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This is not unique taxation measure in India. Many countries , as a consequences of opening economy, felt that Multi national Companies(MNC) plan their business affairs in such way that they earn more profits in a country wherein the taxation is less. This they achieved by shifting cost or apportionment of cost or expense or under invoicing or over invoicing or other innovative plans in connivance with their own company set up in a country or a company in which they have very close connection. To stop this practice,the Article 9 of the UN/OECD Model convention gives the right to make transfer pricing adjustments by a country in income or cost related to international transaction.

The Govt. of India also enacted laws effective from FY 01-04-2001, by inserting Section 92A to 92F by which rules have been framed to determine income arising from an international transaction or the costs of transaction between associated enterprise be computed having regard to the Arm’s length price.

The IT Act has defined i.e. Associated Enterprise, International between Arm’s length price in following words :
1. Associated enterprises are defined as two or more
enterprises shall be deemed to be associated enterprises if, at any time during the previous year--
(a) one enterprise holds, directly or indirectly, shares carrying not less than twenty-six % of the voting power in the other enterprise; or
(b) any person or enterprise holds, directly or indirectly shares carrying not less than twenty-six % of the voting power in each of such enterprises; or
(c) a loan
advanced by one enterprise to the other enterprise constitutes not less than fifty-one % of the book value of the total assets of the other enterprise; or
(d) one enterprise guarantees not less than ten per cent. of the total borrowings of the other enterprise; or
(e) 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 one enterprise, are appointed by the other enterprise; or
(f) 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; or
(g) the manufacture or processing of goods or articles or business carried out by one enterprise is wholly dependent on the use of know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing 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
(h) ninety per cent. or more of the raw materials and consumables required for the manufacture or processing of goods or articles carried out by one enterprise, are supplied by the other enterprise, or by persons specified by the other enterprise, and the prices and other conditions relating to the supply are influenced by such other enterprise; or
(i) 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; or
(j) 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 relative of such individual; or

 (k) where one enterprise is controlled by a Hindu undivided family, the other enterprise is controlled by a member of such Hindu undivided family, or by a relative of a member of such Hindu undivided family, or jointly by such member and his relative; or
(l) where one enterprise is a firm, association of persons or body of individuals, the other enterprise holds not less than ten per cent. interest in such firm, associated of persons or body of individuals; or there exists between the two enterprises, any relationship of mutual interest, as may be prescribed.

An international transaction means a transaction of purchase, sale or lease of tangible or intangible property or provisional services of lending or
borrowing of money or any other transaction having a bearing on the profits, income, losses or assets of such enterprises or a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of or any contribution to any cost or expense incurred or to be incurred in connection with the benefit, service or facility provided or to be provided to any one or more of such enterprises. between two or more associated enterprises either or both of whom are non-residents.

Further, a transaction entered into by an enterprise with a person, other than an `associated enterprise' shall for purposes of Section 92B(1) be deemed to be a transaction entered into between two associated enterprises if there exists a prior agreement in relating to the relevant transaction between such other person and the associated enterprise or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise.

Arm's length price ---Section 92F(ii) defines arm's length price as `a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises in uncontrolled conditions'. This definition shall apply for Section 92 as also Sections 92A to 92E of the I.T.Act. Section 92C provides for computation of arm's length price for the levy of
tax on non-residents in terms of Section 92. The statutorily recognised methods are:-- (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. The most appropriate method specified in Section 92C(1) has to be identified and applied for the purpose of determination of arm's length price in the manner prescribed by the rules. Wherever more than one price is determined to be the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices or at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding 5 per cent
Provision in brief ----According to the new Section 92(1) in force from A.Y. 2002-2003 and onwards, any income arising from the international transaction/s must be computed having regard to the arm's length price.
Section 92(2) provides that in cases where in an international transaction, two or more associated enterprises enter into 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 the cost of expense allocated or apportioned to or contributed by as the case may be, by any such enterprise must be determined having regard to the arm's length price of such benefit, service or facility, as the case may be.
However, as per section 92(3) of the I T Act if the net result out of such computation is increase in loss or reducing the income, provision u/s 92(2) shall not apply.

Transfer Pricing Officer-What is his role ?
According to the provision u/s 92CA in case of an international transaction in any previous year the Assessing Officer may, with the previous approval of the Commissioner, refer the computation of arm's price in relation to the said international transaction/s u/s 92C to the Transfer Pricing Officer.
The TPO has powers not only to determine the arm's length price by an order to be passed by him after complying with the requirements of natural justice and having regard to the facts of the case and the law applicable but is also empowered to rectify any mistake apparent from record and, for that purpose, amend any order passed by him. The TPO has, however,no penal powers noe can he demand tax from assessee.

Further Section 92C(3) provides that in cases where during the course of any proceeding for assessment of income, on the basis of material or information or document in his possession, the Assessing Officer is of the opinion that--

(a) the price charged or paid in an international transaction has not been determine

in accordance with sub-sections (1) and (2); or

(b) any information and document relating to an international transaction have not

been kept and maintained by the assessee in accordance with the provisions

contained in sub-section (1) of Section 92D and the rules made in this behalf;

(c) the information or data used in computation of the arm's length price is not

reliable or correct; or

(d) the assessee had failed to furnish, within the specified time, any information or

document which he was required to furnish by a notice issued under sub-section (3)

of Section 92D, the Assessing Officer may proceed to determine the arm's length price in relation to the said international transaction in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him.

The assesse cannot be allowed nor can he claim any additional deduction or exemption and allowance under Sections 10A and/or 10B, as also Chapter VIA of the I.T. Act in respect of the enhancement to the total income so made by the Assessing Officer by resort to arm's length price.

Section 92D provides that every person who has entered into international transaction shall keep and maintain such information and document in respect thereof as may be prescribed by the CBDT through Rules framed for the purpose.

The details of information and documents to be kept and maintained under Section 92D as prescribed under Rule 10D are:--

(a) a description of the ownership structure of the assessee enterprise with details of the shares or other ownership interest held therein by other enterprises;

(b) a profile of the multinational group of which the assessee enterprise is a part along with the name, address, legal status and country of tax residence of each of the enterprises comprised in the group with whom international transactions have been entered into by the assessee, and ownership linkages among them;

(c) a broad description of the business of the assessee and the industry in which the assessee operates, and of the business of the associated enterprises with whom the assessee has transacted;

(d) the nature and terms (including prices) of international transactions entered into with each associated enterprise, details of the property transferred or services provided and the quantum and the value of each such transaction or class of such transaction;

(e) a description of the functions performed, risks assumed and assets employed or to be employed by the assessee and by the associated enterprises involved in the international transaction;

(f) a record of the economic and market analyses, forecasts, budgets or any other financial estimates prepared by the assessee for the business as a whole and for each division or product separately, which may have a bearing on the international transactions entered into by the assessee;

(g) a record of uncontrolled transactions taken into account for analysing their comparability with the international transactions entered into, including a record of the nature, terms and conditions relating to any uncontrolled transaction with third parties which may be of relevance to the pricing of the international transactions;

(h) a record of the analysis performed to evaluate comparability of uncontrolled transactions with the relevant international transactions;

(i) a description of the methods considered for determining the arm's length price in relation to each international transaction or class of transaction, the method selected as the most appropriate method along with explanations as to why such method was so selected, and how such method was applied in each case;

(j) a record of the actual working carried out for determining the arm's length price, including details of the comparable data and financial information used in applying the most appropriate method, and adjustments, if any, which were made to account for differences between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions;

(k) the assumptions, policies and price negotiations, if any, which have critically affected the determination of the arm's length price;

(l) details of the adjustments, if any, made to transfer prices to align them with arms's length prices determined under these rules and consequent adjustment made to the total income for fax purposes;

(m) any other information, data or document, including information or data relating to the associated enterprise, which may be relevant for determination of the arm's length price.

Exemption for small assessees

Rule 10D(2) exempts all those cases and persons where the aggregate value as recorded in the books of accounts, of international transactions entered into by the assessee does not exceed Rs. one crore from the requirement of maintenance of detailed records and documents prescribed under Rule 10D(1).

The information required under Rule 10B(1) must be supported by authentic documents and records which may include--

(a) official publications, reports, studies and data bases from the Government of the country of residence of the associated enterprise, or of any other country;

(b) reports of market research studies carried out and technical publications brought out by institutions of national or international repute;

(c) price publications including stock exchange and commodity market quotations;

(d) published accounts and financial statements relating to the business affairs of the associated enterprises;

(e) agreements and contracts entered into with associated enterprises or with unrelated enterprises in respect of transactions similar to the international transactions;

(f) letters and other correspondence documenting any terms negotiated between the assessee and the associated enterprise;

(g) documents normally issued in connection with various transactions under the accounting practices followed.

The information, records and documents must be kept and maintained for a period of eight years from the end of the relevant assessment year as required in Rule 10D(5) of the I.T. Rules.

Section 92-E mandatorily requires every person who has entered into an international transaction during an accounting period to obtain a report of a Chartered Accountant and furnish the same on or before the specified date in the prescribed form .

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