INDIA Law and Practice Contributed by: Deepak Chopra, Harpreet Singh Ajmani, Rohan Khare, Pulkit Pandey and Priyam Bhatnagar, AZB & Partners
1. Rules Governing Transfer Pricing 1.1 Statutes and Regulations The Income Tax Act, 1961 ( “IT Act” ) contains a specific chapter, namely Chapter X, which deals with special anti-avoidance rules in the form of transfer pricing regulations as applicable to com - panies entering into related-party transactions. Sections 92 to 92F of the IT Act, which forms part of “Chapter X – Special provisions relating to avoidance of tax” , deals with transfer pric - ing regulations mandating the determination of arm’s length price of related-party transactions entered into by the taxpayer. These regulations are required to be read with Rules 10A to 10THD of the Income Tax Rules, 1962( “IT Rules” ). These regulations are also governed through the issu - ance of circulars as well as notifications by the Central Board of Direct Taxes (CBDT) from time to time. 1.2 Current Regime and Recent Changes Historically, the main intention for the introduc - tion of transfer pricing provisions was to discour - age companies from shifting profit to overseas associated enterprises (AE) through under-pric - ing or over-pricing of cross-border transactions. In India, transfer pricing regulations were intro - duced for the first time in 2001, following the UN Model Transfer Pricing Regulations, which were, in turn, based on the Organisation for Economic Co-operation and Development’s (OECD) Model Transfer Pricing Regulations introduced in 1980. Though India is not a member of the OECD, India is still a key partner country that actively participates in various committees, workshops and working groups of the OECD. The OECD and India have enhanced their co-operation in dealing with issues related to transfer pricing and to promote better tax compliance in order to improve the prevention of cross-border dis - putes. These transfer pricing regulations were
introduced to avoid base erosion of the Indian tax base and discourage shifting of profits out of India by multinational enterprises (MNE). Since then, these regulations have been constantly amended to be in line with the various global and local practices and some of the landmark changes are highlighted below. • Advance Pricing Agreement programme ( “APA programme” ) – the APA programme was introduced in India vide the Finance Act, 2012 by introducing Section 92CC and Sec - tion 92CD to the IT Act. The APA programme sought to provide certainty to the taxpayer by allowing them to opt for a unilateral, bilateral or multilateral APA, for five prospective years along with a roll back option for four previous years. Further, the APA programme does not impose any threshold in terms of the value of the transaction upon a taxpayer. • Safe harbour provisions – “safe harbour” , in a transfer pricing regime, is a provision that applies to a defined category of taxpay - ers or transactions and that relieves eligible taxpayers from certain obligations otherwise imposed by a jurisdiction’s general transfer pricing rules. It substitutes simpler obliga - tions for those under the general transfer pricing regime. Therefore, for this purpose, CBDT has notified Rules 10TA to 10TG of the IT Rules in relation to “safe harbour rules” for “international transactions” , and Rules 10TH to 10THD of the IT Rules in relation to “safe harbour rules” for “specified domestic trans - actions” . The objective for introduction of such rules was to provide an optional dispute avoidance mechanism that prescribes the minimum cost-plus mark-up/transfer price that an eligible taxpayer has to maintain in relation to eligible categories of international transactions for a specified block of financial years (FY).
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