INDIA Law and Practice Contributed by: Deepak Chopra, Harpreet Singh Ajmani, Rohan Khare, Pulkit Pandey and Priyam Bhatnagar, AZB & Partners
• Secondary adjustments – these provisions were introduced in India in the year 2017, thereby mandating an adjustment in the books of accounts of both the Indian tax - payer and its AE, to reflect that the actual allocation of profits is based on the arm’s length principle. These provisions also require repatriation of excess money in the hands of the taxpayers into India within a prescribed time-limit, failing which the amount not repatriated is treated as deemed advance on which interest would be chargeable. In 2019, amendments were introduced, thereby allowing the taxpayer to repatriate secondary adjustment from any of its AEs and also gives an option to pay an additional tax at 18% (plus applicable surcharge on tax) in case the taxpayer is not able to repatriate the money into India. • Mutual Agreement Procedure (MAP) – statuto - ry framework for MAP was initially introduced by insertion of Part IX-C under the IT Rules, for the benefit of taxpayers, tax authorities and competent authorities of treaty partners. Thereafter, Circular No.F.No.500/09/2016- APA-I dated 07.08.2020 (as modified by Circular No.F.No.500/09/2016-APA-I dated 10.06.2022) was issued by the CBDT provid - ing guidance on the procedure as well as mechanism to cover aspects of access to and denial of MAP route, technical issues and implementation of MAP outcomes. Among other things, it has been stated in the guid - ance that India is committed to endeavour to resolve MAP cases within an average time - frame of 24 months. • Thin Capitalisation – Section 94B was intro - duced in the IT Act vide the Finance Act, 2017 to limit interest deduction to 30% of Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA) with a carry for - ward period of eight years for balance interest
amount. This provision applies for interest payments to the associated enterprises or any lender (to whom the AEs have provided an explicit or implicit guarantee) exceeding INR10 million. In 2020, interest payments on loans taken from an Indian branch of a foreign bank have been excluded from the purview of the provision for limitation of interest deduc - tion. 2. Definition of Control/Related Parties 2.1 Application of Transfer Pricing Rules In terms of the mandate provided under Section 92(1) of the IT Act, a taxpayer is required to com - ply with the transfer pricing provisions in a case where he/she has entered into an international transaction or a specified domestic transaction with its associated enterprise. Further, in order to understand the application of the transfer pricing regulations in India, it is pertinent to understand the meaning of following terms. • Arms’ Length Price – Section 92F(ii) of the IT Act defines arm’s length price (ALP) to mean a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncon - trolled conditions. • Associated enterprises – in terms of Sec - tion 92A(1) of the IT Act, two enterprises are considered to be AEs when one party (directly or indirectly) participates in the manage - ment, control or capital of the other party; or a common person (or persons) participates in the management, control or capital of both enterprises. Further, Section 92A(2) of the IT Act, in the case where two enterprises do not fall into the criteria laid down in Section 92A(1) of the IT Act, but fall into one of the 13
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