A Company Secretary holds a key position in any Company as the Compliance Officer of the Company. A Company Secretary is responsible for all regulatory compliances of Company. A Company Secretary supervises the finalization of Annual Accounts of a Company and is also a party to sign the Balance Sheet when a Company Secretary is employed by the Company. A Company Secretary has to ensure that all disclosures with respect to financial statements, company law compliances, taxation, audit, related party disclosure, etc. has been disclosed and that the financial statement gives a true and fair view of the financial performance of the Company. Merely because a Company has a hired specialist key personnel taking care of taxation related matters (including transfer pricing matters) including Financial Director or a Chief Financial Officer or a Chartered Accountant who takes care of tax related compliance matters does not absolve a Company Secretary from his duties to ensure that tax related matters are regularly complied by the Company in a timely manner. Even then, a Company Secretary has to overlook the work done by the key personnel or a Chartered Accountant and ensure appropriate compliance by the Company.
As per the Income Tax Act, any income (expenses) arising from an international transaction (or specified domestic transaction) with an Associated Enterprise shall be computed having regard to arm’s length price. Accordingly, it is imperative for the Company Secretary to understand certain terminologies governing the Indian Transfer Pricing Regulations.
1. Associated Enterprise:
Two companies can be said to be AEs when there is direct or indirect participation in management, control or capital by one enterprise in other enterprise or by the same person in two enterprises. The participation in management, control or capital can be through direct or indirect equity holding, control over the board of directors, or appointment of one or more executive directors by one enterprise in other enterprise or by the same person in two enterprises. Situations like granting of loan more than 51% of the book value of assets, giving guarantee of more than 10% of the total borrowings of the other Company, complete dependence on know-how, patent, etc. of the other Company, or purchase of raw materials from the other Company greater than 90% of the total raw material purchased by the Company during the year, or one entity has more than 10% of the beneficial interest in a partnership firm, association of persons or body of individuals triggers the deemed fiction and the two entities will be deemed to be AE irrespective of the fact that there is no direct or indirect participation in management, control or capital within the enterprises.
Role of Company Secretary:
The prima-facie role of a Company Secretary is to identify all the AEs with whom the Company has transacted during the year. There are likely chances that some of the entities which are falling under the deeming fiction might go unnoticed to the auditors. The consequence of non-reporting of a transaction is as high as 2 % of the total value of transaction that went unreported. Further, penalty proceedings can also be initiated for concealment of true facts and disclosure under section the Income Tax Act.
2. International Transaction:
An international transaction means a transaction between two or more AEs, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more AEs 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.
Finance Act 2012 has now clarified that an international transaction shall also include the following:
• Capital financing, including 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;
• Provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service;
• A transaction of business restructuring or reorganization, entered into by an enterprise with an AE, irrespective of the fact that it has bearing on the profit, income, losses or assets of such enterprises at the time of the transaction or at any future date;
• Further, Finance Act 2012 has also clarified that an intangible asset shall also include marketing related intangible such as trademarks, trade names, brand names, logos, etc; technology related intangible such as process patent, patent application, technical documents and know-how; artistic related intangible such as literary works and copyrights, musical compositions; data processing related intangibles such as proprietary computer software, software copyrights, automated databases; engineering related intangible such as industrial design, product patent, trade secrets, engineering drawings and schematics, blueprints; customer related intangible such as customer list, customer contracts; goodwill related intangible such as institutional goodwill; professional practice goodwill, celebrity goodwill, etc.
Role of Company Secretary:
Whenever a Company is proposing to enter into any of the above international transactions, a Company Secretary should liaise with the Finance Director or the Chief Financial Officer of the Company and ensure that an appropriate advise from a transfer pricing specialist has been taken as to what should be an appropriate arm’s length price for entering into such international transactions.
When such transaction is a continuous transaction which is taking place, the Company Secretary should liaise with the Finance Director or the Chief Financial Officer and ensure revisiting their pricing model on a reasonable concurrent level so as to demonstrate to the tax authorities that the transfer pricing documentation are maintained on a contemporaneous basis.
3. Specified Domestic Transaction:
TP until now was applicable to companies having cross border transactions with their AE. However, Finance Bill 2012, honoring the supreme court ruling in case of CIT vs. M/S Glaxo Smithkline Asia (P) Ltd. (Special Leave to Appeal (Civil) No(s).18121/2007), expanded the ambit of TP to specified domestic transactions w.e.f 01 April 2013.
Transactions covered under the ambit of domestic transfer pricing:
• Any expenditure in respect of which payment is made or is to be made to a person referred to in Section 40A(2)(b) of the IT Act;
• Any transaction that is referred to in Section 80A;
• Any transfer of goods or services referred to in Section 80-IA(8) i.e. applicable to companies operating as industrial undertaking or enterprises engaged in infrastructure development;
• Any business transacted between the assessee and other person as referred to in section 80-IA(10);
• Any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which provisions of sub-section (8) or sub-section (10) of section 80-IA are applicable;
• Any other transaction, as may be prescribed by the board.
Provided that the aggregate value of the transaction entered into by the assessee with its domestic AE exceeds Rs. 5 crore.
Implication of such amendment by Finance Act, 2012:
All the transactions entered into by the taxpayers operating in Special Economic Zones (‘SEZs’); taxpayers entering into transactions with certain related parties specified under section 40A(2) and all the taxpayers claiming profit based deductions for undertaking specified business activities (under section 80A, 80- IA, etc.) will be covered.
The most likely affected industries are industries operating in SEZs, infrastructure developers and / or infrastructure operators, telecom services industries, industrial park developers, power generations or transmission, etc. Apart from these industries, the business conglomerates having significant intra-group transactions would be impacted.
Most likely transactions under the scanner of the TP Authorities would be:
• Interest Free Loans to group companies;
• Granting of Corporate Guarantees / Performance Guarantees by Parent Company to its subsidiaries;
• Intra-group purchase / sell / service transactions;
• Payment made to key personnel of the group companies;
• Payment made to relatives of key personnel of the group companies.
Role of a Company Secretary:
Companies which did not have international transactions till date, however had domestic transactions with related parties, were not governed by the Indian TPR. However, now since the domestic transfer pricing regulations are in place, Company Secretary of the companies who have domestic transaction with its related parties equal to or more than Rs. 5 crore or companies whose present domestic transaction less than Rs. 5 crore but is likely to increase beyond Rs. 5 crore in the financial year 2012-13 are advised to validate their present business model and pricing methodology from a transfer pricing perspective which will enable them to take corrective actions, if necessary.
4. Arm’s Length Price:
An arm’s length price, is a price at which a transaction is entered into by a Company with a third party under normal market / economic conditions, i.e. without the influence of the relation between the parties. The principle of arm’s length pricing requires a Company to enter into a transaction with its AE similar to a transaction it has entered into or would have entered into with a third party under uncontrolled conditions.
Role of a Company Secretary:
The role of the Company Secretary is to ensure that all the transactions which are entered into by a Company with its AE should be entered into having regards to arm’s length price (and not at arm’s length price). If the transactions are found not to be at arm’s length, the Company might face huge transfer pricing additions during the transfer pricing assessments.
Check List for a Company Secretary to ensure appropriate compliance of Transfer Pricing Regulation:
1. During the financial year, liaise with the Financial Director or the Chief Financial Officer to identify the list of AEs and determine the value of International Transactions or specified domestic transactions.
2. Revisit the existing business model and transfer pricing methodology atleast once in a year to ensure that the transactions of the Company with its AEs are at arm’s length to justify contemporaneous nature of transfer pricing business model.
3. Ensure that the Transfer Pricing Accountant Report is filed with the Assessing Officer before the due date of filing of the return of income i.e. 30 November.
Authors: Jinesh Bhagdev, Practicing Chartered Accountant & Jatin Popat, Practicing Company Secretary