Transfer Pricing - Filing of Form 3CEB & Practical Issues November 11, CA Vikram R. B.Com., FCA.

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1 12 November 2014 Transfer Pricing - Filing of Form 3CEB & Practical Issues November 11, 2017 CA Vikram R. B.Com., FCA vikram@vcmv.in

2 Transfer Pricing Introduction in India Finance Minister s speech on the rationale for introducing Transfer Pricing Regulations The presence of multinational enterprises in India and their ability to allocate profits in different jurisdictions by controlling prices in intra-group transactions has made the issue of transfer pricing a matter of serious concern. I had set up an Expert Group in November 1999 to examine the detailed structure for transfer pricing legislation. Necessary legislative changes are being made in the Finance Bill based on these recommendations. Mr. Yashwant Sinha Finance Minister, Government of India February 28, 2001

3 Transfer Pricing Provision Ø The Finance Act, 2001 introduced Transfer Pricing Regulation in India by substituting existing Section 92 of the Act and introducing new sections 92 to 92F w.e.f April, 2001 (from AY ). Rule 10A to 10E with reference these sections 92 have been notified subsequently. Ø The provisions of Chapter X as regards transfer pricing have been extended by Finance Act, 2012 to specified domestic transaction (SDTs) with effect from assessment year Ø CBDT has issued the Notification #41 dated 10 June 2013 amending the relevant rules and revising the Accountant s Report in Form No. 3CEB to align the reporting requirements with the definition of international transaction and the extended provisions of Transfer Pricing (TP) covering Specified Domestic Transactions (SDT). Ø The Amended Income Tax Rules, has been brought with effect from the 1st of April Primarily, the words International Transaction has been substituted with International transaction or a Specified Domestic Transaction

4 Legislative Framework

5 Accountant s Report Section 92E Traditionally Form No. 3CEB entailed covering of International transactions with Associated Enterprises However Domestic Transfer Pricing was made applicable from assessment year whereby the existing Form No. 3CEB was revised to include Part C covering clauses 21 to 25 to capture data relating to specified domestic transactions (SDT) With the advent of the same, the term related party is also used along with the traditional term Associated Enterprise for addressing specified domestic transactions Section 92E Every person who has entered into an international transaction or SDT during a previous year shall obtain a report from an accountant and furnish such report on or before the specified date in the prescribed form duly signed and verified in the prescribed manner by such accountant and setting forth such particulars as may be prescribed Rule 10E The report from an accountant required to be furnished under section 92E by every person who has entered into an international transaction or SDT during a previous year, shall be in Form No. 3CEB and shall be verified in the manner indicated therein

6 Form 3CEB Ø Every Person - Applies to both Residents & Non Residents (Foreign Companies) -Branch, PE. Ø No exemption from filing Form 3CEB - Even if, the Assessee has entered into international transactions of INR 1, Form 3CEB must be filed. Ø Reporting of Domestic transactions is applicable if the aggregate value of the SDT is > INR 20 crore Ø The threshold limit for SDT can be computed either on net basis (i.e. without including indirect tax levies like service tax, VAT, GST, etc.) if the assessee is availing credit of those indirect taxes or on gross basis if the assessee is not availing credit, depending upon the method of accounting regularly followed. Ø Report in the prescribed form Information as required in respective clauses must be provided Ø Can be issued by Statutory auditor or any other CA in practice

7 Accountants Report Sec 92E Ø Prepared by every person / enterprise entering into an international transaction or SDT with AE / related party Form No. 3CEB [See rule 10E] Ø Ø Ø To be filed by the due date for filing return of income Opinion as to whether prescribed documents have been maintained and the particulars in the report are true and correct An important document for the Assessing Officer Ø Ø Ø Contains summary of international transactions / SDTs; Contains details of taxpayer; Contains method employed to determine ALP Report from an accountant to be furnished under section 92E relating to international transaction(s) or specified domestic transaction(s) 1. We have examined the accounts and records of <<name of the entity>>, with its registered office at <<insert address>> having Permanent Account Number <<XXX>> that have been made available to us relating to the international transaction(s) or specified domestic transaction(s) entered into by the assessee during the previous year ending on 31 March In our opinion proper information and documents as are prescribed have been kept by the assessee in respect of the international transaction(s) or specified domestic transaction(s) entered into so far as appears from our examination of the records of the assessee. 5. The particulars required to be furnished under section 92E are given in the Annexure to this Form. In our opinion and to the best of our information and according to the explanations given to us, the particulars given in the Annexure, as read with notes appended thereto, are true and correct. Place : Ø Ø Date of e-filing of Form No. 3CEB is required to be mentioned in the Return of Income Digital Signature, Name, Membership number, Date : For XXXX Chartered Accountants Membership Number

8 Features of Form 3CEB Para 1 *I/we have examined the accounts and records of.. (name and address of the assessee with PAN) relating to the international transactions and specified domestic transactions entered into by the assessee during the previous year ending on 31st March,. 1. Cases where books/ accounts of foreign companies are not available? 2. Reliance on the statutory audited results in case you are not the statutory auditor. For the purpose of this report we have relied upon the accounts of the assessee for the year ended 31 March 2014 audited by <<insert name of the auditors>> vide their audit report dated <<insert date>>. 3. Reliance on management prepared accounts in case of different statutory year end.

9 Features of Form 3CEB Para 2 In *my/our opinion proper information and documents as are prescribed have been kept by the assessee in respect of the international transactions and the specified domestic transactions entered into so far as appears from *my/our examination of the records of the assessee. 1. Auditor signing the Form 3ceb, needs to check whether proper documentation maintained 2. Documentation requirement prescribed in Sec 92 D read with Rule 10 D 3. Exemption from preparing detailed documentation, if the international transaction value less than INR 1 crores - However, the Assessee must maintain documents to justify ALP. 4. More onus on auditor to satisfy whether adequate / appropriate documentation maintained - - If any required document is not maintained, the Accountant should qualify the report or disclose the same. 5. Reporting and Documentation, if SDT exceeds INR 20 crores

10 Features of Form 3CEB Para 3 The particulars required to be furnished under section 92E are given in the Annexure to this Form. In *my/our opinion and to the best of my/our information and according to the explanations given to *me/us, the particulars given in the Annexure are true and correct 1. True and correct v/s True and fair - Emphasis on factual accuracies. 2. Foreign companies disclose the incapacity to gather all information 3. Limit the scope of work and review procedures to extent certified by him in Form 3CEB 4. Most appropriate method - Para 9.17 of the revised GN

11 International Transaction Section 92B

12 Specified Domestic Transactions Section 92BA

13 The New Form 3CEB Ø Vide the Notification, the Government has notified the new Form 3CEB, as part of Appendix II of the Primary Rules. Ø The 3CEB, erstwhile with 13 clauses for internal transactions has now been replaced with a new form, with 25 clauses: Ø Further, as per Notification No. 4 of 2013, the filing of the Form 3CEB shall be mandatorily electronic.

14 Annexure to Form No. 3CEB A Glimpse

15 Annexure to Form No. 3CEB PART A Clauses Clause 1: Name of assessee Clause 2: Address Clause 3: PAN Clause 4: Nature of business or activities of the assessee Clause 5: Status Description Full and complete name In case of change in name, write both new and old name In case of foreign company, provide foreign address Permanent Account Number Code for nature of business to be filled in as per instructions for filing Form ITR 6 Refers to the person defined under Section 2(31) of the Act i.e. Company in our case Clause 6: Previous Year ended 31 March 2017 Clause 7: Assessment year Clause 8: Aggregate value of international transactions Clause 9: Aggregate value of specified domestic transactions Refers to value of transactions as per books of accounts Refers to value of transactions as per books of accounts

16 Annexure to Form No. 3CEB: Part B International Transactions

17 Clause 10: illustration List of AEs with whom taxpayer has entered into international transactions Clause 10 : List of associated enterprises with whom the assessee has entered into international transactions Sr. No. Name of the associated enterprise Nature of the relationship with the associated enterprise as referred to in section 92A(2) Brief description of the business carried on by the associated enterprise 1 XYZ Tokyo, Japan 2 Clause 10(a) Clause 10(b) Clause 10(c) Holding / Subsidiary / Associate vide section.. Engaged in the business of.. 3 Details covered Legal organization chart covering all AEs, Name and the Address of each AE Nature of relationship with the AEs Business Description of AEs Key check points: Correct legal name of the AE (to be verified from the website / annual report / other documents) Nature of relationship - to be specific; reference to clause of 92A(2), verification using shareholding pattern, investment schedule, notes to accounts, etc. Refer to register maintained under the companies act Details of common directors to evaluate the applicability of deemed AE.

18 Clause 11: illustration Particulars in respect of transactions in tangible property Clause 11A : International transaction(s) in respect of purchase / sale of raw material, consumables or any other supplies for assembling or processing / manufacturing of goods or articles from / to associated enterprises Sr. No. Name and address of the associated enterprise with whom the international transaction has been entered into Description of transaction Quantity purchased / sold Total amount paid / received or payable / receivable in the transaction Method used for determining the arm s length price [See section 92C(1)] Unit of Quantity (i) as per books (ii) as computed Measurement of account by the assessee having regard to the arm's length price Clause 11B(a) Clause 11B(b) Clause 11B(c) Clause 11B(d) 1 XYZ Japan Purchase of material Clause 11B : International transaction(s) in respect of purchase / sale of traded / finished goods Sr. No. Name and address of the associated enterprise with whom the international transaction has been entered into Description of transaction and quantity purchased/sold Description of Quantity transaction Total amount paid / received or payable / receivable in the transaction (i) as per books of (ii) as computed by account the assessee having regard to the arm's length price Method used for determining the arm s length price [See section 92C(1)] Clause 11B(a) Clause 11B(b) Clause11B(c) Clause 11B(d) 1 XYZ Sale of finished products Japan Key check points: Verify value and quantitative details from notes to accounts (in addition to AS 18), invoices and ledger accounts Customs valuation in case of imports and Standard pricing policy of the group. Basis of arriving at the purchase / sale price Global Pricing policy of the Group

19 Clause 11...continued: illustration Particulars in respect of transactions in tangible property Clause 11C - Purchase / sale / transfer of any other tangible property or lease of such property fixed assets Clause 11C : International transaction(s) in respect of purchase, sale, transfer, lease or use of any other tangible property including transactions specified in Explanation (i)(a) below section 92B(2) Sr. No. Name and address of the associated enterprise with whom the international transaction has been entered into Description of property and nature of transaction Number of units of each category of tangible property involved in the transaction Amount paid / received of payable / receivable in each transaction of purchase / sale / transfer / use, or lease rent paid / received or payable / receivable in respect of each lease provided / entered into Method used for determining the arm s length price [See section 92C(1)] Description of property Nature of transaction (i) as per books of account (ii) as computed by the assessee having regard to the arm's length price 1 XYZ Clause 11C(a) Clause 11C(b) Clause 11C(c) Clause 11C(d) Clause 11C(e) Key check points: Clause 11C - capital assets Verification using fixed asset schedule. New Asset / used asset Valuation report. In case of proprietary asset basis of arriving at the cost and mark up charged, if any Customs valuation / independent valuer s report in case of imports

20 Clause 12: illustration Particulars in respect of transactions of intangible property Clause 12 : International transaction(s) in respect of purchase, sale, transfer, lease or use of intangible property including transactions specified in Explanation (i) (b) below section 92B(2) Sr. No. Name and address of the associated enterprise with whom the international transaction has been entered into Description of intangible property and nature of transaction Amount paid / received or payable / Method used for receivable for purchase / sale / determining the arm s transfer / lease / use of each category of length price intangible property [See section 92C(1)] Description of intangible property Nature of transaction (i) as per books of account (ii) as computed by the assessee having regard to the arm's length price 1 XYZ Japan Clause 12(a) Clause 12(b) Clause 12(c) Clause 12(d) Use of Technical Know how Payment of Royalty Transactions of purchase / sale / use of intangible property i.e. marketing, technology related such as know-how, patents, etc to be covered. Reliance on Valuation Report RBI approval is not a specified transfer pricing method and often disputed by tax authorities Accountant s Report needs to be filed for foreign/non-resident entity, if there is income earned from the Indian entity which is liable to tax in India Key check points Relevant agreements / similar arrangements with other AEs / non AEs Computation of royalty as per existing agreement External comparables data available on relevant databases Withholding tax certificate and IT Return of foreign enterprise Any foreign inward remittance / repatriation of funds certificate

21 Clause 13: illustration Particulars in respect of providing of services Clause 13 : International transaction(s) in respect of services including transactions as specified in Explanation (i)(d) below section 92B(2) Sr. No. Name and address of the associated enterprise with whom the international transaction has been entered into Description of services provided / availed to / from the associated enterprise Amount paid / received or payable / receivable for the services provided / taken (i) as per books of account (ii) as computed by the assessee having regard to the arm's length price Method used for determining the arm s length price [See section 92C(1)] 1 ABC Inc. Address >>>> Clause 13(a) Clause 13(b) Clause 13(c) Clause 13(d) Services rendered / availed Amounts to be mentioned inclusive or exclusive of service tax? Note on Aggregation Key check points: Review the agreement(s), invoices, debit notes raised Check for CUP i.e., whether services are provided to unrelated parties Profitability of the entity / division (AE and Non AE)

22 Clause 14: illustration Particulars in respect of lending or borrowing money Clause 14 : International transaction(s) in respect of lending or borrowing of money including any type of advance, payments, deferred payments, receivable, non-convertible preference shares / debentures or any other debt arising during the course of business as specified in Explanation (i)(c) below section 92B(2) Sr. No. Name and address of the associated enterprise with whom the international transaction has been entered into Nature of financing agreement Currency in which transaction has taken place Interest rate charged / paid in respect of each lending / borrowing Amount paid / received or payable / receivable in the transaction (i) as per books of account (ii) as computed by the assessee having regard to the arm's length price Method used for determining the arm s length price [See section 92C(1)] Clause 14(a) Clause 14(b) Clause 14(c) Clause 14(d) Clause 14(e) Clause 14(f) 1 XYZ Japan Interest payments for loan taken / on debentures Interest receipts for loans given Interest free loans / borrowings Interest on overdue receivables / payables from / to AEs Other capital financing transactions In case of loan transactions, whether loan amount or interest is to be reported? Key check points Relevant agreement, Internal CUPs, existing borrowing terms, etc Rate of interest on independent borrowings by AEs Purpose for lending, source of funds in case of lending, i.e. Internal accruals, foreign borrowings, etc External CUP - PLR, LIBOR, US FED rates, quotations, etc

23 Clause 15: illustration Particulars in respect of transactions in the nature of guarantee Clause 15 : International transaction(s) in the nature of guarantee Sr. No. Name and address of the associated enterprise with whom the international transaction has been entered into Nature of guarantee agreement Currency in which guarantee transaction was undertaken Compensation / fees charged / paid in respect of the transaction Method used for determining the arm s length price [See section 92C(1)] 1 XYZ Inc. Address >>>> Clause 15(a) Clause 15(b) Clause 15(c) Clause 15(d) Clause 15(e) Explicit guarantees provided / received to / from AEs Guarantee fees received and paid Free of cost transactions, including receipt or provision of corporate guarantee. Note to be mentioned in case of free guarantee for purpose of justification / self - adjustment Key check points Whether guarantee provided in similar manner for other group entities - Check for internal / external CUPs i.e., whether guarantee provided to AEs / non AEs Computation of guarantee fee in case guarantee issued for part of the year

24 Clause 16: illustration Particulars in respect of international transactions of purchase / sale of marketable securities, issue / buyback of equity shares, and various types of convertible debentures / preference shares Clause 16 : International transaction(s) in respect of purchase or sale of marketable securities or issue of equity shares including transactions specified in Explanation (i)(c) below section 92B(2) Sr. No. Name and address of the associated enterprise with whom the international transaction has been entered into 1 XYZ Japan Nature of transaction Currency in which transaction was undertaken Consideration charged / paid in respect of the transaction Method used for determining the arm s length price [See section 92C(1)] Clause 16(a) Clause 16(b) Clause16(c) Clause16(d) Clause 16(e) Purchase / sale of marketable securities / equity shares / debentures / preference shares Issue / subscription of various types of shares / convertible debentures / convertible preference shares Share valuation report may be considered as justification under the Other Method for subsequent issue of shares Key check points Taxability of transaction Requisite share valuation report Certificate of foreign inward remittance / share certificate, etc Details of board minutes, shareholders meeting, etc Whether receipt / payment of Share application money needs to be reported?

25 Clause 17: illustration Particulars in respect of mutual agreement or arrangement Clause 17 : International transaction with an associated enterprise or enterprises by way of a mutual agreement or arrangement 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 Sr. No. Name and address of the associated enterprise with whom the international transaction has been entered into Description of such mutual agreement or arrangement Amount paid/ received or payable/ receivable in the transaction (i) as per books of account (ii) as computed by the assessee having regard to the arm's length price Method used for determining the arm s length price [See section 92C(1)] Clause 17(a) Clause 17(b) Clause 17(c) Clause 17(d) 1 XYZ Japan Cost allocation agreements (with or without any mark-up) Cost sharing agreements (with or without any mark-up) Transactions where costs / services pooled / centralized and charged at cost plus mark-up Key check points: Verification of basis for cost-sharing (relevant agreement), cost details, etc Whether similar basis applied consistently for other group entities Audit certificate for cost allocation if any, obtained by the AE Documentary evidence to demonstrate services received / rendered, benefits derived

26 Clause 18: illustration Particulars in respect of international transactions arising out / being part of business restructuring or reorganizations Clause 18 : International transaction(s) arising out / being part of any business restructuring or reorganization entered into by it with the associated enterprise or enterprises as specified in Explanation (i)(e) below section 92B(2) and which has not been specifically referred to in any other clauses Sr. No. Name and address of the associated enterprise with whom the international transaction has been entered into Nature of transaction Agreement in relation to such business restructuring / reorganization Terms of business restructuring / reorganization Method used for determining the arm s length price [See section 92C(1)] Clause 18(a) Clause 18(b) Clause 18(c) Clause 18(d) Clause 18(e) 1 ABC Inc. Address >>>> Agency Services Agreement Cross border transfers of valuable intangibles Termination / renegotiation of existing arrangements Internal reallocation of FAR within group / shift in allocation of profits Rationalisation / specialisation / de-specialisation of operations / down sizing / closing of operations Change in operations / organization / nature / scope of transactions amongst controlled entities Key check points: Verification of basis for restructuring (relevant agreement), reorganisation details, etc. Cost benefit analysis (whether restructuring commensurate with benefits derived) Profitability of AE / non AE before restructuring, etc Conversion of full-fledged distributors into limitedrisk distributors, etc

27 Clause 19: illustration Particulars in respect of any other transaction including the transaction having a bearing on the profits, income, losses or assets of the assessee Clause 19: Any other international transaction(s) including a transaction having a bearing on the profits, income, losses or asset but not specifically referred to above, with associated enterprises Sr. No. Name and address of the associated enterprise with Description of transaction Amount paid / received or payable / receivable in the transaction Method used for determining the arm s whom the international (i) as per books of (ii) as computed by length price transaction has been entered account the assessee having [See section 92C(1)] into regard to the arm's length price Clause 19(a) Clause 19(b) Clause 19(c) Clause 19(d) 1 ABC Limited Recovery of bank charges Comparable Uncontrolled Address >>>> Price Method (Refer to Note 1 below) 2 ABC Inc. Reimbursement of product liability charges Comparable Uncontrolled Price Method (Refer to Note 1 below) Reimbursements / recovery of expenses Goods / services received free of cost Other residual transactions not covered in any other clauses Key check point : To ensure that reimbursement / recovery of expenses are at actual cost and do not involve any service, else need to disclose them under relevant clauses Verify sample invoices. Other items such as prior period income, reversals of earlier years figures may be covered with special emphasis on Notes to explain the same

28 Clause 20: illustration Particulars of deemed international transactions Clause 20 : Any transaction with a person other than an AE in pursuance of a prior agreement in relation to the relevant transaction between such other person and the associated enterprise Sr. No. Name and address of the person other Description of the transaction Amount paid / received or payable / Method used for than the associated enterprise with receivable in the transaction determining the arm s whom the deemed international (i) as per books of (ii) as computed by length price transaction has been entered into account the assessee having [See section 92C(1)] regard to the arm's length price Clause 20(a) Clause 20(b) Clause 20(c) Clause 20(d) 1 XYZ Inc.. Address >>>> A transaction entered into with non-ae where prior arrangement for such transaction/terms of such transaction are determined in substance thus engaging both parties Deemed international transactions where an independent third party can be interposed by two AEs to remain out of transfer pricing provisions Key check points Evidence regarding influence of AE on price, terms of transactions, etc Details of prior arrangements / agreements Details of invoices, debit notes, etc Check for CUP i.e., whether goods / services are provided to unrelated parties

29 Annexure to Form No. 3CEB: Part C Specified Domestic Transactions (SDT)

30 Clause 21: illustration List of Related Parties with whom the assessee has entered into SDT with the necessary details Clause 21 : List of associated enterprises with whom the assessee has entered into specified domestic transactions Sr. No. Name of the associated enterprise Address of the associated PAN of the associated Nature of the relationship with the enterprise enterprise associated enterprise Brief description of the business carried on by the said associated enterprise 2 ABC India Medical Ltd (Pune SEZ Unit) Clause 21 (a) Clause 21 (b) Clause 21 (c) Address >>>> PAN >>>> ABC India Pvt Ltd beneficially Manufacturing of owns shares having voting powers Pharmaceutical Products of not less than 20% of ABC India Medical Ltd Name, address and PAN of the related party(s) Nature of the relationship with related party Brief description of the business carried on by the said related party Cover details of relationships with managerial personnel, holding / subsidiary company, interunit transactions and those with closely connected persons Key check points: Correct legal name of the related party (to be verified from the website / annual report) along with PAN details, etc Nature of relationship - to be specific; reference to clause of 92BA, verification using shareholding pattern, investment schedule, etc Whether indirect shareholding relationships covered?

31 Clause 22: illustration Particulars in respect of transactions in the nature of any expenditure Clause 22 : Specified domestic transaction(s) being any expenditure in respect of which payment has been made or is to be made to any person referred to in section 40A(2)(b) Sr. No. Name of the person with whom the specified domestic transaction has been entered into 1 ABC India Support Limited Description of the transaction along with quantitative details, if any Description of the transaction Quantity Total amount paid or payable in the transaction (i) as per books of account (ii) as computed by the assessee having regard to the arm's length price Method used for determining the arm s length price [See section 92C(1)] Expenditures made to persons covered under section 40A(2)(b) of the Act. Emphasis on direct / indirect holding. Transactions where tax holiday / deduction is claimed in respect of capital expenditure Managerial remuneration Expenditure for which no deduction/part deduction has been claimed Key check points: Verify value and quantitative details from notes to accounts (in addition to AS 18), tax audit report, invoices and ledger accounts, fixed assets schedule, etc Service / employment contracts / agreements Minutes of board meetings for managerial remuneration Other relevant documents substantiating expenditure Reimbursements to related parties

32 Clause 23: illustration Particulars in respect of transactions in the nature of transfer or acquisition of any goods or services Clause 23A : Specified domestic transaction(s) in the nature of transfer or acquisition of any goods or services by an undertaking or unit or enterprise or eligible business of the assessee [as referred to in section 80A(6), 80IA(8) or section 10AA)] to any other business carried on by the assessee Sr. No. Name and details of business to which goods or services Description of goods Amount received / receivable for transferring of Method used for have been transferred or services transferred such goods or services determining the arm s Name of business Details of business (i) as per books of account (ii) as computed by the length price assessee having regard [See section 92C(1)] to the arm's length price Clause 23A(a) Clause 23A(b) Clause 23A(c) Clause 23A(d) 1 ABC India Support Ltd Operating retail pharmacy stores Purchase of Medicines Clause 23B : Specified domestic transaction(s) in the nature of transfer or acquisition of any goods or services by an undertaking or unit or enterprise or eligible business of the assessee [as referred to in section 80A(6), 80IA(8) or section 10AA] from another business of the assessee Sr. No. Name and detail of business to which goods or services Description of goods or Amount paid / payable for acquiring of Method used for have been acquired services acquired such goods or services determining the arm s Name of business Details of business (i) as per books of (ii) as computed by length price account the assessee having [See section 92C(1)] regard to the arm's length price 1 ABC India Medical Ltd (Pune SEZ Unit) Clause 23B(a) Clause 23B(b) Clause 23B(c) Clause 23B(d) Manufacturer of Medical Products Sale of Medicines SDTs in nature of transfer / acquisition of any goods or services referred to in 80A(6), 80IA(8) or 10AA Transactions for which tax holiday is not claimed by the Eligible Unit / Undertaking Above covers income as well as expenditure transactions

33 Clause 23: illustration Particulars in respect of transactions in the nature of transfer or acquisition of any goods or services Key check points: Verify value and quantitative details from notes to accounts (in addition to AS 18), invoices and ledger accounts, fixed assets schedule, etc Review the agreement(s), invoices, debit notes raised Check for CUP i.e., whether services are provided to unrelated parties Profitability of the entity / division (related party / non-related party) Whether inter unit cost allocations are equivalent to expenditure whether same is required to be reported in this clause?

34 Clause 24: illustration Particulars in respect of any SDT in the nature of business transacted Clause 24 : Specified domestic transaction (s) in the nature of any business transacted which has resulted in more than ordinary profits to an eligible business to which section 80IA(10) or section 10AA applies Sr. No. Name of the person with whom the specified domestic transaction has been entered into Description of the transaction including quantitative details, if any Total amount received / receivable or paid / payable in the transaction Description of the transaction Quantity (i) as per books of account (ii) as computed by the assessee having regard to the arm's length price Method used for determining the arm s length price [See section 92C(1)] Clause 24 (a) Clause 24 (b) Clause 24 (c) Clause 24 (d) 1 ABC India Medical Limited Sale of Equipment 1 2,000,000 2,000,000 Other Method (Refer to Note below) Transactions resulting in more than ordinary profits to an eligible business under section 80IA (10) or 10AA Covers amounts paid / payable or received / receivable TP study to be relied upon to determine whether transactions are at arm s length. Accordingly to be covered here only if transaction resulting in more than ordinary profit Key check points: Verify value and quantitative details from notes to accounts (in addition to AS 18), invoices and ledger accounts, fixed assets schedule, etc Review the agreement(s), invoices, debit notes raised Check for CUP i.e., whether services are provided to unrelated parties Profitability of the entity / division (related party and Non related party)

35 Clause 25: illustration Particulars in respect of any other transactions Clause 25 : Any other specified domestic transaction(s) not specifically referred to above in any other clauses, with an associated enterprise Sr. No. Name of the person with whom the specified domestic transaction has been entered into Description of the transaction Amount paid/received or payable/receivable in the transaction (i) as per books of account (ii) as computed by the assessee having regard to the arm's length price Method used for determining the arm s length price [See section 92C(1)] Clause 25 (a) Clause 25 (b) Clause 25 (c) Clause 25 (d) 1 ABC India Medical Limited --- 2,000,000 2,000,000 Other Method (Refer to Note below) Key check point: This residual clause is to cover transactions which may be prescribed per Section 92BA(vi). As there are no transactions which have been prescribed till date, this clause has to be replied by stating a No.

36 Form No. 3CEB checklist General applicability: Ensure that the TP approach and disclosures in Form No. 3CEB are consistent with previous year Check references of notes against the amount and follow consistent wordings in all annexures Ensure correct description of nature of transaction All international transactions or SDTs, even though insignificant, need to be reported If international transactions or SDTs not at ALP, suitable note to be disclosed in Form No. 3CEB for self adjustment Form No. 3CEB to be signed on / dated after the date of audited accounts Return of Income to be filed / uploaded after signing of Form No. 3CEB Details / documents to be examined Audited accounts Notes to accounts Forex Details AS 18 / related party disclosures Shareholding pattern and changes during the year Tax Audit Report Transfer Pricing Study Report Inter-company agreements Local / Global Transfer pricing policy Representation Letter Invoice / Ledger copy(s) Documents evidencing internal / external Comparables RBI / other regulatory approvals Verified

37 Responsibility of Taxpayer Identify all international transactions and SDT during the year with AE / related parties Determination of most appropriate transfer pricing methodology Recognizing comparable transactions / entities, as much as is relevant from TP perspective. Providing relevant industry-level and market-level information, such as key markets, major customers, competitors etc. Providing insight into price-setting mechanism (Transfer Pricing Study to cover the above) Determination of arms length price. Compilation of relevant documents as proof of Arm s Length Price on real time basis Maintenance of transfer pricing documentation (as per section 92D r.w. Rule 10D) Furnish completed Annexure to Form No. 3CEB to the Accountant Approve the Form No. 3CEB uploaded online by the Chartered Accountant as a final step towards filing of e-form

38 Responsibility of the Accountant Review accuracy and completeness of information compiled by taxpayer Reconcile transactions in Form No. 3CEB with audited accounts (related party disclosure, notes to accounts) Verify the details mentioned in the notes to accounts, register of transactions with related parties Test-check, invoices, negotiations, correspondence, ledger accounts, agreements, etc. Collate documents 100% CUP details, reimbursement / recovery details, documents evidencing the receipt of services and benefits, etc. Compare last year s Form No. 3CEB with current year s to ensure no regular international transactions or SDT are missed out. Smell test - to identify unreported transactions e.g. Guarantees given on behalf of subsidiaries, interest free loan, loan taken and repaid in the same year, etc. Interview client to check if AE / related party relationship with any party exists under any clauses of Section 92A(2) and also check if Deemed International Transaction exist under Section 92B(2)

39 Penalties Default Failure to furnish accountant s report (Section 271BA of the Act) Failure to report a transaction in accountant s report (Section 271AA of the Act) Failure to maintain documents (Section 271AA of the Act) Maintaining or furnishing incorrect information or documents (Section 271AA of the Act) Failure to furnish documents (Section 271G of the Act) In case of a post-inquiry adjustment, there is deemed to be a concealment of income (Section 271(1)(c) of the Act)* Penalty Rs. 100,000 2% of the value of transaction 2% of the value of transaction 2% of the value of transaction 2% of the value of transaction % of tax on the adjusted amount * Applicable upto AY Section 270A - Applicable from AY Clause 9(f): Failure to report TP transactions will constitute misreporting liable to 200% penalty

40 E Filing Procedure For E-filing Chartered Accountant Procedure For E-filing Taxpayer

41 Issues relating to filing of Form 3CEB Clause 5 - The drop down menu in the existing form does not have options for Branch, PE or a foreign company. Absence of disclosure of explanatory Notes Qualified Accountant s Report? Method has to be mandatorily chosen from a drop down menu i.e, even for receivables / payables, a method to benchmark will necessarily have to be chosen No option of attachment Special characters not allowed Limitation of words in sub-clause (eg. Business description was restricted to 100 words) Uploading of xml file through fake path Frequent changes by department of xml file structure Change in filing java utility. Format for Foreign company Form 3CEB? DSC of client needs to be registered PAN based Whether physical filing done / allowed? Difficulties in identifying errors in the xml file.

42 Case Law on 271 BA Case Ajit Singh Rana v/s. ACIT Ruling Amritsar ITAT held that ignorance of Law (CA not aware of TP provisions) could not be considered as reasonable cause & hence penalty chargeable u/s 271 BA from AY to AY Syscom Corporation Limited v/s. DCIT Palm Grove Beach Hotels Pvt Ltd Mumbai ITAT BNT Global Pvt Ltd Mumbai ITAT Tussor Machine Tools India (P) Ltd Chennai ITAT Assessee filed report u/s 92E filed on due date in Delhi instead of Mumbai, but filed after two weeks in Mumbai after realizing the mistake Mumbai ITAT held delay on account of technical nature a reasonable cause for not applying penalty u/s 271BA Deletes penalty u/s 271BA considering assessee s interpretation of Sec 92A provisions as plausible view Confirms penalty for not filing Form 3CEB for share investment transaction; Distinguishes Vodafone No penalty leviable u/s 271AA for delay in filing Form 3CEB; Sec 271AA applicable in case of 'failure' to maintain documentation, not delay in producing it; Specific penalty prescribed for delay u/s 271G, which was not invoked by Revenue

43 MRL MRL is Management Representation in respect of Accountant s Report under section 92E of the Income Tax Act, 1961 relating to International /Specified Domestic Transactions of the assessee Broad contents of MRL: Declaration as regards information / documents required as per Rule 10D are contained in TP Study Report Declaration as regards completeness of international transactions and reconciliation with Audited Financial Statements Ownership Structure International transactions / SDT Most Appropriate Method followed Reimbursement of expenses Note w.r.t. to each clause

44 Q&A Questions & Answers

45 Thank You VCMV & Associates, Chartered Accountants Address - Suite 303, Kaveri Complex, #104, Nugambakkam High Road, Chennai , India Direct reach@vcmv.in