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ICAI TP Guidance Note: Useful & Onerous!
May, 06th 2013

Rohan Phatarphekar, Head – Transfer Pricing, KPMG India, Global Transfer Pricing Services
The Institute of Chartered Accountants of India (ICAI) recently revised the Guidance Note on Report Under Section 92E of the Income-tax Act, 1961 (GN). Given the ever changing Transfer Pricing (TP) landscape in India, the GN brings the much awaited direction to the accountants to issue report on the transactions covered by the transfer pricing regulations in the specified form.

The 2008 edition of the GN needed update for the myriad developments brought about by the Finance Acts 2009 through 2012. Little guidance existed regarding the explanation and application of amendments brought by Finance Act, 2012. The GN is a step forward in explaining the new concepts introduced by the Finance Act, 2012 which shall be helpful to the practicing accounting fraternity and tax payers alike.
Key highlights:

· Meaning of “International transaction” - The GN states that the amended definition of the term “international transaction” is wide and any transaction or “business restructuring or reorganizations” would be considered to be an international transaction irrespective of whether it has a bearing on the profits, income, losses or assets of the enterprise. The GN has made a reference to Guidelines issued by the Organization for Economic Cooperation and Development (OECD Guidelines) and the various instances of restructuring or reorganizations which could be construed as an international transaction.

· Capital financing / Intangible property - The GN has provided that taxpayers and accountants should carefully identify and report transactions of “capital financing” nature, particularly equity, preference, capital, debentures, guarantees provided and received, etc. The debate on “Issue of shares” whether the same is an international transaction or not, seems to be put to rest with the specific provision to report the above transactions.

Referring to the wide scope of the phrase ‘international transactions’ and “intangible property”, the same seems to cast onerous responsibilities on taxpayers and accountants alike, who would need to review transactions not apparently reflected in the books of account and also review pending / past assessments/ appeals and related records to identify transactions which are not otherwise apparent from books of accounts.

· Specified Domestic transactions (SDTs) - The GN has elaborated on the concept of ‘specified domestic transactions’ but to date no form has been specified with respect to the SDT. The GN points out that the threshold limit to qualify for substantial interest is 20% for Section 40A(2), whilst the threshold to be considered an “Associated Enterprise” is 26%. It has also been noted that purchase from a foreign entity having a 23% equity stake, will not qualify as an “international transaction”, but will be covered as SDT and need to satisfy the arm’s length test, despite not being an “international transaction”.

While a plain reading of Section 40A(2)(b) of the Act does not seem to elaborate on the phrase “directly or indirectly”, the GN makes a reference to the CBDT Circular number 6-P dated 6 July 1968 (issued to explain the provisions of Section 40A(2)). The circular elaborates the types of persons covered under Section 40A(2) which include, inter alia , “persons in whose business or profession the taxpayer has a substantial interest directly or indirectly”. To this extent, the Guidance provides that taxpayers and accountants should be prudent in identifying and including these transactions in the TP documentation and Accountant’s Report.

The GN also states that the domestic TP provisions in relation to the Section 40A(2)(b) payments would apply only to the expenditure side and would have no impact in the hands of the recipients of such payments.

· The introduction of ‘other method’ as an acceptable method for computing arms length pricing is a welcome change. The GN has discussed the various possibly acceptable approaches/ data that could be used while applying the new method, permitting use of third party quotations, valuation reports, tender/ bid documents, standard rate cards, commercial and economic business models, etc. as appropriate for the purpose of the application of ‘other method’.
· The GN emphasizes that different methods may be chosen as the most appropriate method for different

transactions of the taxpayer as long as the rationale for each of such choices is adequately documented. It further states that different methods may be chosen for the same transaction in different years as long as the rationale for each such choice made in each year is adequately documented.

· Risk Adjustment - The GN has recognized the concept of “risk adjustment’ to be made where possible enterprise level differences warrant an adjustment to take into account the difference in risk profiles of the taxpayer and the comparables.

Considering the increased complexity associated with identification and interpretation of international transactions / SDTs, in the absence of any guidance till recently, taxpayers and the accounting fraternity have been struggling on this count. To this extent, the GN is welcome and serves as a useful reference tool. However, the GN also seems to place rather onerous obligations on taxpayers and accountants to identify and report such transactions and does not provide as much clarity on the current rather ambiguous TP provisions which are currently subject to diverse interpretations by taxpayers and the Revenue authorities alike.

The views and opinions expressed herein are those of the author and do not necessarily represent the views of KPMG in India

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