or document, to establish that the terms of
the agreement has been complied with.
(b) The compliance audit report shall be furnished by the Transfer Pricing Officer within six
months from the end of the month in which the Annual Compliance Report is received
by the Transfer Pricing Officer.

(8) Revision of an agreement [Rule 10Q]:

(a) An agreement, after being entered, may be revised by the Board either suo moto or on
request of the assessee or the competent authority in India or the Director General of
Income-tax (International Taxation), if–
(i) there is a change in critical assumptions or failure to meet a condition subject to
which the agreement has been entered into;
(ii) 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
(iii) there is a request from competent authority in the other country requesting revision
of agreement, in case of bilateral or multilateral agreement.
(b) Except when the agreement is proposed to be revised on the request of the assessee, the
agreement shall not be revised unless an opportunity of being heard has been provided to
the assessee and the assessee is in agreement with the proposed revision.
(c) 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.
(9) Cancellation of an agreement [Rule 10R]:
(a) An agreement shall be cancelled by the Board for any of the following reasons:
(i) the compliance audit has resulted in the finding of failure on the part of the assessee
to comply with the terms of the agreement;
(ii) the assessee has failed to file the annual compliance report in time;
(iii) the annual compliance report furnished by the assessee contains material errors; or
(iv) the assessee is not in agreement with the revision proposed in the agreement or the
agreement is to be cancelled under rule 10RA(7);.
(b) The Board shall give an opportunity of being heard to the assessee, before proceeding
to cancel an application.
(c) The order of cancellation of the agreement shall be in writing and shall provide reasons
for cancellation and for non-acceptance of assessee's submission, if any.
(d) The order of cancellation shall also specify the effective date of cancellation of the
agreement, where applicable.
(e) The order under the Act, declaring the agreement as void ab initio, on account of fraud
or misrepresentation of facts, shall be in writing and shall provide reason for such
declaration and for non-acceptance of assessee's submission, if any.

(10) Mere filing of an application for an agreement under these rules shall not prevent the
operation of Chapter X of the Act for determination of arms' length price under that Chapter
till the agreement is entered into. [Rule 10T(1)].
(11) The negotiation between the competent authority in India and the competent authority in
the other country or countries, in case of bilateral or multilateral agreement, shall be carried
out in accordance with the provisions of the tax treaty between India and the other country or
countries. [Rule 10T(2)].
(xi) Provision for Roll back in APA Scheme [Section 92CC]
(a) In order to reduce current pending as well as future litigation in respect of the transfer
pricing matters, section 92CC(9A) provides roll back mechanism in the APA scheme.
(b) Accordingly, the APA may, subject to such prescribed conditions, procedure and
manner, provide for determining the ALP or for specifying the manner in which ALP is to
be determined in relation to an international transaction entered into by a person during
any period not exceeding four previous years preceding the first of the previous years
for which the APA applies in respect of the international transaction to be undertaken.
The CBDT has, vide Notification No.23/2015 dated 14.3.2015, in exercise of the powers
conferred by 92CC(9A) read with section 295, following conditions, procedure and manner for
determining the arm’s length price or for specifying the manner in which arm’s length price is
to be determined in relation to an international transaction:
Rule Particulars Conditions, Procedure & Manner of determination of ALP
10F(ba) Definition of A person who has made an application.
Applicant
10F(ha) Definition of Any previous year, falling within the period not exceeding four
Rollback previous years, preceding the first of the five consecutive
year previous years referred to in section 92CC(4).
10MA Roll back of The said rule provides the following:
the 1. The agreement may provide for determining the arm’s
agreement length price or specify the manner in which arm’s length
price shall be determined in relation to the international
transaction entered into by the person during the rollback
year (hereinafter referred as “rollback provision”).
2. Conditions for applying for rollback provisions:
The agreement shall contain rollback provision in respect
of an international transaction subject to the following,
namely:-
(i) the international transaction is same as the
international transaction to which the agreement
(other than the rollback provision) applies;

(ii) the return of income for the relevant rollback year

has been or is furnished by the applicant before the
due date as specified in Explanation 2 of section
139(1).
(iii) the report in respect of the international transaction
had been furnished in accordance with section 92E;
(iv) the applicability of 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; and
(v) the applicant has made an application seeking
rollback in Form 3CEDA in accordance with sub-
rule (5);
3. Non-applicability of Rollback provision: Rollback
provision shall not be provided in respect of an
international transaction for a rollback year, if,-
(i) the determination of arm’s length price of the said
international transaction for the said year has been
subject matter of an appeal before the Appellate
Tribunal and the Appellate Tribunal has passed an
order disposing of such appeal at any time before
signing of the agreement; or
(ii) 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.
4. Manner for determining arm length price to be the
same for rollback years and other previous years:
Where the rollback provision specifies the manner in
which arm’s length price 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 arm’s length price of the same international
transaction to be undertaken in any previous year to
which the agreement applies, not being a rollback year.
5. Time limit for filling application for rollback
provision: The applicant may furnish along with the
application for advance pricing agreement, the request
for rollback provision in Form No. 3CEDA with proof of
payment of an additional fee of ` 5 lakh.

10RA Procedure Rule 10RA has been inserted to provide the “Procedure for
for giving giving effect to rollback provision of an Agreement” as follows:
effect to (i) The applicant shall furnish modified return of income
rollback referred to in section 92CD in respect of a rollback year
provision of to which the agreement applies along with the proof of
an payment of any additional tax arising as a consequence
Agreement of and computed in accordance with the rollback
provision.
(ii) The modified return in respect of rollback year shall be
furnished along with the modified return to be furnished
in respect of first of the previous years for which the
agreement has been requested for in the application.
(iii) If any appeal filed by the applicant is pending before the
Commissioner (Appeals), Appellate Tribunal or the High
Court for a rollback year, on the issue which is the
subject matter of the rollback provision for that year, the
said appeal to the extent of the subject covered under
the agreement shall be withdrawn by the applicant before
furnishing the modified return for the said year.
(iv) If any appeal filed by the Assessing Officer or the Principal
Commissioner or Commissioner is pending before the
Appellate Tribunal or the High Court for a rollback year, on
the issue which is subject matter of the rollback provision for
that year, the said appeal to the extent of the subject
covered under the agreement, shall be withdrawn by the
Assessing Officer or the Principal Commissioner or the
Commissioner, as the case may be, within three months of
filing of modified return by the applicant.
(v) The applicant, the Assessing Officer or the Principal
Commissioner or the Commissioner, shall inform the
Dispute Resolution Panel or the Commissioner (Appeals)
or the Appellate Tribunal or the 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.
(vi) In case effect cannot be given to the rollback provision of
an agreement in accordance with this rule, for any
rollback year to which it applies, on account of failure on
the part of applicant, the agreement shall be cancelled.
Subsequent to the notification of the rules, the CBDT has issued Circular No. 10/2015 dated
10.6.2015 adopting a Question and Answer format to clarify certain issues arising out of the said
Rules. The questions raised and answers to such questions as per the said Circular are given
hereunder:

Question 1
Under rule 10MA(2)(ii) there is a condition that the return of income for the relevant roll back
year has been or is furnished by the applicant before the due date specified in Explanation 2
to section 139(1). It is not clear as to whether applicants who have filed returns under section
139(4) or 139(5) of the Act would be eligible for roll back.
Answer
The return of income under section 139(5) can be filed only when a return under section 139(1)
has already been filed. Therefore, the return of income filed under section 139(5) of the Act,
replaces the original return of income filed under section 139(1). Hence, if there is a return which
is filed under section 139(5) to revise the original return filed before the due date specified in
Explanation 2 to sub-section (1) of section 139, the applicant would be entitled for rollback on this
revised return of income.
However, rollback provisions will not be available in case of a return of income filed under section
139(4) because it is a return which is not filed before the due date.
Note – A belated return filed under section 139(4) can also be revised under section 139(5). In
such a case, the revised return would replace the belated return. Therefore, an applicant would not
be entitled for roll back provisions on a revised return which replaces a belated return.
Question 2
Rule 10MA(2)(i) mandates that the rollback provision shall apply in respect of an international
transaction that is same as the international transaction to which the agreement (other than the
rollback provision) applies. It is not clear what is the meaning of the word “same”. Further, it is not
clear whether this restriction also applies to the Functions, Assets, Risks (FAR) analysis.
Answer
The international transaction for which a rollback provision is to be allowed should be the same as
the one proposed to be undertaken in the future years and in respect of which the agreement has
been reached. There cannot be a situation where rollback is finalised for a transaction which is not
covered in the agreement for future years. The term same international transaction implies that the
transaction in the rollback year has to be of same nature and undertaken with the same associated
enterprise(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
materially from the FAR validated for the purpose of reaching an agreement in respect of
international transactions to be undertaken in the future years for which the agreement applies.
The word “materially” is generally being defined in the Advance Pricing Agreements being entered
into by CBDT. According to this definition, the word “materially” will be interpreted consistently with
its ordinary definition and in a manner that a material change of facts and circumstances would be
understood as a change which could reasonably have resulted in an agreement with significantly
different terms and conditions.

Question 3
Rule 10MA(2)(iv) requires that the application for rollback provision, in respect of an international
transaction, has to be made by the applicant for all the rollback years in which the said
international transaction has been undertaken by the applicant. Clarification is required as to
whether rollback has to be requested for all four years or applicant can choose the years out of the
block of four years.
Answer
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 four 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 four 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.
Question 4
Rule 10MA(3) states that the rollback provision shall not be provided in respect of an international
transaction for a rollback year if the determination of arm’s length price of the said international
transaction for the said year has been the subject matter of an appeal before the Appellate
Tribunal and the Appellate Tribunal has passed an order disposing of such appeal at any time
before signing of the agreement. Further, Rule 10 RA(4) provides that if any appeal filed by the
applicant is pending before the Commissioner (Appeals), Appellate Tribunal or the High Court for a
rollback year, on the issue which is subject matter of the rollback provision for that year, the said
appeal to the extent of the subject covered under the agreement shall be withdrawn by the
applicant.
There is a need to clarify the phrase “Tribunal has passed an order disposing of such appeal” and
on the mismatch, if any, between Rule 10MA(3) and Rule 10RA(4).
Answer
The reason for not allowing rollback for the international transaction for which Appellate Tribunal
has passed an order disposing of an appeal is that the ITAT 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.
There is no mismatch between Rule 10MA(3) and Rule 10RA(4).
Question 5
Rule 10MA(3)(ii) provides that rollback provision shall not be provided in respect of an
international transaction for a rollback year 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. It may be clarified whether the rollback provisions in such
situations can be applied in a manner so as to ensure that the returned income or loss is accepted
as the final income or loss after applying the rollback provisions.
Answer
It is clarified that in case the terms of rollback provisions contain specific agreement between the
Board 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 ` 100, the income as adjusted by the TPO is `
120, and the application of the rollback provisions results in reducing the income to ` 90, then the
rollback for that year would be determined in a manner that the declared income ` 100 would be
treated as the final income for that year.
Question 6
Rule 10RA(7) states that in case effect cannot be given to the rollback provision of an agreement
in accordance with this rule, for any rollback year to which it applies, on account of failure on the
part of applicant, the agreement shall be cancelled. It is to be clarified as to whether the entire
agreement is to be cancelled or only that year for which roll back fails.
Answer
The procedure for giving effect to a rollback provision is laid down in Rule 10RA. Sub-rules (2), (3),
(4) and (6) of the Rule specify the actions to be taken by the applicant in order that effect may be
given to the rollback provision. If the applicant does not carry out such actions for any of the
rollback years, the entire agreement shall be cancelled.
This is 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 in sub-rules (2), (3),
(4) or (6), the entire agreement gets vitiated and will have to be cancelled.
Question 7
If there is a Mutual Agreement Procedure (MAP) application already pending for a rollback year,
what would be the stand of the APA authorities? Further, what would be the view of the APA
Authorities, if MAP has already been concluded for a rollback year?
Answer
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 in Rules 10MA and 10RA. However, if MAP request is
pending for any of the rollback year under APA, upon the option exercised by the applicant, either
MAP or application for roll back shall be proceeded with for such year.
Question 8
Rule 10MA(1) provides that the agreement may provide for determining ALP or manner of
determination of ALP. However, Rule 10MA(4) only specifies that the manner of determination of
ALP should be the same as in the APA term. Does that mean the ALP could be different?
Answer
Yes, 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.
Question 9
Will there be compliance audit for roll back? Would critical assumptions have to be validated
during compliance audit?
Answer
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.
Question 10
Whether applicant has an option to withdraw its rollback application? Can the applicant accept the
rollback results without accepting the APA for the future years?
Answer
The applicant has an option to withdraw its roll back 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 specified in Rule 10MA(5) shall
not be refunded even where a rollback application is withdrawn.
Question 11
For already concluded APAs, will new APAs be signed for rollback or earlier APAs could be
revised?
Answer
The second proviso to Rule 10MA(5) provides for revision of APAs already concluded to include
rollback provisions.

Question 12
For already concluded APAs, where the modified return has already been filed for the first year of
the APA term, how will the time-limit for filing modified return for rollback years be determined?
Answer
The time to file modified return for rollback years will start from the date of signing the revised APA
incorporating the rollback provisions.
Question 13
In case of merger of companies, where one or more of those companies are APA applicants, how
would the rollback provisions be allowed and to which company or companies would it be allowed?
Answer
The agreement is between the Board and a person. The principle to be followed in case of merger
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.
Question 14
In case of a demerger of an APA applicant or signatory into two or more companies (persons), who
would be eligible for the rollback provisions?
Answer
The same principle as mentioned in the previous answer, i.e., the person (company) who makes
an APA application or enters into an APA would only be entitled for the rollback provisions, would
continue to apply. 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 for 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.
Section 92CD provides for the following procedure for giving effect to an APA
(i) In case a person has entered into an APA and prior to the date of entering into such APA, he
has furnished the return of income under the provisions of section 139 in respect of any
assessment year relevant to a previous year to which the APA applies, then, such person
shall, within a period of three months from the end of the month in which the said agreement

was entered into, furnish a modified return, notwithstanding any contrary provision contained
in section 139.
(ii) Such modified return shall be in accordance with and limited to the provisions of such APA i.e.,
modifications can only be made on account of such APA in the return to be filed.
(iii) All other provisions of this Act shall apply as if the modified return is a return furnished under
section 139, unless anything to the contrary is provided in this section.
(iv) If the assessment or reassessment proceedings for an assessment year relevant to a
previous year to which the APA applies have been completed before the expiry of period
allowed for furnishing of modified return, the Assessing Officer shall, in a case where
modified return is filed in accordance with the provisions of this section, proceed to assess or
reassess or re-compute the total income of the relevant assessment year having regard to
and in accordance with the APA.
Such order for assessment or reassessment or re-computation of total income shall be
passed within a period of 1 year from the end of the financial year in which the modified
return was furnished. This shall apply notwithstanding the period of limitation contained
under section 153 or 153B or 144C.
The appeal against such order shall lie to Commissioner (Appeals) [Section 246A]
(v) Where the assessment or reassessment proceedings for an assessment year relevant to the
previous year to which the APA applies, are pending on the date of filing of modified return, the
Assessing Officer shall proceed to complete the assessment or reassessment proceedings in
accordance with the APA taking into consideration the modified return so furnished.
In this case, the time period of completion of pending assessment or reassessment mentioned
under section 153 or 153B or 144C shall be extended by 12 months. This shall apply
notwithstanding the period of limitation contained under section 153 or 153B or 144C.
(vi) The assessment or reassessment proceedings for an assessment year shall be deemed to
have been completed where -
(a) an assessment or reassessment order has been passed; or
(b) no notice has been issued under section 143(2) till the expiry of the limitation period
provided under the said section.
(vii) Mutual Agreement Procedure (MAP)
The mutual agreement procedure is a well-established means through which tax
administrations consult to resolve disputes regarding the application of double tax
conventions. This procedure, described and authorized by Article 25 of the OECD Model Tax

Convention, can be used to eliminate double taxation that could arise from a transfer pricing
adjustment.
Article 25 sets out three different areas where mutual agreement procedures are generally
used. The first area includes instances of “taxation not in accordance with the provisions of
the Convention” and is covered in paragraphs 1 and 2 of the Article. Procedures in this area
are typically initiated by the taxpayer. The other two areas, which do not necessarily involve
the taxpayer, are dealt with in paragraph 3 and involve questions of “interpretation or
application of the Convention” and “the elimination of double taxation in cases not otherwise
provided for in the Convention”. Paragraph 10 of the Commentary on Article 25 makes clear
that Article 25 is intended to be used by competent authorities in resolving not only problems
of juridical double taxation but also those of economic double taxation arising from transfer
pricing adjustments made pursuant to paragraph 1 of Article 9 (Article 9 – Associated
enterprises).
Juridical double taxation
When source rules overlap, double taxation may arise i.e. tax is imposed by two or more
countries as per their domestic laws in respect of the same transaction, income arises or is
deemed to arise in their respective jurisdictions. This is known as “juridical double taxation”.
Economic double taxation
‘Economic double taxation’ happens when the same transaction, item of income or capital is
taxed in two or more states but in hands of different person.
(a) Categories of Disputes covered under MAP
Specific case General Cases not

provisions interpretative provided for in
provisions DTAA
Includes issues
relating to
Arise where a person who
interpretation or
is resident of a contracting
application of the Provides for
state considers that the
treaty elimination of double
actions of one or both the
taxation in cases not
contracting states results
General in nature and provided in DTAA
or will result in taxation
could be initiated
not in accordance with the
suo moto by
provisions of a DTAA
Competent Authority

(b) Mechanism under MAP
Tax dispute
Applicant approaches the

Competent Authority (CA) in country of residence (home country)
Yes Dispute capable of No

unilateral resolution
Should be resolved by Should be resolved by

Competent Authority of home consultation
country
(c) Need for MAP

 Double Taxation Avoidance Agreements (‘tax treaties’) are available for capturing and
curtailing juridical double taxation.
 Tax treaties generally do not cover instances of economic double taxation.
 MAP provides relief in cases of economic double taxation.
 MAP also provides relief in cases where automatic relief, such as tax credits, tax
exemption, etc. are not available
(d) Steps involved in the MAP application process
 Brief facts and background of the case must be summarized
 Contentions of Indian Revenue must be summarized in the application
 The net tax and interest impact only by virtue of transfer pricing adjustment is computed
 Take note of transactions only relating to one country (in one application), e.g. USA, UK, etc.
 All documents including tax returns, TP study, notices, submissions, orders, etc. must
be furnished.
 Relevant judicial precedence and their applicability to taxpayer’s case must be
demonstrated.

(e) Typical MAP process in India
(e) Outcome of MAP process:

 The Assessing Officer gives effect of the decision of the MAP, after receiving
instructions from the CCIT / DGIT (within 90 days of receiving instructions)
 If taxpayer is aggrieved by decision of the Competent Authority, he may reject the
decision and go ahead with the remedies under the domestic law.
 If remedies are not granted by the domestic law, the taxpayer may apply to the
Competent Authorities again for subsequent years.
 Decision of a Competent Authority is generally case specific and not a precedent for the
taxpayer for subsequent years or other taxpayers on same issues.
(f) Drawbacks of the MAP process
 Time limits under domestic law may make corresponding adjustments unavailable if
those limits are not waived in the relevant tax treaty.
 Mutual agreement procedures may take too long to complete.
 Taxpayer participation may be limited.
 Published procedures may not be readily available to instruct taxpayers on how the
procedure may be used; and

 There may be no procedures to suspend the collection of tax deficiencies or the accrual
of interest pending resolution of the mutual agreement procedure
Indian Statutory regime – MAP
MAP- Indian Statutory Regime
Rule 44G Rule 44H
Applicable to resident assessee Indian Competent Authority receives a reference

from Competent Authority outside India, he shall
call for records and endeavor to arrive at a
resolution.
Aggrieved by action of the tax authority Resolution arrived at shall be communicated to

outside India Chief Commissioner or Director General of
Income-tax in writing.
Such action is not in accordance with the Assessee can give his acceptance to the
agreement or tax laws resolution and withdraw the appeal, if any,
pending on the issue which was the subject matter
for adjudication under MAP.
May make an application to Competent Assessing Officer to give effect to MAP within 90
Authority in Form 34F in India to invoke MAP days of receipt of the same by Chief
Commissioner or Director General of Income-tax,
subject to conditions fulfilled.
1.17 TRANSFER OF INCOME TO NON RESIDENTS

[SECTION 93]
Section 93 hits at transactions which are effected with a view to avoiding liability to taxation. For
the purpose, the word “non-resident” also includes a person who is not-ordinarily resident. In order
to attract the provisions of this section, all the following conditions must be satisfied:
(a) There is a transfer of assets - whether movable or immovable and whether tangible or
intangible.
(b) The transfer is made by any person in India or outside irrespective of his residential status or
citizenship.
(c) The transfer is made either alone or in connection with associated operations.
(d) The assets transferred directly yield income chargeable to tax under this Act.

(e) The transfer of assets is effected in such a manner that the income becomes payable to a
person outside India who is either a non-resident or a not ordinarily resident in India.
(f) The transferor acquires any right by virtue of which he gets the power to enjoy the income
whether immediately or in future.
(g) The Assessing Officer is satisfied that avoidance of liability to tax in India is the purpose of the
transfers.
In particular, this section deems any income of a non-resident person which, if it were the income of a
resident person, would be chargeable to tax in India (in the absence of this Section), as the income of
the resident person in India for all purposes of the Act provided that all the conditions stated above are
satisfied. This section also covers a variety of transactions constituting a transfer including cases where
assets are transferred to a non-resident person and the transferor indirectly derives income under the
guise of obtaining loans or repayment of loans. If the aforesaid conditions are fulfilled, the income from
the assets transferred should be treated as the income of the transferor and would accordingly be
taxable in his hands. Therefore, where assets are transferred to a body corporate outside India, in
consideration of shares allotted by it to the transferor, he (the transferor), will become assessable under
this section in respect of the income of the company derived by it from those assets. This section will
not, however, apply to cases where it is shown to the satisfaction of the Assessing Officer that (i)
neither the transfer nor any associated operation had for its purpose or for one of its purposes the
avoidance of liability to taxation or (ii) it is provided to the satisfaction of the Assessing Officer that the
transfer was effected for bonafide commercial purpose and with no intent to avoid tax.
The income which is deemed to be that of the transferor under this section may also arise as a result of
the transfer in connection with associated operations. However, in this case also, the treatment of the
income would be the same.
Meaning of “associated operation”: The expression ‘associated operation,” in relation to a
transfer, means an operation of any kind effected by any person in relation to:
(i) any of the assets transferred;
(ii) any assets representing, whether directly or indirectly, any of the assets transferred;
(iii) any income arising from such assets;
(iv) any assets representing, whether directly or indirectly, the accumulation of income arising
from such assets.
Meaning of “Assets”: It includes property or rights of any kind.
Meaning of “transfer”: In relation to rights, transfer includes the creation of those rights.
Meaning of “benefit”: It includes a payment of any kind.
In order to determine the liability of the assessee in respect of the deemed income it is immaterial
if the income or benefits from the transfer (i) are actually received or not or (ii) are received or are
receivable in cash or kind or (iii) are receivable directly or indirectly. For purposes of this section, a
person is deemed to have the power to enjoy the income of a non-resident if:

(i) the income, in fact, so dealt with by any person as to be calculated at some point of time to
enure for the benefit of the transferor, whether in the same form of the income or otherwise;
(ii) the receipt or accrual of the income operates to increase value of any assets held by the
transferor or for his direct or indirect benefit;
(iii) the transferor receives or is entitled to receive at any time any benefit out of the income or
out of any money available for the purpose by reason of the effect or successive effects of
the associated operations on that income and the assets which represent that income;
(iv) the transferor is in a position to obtain for himself the beneficial enjoyment of the income by
exercising any power of appointment or power of revocation or otherwise, whether with or
without the consent of any other person, or
(v) the transferor is able to control directly or indirectly the application of the income in any
manner whatsoever.
However, in determining whether a person has the power to enjoy the income due regard shall be
had to the substantial result and effect of the transfer and any associated operations must be
taken into consideration irrespective of the nature or form of the benefits.
It may be noted that where an assessee has been charged to tax in respect of a sum deemed to
be his income under this section, the subsequent receipt of that sum by the assessee, whether as
income or in any other form, shall not be liable to tax in his hands at the time of receipt.
1.18 INTRODUCTION OF SPECIFIC ANTI AVOIDANCE

MEASURES IN RESPECT OF TRANSACTIONS WITH
PERSONS LOCATED IN NOTIFIED JURISDICTIONAL AREA
[SECTION 94A]
The objective of anti-avoidance measures is to discourage assessees from entering into
transactions with persons located in countries or territories which do not have effective information
exchange mechanism with India. The following are the anti-avoidance measures introduced -
(i) The Central Government empowered to notify any such country or territory outside India as a
NJA (Notified Jurisdictional Area), having regard to the lack of effective exchange of
information with such country or territory.
Clarification on removal of Cyprus from the list of notified jurisdictional area under
section 94A of the Income-tax Act, 1961 – [Circular No. 15/2017, dated 21-04-2017]
Cyprus was specified as a "notified jurisdictional area" (NJA) under section 94A of the
Income-tax Act, 1961 vide Notification No. 86/2013 dated 01.11.2013. The said Notification
No. 86/2013 was subsequently rescinded vide Notification No. 114 dated 14.12.2016 and
Notification No. 119 dated 16.12.2016 with effect from the date of issue of the notification.

The CBDT has, vide this Circular, clarified that Notification No. 86/2013 has been rescinded
with effect from the date of issue of the said notification, thereby, removing Cyprus as a
notified jurisdictional area with retrospective effect from 01.11.2013.
(ii) A transaction where one of the parties thereto is a person located in a NJA would be deemed
to be an international transaction then all parties to the transaction to be deemed as
associated enterprises, and accordingly, all the provisions of transfer pricing to be attracted in
case of such a transaction. However, the benefit of permissible variation between the ALP
and the transfer price [provided for in the second proviso to section 92C(2)] based on the rate
notified by the Central Government would not be available in respect of such transaction.
(iii) Such transaction may be in the nature of –
(1) purchase, sale or lease of tangible or intangible property or
(2) provision of service or
(3) lending or borrowing money or
(4) any other transaction having a bearing on the profits, income, losses or assets of the assessee.
It may include a mutual agreement or arrangement for allocation or apportionment of, or
contribution to, any cost or expense incurred or to be incurred in connection with a benefit,
service or facility provided or to be provided by or to the assessee.
(iv) Person located in a NJA shall include a person who is a resident of the NJA and a person,
not being an individual, which is established in the NJA. It would also include a permanent
establishment of any other person in the NJA.
(v) Payments made to any financial institution located in a NJA would not be allowed as deduction
unless the assessee authorizes the CBDT or any other income-tax authority acting on its behalf
to seek relevant information from the financial institution on behalf of the assessee.
(vi) No deduction in respect of any other expenditure or allowance, including depreciation, arising
from the transaction with a person located in a NJA would be allowed unless the assessee
maintains the relevant documents and furnishes the prescribed information.
(vii) Any sum credited or received from a person located in a NJA to be deemed to be the income
of the recipient-assessee if he does not explain satisfactorily the source of such money in the
hands of such person or in the hands of the beneficial owner, if such person is not the
beneficial owner.
(viii) The rate of TDS in respect of any payment made to a person located in the NJA, on which tax
is deductible at source, will be the higher of the following rates –
(1) rates specified in the relevant provision of the Income-tax Act, 1961; or
(2) rate or rates in force; or
(3) 30%.

ILLUSTRATION 2
A Ltd., an Indian company, provides technical services to a company, XYZ Inc., located in a NJA for
a consideration of ` 40 lakhs in October, 2018. It charges ` 42 lakhs for similar services rendered to
PQR Inc., which is not located in a NJA. PQR Inc. is not an associated enterprise of A Ltd.
Discuss the tax implications under section 94A read with section 92C in respect of the above
transaction of provision of technical services by A Ltd. to XYZ Inc.
SOLUTION
Since XYZ Inc. is located in a NJA, the transaction of provision of technical services by the Indian
company, A Ltd., would be deemed to be an international transaction and XYZ Inc. and A Ltd. would
be deemed to be associated enterprises. Therefore, the provisions of transfer pricing would be
attracted in this case.
The price of ` 42 lakhs charged for similar services from PQR Inc, being an independent entity
located in a non-NJA country, can be taken into consideration for determining the arm’s length price
(ALP) under Comparable Uncontrolled Price (CUP) Method.
Since the ALP is more than the transfer price, the ALP of ` 42 lakhs would be considered as the
income arising from the international transaction between A Ltd. and XYZ Inc.
It may be noted that the benefit of permissible variation between the ALP and transfer price is not
available in respect of a transaction entered into with an entity in NJA.
ILLUSTRATION 3
Mr. X, a non-resident individual, is due to receive interest of ` 5 lakhs during March 2019 from a
notified infrastructure debt fund eligible for exemption under section 10(47). He incurred expenditure
amounting to ` 10,000 for earning such income. Assuming that Mr. X is a resident of a NJA, discuss
the tax implications under section 94A, read with sections 115A and 194LB.
SOLUTION
The interest income received by Mr. X, a non-resident, from a notified infrastructure debt fund
would be subject to a concessional tax rate of 5% under section 115A on the gross amount of such
interest income. Therefore, the tax liability of Mr. X in respect of such income would be ` 26,000
(being 5% of ` 5 lakhs plus health and education cess@4%).
Under section 194LB, tax is deductible @5% (plus health and education cess@4%) on interest
paid by such fund to a non-resident. However, since X is a resident of a NJA, tax would be
deductible@30% (plus health and education cess@4%) as per section 94A, and not @5%
specified under section 194LB. This is on account of the provisions of section 94A(5), which
provides that “Notwithstanding anything contained in any other provision of this Act, where
a person located in a NJA is entitled to receive any sum or income or amount on which tax is
deductible under Chapter XVII-B, the tax shall be deducted at the highest of the following
rates, namely–
(a) at the rate or rates in force;

(b) at the rate specified in the relevant provision of the Act;

(c) at the rate of thirty per cent.”
Mr. X can, however, claim refund of excess tax deducted along with interest.
1.19 LIMITATION OF INTEREST DEDUCTION IN CERTAIN

CASES [SECTION 94B]
(1) Preference of debt over equity as a measure to finance businesses: Debt and equity are
the instruments through which a company is generally financed or capitalized. The manner in
which a company is capitalized has a major impact on the amount of taxable profit as the tax
laws of countries generally provide for a deduction in respect of interest paid or payable while
arriving at the taxable profit. However, the dividend paid on equity contribution is not
deductible. Therefore, the higher the level of debt in a company, and thus, the amount of
interest it pays, the lower will be its taxable income. Due to this reason, debt is considered a
more tax efficient method of finance than equity. Multinational groups are of ten able to
structure their financing arrangements to maximize tax benefits.
(2) Tax Rules to prevent shifting of profits through excessive interest payments: In order to
address this issue, tax rules are in place in each country to fix a ceiling limit on the amount of
interest deductible in computing a company's profit for tax purposes. Such rules are designed to
counter cross-border shifting of profit through excessive interest payments, with the objective of
protecting a country's tax base.
(3) Relevant Action Plan of BEPS: 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 and recommended certain measures in its final report.
(4) Insertion of provision in the Income-tax Act, 1961 in line with BEPS Action Plan 4: Section
94B has, accordingly, been inserted in the Income-tax Act, 1961, in line with the recommendations
of OECD BEPS Action Plan 4, to provide that interest expenses claimed by an entity to its
associated enterprises shall not be deductible in computation of income under the “Profits and
gains of business or profession” to the extent that it arises from excess interest.
Excess interest shall mean an amount of
- total interest paid or payable* in excess of 30% of its earnings before interest, taxes,
depreciation and amortization (EBITDA) of the borrower in the previous year or
- interest paid or payable to associated enterprise for that previous year
whichever is less.
*Total interest paid or payable may be interpreted as interest paid or payable to non-resident
associated enterprise as per the intent expressed in section 94B(1) and also the Explanatory
Memorandum to the Finance Bill, 2017.

(5) Applicability: The provision shall be applicable to an Indian company, or a permanent

establishment of a foreign company in India, being the borrower who incurs expenditure by
way of interest or similar nature in respect of any form of debt issued by a non -resident who
is an 'associated enterprise' of the borrower.
However, the provision of this section would be applicable only where the expenditure by way of
interest or of similar nature exceeds ` 1 crore, in respect of any form of debt issued by a non-
resident, being an 'associated enterprise' of such borrower.
(6) Meaning of debt: 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”.
(7) Provision of guarantee and deposit of matching amount deemed to be debt issued: Where
the debt is issued by a lender which is not associated but an associated enterprise either
- provides an implicit or explicit guarantee to such lender or
- deposits a corresponding and matching amount of funds with the lender,
such debt shall be deemed to have been issued by an associated enterprise
(8) Carry forward of excess interest: The disallowed interest expense can be carried forward upto
eight assessment years immediately succeeding the assessment year for which the disallowance
was first made and claimed as deduction against the income computed under the head "Profits
and gains of business or profession” to the extent of maximum allowable interest expenditure.
(9) Businesses excluded from applicability of the provisions of section 94B: Taking into
consideration the special nature of business of Banks and Insurance business, an Indian company
or permanent establishment of a foreign company which is engaged in these business have been
excluded from the applicability of the provisions of this section.

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1

After studying this chapter, you would be able to -

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

1.2 WHAT IS TRANSFER PRICING?

1.3 MEANING OF THE TERM “ARM’S LENGTH PRINCIPLE”

© The Institute of Chartered Accountants of India

1.4 SIGNIFICANCE OF ARM’S LENGTH PRINCIPLE

© The Institute of Chartered Accountants of India

1.5 PRACTICAL DIFFICULTIES IN APPLICATION OF ALP

© The Institute of Chartered Accountants of India

1.6 EVOLUTION OF TRANSFER PRICING IN INDIA

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

establishment of a non-resident company and a non-resident were not covered.

© The Institute of Chartered Accountants of India

(b) provision of service; or

1.7 COMPUTATION OF INCOME FROM TRANSACTION

© The Institute of Chartered Accountants of India

to be at arm’s length price, if the transaction is between associated enterprises.

1.8 ASSOCIATED ENTERPRISES

© The Institute of Chartered Accountants of India

Management of Control of the Capital of the

Both Enterprises are Associated Enterprises

Example: A Ltd. directly participates in management of B Ltd.

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

X Ltd. & Y Ltd. are deemed to be associated enterprises

A Ltd. A Ltd. & B Ltd. are associated enterprises B Ltd.

© The Institute of Chartered Accountants of India

1.9 INTERNATIONAL TRANSACTION

© The Institute of Chartered Accountants of India

A Ltd Mr. B C Inc.

Agreement for sale of Agreement for sale of

Transaction between A Ltd. and Mr. B is deemed to be an

Note – C Inc. is deemed to be an associated enterprise of A Ltd. since it is a specified foreign

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(3) The scope of “international transaction” shall include:

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(4) Further, the expression “intangible property” shall include

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• open purchase orders

(5) Meaning of Transaction

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1.10 SPECIFIED DOMESTIC TRANSACTIONS

Particulars Tax Holiday Unit DTA Unit

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1.11 COMPUTATION OF ARM’S LENGTH PRICE

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