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Exposure Draft of Revised Guidance Note on Report under Section 92E of the Income-tax Act, 1961 (Transfer Pricing)
September, 02nd 2017
           EXPOSURE DRAFT

  GUIDANCE NOTE ON REPORT
    UNDER SECTION 92E OF
   THE INCOME-TAX ACT, 1961
           (TRANSFER PRICING)
[Based on the law as amended by the Finance Act, 2017]

                    (Revised 2017)


     (Last date for Comments: 11th September, 2017)




          Committee on International Taxation
 The Institute of Chartered Accountants of India
             (Set up by an Act of Parliament)
                       New Delhi
EXPOSURE DRAFT- GUIDANCE NOTE ON REPORT
UNDER          SECTION           92E        OF
THE INCOME-TAX ACT, 1961 (TRANSFER PRICING)

Following is the Exposure Draft of the Guidance Note on Report
under section 92E of the Income-tax Act, 1961 (Transfer Pricing),
issued by the Committee on International Taxation of ICAI for
comments. Changes have been made to the extent of amendments
made by the Finance Act, 2017.
The Committee invites comments on this Exposure Draft.
Comments are most helpful if they indicate the specific paragraph
or group of paragraphs to which they relate, contain a clear rationale
and, where applicable, provide suggestions for alternative wording.


How to comment:

Comments can be submitted using one of the following
methods, so as to be received not later than 11th September,
2017.


1. Email:        Comments can be sent to citax@icai.in


2. Postal:       Secretary, Committee on International Taxation,
                 Committee        on      International   Taxation
                 The Institute of Chartered Accountants of India
                 ICAI Bhawan,
                 Sixth Floor, Hostel Block
                 A-29, Sector -62,
                 NOIDA(U.P.), India.
                                                              Chapter 1
                                                       Introduction
Legislative Framework
1.1     In an era of liberalization and globalization of trade and investment
and the emergence of e-commerce, the perceptible results have been -
increase in the number of cross-border transactions, the complexity, speed
and lack of transparency with which global business can be transacted.
There is a general belief that multi-national corporations, in an effort to
manage and minimize their global tax outflows, have employed creative
transfer pricing approaches in the context of flow of goods, services, funds,
intangibles, etc.
1.2     When transactions are entered into between independent enterprises,
the consideration therefore is determined by market forces. However, when
associated enterprises deal with each other, it is possible that the
commercial and financial aspects of the transactions are not influenced by
external market forces but are determined based on internal factors. In such
a situation, when the transfer price agreed between the associated
enterprises does not reflect market forces and the arm's length principle, the
profit arising from the transactions, the consequent tax liabilities of the
associated enterprises and the tax revenue of the host countries could be
distorted.
1.3     The existence of different tax rates and rules in different countries
offers a potential incentive to multinational enterprises to manipulate their
transfer prices to recognise lower profit in countries with higher tax rates and
vice versa. This can reduce the aggregate tax payable by the multinational
groups and increase the after tax returns available for distribution to
shareholders.
1.4     In India, the Act had hitherto not dealt with this problem in a detailed
manner. The erstwhile section 92 sought to determine the amount of profits
which may reasonably be deemed to have been derived from a business
carried on between a resident and a non-resident which, owing to the close
connection between them is so arranged that it produced, to the resident,
either no profits or less than the ordinary profits which might be expected to
arise in that business in case the transaction would have been entered into
between two entities having no close connection. Besides, sections 40A(2);
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

80IA(10) and 80IB(13) of the Act provide powers to the Assessing Officer to
interfere with the pricing or costing of certain transactions in certain cases in
order to determine the correct quantum of deduction permissible.
1.5     The Finance Act, 2001, recognised that international transactions
between Associated Enterprises may not be subject to the same market
forces that shape relations between two independent firms, and therefore
introduced a set of provisions in Chapter X of the Act under the title "Special
Provisions relating to avoidance of tax". The statutory framework attempts to
monitor transfer prices for goods, facilities and services in order to determine
that they conform to the "arm's length principle". Not only has section 92 of
the Act been completely recast but new sections 92A to 92F have also been
introduced to meet the desired objective of ensuring that the local tax base of
an assesseea taxpayer is fair.
1.6      The relevant provisions contained in Chapter X (sections 92 to 92F)
of the Act and the provisions dealing with the levy of penalties for non-
compliance thereof are reproduced in Annexure I. The Finance Act, 2002
made certain changes to the provisions contained in sections 92A, 92C, 92F
and 271F. The Finance Act, 2006 further amended section 92C. Further, the
Finance Act, 2007 inserted sub-sections (3A) and (4) in section 92CA.
Finance Act 2009 amended the proviso to section 92C, provided for
constitution of the dispute resolution panel and empowered the Board to
formulate safe harbor rules. Finance Act 2011 amended the allowable
variation as per second proviso to section 92C (2) to be notified by the
Central Government, and made changes to Section 92CA. The Finance Act
2012 has introduced significant amendments including inter alia clarifying the
coverage of the term `international transactions', expanding the scope of
transfer pricing provisions to specified domestic transactions (Section 92BA)
and providing an Advance Pricing Agreement framework (Section 92CC and
Section 92CD). Further changes specifically in respect of arm's length price
determination were introduced vide Finance (No. 2) Act 2014 and the
Finance Act 2015. The Finance Bill 2014 introduced the use of multiple year
data and the Finance Act (No. 2), 2014 introduced range concept for
determination of arm's length price and roll-back mechanism for APA. The
final rules in relation to the range concept and use of multiple year data were
notified by the Central Board of Direct Taxes in October, 2015.
1.7     Further, section 92B extended application of transfer pricing
provisions to transaction entered by an Indian entity with a resident
independent third party. The Finance Act 2015 increased the threshold limit
for the applicability of specified domestic transaction from INR 5 crores to
INR 20 crores with effect from Financial Year 2015-16.

                                       2
                                                                  Introduction

1.8     The Finance Act 2016, in line with recommendations of the BEPS
Action Plan 13, inserted section 286 for furnishing of country-by-country
report and inserted proviso to section 92D(1) for maintenance of Master file
(form to be prescribed), with effect from Financial Year 2016-17.
1.9    Further, the existing penalty provisions have been rationalised along
with insertion of additional penalties for non-furnishing/ maintenance of
country-by-country report and master file.
1.101.10 The Finance Act 2017, amended the applicability of specified
domestic transactions compliance by excluding expenditure made to person
referred to in Sec. 40A(2)(b) of the Act, from the ambit of the definition.
1.11      Further, provisions regarding secondary adjustments and limitation
on interest deduction were introduced and inserted as new sections (92CE
and 94B respectively) vide Finance Act, 2017. Also, penalty for furnishing
incorrect information in reports or certificates were introduced.Finance Act
2017 also introduced section 271J for levying penalty on accountants for
furnishing incorrect information in reports or certificates furnished under any
provisions of the Act or the rules made thereunder.
1.12 These amendments are also included in the said Annexure. The
Rules prescribed in this regard by the Central Board of Direct Taxes are
reproduced in Annexure II. The relevant extracts from the Memorandum
explaining the provisions of the Finance Act, 2001, Finance Act, 2002,
Finance Act, 2006, Finance Act, 2007, Finance Act, 2009, Finance Act, 2011,
Finance Act 2012, Finance (No. 2) Act 2014, Finance Act 2015, Finance Act
2016 and Finance Act 2016, 2017 are given in Annexure III. The Central
Board of Direct Taxes has issued Circulars explaining the provisions and
clarifying certain related aspects. These circulars are given in Annexure IV.

Terms and abbreviations used
1.11 In this Guidance Note the following terms and abbreviations occur
often in the text. A brief explanation of such terms and abbreviations is given
below. Further, reference to a section without reference to the relevant Act
means that the section has reference to the Income-tax Act, 1961.
(a)    Act
The Income-tax Act, 1961.
(b)    Accountant
Accountant means a chartered accountant within the meaning of the
Chartered Accountants Act, 1949 and as referred to in section 288 of the Act.


                                      3
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

(c)    Arm 's Length Price (ALP)
ALP as defined under section 92F(ii) of the Act.
(d)    AS
The Accounting Standards issued, prescribed and made mandatory by the
ICAI or as under section 2 (2) of Companies Act, 2013 and the Companies
(Accounting Standards) Rules, 2006.
(e)    AS (IT)
Income Computation and Disclosure Standards notified by the Central
Government under section 145(2) of the Act.
(f)    AAS
Auditing and Assurance Standards prescribed and made mandatory by the
Institute of Chartered Accountants of India.
(g)    Associated enterprises (AEs)
An AE as defined under section 92A of the Act.
(h)    APA
Advance Pricing Agreement
1.     BEPS
Base Erosion and Profit Shifting
(j)    Board
The Central Board of Direct Taxes constituted under the Central Boards of
Revenue Act, 1963.
(k)    Circular
A circular or instructions issued by the Board under section 119(1) of the Act.
(l)    CUT
Comparable Uncontrolled transaction
(m)    CUP Method
Comparable Uncontrolled Price Method
(n)    RPM
Resale Price Method
(o)    PSM
Profit Split Method


                                       4
                                                                  Introduction

(p)    CPM
Cost Plus Method
(q)    TNMM
Transactional Net Margin Method
(r)    Enterprise
An enterprise as defined under section 92F (iii) of the Act.
(s)    ICAI
The Institute of Chartered Accountants of India.
(t)    International transaction
International transaction as defined under section 92B of the Act.
(u)    OECD
Organisation for Economic Co-operation and Development.
(v)    OECD Guidelines
Transfer Pricing Guidelines for Multinational Enterprises and Tax
Administrations by OECD - provides guidance on the application of the
"arm's length principle"
(w)    Report
The report of an accountant under section 92E of the Act.
(x)    Rules
The Income-tax Rules, 1962.
(y)    Specified date
Specified date as stipulated under clause (iv) of section 92F of the Act.
(z)    Specified domestic transaction
Specified domestic transaction as defined under section 92BA of the Act.
(za)   Transaction
A transaction as defined under section 92F(v) of the Act.
(zb)   Transfer Pricing Officer (TPO)
An officer as defined in explanation to section 92CA.

Objective of the guidance note


                                       5
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

1.12 The provisions relating to computation of income from international
transactions between AEs having regard to ALP are applicable with effect
from assessment year 2002-03. According to section 92E of the Act, every
person who has entered into an international transaction or a specified
domestic transaction1 during a previous year shall obtain a report from an
accountant and furnish such report on or before the specified date in the
prescribed form. An accountant is required to discharge his function in this
regard from assessment year 2002-03.
1.13 The object of this guidance note is to provide guidance to
accountants in discharging their responsibilities under section 92E of the Act.
It intends to:
(i)     assist in understanding the respective responsibilities of the
        assesseetaxpayer enterprise and the accountant;
(ii)    guide the accountant as to the nature and scope of information to be
        obtained by him from the assesseetaxpayer enterprise to enable him
        to conduct the examination;
(iii)   provide guidance on the verification procedures to be adopted by the
        accountant for giving the report and the prescribed particulars in the
        annexure thereto; and
(iv)    explain the circumstances where a disclosure or qualification or
        disclaimer may be required from the accountant while giving his
        report.

Applicability of the provisions
1.14 The provisions contained in Chapter X of the Act are applicable to an
international transaction entered into between two or more AEs either or both
of whom are non-residents. Also, in the case of a specified domestic
transaction, not being an international transaction as covered as per section
92BA of the Act these provisions are attracted.
1.15 International transaction covers transaction 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 and income, losses or assets of such enterprises and includes a
mutual agreement or arrangement between two or more AEs for the

1 The provisions relating to Specified Domestic Transactions are applicable with
effect from assessment year 2013-14.


                                       6
                                                                  Introduction

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. Further,
the expression `international transaction' has been clarified vide Finance Act
2012 with retrospective effect from 1 April 2002 to include a wide variety of
arrangements.
1.16 According to section 92B(2) of the Act, a transaction entered into by
an enterprise with a person other than an AE, shall be deemed to be a
transaction between two AEs if there exists a prior agreement in relation to
the relevant transaction between such other person and the AE or the terms
of the relevant transaction are determined in substance between such other
person and the AE. Consequently the provisions of this chapter shall apply
even in the aforementioned cases. This provision has been further amended
to include transactions irrespective of whether such unrelated person is a
resident or non-resident, as long as either the enterprise or the AE is non-
resident.
1.17 As per section 92(3), these provisions are not intended to be applied
in cases where the effect of application of these provisions reduces income
chargeable to tax in India or increases the loss, as the case may be.

New developments
1.18   Safe Harbour (Section 92CB of the Act)
The Finance Act 2009 empowered the Board to frame safe harbor rules. Safe
harbor means circumstances in which the tax authorities shall accept the
transfer price as declared by the assesseetaxpayer. The safe harbour rules
were notified in September 2013. In the rules, safe harbor rates were
prescribed for specific nature of international transactions.
The CBDT, vide a notification dated 7 June 2017, revised the existing safe
harbour rules in India.
The revised SHRs apply for Assessment Year (AY) 2017-18 and two
immediately following AYs i.e. upto AY 2019-20. The earlier SHRs were
applicable from AY 2013-14 and four immediately following AYs i.e. upto AY
2017-18. For AY 2017-18, the taxpayer can choose from old or new rules
whichever is more beneficial.
Key highlights
Rationalisation of safe harbour rates - The safe harbour rates for all contract
services have been moderated.


                                      7
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

Upper turnover threshold of INR 200 crore introduced for all contract service
providers [IT, (ITeS), KPO, R&D for IT and generic pharmaceutical drugs].
Introduction of safe harbour for receipt of low value adding intra group
services - The safe harbour provisions have been extended to receipt of such
services by Indian entities under the revised SHRs. The revised SHRs in this
regard also lay down a requirement for the applicant to get the method of
cost pooling, exclusion of shareholder costs and duplicate costs from cost
pool and the reasonableness of the allocation keys used for allocation of
costs certified by an accountant. In this regard, the definition of an
accountant has also been incorporated in the revised SHRs.
Introduction of safe harbour rates on loans advanced in foreign currency -
The revised SHRs have prescribed safe harbour rates based on London
Inter-bank Offer Rate (LIBOR) for loans advanced to AEs denominated in
foreign currency and based on State Bank of India's marginal cost of funds
lending rate for loans advanced to AEs denominated in INR. The revised
SHRs have also prescribed staggered rates (spread over the applicable base
rates) depending upon the credit rating of the overseas borrower, subject to
such credit ratings being approved by CRISIL (formerly Credit Rating
Information Services of India Limited)
The Safe harbour rates as per the old and new rules are tabulated below:
The same are tabulated below:

S No.    Nature of international         Conditions          Safe Harbour
              transaction                                   Rates(minimum
                                                             threshold on
                                                               operating
                                                                costs)

  1.    Software      development     Annual
        services*                     transaction value           22%
                                      > INR 500 crore
                                      Annual                      20%
                                      transaction value
                                      =     < INR 500
                                      crore

  2.    IT enabled services*          Annual
                                      transaction value           22%
                                      > INR 500 crore
                                      Annual

                                     8
                                                                Introduction

S No.      Nature of international         Conditions        Safe Harbour
                transaction                                 Rates(minimum
                                                             threshold on
                                                               operating
                                                                costs)
                                       transaction value          20%
                                       = < INR 500 crore

     3.   Knowledge          process   No threshold for           25%
          Outsourcing services*        annual
                                       transaction value

     4.   Contract R&D services*
          · Software development                                 30 %
          · Generic                                              29 %
              pharmaceutical drugs

     5.   Manufacture and export of    90 % or more of
          · core auto components       total     turnover        12%
          non-core auto component      areis in nature of        8.5%
                                       Original
                                       Equipment
                                       Manufacture
                                       sales
6.        Advancing intra-group loan   ·   To      wholly   Interest rate = /
                                           owned non-       > base rate of
                                           resident         SBI as on 30th
                                           subsidiary       June of the
                                       ·   Loan sourced     relevant     year
                                           in INR           plus
                                       ·   Excludes          · 150      basis
                                           loans       by      points [Loan
                                           enterprises         =/< INR 50
                                           engaged in          crores]
                                           lending     or    · 300      basis
                                           borrowing in        points [Loan
                                           normal              > INR 50
                                           course      of      crores]
                                           business


                                       9
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

S No.    Nature of international            Conditions         Safe Harbour
              transaction                                     Rates(minimum
                                                               threshold on
                                                                 operating
                                                                  costs)
                                        ·   Excludes
                                            credit line or
                                            any       other
                                            loan facility
                                            with no fixed
                                            term        for
                                            repayment

 7.     Providing explicit corporate    ·   Amount    of      2%     of  the
        guarantee                           guarantee is      guaranteed
                                            upto INR 100      amount
                                            crores
                                        ·   Amount    of      1.75% of the
                                            guarantee         guaranteed
                                            exceeds           amount
                                            INR100
                                            crores



Categories of              Safe harbour rates -       Safe Harbour rates -
international              old rules [as per sub      revised rules [as per sub
transactions               Rule (2) of rule 10TD      Rule (2A) of rule 10TD]
                           of Income-tax Rules,       applicable from AY 2017-18
                           1962] applicable from      to AY 2019-20
                           AY 2013-14 to AY
                           2017-18



Provision of Software Operating profit margin Operating profit margin to



                                       10
                                                                          Introduction

development         services to operating expense       operating expense
(IT     services)       and
Information Technology
Enabled services (ITeS), ·        where             the ·      where      the     aggregate
with insignificant risks          aggregate value of           value         of       such
                                  such transactions <          transactions < INR100
                                  INR500 crore ­ not           crore ­ not less than 17
                                  less than 20 per             per cent
                                  cent


                              ·   where             the ·      where      the     aggregate
                                  aggregate value of           value         of       such
                                  such transactions >          transactions > INR100
                                  INR500 crore ­ not           crore but < INR200 crore
                                  less than 22 per             - not less than 18 per
                                  cent.                        cent.




Provision      of      KPO Operating profit margin The value of international
services,               with to operating expense transaction  INR200 crore
insignificant risks          not less than 25 per and the operating profit
                              cent                      margin to operating expense
                                                        is ­
                                                        ·      Not less than 24 per
                                                               cent, if the employee cost
                                                               to operating expense is
                                                               at least 60 per cent



                                          11
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

                                                         ·    Not less than 21 per
                                                              cent, if the employee cost
                                                              to operating expense is
                                                              greater than 40 per cent
                                                              or more but less than 60
                                                              per cent; or
                                                         ·    Not less than 18 per
                                                              cent, if the employee cost
                                                              to   operating    expense
                                                              does not exceed 40 per
                                                              cent.


Provision of Intra-group Interest rate equal to or
loan to Wholly Owned greater than the base The threshold of INR50 crore
Subsidiary (WOS)     rate of State Bank of has been removed
                             India (SBI) as on 30th
                             June of the relevant Different safe harbour rates
                             previous year:       have been prescribed for


                         ·     plus 150 basis points ·       Loan denominated in

                               where the amount of           Indian Rupees (INR)

                               loan is < INR50
                               crore                         Refer table 1 below

                         ·     plus 300 basis points
                               where    amount    of ·       Loan denominated in

                               loan is > INR50               foreign currency

                               crore




                                       12
                                                                   Introduction

                                                        Refer table 1 below




Provision of Corporate ·   where the amount
guarantee to WOS           guaranteed             < The differential rates of 2 per
                           INR100       crore     - cent and 1.75 per cent have
                           Commission or fee been moderated down to a
                           of 2 per cent or standard rate of 1 per cent
                           more per annum             irrespective of the amount
                      ·    where the amount guaranteed.
                           guaranteed             >
                           INR100 crore, and However the requirement for
                           the credit rating of the credit rating of the
                           the borrower, by a borrower to be certified by a
                           Securities           and SEBI registered agency and
                           Exchange Board of such credit rating to be of
                           India          (SEBI) adequate to highest safety
                           registered    agency still      remains    for     amount
                           is of the adequate         guaranteed            exceeding
                           to highest safety - INR100 crore
                           Commission or fee
                           of 1.75 per cent or



                                   13
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

                                        more per annum


Provision of specified Operating profit margin The operating profit margin to
contract research and to operating expense operating expense not less
development    services not less than 30 per than 24 per cent, where the
(Contract R&D services), cent                value of the international
with insignificant risks,                                   transaction is < INR200 crore.
wholly or partly relating
to software development



Provision       ofcontract Operating profit margin The operating profit margin to
R&D       services, with to operating expense operating expense not less
insignificant risks, wholly        not less than 29 per than 24 per cent, where the
or    partly        relating    to cent                 value of the international
generic pharmaceutical                                      transaction is < INR200 crore.
drugs



Manufacture and export Operating profit margin Operating profit margin to
of:                                 to operating expense:   operating expense:


·     core                     auto ·   not less than 12 per ·   not less than 12 per cent
      components                        cent                ·    not less than 8.5 per cent
·     non-core                 auto ·   not less than 8.5
      components                        per cent
where 90 per cent or
more of total turnover
relates        to       Original


                                               14
                                                                       Introduction

Equipment Manufacturer
sales


Receipt of low value-                                Aggregate value of such
adding      intra-group                              transactions           (including     a
services                                             mark-up not exceeding 5 per
                                                     cent), does not exceed INR10
                                                     crore.


                                                     Method       of        cost    pooling,
                                                     exclusion         of     shareholder
                                                     costs and duplicate costs
                                                     from cost pool and the
                                                     reasonableness                of     the
                                                     allocation        keys        used   for
                                                     allocation of costs to be
                                                     certified by an accountant.



Table 1 ­ Safe harbour rates prescribed for loans advanced to AE


CRISIL credit rating of Loan in INR - Interest Loan in Foreign currency -
AE                      rate > one-year marginal Interest rate > six-month
                          cost of funds lending rate London Inter-Bank Offer Rate
                          of State Bank of India as of the relevant foreign currency
                          on 1 April of the relevant as on 30 September of the
                          previous year plus basis relevant previous year plus
                          points as below           basis points as below



                                     15
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

between AAA to A or its 175 basis points                    150 basis points
equivalent

BBB-, BBB or BBB+ or 325 basis points                       300 basis points
its equivalent

between BB to B or its 475 basis points                     450 basis points
equivalent

between C to D or its         625 basis points              600 basis points
equivalent

Credit       rating     not 425 basis points                400 basis points
available and aggregate
amount of loan advanced
to all AEs as on 31
March of the relevant
previous year < INR100
crore


*Applicable to service providers with insignificant risks




                                           16
                                                                        Introduction

Further, safe harbour provisions have also been prescribed for the following
specified domestic transactions:

S No.        Nature of specified                        Circumstances
            domestic transaction

    1.   Supply         of   electricity,    The tariff in respect of supply of
         transmission of electricity,        electricity, transmission of electricity,
         wheeling of electricity             wheeling of electricity, as the case
         referred to in clause (i), (ii)     may be, is determined [or the
         or (iii) of rule 10THB, as the      methodology for determination of the
         case may be                         tariff is approved] by the Appropriate
                                             Commission in accordance with the
                                             provisions of the Electricity Act, 2003
                                             (36 of 2003).

    2.   Purchase of milk or milk            The price of milk or milk products is
         products referred to in             determined at a rate which is fixed on
         clause (iv) of rule 10THB.          the basis of the quality of milk,
                                             namely, fat content and Solid Not Fat
                                             (SNF) content of milk; and-
                                             (a) the said rate is irrespective of,-
                                                  (i) the quantity of milk procured;
                                                  (ii) the percentage of shares held
                                                  by the members
                                                  in the co-operative society;
                                                  (iii) the voting power held by the
                                                  members in the society; and
                                             (b) such prices are routinely declared
                                             by the cooperative society in a
                                             transparent manner and are available
                                             in public domain.".

The final Safe Harbour Rules is applicable for 5 years from AY 2013-14. To
exercise theis option of safe harbour, the taxpayer is required to file specified
form (Form No 3CEFA) with the AO on or before due date of furnishing the
return of income with required details for:
·        the relevant assessment year, in case the option is exercised only for
         that assessment year; or



                                            17
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

·      the first of the assessment years, in case the option is exercised for
       more than one assessment years.
The taxpayer can opt out of the safe harbour regime from the second year
onwards, by filing a declaration to that effect with the AO.
1.19   APA (Section 92CC of the Act)
Finance Act 2012 introduced APAs wherein the Board, with the approval of
the Central Government may enter into APAs with any person to determine
the ALP or specify the manner in which the ALP is to be determined, in
relation to an international transaction to be entered into by that person.
APAs presents a proactive measure for resolving transfer pricing disputes in
a cooperative manner. The Indian APA regulations, in gist, provide for the
following:
(a)    Unilateral / bi-lateral/ multilateral APAs - Unilateral APA is an
       arrangement between the tax payer and the Indian tax administration
       (CBDT) whilst a bilateral / multilateral APA involves not only the
       taxpayer and the Indian tax administration but also the taxpayer 's
       affiliates (with whom he transacts) and their tax administration.
(b)    APA would be applicable for existing as well as new transactions. For
       an existing transaction, the taxpayer seeking an APA needs to file its
       application before the commencement of the fiscal year for which it
       seeks to apply.
(c)    The provision to provide for a roll back mechanism was brought into
       the Act vide Finance Act (No. 2) 2014, with effect from 1 October
       2014. The Board has announced detailed rules explaining the roll
       back provisions and the procedure for giving effect to them. The roll
       back is available for 4 previous years.
(d)    There are procedures in place for renewal, amendments, withdrawals
       and revisions of APA.
1.20   Roll-back provisions
The roll back provision was brought into the Act vide Finance (No. 2) Act
2014, with effect from 1 October, 2014. The Board has announced detailed
rules explaining the roll back provisions and the procedure for giving effect to
them. Apart from that, the Board has made another key amendment, wherein
pre-filing consultation has been made optional for the taxpayer.
Roll back is available for previous four previous years, preceedingpreceding
the first previous year covered in the APA.


                                      18
                                                                   Introduction

·      Form 3CEB3CEDA for the relevant roll back years have been filed
       before due date.
·      Roll back application should cover all the roll back years (i.e., the
       years falling with the block of four years) in which the international
       transaction has taken place.
·      Roll back provisions shall not be provided, in respect of an
       international transaction, if the Income-tax Appellate Tribunal has
       passed an order disposing off an appeal relating to determination of
       ALP of the international transaction, at any time before signing of the
       APA agreement; or application of roll back has the effect of reducing
       total income or increaincreasing the total loss.
·      The manner of determining ALP in the roll back years with respect to
       any particular international transaction will be same as the manner
       agreed in the regular APA.
1.21 Use of multiple year data and the range concept:
Central Board of Direct Taxes (CBDT) on October 20, 2015 issued the final
rules to give effect to the use of `multiple year data' and `range concept'
which were introduced by Finance Act, 2014. These rules are applicable to
international transactions and specified domestic transactions that are
entered into by taxpayers on or after 1 April 2014.


Multiple year data
·      As per the notification issued by CBDT, use of multiple year data (of
       the comparable companies for the purpose of comparability analysis)
       is applicable only in cases where Resale Price Method (RPM), Cost
       Plus Method (CPM) or Transactional Net Margin Method (TNMM) has
       been selected as the Most Appropriate Method.
·      Thus, in cases where CUP, PSM or Other Method are selected as the
       Most Appropriate Method, multiple year data of comparable
       companies cannot be used.
·      For each comparable selected (under RPM, CPM or TNMM), the data
       of the current year is required to be considered. In case such data is
       not available at the time of furnishing the return of income, data
       pertaining to upto two preceding financial years may be used.
·      To illustrate, say if the current year is Year zero and the financial year
       preceding that is Year 1 and the year prior to such year is Year 2,


                                      19
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

         then it is worth noting that the rules do not envisage a situation
         wherein a comparable is selected only if it has data relating to Year 2.
·        If a comparable is selected on the basis of preceding year data (say
         Year 1 and Year 2), but is not found to be comparable for the current
         year (Year 0) for qualitative or quantitative reasons, then such
         comparable would need to be rejected from the data set.
·        When using multiple year data, data for each comparable shall be the
         weighted average of the selected years. An illustration explaining the
         computation is provided below:
                             Year       Year    Year     Total
                              0          1       2
          Operating          250        300     350      900     OP/TC for the
          Profit                                                 comparable
          Total Cost         1700       1800    1900     5400    would be 900/
                                                                 5400 = 16.7%
·        Further, the notification provides that in the event current year data
         becomes available during the course of the assessment proceedings,
         then the same shall be used by the TPO for the purpose of the
         analysis.
Application of range
·        As per the notification, the `range concept' shall be applicable when:
         (a) the MAM is either Comparable Uncontrolled Price (CUP) Method,
         RPM, CPM, or TNMM; and (b) there are at least 6 entries in the
         dataset. Where these conditions are not fulfilled, `arithmetic mean'
         shall continue to apply, as before, along with the tolerance range
         benefit (3% or 1%)
For determination of the quartiles, the margins in the data set (i.e., set of
comparable companies) are required to be arranged in ascending order and
the arm's length range would be data points lying between the 35th and 65th
percentile of the data set. The computation mechanism of range, is
explained by way of illustrations below:
Illustration 1: Where the data set comprises 7 data points (arranged in
ascending order), and the percentiles computed are not whole numbers
    Percentile    Formula                       Result   Value to be selected
    35th          Total no. of data points in    2.45    3rd value*
                  dataset*35% = [7 * 35%]


                                          20
                                                                         Introduction

     65th         Total no. of data points in      4.55     5th value*
                  dataset*65% = [7 * 65%]
     Median       Total no. of data points in      3.50     4th value*
                  datasets*50% = [7 * 0.5]
* Value referred to here is the place value in the data set as arranged in ascending
order.
Illustration 2: Where the data set comprises 20 data points (arranged in
ascending order), and the percentiles computed are whole numbers.
     Percentile   Formula                        Result     Value to be selected
     35th         Total no. of data points in        7      Mean of 7th & 8th value
                  dataset*35% = [20 * 35%]
     65th         Total no. of data points in       13      Mean of 13th & 14th value
                  dataset*65% = [20* 65%]
     Median       Total no. of data points in       10      Mean of 10th & 11th value
                  datasets*50% = [20 * 0.5]

If the transaction price falls within the range, then the same shall be deemed
to be the ALP. If the transaction price falls outside the range, the ALP shall
be taken to be the Median of the data set.
1.22 Three tier documentation structure
The three-tiered documentation structure (applicable with effect from
Financial Year 2016-17) would consist of a "master file", "local file" and
"Country-by-Country Report" (CbC Report). The master file seeks to capture
information regarding the taxpayer 's global operations and their transfer
pricing policies (form yet to be prescribed). The local file would capture
entity-specific information with reference to the related party transactions. In
the Indian context, the existing transfer pricing documentation requirements
as per Rule 10D of the Income Tax Rules, 1962 (the Rules) already
encompasses the local file requirements. The CbC Report would be
applicable for large multinational enterprises (MNEs)2 and would capture key
metrics of all entities in the group such as revenue, taxes paid, capital
employed, headcount, etc (as defined in section 286 of the Act).The specific
rules on the requirements of information to be covered in the master file and
any modifications to the local file requirements in view of the aforesaid

22
  Having annual consolidated group turnover of over Euro 750 million in the immediately
preceding financial year



                                          21
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

changes are yet to be notified.
1.23 Secondary adjustment
Secondary adjustment means an adjustment in the books of accounts of the
taxpayer and its associated enterprise to reflect that the actual allocation of
profits between the taxpayer and its associated enterprise are consistent with the
transfer price determined as a result of primary adjustment, thereby removing the
imbalance between cash account and actual profit of the taxpayer.
The taxpayer shall be required to carry out secondary adjustment where the
primary adjustment to transfer price:
    ·    has been made suo motu by the taxpayer in his return of income; or
    ·    made by the Assessing Officer has been accepted by the taxpayer; or
    ·    is determined by an advance pricing agreement entered into by the
         taxpayer under section 92CC; or
    ·    is made as per the safe harbour rules framed under section 92CB; or
    ·    is arising as a result of resolution of an assessment by way of the
         mutual agreement procedure under an agreement entered into under
         section 90 or 90A.
Where as a result of primary adjustment to the transfer price, there is an increase
in the total income or reduction in the loss, as the case may be, of the taxpayer,
the excess money which is available with its associated enterprise, if not
repatriated to India within the time* as prescribed, shall be deemed to be an
advance made by the taxpayer to such associated enterprise and the interest* on
such advance, shall be computed as the income of the taxpayer , in the manner
as prescribed*3 below.
Type of primary     Time limit      for   Applicable interest rate for delayed
adjustment          repatriation          receipts
                                          Transaction     in    Transaction     in
                                          INR                   foreign currency
Adjustment made     On or before 90       One year marginal     Six month London
by the Indian Tax   days from the date    cost    of     fund   Interbank Offered
Authority     and   of relevant order     lending rate of       rate as of 30
accepted by the                           State Bank of India   September of the


*3 Rules in relation to secondary adjustment provisions have been notified vide CBDT
Notification No. 52/2017, F.No.370142/12/2017 -TPL



                                          22
                                                                         Introduction

taxpayer                                    as of 1 April of the   relevant FY plus
                                            relevant FY plus       300 basis points
Suo-moto            On or before 90
                                            325 basis points
adjustment by the   days from the due
taxpayer            date of filing return
                    of income
Adjustment
pursuant to APA,
Safe Harbour or
MAP


Excess money means the difference between the arm's length price determined
in primary adjustment and the price at which the international transaction has
actually been undertaken.
Primary adjustment to a transfer price means the determination of transfer price
in accordance with the arm's length principle resulting in an increase in the total
income or reduction in the loss, as the case may be, of the taxpayer.
Secondary adjustment would not be applicable, if the amount of primary
adjustment made in the case of a taxpayer in any previous year does not exceed
one crore rupees and the primary adjustment is made in respect of an
assessment year commencing on or before 1 April 2016.




                                            23
                                                                Chapter 2
  Responsibility of an Enterprise and the
                             Accountant
Responsibility of an Enterprise
2.1     Section 92D provides that every person who has entered into an
international transaction or specified domestic transaction, during a previous
year, shall keep and maintain such information and documents, prescribed
by the Board, as will assist the Assessing Officer/ Transfer Pricing Officer to
compute the income arising from that transaction, having regard to the ALP.
2.1.1. Rule 10D prescribes the manner in which the information and
documents are required to be maintained (Local file). Further, rules are yet to
be prescribed for the manner in which Masterfile would be required to be
maintained.
2.1.2. Section 286 provides that every parent entity or alternate reporting
entity (designated by parent) of an international group that is resident in
India, shall for every reporting accounting year, furnish a report in the form
and manner as may be prescribed, within the due date provided in
subsection (1) of section 139. In case of a constituent entity resident in India,
the parent of which is not resident in India, such entity shall notify whether it
is the alternate reporting entity of the international group or the details of the
parent entity/ alternate reporting entity and the country of which such entities
are resident.
2.2     This responsibility of an enterprise to keep and maintain prescribed
documents arises because of its unique position of being in control and
custody of information that is necessary to verify whether the international
transaction or specified domestic transaction to which it was party was
carried out on the arm's length principle.
2.3    The obligation of an enterprise to keep and maintain records and
documents vis-a-vis the duty of revenue authorities to verify about the
compliance with the arm's length principle has been briefly stated by the
OECD in their Transfer Pricing Guidelines:
"Taxpayers should make reasonable efforts at the time the transfer pricing is
established to determine whether the transfer pricing is appropriate for tax
purposes in accordance with the arm's length principle. Tax administrations
                         Responsibility of an Enterprise and the Accountant

should have the right to obtain the documentation prepared or referred to in
this process as means of verifying compliance with the arm's length principle.
However, the extensiveness of this process should be determined in
accordance with the same prudent business management principles that
would govern the process of evaluating the business decision of a similar
level of complexity and importance. Moreover, the need for the documents
should be balanced by the costs and the administrative burdens, particularly
where this process suggests the creation of documents that would not
otherwise be prepared or referred to in the absence of tax considerations.
Documentation requirements should not impose on tax payers' costs and
burdens disproportionate to the circumstances. Taxpayers should
nonetheless recognise that adequate record-keeping practices and
production of documents facilitates examination and resolution of transfer
pricing issues that arise".
2.4    The requirement to keep and maintain such information and
documents with respect to an international transaction has, however, been
waived in the case of those persons who have entered into international
transactions the aggregate value of which, as recorded in the books of
account, does not exceed one crore rupees - Rule 10D(2).
2.5    Persons who are so exempted from the mandatory requirement of
keeping and maintaining of the prescribed information and documents shall,
nevertheless, on the basis of the material in their possession, have to
substantiate that the income on the international transactions entered into by
them has been computed in accordance with the provisions of section 92 -
proviso to Rule 10D(2).
2.6     By virtue of sub-section (2) of section 92D, the Board is empowered
to prescribe the period for which the assessee must maintain the prescribed
information and records. Pursuant thereto, the Board has stipulated that the
prescribed information and documents be kept and maintained for a period of
eight years from the end of the relevant assessment year - Rule 10D (5). For
example: For Financial Year 2014-152016-17, an Assessee has to maintain
prescribed information and documents for 8 years from the end of the
relevant assessment year (2015-162017-18), i.e. until Financial Year 2023-
242025-26.
2.7    Under section 92D (3), the Assessing Officer or the Commissioner
(Appeals) during the course of any proceeding under the Act may require a
person who has entered into an international transaction or specified
domestic transaction to furnish any information or document, which he was
expected to maintain under section 92D (1). The person shall furnish the


                                     25
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

information or document called for within thirty days from the date of receipt
of a notice issued in this regard.
2.8    Where, for any reason, the person is unable to produce the required
information or documents within the stipulated period of thirty days, the
Assessing Officer or Commissioner (Appeals) may, on an application made
by the person, extend the period by a further period or periods not
exceeding, in all, thirty days.
2.9     Under section 92E, every person who has entered into an
international transaction or specified domestic transaction during a previous
year shall obtain a report from an accountant and furnish such report on or
before the specified date in the prescribed form duly signed and verified in
the prescribed manner by such accountant and setting forth such particulars
as may be prescribed. "Specified date" shall have the same meaning as
assigned to due date in Explanation 2 below subsection (1) of section 139.
The above-mentioned Explanation reads as under:
" In case of an assessee who is required to furnish a report referred to in
section 92E, the due date means the 30th day of November of the
assessment year."

Accountant's responsibility
2.10 The term "accountant" has been defined in clause (i) of section 92F
as under:
"accountant" shall have the same meaning as in the Explanation below sub-
section (2) of section 288.
The above-mentioned Explanation reads as under:
"accountant" means a chartered accountant as defined in clause (b) of sub-
section (1) of section 2 of the Chartered Accountants Act, 1949 who holds a
valid certificate of practice under sub-section (1) of section 6 of that Act, but
does not include except for the purposes of representing the assessee under
sub-section (1) -
(a)    in case of an assessee, being a company, the person who is not
       eligible for appointment as an auditor of the said company in
       accordance with the provisions of sub-section (3) of section 141 of
       the Companies Act, 2013 (18 of 2013); or
(b)    in any other case,--




                                       26
                     Responsibility of an Enterprise and the Accountant

(i)    the assessee himself or in case of the assessee, being a firm or
       association of persons or Hindu undivided family, any partner of
       the firm, or member of the association or the family;
(ii)   in case of the assessee, being a trust or institution, any person
       referred to in clauses (a), (b), (c) and (cc) of sub-section (3) of
       section 13;
(iii) in case of any person other than persons referred to in sub-
      clauses (i) and (ii), the person who is competent to verify the
      return under section 139 in accordance with the provisions of
      section 140;
(iv) any relative of any of the persons referred to in sub-clauses (i),
     (ii) and (iii);
(v)    an officer or employee of the assessee;
(vi) an individual who is a partner, or who is in the employment, of
     an officer or employee of the assessee;
(vii) an individual who, or his relative or partner--
       (i)    is holding any security of, or interest in, the assessee:
              Provided that the relative may hold security or interest in
              the assessee of the face value not exceeding one hundred
              thousand rupees;
       (ii)   is indebted to the assessee:
              Provided that the relative may be indebted to the assessee
              for an amount not exceeding one hundred thousand
              rupees;
       (iii) has given a guarantee or provided any security in
             connection with the indebtedness of any third person to
             the assessee:
              Provided that the relative may give guarantee or provide
              any security in connection with the indebtedness of any
              third person to the assessee for an amount not exceeding
              one hundred thousand rupees;
(viii) a person who, whether directly or indirectly, has business
       relationship with the assessee of such nature as may be
       prescribed;




                                  27
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

       (ix) a person who has been convicted by a court of an offence
            involving fraud and a period of ten years has not elapsed from
            the date of such conviction."
2.10.1 Therefore, the meaning of "accountant" now applies for the definition
of an "Authorised Representative" under section 288(2). As a result, in order
to be appointed as an Authorised Representative for an assessee for any
proceedings under the Act, a Chartered Accountant must have a certificate of
practice. However, a Chartered Accountant having any other qualification
specified in section 288 may be appointed as an Authorised Representative.
2.10.2 Therefore, after this amendment, a Chartered Accountant who does
not satisfy both the following conditions cannot be appointed as an
Authorised Representative for an assessee:
·      He/she does not have a certificate of practice; and
·      He/she does not have any other specified qualification.
2.11 Though the section refers to the accounts being examined by an
accountant, which means a chartered accountant as defined above, the
examination can also be done by a firm of chartered accountants. This has
been a recognised practice under the Act. In such a case, it would be
necessary to state the name of the partner who has signed the report on
behalf of the firm. The accountant signing the report as a partner of a firm or
in his individual capacity should give his membership number below his
name.
2.12 Section 92E does not stipulate that only the statutory auditor
appointed under the Companies Act or other similar statute should perform
the examination. The examination can, therefore, be conducted either by the
statutory auditor or by any other chartered accountant in practice.
2.13 The issue of a report under section 92E, being a recurring
assignment for expressing a professional opinion, the accountant accepting
the assignment should communicate with the accountant who had done the
examination in the earlier year, as provided in the Chartered Accountants
Act. In the case of a person whose accounts of the business or profession
have been audited under any other law (i.e. a company, a co-operative
society, etc. which is required to get the accounts audited under a Statute), it
is not necessary to communicate with the statutory auditor if he had not done
the examination in the earlier year. Attention of the members is invited to the
detailed discussion in the publication of ICAI, "Code of Ethics" under clause
(8) of Part I of the First Schedule to the Chartered Accountants Act, 1949
vide Annexure V.


                                      28
                         Responsibility of an Enterprise and the Accountant

2.14 The accountant should obtain from the assessee a letter of
appointment for conducting the examination as mentioned in section 92E. It
is advisable that such an appointment letter should be signed by the person
competent to sign/verify the return of income in terms of the provisions of
section 140. The accountant should get the statement of particulars, as
required in the annexure to the report, authenticated by the assessee before
he proceeds to verify the same. The accountant is required to submit his
report to the person appointing him viz. the assessee.
2.15 The appointment of the accountant in the case of a company need
not be made at the general meeting of the members. It can be made by the
Board of Directors or even by any officer, if so authorised by the Board in this
behalf. The appointment in the case of a firm or a proprietary concern can be
made by a partner or the proprietor or a person authorised by the assessee.
It is possible for the assessee to appoint two or more chartered accountants
for carrying out the examination, in which case, the report will have to be
signed by all the chartered accountants. In case of disagreement, they can
give their reports separately. In this regard, attention is invited to SA - 299
Responsibility of Joint Auditors, wherein the principle is laid down as under:
"Normally, the joint auditors are able to arrive at an agreed report. However,
where the joint auditors are in disagreement with regard to any of the matters
to be covered by the report, each of them should express his own opinion
through a separate report. A joint auditor is not bound by the views of the
views of the majority of the joint auditors regarding matters to be covered in
the report and should express his opinion in a separate report in case of a
disagreement."
The same analogy shall apply to the report to be given under section 92E .
2.16 The Act prohibits a relative or an employee of the assessee being
appointed as an accountant under section 92E. Also, as per a decision of the
Council (reported in the Code of Ethics under clause (4) of Part I of Second
Schedule), a chartered accountant who is in employment of a concern or in
any other concern under the same management cannot be appointed as an
auditor of that concern. Therefore, an employee of an assessee or an
employee of a concern under the same management cannot examine the
accounts and records of an assessee under section 92E.
2.17 An accountant responsible for writing or the maintenance of the
books of account of the assessee should not examine such accounts. This
principle will apply to the partner of such an accountant as well as to the firm
in which he is a partner. In view of this, an accountant who is responsible for
writing or the maintenance of the books of account, his partner or the firm in

                                      29
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

which he is a partner should not accept the examination assignment under
section 92E in the case of such an assessee.
2.18 Similarly, an internal auditor of the assessee cannot conduct the
examination if he is an employee of the assessee. If the internal auditor is
working in his professional capacity (as an independent accountant not being
an employee of the assessee), he can conduct the examination. However, an
accountant or a firm of accountants appointed as tax consultants of the
assessee can conduct the examination under section 92E.
2.19 No separate guidelines have been prescribed for fees under section
92E. The Institute has recommended fees for professional services on the
basis of time devoted by the accountant and his assistants. The scale of fees
effective from 12.5.2006 recommended by the Institute for "professional
services" is given in Annexure VI. The Council has also clarified that the
scale does not include fees chargeable in respect of non-qualified assistants
and that the chartered accountants are free to negotiate the terms in respect
of such assistants with the clients.
2.20 It will be appreciated that no uniform fees can be recommended for
the reporting function exercised under section 92E of the Act. The
accountant should charge fees depending upon the responsibility involved
and taking into consideration the work involved in such examination. It is
necessary that members of the profession should also maintain reasonable
standards of professional fees.
2.21 A question may arise whether an accountant appointed under section
92E can be held responsible if he does not complete the examination and
give his report before the specified date. The answer to this question will
depend on the facts and circumstances of the case. Normally, it is the
professional duty of a chartered accountant to ensure that the examination
accepted by him is completed before the due date. If there is any
unreasonable delay on his part, he is answerable to the Institute if a
complaint is made by the client. However, if the delay in the completion of
examination is attributable to his client, the accountant cannot be held
responsible. In view of the fact that the Act does not give any discretion to
the tax authorities to extend the time limit for furnishing of the report, the
examination has to be completed within the time limit provided in the Act. It
is, therefore, necessary that a chartered accountant should not accept
assignments which he cannot complete within the specified date.
2.22 In the case of an examination, the accountant is required to express
his opinion as to whether the assessee has maintained the proper
information and documents, as prescribed, in respect of the international

                                     30
                         Responsibility of an Enterprise and the Accountant

transactions entered into by him. As regards the statement of particulars to
be annexed to the report, he is required to give his opinion as to whether the
particulars are true and correct. In giving his report the accountant will have
to use his professional skill and expertise and apply such tests as the
circumstances of the case may require, considering the contents of the
report.
2.23 Section 143 of the Companies Act, 2013 gives certain powers to the
auditors to call for the books of account, information, documents,
explanations, etc. and to have access to all books and records whether kept
at the registered office of the Company or at any other place. The accountant
is advised to obtain all the books of accounts, information, documents,
explanation etc. from the enterprise to enable him to discharge his
responsibility under the Act in a satisfactory manner. If, however, the
assessee does not produce any particular record or fails to provide any
specific information or explanation called for, the accountant will be required
to report the same and accordingly qualify his report.
2.24 The report by the accountant given under section 92E sets forth such
particulars as have been prescribed in Form 3CEB. In order that the
accountant may be in a position to explain any question which may arise
later on, it is necessary that he should keep detailed notes about the
evidence on which he has relied upon while conducting the examination and
also maintain all his working papers. Such working papers should include his
notes on the following, amongst other matters:
(a)    work done while conducting the examination and by whom;
(b)    explanations and information given to him during the course of the
       examination and by whom;
(c)    decision on the various points taken;
(d)    the judicial pronouncements relied upon by him while making the
       report;
(e)    certificates issued by the client/management letters; and
(f)    annexure to Form No.3CEB duly filled in and authenticated by the
       client.
2.25 Attention is also invited to the "SA 230 - Audit Documentation" which
provides that documentation should serve as a sufficient and appropriate
record of the basis for the accountant's report. Further, the documentation
should be prepared on a timely basis and the accountant should document
all matters which are important in providing evidence that the examination


                                      31
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

was planned and performed in accordance with the applicable legal and
regulatory requirements.
2.26 While test checks may suffice in the conduct of a statutory audit for
the expression of the accountant's opinion as to whether the accounts depict
a true and fair' view, the accountant may be required to apply reasonable
tests on the total information to be prepared by the assessee in respect of
certain items in the prescribed form. While the entity may have to prepare the
details for the entire year, the accountant may have to ensure that no items
have been omitted in the information furnished and a reasonable test check
would reveal whether or not the information furnished is correct.
2.27 The extent of check undertaken would have to be indicated by the
accountant in his working papers. The accountant is advised to design his
examination programme in such a manner, which will reveal the extent of
checking undertaken by the accountant and ensures that adequate
documentation in maintained in support of the information being certified by
him.
2.28 The accountant may rely upon the audit conducted by an internal
auditor or by an outside professional firm appointed as internal auditor, by
using his own judgement as to the degree of reliance which he wishes to
place on the work of the internal auditor relevant to the examination. The
degree of reliance would depend on the areas of work covered by the
internal auditor and relevant for purposes of the examination, particularly by
reference to working papers/ documents of the internal auditor and ensuring
that reasonable checks/tests have been applied to transactions covered by
the internal auditor, to satisfy himself about the authenticity of the ultimate
information.
2.29 It would be in the interest of the accountant to obtain and scrutinise
the programme of work and procedures adopted and the relevant working
papers and documents obtained by the internal auditor in evidence of the
work carried out by him. Further, the accountant will have the sole
responsibility for the report issued and the responsibility will not be reduced
by the accountant's use of the work of the internal auditors. Further, the
accountant shall determine:
(a)    Whether the work of the internal auditors is likely to be adequate for
       the purposes of the examination; and
(b)    If so, the planned effect of the work of the internal auditors on the
       nature, timing or extent of the external auditor 's procedures



                                      32
                         Responsibility of an Enterprise and the Accountant

Reference may be made to the Standards on Auditing: Using the work of
Internal Auditors (SA 610) ­ vide Annexure VII.
2.30 Primarily, it would be necessary for the accountant to identify and
assess the risks of material misstatement, whether due to fraud or error, at
the financial statement and assertion levels, through understanding the entity
and its environment, including the entity's internal control, thereby providing
a basis for designing and implementing responses to the assessed risks of
material misstatement. This will help him to reduce the risk of material
misstatement to an acceptably low level. Reference may be made to the
Standards on Auditing: Identifying and Assessing the Risk of Material
Misstatement Through Understanding the Entity and its Environment (SA-
315) and Analytical Procedures (SA-520).
2.31 The accountant must ensure that he receives a standard
Management Representation Letter in respect of all oral representations
explicitly or implicitly given to him. The letter should indicate and document
the continuing appropriateness of the representations made to him and
reduce the possibility of any misunderstanding concerning the matters which
are the subject of the representations. However, it may be noted that in
respect of matters that may be directly verified by the accountant, mere
obtaining of a management representation letter will not be sufficient
compliance with the Generally Accepted Auditing Standards.
2.32 If the assessee is unable to obtain relevant information in respect of
the overseas branches duly certified by the overseas accountant, the
relevant facts should be suitably disclosed and reported upon.
2.33 Paragraph 3 of Form No. 3CEB requires the accountant to state
whether the prescribed particulars are furnished in the annexure to the report
and whether in his opinion and to the best of his information and according to
the explanations given to him, they are true and correct. The accountant may
have a difference of opinion with regard to the particulars furnished by the
assessee and he has to bring these differences under various clauses in
Form No.3CEB. The accountant should make a specific reference to those
clauses in Form No. 3CEB in which he has expressed his reservations,
difference of opinion, disclaimer etc. in this paragraph.
2.34 In case the prescribed particulars are given in part or piecemeal to
the accountant or the relevant form is incomplete and the assessee does not
give the information against all or any of the clauses, the accountant should
not withhold the entire report. In such a case, he can qualify his report on
matters in respect of which information is not furnished to him. In the
absence of relevant information, the accountant would have no option but to

                                      33
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

state in his report that the relevant information has not been furnished by the
assessee.

Professional misconduct
2.35 When any question relating to professional misconduct in connection
with the examination arises, the accountant would be liable under the
Chartered Accountants Act, 1949 and the ICAI's disciplinary jurisdiction will
prevail in this regard.
2.36 Finance Act 2017 has introduced section 271J for levying penalty on
accountants for furnishing incorrect information in reports or certificates
furnished under any provisions of the Act or the rules made thereunder. The
Assessing Officer or the Commissioner (Appeals), in such cases, may direct
the accountant to pay a sum of ten thousand rupees for each such report or
certificate.




                                      34
                                                                    Chapter 3
                                   Associated Enterprises
Associated enterprises and deemed associated
enterprises
3.1     The term `associated enterprise' is defined in section 92A of the Act.
According to sub-section (1), an enterprise which participates directly or
indirectly or through one or more intermediaries, in the management or
control or capital of the other enterprise shall be regarded as an associated
enterprise. This can be understood as follows:
Situation 1 - Direct Participation:

                                      Participates in
              A                       management/                     B
                                      capital/control

Situation 2 - Participation through Intermediary


                                                  Participates in          B
             A                 I
                                                  management/
                                                  capital/control


                        Intermediary

In both the situations detailed above, B will be an associated enterprise of A.
3.2     Similarly, an enterprise in respect of which one or more persons who
participate in its management or control or capital, directly or indirectly, or
through one or more intermediaries are the same persons who participate in
a similar manner in the management or control or capital of the other
enterprise shall be regarded as an associated enterprise. This proposition
can be understood by the following diagrammatic presentation:
Guidance Note on Report under Section 92E of the Income-tax Act, 1961


                                           A




                 Participates in                   Participates in
                 management/                       management,/
                 capital/control                   capital/ control



                    C                                         D


In the above situation, C and D are associated enterprises by virtue of A
participating in the management or capital or control of both C and D.


             A                     B




        Participates in                        I
                                                                      Intermediary
        management/
        capital/control

                                       Participates in
                  C                    Management/
                                       capital/control



                                                   D


In the above example, A and B, conjointly and simultaneously, participate in
the management, capital and control of C and D. Consequently, C and D are
to be construed as associated enterprises.


                                          36
                                                       Associated Enterprises

3.3     The Finance Act, 2002 has amended sub-section (2) of section 92A
to the effect that for the purposes of sub-section (1), two enterprises shall be
deemed to be associated enterprises if, at any time during the previous year
any of the conditions mentioned in clauses (a) to (m) are satisfied. The
provisions of sub-section (2) of section 92A supplements the definition of
associated enterprise given in sub-section (1) by enlisting various situations
under which two enterprises shall be deemed to be associated enterprises.
Each of these situations specified in clauses (a) to (m) of sub-section (2) of
section 92A are discussed here below with suitable illustration, wherever
considered necessary. It may be noted that for the purposes of these
clauses, two enterprises would be associated enterprises if the conditions
stipulated therein are fulfilled at any time during the previous year. Besides,
in clauses (c) to (m) the words `directly' or `indirectly' have not been used
which indicates the intention of the legislature that indirect control is not
envisaged in these clauses. Therefore, direct relationship between two
enterprises is relevant for the purposes of clauses (c) to (m) in order to
determine whether they are associated enterprises.
3.4    One enterprise holds, directly or indirectly, shares carrying not
less than twenty-six per cent of the voting power in the other
enterprise.
                                                           [Section 92A(2)(a)]
Two enterprises shall be associated enterprises based on the shareholding
of one enterprise in the other if the investing enterprise holds shares carrying
not less than twenty-six per cent of the voting power in the other enterprise.
Holding for this purpose includes indirect holding too.
3.5    Any person or enterprise holds, directly or indirectly, shares
carrying not less than twenty-six per cent of the voting power in each of
such enterprises.
                                                          [Section 92A(2)(b)]
Under this clause, two enterprises are deemed associated enterprises, even
though one enterprise may not hold any shares in the other enterprise. This
clause comes into play when one person or enterprise simultaneously holds
shares carrying not less than twenty-six per cent voting power in each such
enterprise. For example, if AA of UK holds 26% voting power in BB of
Germany and also in CC of India, then BB and CC shall be deemed to be
associated enterprises. Even for this clause, shareholding may be direct or
indirect holding.

                                      37
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

3.6    A loan advanced by one enterprise to the other enterprise
constitutes not less than fifty-one per cent of the book value of the total
assets of the other enterprise.
                                                           [Section 92A(2)(c)]
Where the lender enterprise's loans to the borrower enterprise constitute
51% or more of the `book value' of the total assets of the borrowing
enterprise, then both the lender and the borrower enterprises would be
treated as `associated enterprises'.
3.7   One enterprise guarantees not less than ten per cent of the total
borrowings of the other enterprise.
                                                           [Section 92A(2)(d)]
Where the guarantor enterprise guarantees 10% or more of the total
borrowing of the enterprise seeking guarantee, then they would become
`associated enterprises'.
3.8    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.
                                                           [Section 92A(2)(e)]
Where one enterprise has appointed
(a)    more than one-half of the board of directors or members of the
       governing board; or
(b)    one or more executive directors or executive members of that board
       in another enterprise the two enterprises shall be deemed to be
       associated enterprises.
This clause refers to "board of directors" and "governing board". As per
section 2(10) of the Companies Act, 2013, the term "board of directors"
would refer to the board of directors of a company. The term "governing
board", correspondingly, would refer to a body or council that has the
executive authority to manage the affairs of the enterprise to which it relates.
These enterprises could be artificial juridical non-corporate bodies.
For the purposes of this clause, the appointment of even one person to the
post of executive director or executive member would make the enterprises
associated enterprises.


                                      38
                                                       Associated Enterprises

3.9    More than half of the directors or members of the governing
board, or one or more of the executive directors or executive members
of the governing board of each of the two enterprises are appointed by
the same person or persons.
                                                           [Section 92A(2)(f)]
Clause (f) is an extension of the principle laid down in clause (e). This clause
is applicable where the same person has
(a)    appointed more than one-half of the board of directors or members of
       the governing board; or
(b)    appointed one or more executive directors or executive members of
       the governing board of two or more enterprises
For example, the appointment of seven out of twelve members of board of
directors of B Ltd. and six out of ten members of the board of directors of C
Ltd. is controlled and has been made by A Ltd. By virtue of clause (f), B Ltd.
and C Ltd. are associated enterprises.
Further, if the appointment of the executive director of B Ltd. and six out of
ten members of the board of directors of C Ltd. have been made by A Ltd.,
then B Ltd. and C Ltd. shall be regarded as associated enterprises.
Since this clause states "where one enterprise has appointed", two
enterprises shall be deemed to be associated enterprises only when one of
the enterprise exercises its right and actually appoints one executive director/
member to the board or more than half of the Board of directors at any time
during the year. The mere right to appoint one executive director or executive
member by one enterprise to the Board of another enterprise, would not
make both the entities as associated enterprises.
3.10 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 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.
                                                           [Section 92A(2)(g)]



                                      39
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

Two enterprises are deemed to be associated, if one is wholly dependent on
the other for the use of know-how, patents, copyrights etc. for the
manufacture or processing of goods or articles or business carried on by
such enterprise. It should be noted that such know-how, patents, copyrights
etc. must be either owned by the other enterprise or the exclusive rights
thereto must vest with the other enterprise. If an Indian enterprise is wholly
dependent on the licence granted by a non-resident enterprise for
manufacture or processing of goods or articles or business carried out by the
Indian enterprise both enterprises shall be deemed to be associated
enterprises. The clause will equally be applicable in case where the overseas
entity is wholly dependent on the license / brand owned by the Indian entity.
3.11 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.
                                                           [Section 92A(2)(h)]
There are two situations dealt with in this clause and they are as follows:
(i)    90% or more of the raw materials and consumables required for
       manufacturing or processing of goods or articles are supplied by the
       other enterprise,
                                      or
(ii)   90% or more of the raw materials and consumables required for
       manufacturing or processing of goods or articles are supplied by
       persons specified by the other enterprise,
                                      and
       the prices and other conditions relating to supply (by the specified
       person) are influenced by the other enterprise.
Since this clause relates to manufacture or processing of goods, it is
important to note that the 90% criteria should be applied exclusively to raw
materials and consumables used for manufacturing and processing only.
3.12 The goods or articles manufactured or processed by one
enterprise, are sold to the other enterprise or to persons specified by



                                      40
                                                       Associated Enterprises

the other enterprise, and the prices and other conditions relating
thereto are influenced by such other enterprise.
                                                            [Section 92A(2)(i)]
Where the goods or articles manufactured and processed by one enterprise,
(say, enterprise A) are sold
(i)     to another enterprise (say, enterprise B)
                                       or
(ii)    sold to another enterprise (say, enterprise C) specified by enterprise
        B,
                                      and
        the prices and other conditions relating thereto are influenced by
        enterprise B, then enterprises A and B shall be associated
        enterprises.
While in clause (h), a minimum criteria of 90% has been mentioned, no such
quantification has been done in clause (i). This clause covers only sale of
goods manufactured or processed and not the sale of traded goods.
3.13 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.
                                                            [Section 92A(2)(j)]
This clause deals with a situation where one enterprise is controlled by an
individual and the other enterprise is also controlled by ­
(i)     such individuals; or
(ii)    his relative; or
(iii)   jointly by such individual and his relative then both the enterprises
        shall be deemed as associated enterprises.
The word `control' can be interpreted to mean that the individual along with
his relatives has the power to make crucial decisions regarding the
management and running of the two enterprises.
The word `relative' is defined under section 2(41) of the Act as follows:
" " relative", in relation to an individual, means the husband, wife, brother or
sister or any lineal ascendant or descendant of that individual"

                                      41
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

3.14 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.
                                                         [Section 92A(2)(k)]
This clause envisages control of the two enterprises by the same Hindu
undivided family and includes control by -
(i)     a member of the Hindu undivided family, or
(ii)    by a relative of a member of such Hindu undivided family, or
(iii)   jointly by such member and his relatives.
3.15 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, association of persons or body of individuals
                                                          [Section 92A(2)(l)]
This clause seeks to cover non-corporate bodies like partnership firms,
association of persons and body of individuals. Sub-clause (v) of clause (31)
of section 2 of the Act defines the term `person' to include these entities.
In case of partnership firm or association of persons or body of individuals,
the other enterprise must hold not less than 10% interest in such firm,
association of persons or body of individuals to be regarded as an associated
enterprise.
3.16 There exists between the two enterprises, any relationship of
mutual interest, as may be prescribed.
                                                         [Section 92A(2)(m)]
This residuary clause enables the CBDT to widen the scope by adding any
relationship of mutual interest from time to time that will make any two
enterprises as associated enterprises. However, no such relationship of
mutual interest has yet been prescribed.
3.17 If an assessee enters into a transaction where one of the parties
to the transaction is a person located in a notified jurisdictional area,
then all the parties to the transaction shall be deemed to be associated
enterprises within the meaning of section 92A
                                                          [Section 94A(2)(i)]


                                      42
                                                       Associated Enterprises

As per Section 94A(1), the Central Government may, specify a country or
territory as a notified jurisdictional area. Currently, the The Central
Government hashad specified Cyprus as a notified jurisdictional area.
However, the same has been rescinded vide notification no. 114 dated 14-
12-2016. Therefore, at present there is no such notified jurisdictional area.
This clause seeks to cover transactions with persons located in notified
jurisdictional areas where there is a lack of effective exchange of information.
The relationship with the "person" is not specified in the section. Accordingly,
a person could be a related or an unrelated person and therefore a person
could also include an AE [i.e. an enterprise covered under section 92A(1)/(2)]
3.18 It requires mention that the term `enterprise' is defined under clause
(iii) of section 92F of the Act. Accordingly, "enterprise" means a person
(including a permanent establishment of such person) who is, or has been, or
is proposed to be, engaged in any activity, relating to the production, storage,
supply, distribution, acquisition or control of articles or goods, or know-how,
patents, copyrights, trade-marks, licences, franchises or any other business
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 the provisions of services
of any kind, or in carrying out any work in pursuance of a contract, or in
investment, or providing loan or in the business of acquiring, holding,
underwriting or dealing with shares, debentures or other securities of any
other body corporate, whether such activity or business is carried on, directly
or through one or more of its units or divisions or subsidiaries, or whether
such unit or division or subsidiary is located at the same place where the
enterprises is located or at a different place or places. While the term is
defined to mean a person engaged in the past, present or in the future in any
activity relating to tangibles, intangibles, facilities or services with widest
possible modes, forms or pattern of operation, it also includes a permanent
establishment of such person. Permanent Establishment" referred to in
clause (iii)(a) of section 92F of the Act, includes a fixed place of business
through which the business of the enterprise is wholly or partly carried on.




                                      43
                                                               Chapter 4
                              International Transaction
Definition
4.1    Before proceeding to analyse the expression "international
transaction", it would be useful to take note of the definition of the term
"transaction". The term `transaction' has been defined in clause (v) of section
92F as under:-
"(v) transaction includes an arrangement, understanding or action in concert:
(i)    whether or not such arrangement, understanding or action is formal
       or in writing; or
(ii)   whether or not such arrangement, understanding or action is intended
       to be enforceable by legal proceedings".
This definition is an inclusive definition and therefore wider in its scope. As
per this definition, a transaction includes any arrangement, understanding or
action, whether formal or informal, whether oral or in writing, whether legally
enforceable or not.
4.2   Section 92B defines an international transaction in the following
manner:
"For the purposes of this section and sections 92, 92C, 92D and 92E,
"international transaction" means a transaction between two or more AEs,
either or both of whom are non-residents, 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 such enterprises - section 92B(1) ".
"A transaction entered into by an enterprise with a person other than an AE
shall, for the purposes of sub-section (1), be deemed to be an international
transaction entered into between two AEs, if there exists a prior
arrangementagreement in relation to the relevant transaction between such
                                                     International Transaction

other person and the AE; or the terms of the relevant transaction are
determined in substance between such other person and the AE where the
enterprise or the AE or both of them are non-residents irrespective of
whether such other person is a non-resident or not - section 92B(2) ".
However, depending on the facts and circumstances of each case, a
transaction should be classified as a deemed international transaction.
From the above, it can be seen that sub-section (1) of section 92B defines
the term "international transaction" in an exhaustive manner; and sub-section
(2) of section 92B deems a transaction entered into between two enterprises
in certain situations, as an international transaction between AEs.
4.3     The definition of international transaction under the transfer pricing
regulations is very wide in its scope and has been further clarified vide
Finance Act 2012 with retrospective effect from 1 April 2002 to include:
(i)    the purchase, sale, transfer, lease or use of tangible property
       including building, transportation vehicle, machinery, equipment,
       tools, plant, furniture, commodity or any other article, product or
       thing; or


                                      A Inc.



                Sale of finished                Payment for
                    goods                        purchases




                                    ABC India

(ii)   the purchase, sale, transfer, lease or use of intangible property,
       including the transfer of ownership or the provision of use of rights
       regarding land use, copyrights, patents, trademarks, licences,
       franchises, customer list, marketing channel, brand, commercial
       secret, know-how, industrial property right, exterior design or practical
       and new design or any other business or commercial rights of similar
       nature; or


                                      45
Guidance Note on Report under Section 92E of the Income-tax Act, 1961




                                         A Inc.



                 License of IPs (i.e.
                    trademarks,                     Payment of
                     technology,                      royalty
                    design, etc.)


                                        ABC India

(iii)   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; or


                                    A Inc.




               Provision of                   Payment of
                  Loan                         Interest




                                 ABC India

(iv)    provision of services, including provision of market research, market
        development, marketing management, administration, technical
        services, repairs, design, consultation, agency, scientific research,
        legal or accounting service; or




                                         46
                                                      International Transaction




                              A Inc.




            Provision of
             marketing                    Return for such
          support services                   services




                             ABC India

(v)    a transaction of business restructuring or reorganization, entered into
       by an enterprise with an AE, irrespective of the fact that it has a
       bearing on the profits, income, losses, or assets of such enterprises
       at the time of transaction or at any future date.
4.3.1 It shall also include 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 a benefit, service, facility provided or to be provided to any one or more
such enterprises.
4.3.2 It is relevant to note that a transaction of business restructuring or
reorganization has been clarified to be an international transaction
irrespective of whether it has a bearing on the profits, income, losses or
assets of the enterprise. However, the Act does not define business
restructuring. In this respect, guidance may be drawn from the OECD
guidelines, which defines business restructuring as cross border
redeployment by a multinational enterprise of functions, assets or risks. A
business restructuring may also involve cross border transfers of valuable
intangibles or alternatively involve the termination or substantial
renegotiation of existing arrangements.
4.3.3 Restructuring could be in the form of operational change (in
functional, asset and risk profile of the entity) or organizational change (in
ownership structure/management of the entity). It could include a change in
the nature or scope of transactions among controlled entities, a shift in the


                                         47
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

allocation of risks, a change in responsibility for specific functions or
commencement or termination of a relationship, etc.
4.3.4 Examples of transactions relating to business restructuring will
include transactions such as conversion of a full-fledged manufacturer into a
contract manufacturer, conversion of a full-fledged distributor into a low risk
distributor, merger of two AEs to form a single entity, demerger of a business
unit of an enterprise with an AE, etc. These are mere examples of what
could fall within the definition of the term `business restructuring', however
the Accountant should take care and evaluate the necessary facts /
conditions to assess whether a particular transaction will fall within the said
definition.
4.4     Any transaction between an enterprise and a person other than an
AE will be deemed to be an international transaction with an AE as per sub-
section (2) of section 92B under certain situations. This deeming provision is
intended to cover cases where an independent third party (irrespective of
whether it is a resident or non-resident) can be interposed by two AEs to
remain out of the transfer pricing provisions of the Act.
4.5     According to sub-section (2) of section 92B, a transaction between an
enterprise and an unrelated person shall be deemed to be a transaction
between AEs if in relation to that transaction -
(i)    there exists a prior agreement between such other person and the
       AE; or
(ii)   the terms of the relevant transaction are determined in substance
       between such unrelated person and the AE.
4.6     For example, enterprise X of India and enterprise Y of Australia are
AEs. Enterprise Z of Singapore is not an AE of enterprise X. Enterprise Y
and enterprise Z enter into an agreement for determining the terms of
transactions between enterprise X and enterprise Z. The transaction as may
be entered between enterprise X and enterprise Z which is governed by such
an agreement existing between Y and Z shall be deemed to be a transaction
between two AEs. In this example the transaction could still be a deemed
international transaction if Enterprise Z was an Indian resident.
4.7     Finance Act (No.2) 2014 has amended the said section w.e.f 1-4-
2015 to provide that even where the unrelated third party is located in India,
the transaction between the Indian entity and the unrelated third party will be



                                      48
                                                      International Transaction

deemed as an international transaction between the Indian entity and its AE
located overseas.
The amended provisions would certainly cover within its ambit a three party
scenario under the provisions of section 92B(2). However, a four party
situation would need a detailed analysis / evaluation by the Accountant. The
same is explained in the form of example below:

                                                           XYZ Plc. (AE of
        ABC Plc. (AE)                                      Unrelated Party)



Outside India


India
           ABC Ltd.            Local Agreement                 XYZ Ltd.
          (Assessee)                                       (Unrelated Party)


In the said case, ABC Plc. which is based outside India enters into an agreement
with XYZ Plc. (an unrelated party) to procure (raw material) from XYZ Plc and all
its subsidiaries on a global basis.
Pursuant to the said agreement, ABC Ltd. which is a subsidiary of ABC Plc.
procures raw material from XYZ Ltd which is a subsidiary of XYZ Plc.
In light of the facts provided above, whether the arrangement between ABC Ltd.
and XYZ Ltd. will be deemed to be an international transaction under Section
92B(2) of the Act for ABC Ltd.? Such cases should be analysed in detail by the
accountant (having regard to the underlying facts and circumstances) before
reaching to a conclusion.

Impact of Amendment
·       The tax authorities may evaluate whether the profits earned in India
        is lower because of the influence of a non-resident AE on that
        transaction.

·       As per the amendment, domestic transactions which are influenced
        by an AE would also be covered within the scope of TP provisions




                                       49
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

·      Care should be taken to properly report and disclose such
       transactions to avoid levy of penalty under Section 271AA.

·      Amendment may not cover transaction between two resident parties
       in India who are AEs. (Meaning of an AE and the scenarios where 2
       persons can be regarded as AEs has been defined under section
       92A(1) and 92A(2), respectively)

Example of Deemed International Transaction: Case 1

    Foreign Co



                 Understanding for transfer
                 of business unit of Indian
                 Co 1



                                         Outside India


                                            India


     India Co 1                              India Co 2
    (AE of FCo)                             (AE of FCo)




                    Business unit of
                         ICo 1

Foreign Co has two subsidiaries in India (I Co 1 and I Co 2). I Co 1 proposed
to transfer one of its business undertakings to I Co 2. There is an
understanding that I Co 1 has with F Co regarding transfer of this business
as well as the terms and conditions of transfer .



                                       50
                                                       International Transaction

Since I Co 1 and I Co 2 are AEs, provisions of section 92B(2) should not
apply to the transaction of sale of business unit.
However, sale of a business undertaking can involve termination/
renegotiation of an existing contract, which can be based on an
understanding between I Co1 and F Co. In such case, an international
transaction of `business restructuring' can exist between I Co 1 and F Co.

Case 2:

   Foreign Co




   Unrelated
    Vendor


                                                     Outside India

                                                     India


     India Co                                Unrelated
   (AE of FCo)                                Vendor

Foreign Co has a global procurement organization that identifies, appoints,
and negotiates with global vendors to supply to Foreign Co's affiliates
(including India Co) at terms agreed by Foreign Co and the vendors.

Such transaction would be covered under the amended provision




                                       51
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

Case 3:

                          Foreign Co




         Terms/ Conditions
         determined by F Co

                                              Outside India

                                                  India



         India Co                                   Contract
       (AE of FCo)                                Manufacturer

Indian Co enters into an arrangement with a third party contract manufacturer
for manufacture & purchase of goods.
The terms are determined `in substance by Foreign Co.
Such transaction would be covered under the amended provision

Tangible and intangible property
4.7     Tangible property has an existence in physical form. Any property
other than tangible is intangible property. OECD guidelines include right to
use industrial assets such as patents, trademarks, names, designs or models
as intangible properties. It also includes literary and artistic property. OECD
guidelines focus on "business rights" associated with commercial activities
including marketing activities.
4.8     The expression "intangible property" for purposes of the Indian
transfer pricing regulations has been clarified to include-
(i)       marketing related intangibles assets, such as, trademarks, trade
          names, brand names, logos; or
(ii)      technology related intangibles assets, such as, process patents,
          patent applications, technical documentation such as laboratory
          notebooks, technical know-how; or

                                       52
                                                     International Transaction

(iii)    artistic related intangible assets, such as, literary works and
         copyrights, musical compositions, copyrights, maps, engravings ; or
(iv)     data processing related intangible assets, such as proprietary
         computer software, software copyrights, automated databases, and
         integrated circuit masks and masters; or
(v)      engineering related intangible assets, such as industrial design,
         product patents, trade secrets, engineering drawing and schema-tics,
         blueprints, proprietary documentation; or
(vi)     customer related intangible assets, such as, customer lists, customer
         contracts, customer relationship, open purchase orders; or
(vii)    contract related intangible assets, such as, favourable supplier,
         contracts, licence agreements, franchise agreements, non-compete
         agreements; or
(viii)   human capital related intangible assets, such as, trained and
         organised workforce, employment agreements, union contracts; or
(ix)     location related intangible assets, such as leasehold interest, mineral
         exploration rights, easements, air rights, water rights; or
(x)      goodwill related intangible assets, such as, institutional goodwill,
         professional practice goodwill, personal goodwill of professional,
         celebrity goodwill, general business going concern value; or
(xi)     methods, programmes, systems, procedures, campaigns, surveys,
         studies, forecasts, estimates, customer lists, or technical data; or
(xii)    any other similar item that derives its value from its intellectual
         content rather than its physical attributes.
Given the wide scope of the phrase `international transaction' and more
particularly as regards `intangible property' the accountant will need to
exercise due diligence that all relevant transactions are considered and
included in the report, whether these are included in the books of accounts or
records of the assessee or not. The accountant should also review the record
of any pending or past transfer pricing assessments or appeals of the
assessee to identify any transactions not otherwise apparent from the books
of accounts or records of the assessee. Where the accountant is unable to
verify all such transactions due to any reason, and/ or relies upon
explanations/ representations made to it by the assessee, and/ or there is a
difference of opinion between the accountant and the assessee, such aspect

                                       53
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

should be included in the accountant's report as a note or qualification, as
appropriate.

Services, finances and costs etc.
4.9     "Provision of services" refers to trade related services like intellectual
property rights and trade related investments. According to the OECD
guidelines, there are two main issues while analysing intra-group services:
(i)    whether an intra-group service that should be charged for has been
       provided; and
(ii)   what the charge should be in accordance with the arm's length
       principle.
The basis to decide whether a service has been provided is set out in the
guidelines as `whether an independent enterprise in comparable
circumstances would have been willing to pay for the activity if performed for
it by an independent enterprise or would have performed the activity in-house
for itself. If the activity is not one for which the independent enterprise would
have been willing to pay or perform for itself, the activity ordinarily should not
be considered as an intra-group service under the arm's length principle'.
Services benefiting a group of enterprises as a whole should be allocated
amongst the group in a way that matches the benefit received.
4.10 The AEs often enter into transactions of capital financing including
borrowing, lending, guarantee arrangements, etc. The pricing of these
arrangements will have a bearing on the profits or losses of the AEs and
hence are included as part of the definition of `international transaction'.
These transactions of 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 are
expressly covered as international transactions vide Finance Act 2012. The
accountant will need to carefully identify and report such transactions and
particularly equity and preference capital, debentures, guarantees provided
or received, etc. Advance payments received or made and debts arising
during the course of business shall need to be carefully considered and
reported by the accountant however ensuring that there is no duplication or
overlap with reporting of the principal transactions to which such advances or
debts relate to, unless the accountant identifies factors which cause such
advances or debts as separate transactions.


                                       54
                                                    International Transaction

4.11 Agreement or arrangement represents understanding, and not a
transaction as ordinarily understood as being some business or dealing,
which is carried on or transacted between two or more persons. It is
reciprocal to contribute to the cost or incur expenditure for the mutual
advantage or to share according to the agreement or the arrangement. Such
agreement or arrangement is not in the nature of conveying any property or
provision of services or lending or borrowing and is known as `cost
contribution arrangement'.
4.12 The cost contribution arrangements, as aforesaid, are arrangements
between business enterprises to share the costs and risks of developing,
producing, or obtaining assets, services or rights. Its conditions should be in
conformity with arm's length principle and therefore, a participant's
contributions must be consistent with what an independent enterprise would
have agreed to contribute under comparable circumstances given the
benefits it reasonably expects to derive from the arrangement.

Cross-border transactions
4.13 For a transaction to be an international transaction, it should satisfy
the following two conditions cumulatively:
(a)    it must be a transaction between two AEs; and
(b)    at least one of the two enterprises must be a non-resident.
4.14 A transaction is considered to be a cross-border transaction if it
originates in one counrtry and gets concluded in another country. A cross-
border transaction may or may not be an international transaction within the
meaning of Chapter X of the Act. Similarly, a transaction which is not a
cross-border transaction may still be an international transaction for the
purpose of the said chapter if it falls within the ambit of the definition of
"international transaction".
4.15 For example, it may be assumed that there are two US companies
which are AEs. If the Indian subsidiary of one such US (holding) company
enters into a transaction with the Indian branch or the permanent
establishment in India of the other US company, this transaction, even
through it has originated, executed and concluded within India, shall be an
international transaction as it is between two AEs and one of the party is a
non-resident.
4.16 In alternative, assume that there is an Indian company which is the
holding company of two Indian (subsidiary) companies. The two Indian

                                      55
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

companies are AEs since they are subsidiaries of a common holding
company. If one such Indian subsidiary company enters into a transaction
with the foreign branch of the other Indian subsidiary company, such
transaction shall not be regarded as an international transaction. In this case,
even though the transaction is between two AEs, both the parties to the
transaction are residents. For a transaction to be regarded an international
transaction, either or both the parties must be non-residents. An important
aspect to be noted here is that even though the above mentioned transaction
is not an international transaction but it would be covered under domestic
transfer pricing as per the amendements made vide Finance Act 2012 and
the ALP would have to be determined having regard to transfer pricing
provisions.
4.17 Even where a transaction is between two non-resident AEs, the
provisions of chapter X of the Act shall apply so long as the income arising
therefrom is assessable within the perview of the Act. It is possible that an
international transaction between two AEs, both of whom are non-residents,
may not attract the provisions of chapter X of the Act if the income from such
transction is not taxable in India and falls outside the scope of total income
assessable under the Act.




                                      56
                                                         Chapter 4A
              Specified Domestic Transactions
4A.1 Transfer pricing regulations have been extended vide Finance Act
2012 to include transactions entered into with domestic related parties or by
an undertaking with other undertakings of the same entity for the purposes of
section 40A (now omitted), Chapter VI-A and section 10AA. Domestic
transfer pricing provisions are applicable from Assessment Year 2013-14
onwards.
4A.2 All of the compliance requirements relating to transfer pricing
documentation, accountant's report, etc shall equally apply to specified
domestic transactions as they do for international transactions amongst
associated enterprises.

Definition
4A.3 The definition of section 92BA which defines Specified Domestic
Transaction (SDT) has been amended vide Finance act, 2017 to omit
transacations in the nature of expenditure for which payment has been
made or would be made to persons specified in section 40A(2)(b). The
said amendment is applicable for assessment year 2017-18 i.e. previous
year 2016-17.
Section 92BA defines Specified Domestic Transaction (SDT) which is
covered by TP regulations as under:
"For the purposes of this section and sections 92, 92C, 92D and 92E,
"specified domestic transaction" in case of an assessee means any of the
following transactions, not being an international transaction, namely:--
¾      any expenditure in respect of which payment has been made or is to
       be made to a person referred to in clause (b) of sub-section (2) of
       section 40A;
¾      any transaction referred to in section 80A;
¾      any transfer of goods or services referred to in sub-section (8) of
       section 80-IA;
¾      any business transacted between the assessee and other person as
       referred to in sub-section (10) of section 80-IA;
¾      any transaction, referred to in any other section under Chapter VI-A
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

       or section 10AA, to which provisions of sub-section (8) or sub-section
       (10) of section 80-IA are applicable; or
¾      any other transaction as may be prescribed,
and where the aggregate of such transactions entered into by the assessee
in the previous year exceeds a sum of Rupees Five crores. This threshold
has been increased to Rupees Twenty Crores from 1 April 2015 onwards.
The definition of section 92BA has been amended vide Finance act,
2017 to omit transacations in the nature of expenditure for which
payment has been made or would be made to persons specified in
section 40A(2)(b). The said amedment is applicable for assessment year
2017-18 i.e. previous year 2016-17.

Threshold Limit
4A.4 The above referred transactions will be regarded as SDT only if the
aggregate value of all the above specified transactions exceeds the threshold
limit of ` 5 crore (Rupees 20 Crores from 1 April 2015 onwards). If the
threshold limit is crossed, the taxpayer will be required to comply with TP
requirements with reference to all the transactions regardless of the fact that
that the value of transactions under one of the limbs may be very small or
nominal. Thus, there is no internal threshold for each limb of the definition.
4A.5 The threshold limit for SDT can be computed either on net basis (i.e.
without including indirect tax levies like service tax, VAT, etc.) if the
assessee is availing credit of those indirect taxes or on gross basis if the
assessee is not availing credit, depending upon the method of accounting
regularly followed. A useful reference may be made to the paragraph relating
to Sales, Turnover, Gross Receipts under Guidance Note on Tax Audit u/s.
44AB issued by the Institute for the purpose of determining the threshold
limit.
Expenditure in respect of payments made to persons referred to in
section 40A(2)(b)
4A.6 Section 92BA(i) refers to `any expenditure in respect of which
payment has been made or is to be made to a person referred to in clause
(b) of sub-section (2) of section 40A;'
Section 40A(2)(a) lays down
`Where the assessee incurs any expenditure in respect of which payment has
been or is to be made to any person referred to in clause (b) of this sub-
section, and the Assessing Officer is of opinion that such expenditure is
excessive or unreasonable having regard to the fair market value of the

                                      58
                                            Specified Domestic Transactions

goods, services or facilities for which the payment is made or the legitimate
needs of the business or profession of the assessee or the benefit derived by
or accruing to him therefrom, so much of the expenditure as is so considered
by him to be excessive or unreasonable shall not be allowed as a deduction.'
The following proviso has been inserted in sub-section (2)(a) of section
40A by the Finance Act, 2012, w.e.f. 1-4-2013 :
`Provided that no disallowance, on account of any expenditure being
excessive or unreasonable having regard to the fair market value, shall be
made in respect of a specified domestic transaction referred to in section
92BA, if such transaction is at arm's length price as defined in clause (ii) of
section 92F.'
4A.7 The transactions included in the ambit of this section would
include expenditure transactions like ( illustrative only):
·      Expenditure on buying goods
·      Expenditure on procurement of services
·      Expenditure on interest payments
·      Expenditure on salary, training services, marketing expenses
·       Expenditure on purchase of tangible and intangible property
(provided the same is eligible for deduction while computing the taxable
profits of the entity)
·      Director 's remuneration, commission, sitting fees
·      Group charges
·      Reimbursement expenditure
·      Guarantee fee expenditure
4A.8 This provision operates only on the expenditure side and would not
have any impact in the hands of the recipients of such payments. Thus only
the persons/entities incurring such expenditure would be subject to SDT
under this provision and would be required to comply with the relevant
transfer pricing compliances.
4A.9 The persons/entities receiving such income will not be subject to SDT
under this provision and would not be required to comply with the relevant
transfer pricing compliances.
4A.10 These provisions are applicable to expenditures claimed as deduction
under `income from other sources' head on account of specific direction in


                                      59
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

section 58(2) which states that provisions of section 40A are also applicable
for computation of taxable income under "income from other sources".
Section 58 (2)
`" The provisions of section 40A shall, so far as may be, apply in computing
the income chargeable under the head "Income from other sources" as they
apply in computing the income chargeable under the head "Profits and gains
of business or profession'
4A.11 These provisions are applicable to expenditures which are in capital
in nature and fully claimed as deduction under other provisions (eg. Sec
35(2AB), 35 or 35AD) since any expenditure is covered under the scope of
sec 40A (2)(b). However, these provisions are not applicable to capital
expenditures which are capitalized in the books of accounts and not claimed
as deduction in the profit & loss account.
4A.12 Sections 40A(2)(b) lays down the list of persons who would be
covered under this section
Sections 40A(2)(b) reads as under:
The persons referred to in clause (a) are the following, namely:--
(i)     where the assessee is an individual - any relative of the assessee;
(ii)    where the assessee is a company, firm, association of persons or
        Hindu un-divided family - any director of the company, partner of the
        firm, or member of the association or family, or any relative of such
        director, partner or member;
(iii)   any individual who has a substantial interest in the business or
        profession of the assessee, or any relative of such individual;
(iv)    a company, firm, association of persons or Hindu undivided family
        having a substantial interest in the business or profession of the
        assessee or any director, partner or member of such company, firm,
        association or family, or any relative of such director, partner or
        member [or any other company carrying on business or profession in
        which the first mentioned company has substantial interest];
(v)     a company, firm, association of persons or Hindu undivided family of
        which a director, partner or member, as the case may be, has a
        substantial interest in the business or profession of the assessee; or
        any director, partner or member of such company, firm, association or
        family or any relative of such director, partner or member;


                                      60
                                            Specified Domestic Transactions

(vi)   any person who carries on a business or profession,--
       A.      where the assessee being an individual, or any relative of
               such assessee, has a substantial interest in the business or
               profession of that person; or
       B.      where the assessee being a company, firm, association of
               persons or Hindu undivided family, or any director of such
               company, partner of such firm or member of the association or
               family, or any relative of such director, partner or member,
               has a substantial interest in the business or profession of that
               person.
       Explanation.--For the purposes of this sub-section, a person shall
       be deemed to have a substantial interest in a business or profession,
       if,--
       a)      in a case where the business or profession is carried on by a
               company, such person is, at any time during the previous
               year, the beneficial owner of shares (not being shares entitled
               to a fixed rate of dividend whether with or without a right to
               participate in profits) carrying not less than twenty per cent of
               the voting power; and
       b)      in any other case, such person is, at any time during the
               previous year, beneficially entitled to not less than twenty per
               cent of the profits of such business or profession.
4A.13 Further, the list of specified persons as per section 40A(2)(b) has
also been amended by Finance Act 2012 to cover transactions amongst
persons/companies wherein another person/company has substantial interest
in both such transacting persons/companies.
4A.14 The threshold for substantial interest to qualify as `specified persons'
(relevant for domestic transfer pricing) is 20% or more, as compared to the
threshold of 26% of more applicable for `associated enterprises' (relevant for
international transfer pricing). For example, where an Indian company
purchases goods from a US company in which it has a 23% equity stake
(substantial interest), such an expenditure transaction will not qualify as an
international transaction amongst associated enterprises, but will qualify as a
specified domestic transaction and thus subjected to arms length price
requirements, transfer pricing documentation, accountant's report, etc.
4A.15 Given below is an illustrative (only) chart of specified persons as per


                                      61
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

section 40A(2)(b) in case of a corporate taxpayer:
                                  Rela         Rel
                    Relati                               Relativ
                     ve             All

                                                         Directo
                                    All

                     Direct       Indivi                             >=
                                                         Compa
                       or                                            20
  >=        >=                                                       %
                                >=2                >=2
  20        20
                                0%                 0%
  Com
  %         %Com                Corporate Taxpayer                    Comp


                                              >=2
                                              0%
                                           Compa

4A.16 As in the case of section 92A(2)(a) and (b) (which defines the term
`associated enterprise' for the purposes of international transactions) the
phrase "directly or indirectly" is not used in Section 40A(2)(b). However, in
this regard, reference should be made to the Central Board of Direct Taxes'
Circular number 6-P dated 6 July 1968 explaining the then newly inserted
provisions in section 40A(2). This circular sets out the categories of the
persons, payments to whom fall within the purview of section 40A(2). It
mentions that such persons would include inter alia ­
"(c) persons in whose business or profession the taxpayer has a substantial
interest directly or indirectly".
However, Explanation to Section 40A(2) deems a person to have substantial
interest if such person is `beneficial owner ' of shares carrying not less than
twenty per cent of voting power. The expression "beneficial owner " needs to
be construed in contrast to "legal owner " and not in the context of
determining indirect ownership of shares. Hence, the emphasis is on
covering the real owner of the shares and not the nominal owner. This
proposition is also supported by legal jurisprudence which states that in a
multi-tier structure, a parent cannot be regarded as the beneficial owner of
shares in a downstream subsidiary merely because it owns the shares of the
intermediate subsidiary companies. It is important to respect the fact that the

                                      62
                                             Specified Domestic Transactions

entities are separate legal entities.
Consequently, in a situation where A Ltd. holds 50% in B Ltd. and B Ltd.
holds 50% in C Ltd., under ordinary circumstances, A Ltd. cannot be
regarded as having beneficial interest in C Ltd. In other words, for purposes
of Section 40A(2)(b), it may be appropriate to consider only direct
shareholding and not derivative or indirect shareholding.
4A.17 The coverage of section 40A(2)(b) is very wide and covers persons
related to the assessee under several relationships. Thus the assessee and
the accountant should ensure that all relevant expenditure transactions with
all specified persons as mentioned in section 40A(2)(b) should be carefully
identified and included in transfer pricing documentation and accountant's
report. With regard to ensuring completeness of such information, the
accountant should obtain a written representation from the assessee
detailing the list of persons specified in section 40A(2)(b0 and expenditure
transactions with them.
4A.184A.6        Transactions covered under section 80A, 80-IA and 10AA
Section 92BA further extends transfer pricing provisions to:
(i)     any transaction referred to in section 80A;
(ii)    any transfer of goods or services referred to in sub-section (8) of
        section 80-IA;
(iii)   any business transacted between the assessee and other person as
        referred to in sub-section (10) of section 80-IA;
(iv)    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
4A.197 Transactions covered under section 80A
The second limb of section 92BA refers to any transaction referred to in
section 80A.
Section 80A applies to deductions to be made in computing total income
under Chapter VI-A. Though the reference in section 92BA is to section 80A
in general, on a closer examination, it becomes clear that the reference is
merely to sub-section (6) of section 80A and not to any other sub-section
since other sub-section of section 80A merely regulates the quantum of
deduction and does not involve fair pricing of any transaction. This is also
supported by corresponding amendment made to section 80A(6) by Finance
Act 2012 to amend the meaning of expression `market value' referred to in
that sub-section and to provide that in case of specified domestic

                                        63
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

transactions, the market value shall be computed at arm's length price.
4A.208 Section 80A (6) of the Act provides that
"Notwithstanding anything to the contrary contained in section 10A or section
10AA or section 10B or section 10BA or in any provisions of this Chapter
under the heading "C-- Deductions in respect of certain incomes", where any
goods or services held for the purposes of the undertaking or unit or
enterprise or eligible business are transferred to any other business carried
on by the assessee or where any goods or services held for the purposes of
any other business carried on by the assessee are transferred to the
undertaking or unit or enterprise or eligible business and, the consideration,
if any, for such transfer as recorded in the accounts of the undertaking or unit
or enterprise or eligible business does not correspond to the market value of
such goods or services as on the date of the transfer, then, for the purposes
of any deduction under this Chapter, the profits and gains of such
undertaking or unit or enterprise or eligible business shall be computed as if
the transfer, in either case, had been made at the market value of such
goods or services as on that date.
Explanation -- For the purposes of this sub-section, the expression "market
value",--
(i)     in relation to any goods or services sold or supplied, means the price
        that such goods or services would fetch if these were sold by the
        undertaking or unit or enterprise or eligible business in the open
        market, subject to statutory or regulatory restrictions, if any;
(ii)    in relation to any goods or services acquired, means the price that
        such goods or services would cost if these were acquired by the
        undertaking or unit or enterprise or eligible business from the open
        market, subject to statutory or regulatory restrictions, if any;
(iii)   in relation to any goods or services sold, supplied or acquired
        means the arm 's length price as defined in clause (ii) of section
        92F of such goods or services, if it is a specified domestic
        transaction referred to in section 92BA "
4A.219 This provision requires that the inter unit transfer of goods or services
between eligible and other units of the same taxpayer should be recognized
at market value of such goods or services on the date of transfer for the
purpose of computing deduction admissible to the taxpayer under specified
sections of Chapter VI-A. The provision covers income as well as
expenditure of the eligible unit. Further, if threshold of ` 520 crore is not

                                      64
                                            Specified Domestic Transactions

crossed (Rupees 20 crores from 1 April 2015), the same will continue to be
governed by un-amended provisions of section 80A(6) of the Act and FMV
will be computed on general principles
4A.10 The provisions currently in force which grant profit linked tax holiday
deductions and which are regulated by section 80A(6) and, consequently,
subject to Domestic transfer pricing are as follows:-
·      80-IA ­ Infrastructure development, etc
·      80-IAB ­ SEZ development
·      80-IAC ­ Startup business
·      80-IB ­ Industrial undertakings
·      80-IBA ­ Development and building house projects
·      80-IC ­ Industrial undertakings or enterprises in special category
       states
·      80-ID ­ Hotels and convention centres in specified area
·      80-IE ­ Undertakings in North-Eastern states
·      80JJA ­ Collection and processing of bio-degradable waste
·      80JJAA ­ Employment of new workmen
·      80LA ­ Offshore Banking units and International Financial Services
       Centre
·      80P ­ Co-operative societies
4A.2211 Transfers referred to in section 80-IA(8)
The thirdsecond limb of sectionSection 92BA refers to any transfer of goods
or services referred to in sub-section (8) of section 80-IA. Section 80-IA (8)
covers inter-unit transfer of goods and services.
Section 80-IA(8) reads as under:
" Where any goods or services held for the purposes of the eligible business
are transferred to any other business carried on by the assessee, or where
any goods or services held for the purposes of any other business carried on
by the assessee are transferred to the eligible business and, in either case,
the consideration, if any, for such transfer as recorded in the accounts of the
eligible business does not correspond to the market value of such goods or
services as on the date of the transfer, then, for the purposes of the
deduction under this section, the profits and gains of such eligible business

                                      65
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

shall be computed as if the transfer, in either case, had been made at the
market value of such goods or services as on that date
Provided that where, in the opinion of the Assessing Officer, the computation
of the profits and gains of the eligible business in the manner hereinbefore
specified presents exceptional difficulties, the Assessing Officer may
compute such profits and gains on such reasonable basis as he may deem
fit.
Explanation.--For the purposes of this sub-section, "market value", in
relation to any goods or services, means--
(i)    the price that such goods or services would ordinarily fetch in the
       open market; or
(ii)   the arm's length price as defined in clause (ii) of section 92F,
       where the transfer of such goods or services is a specified
       domestic transaction referred to in section 92BA.
4A.2312 The above provision entitles the assessing officer to compute
profits and gains of eligible business based on market value of goods and
services transferred between an eligible and a non-eligible business only if
the consideration for such transfer (if any) as recorded in the books of
accounts of the eligible business does not correspond to the market value of
the goods or services. By virtue of the amendment made to the above
explanation vide Finance Act 2012, on lines of extension of Explanation to
section 80A(6) defining market value, the Explanation under this provision
has also been expanded to provide that the market value shall be computed
at arm's length price if the inter unit transfer constitutes specified domestic
transaction.
4A.2413 Transfers referred to in section 80-IA(10)
The fourththird limb of section 92BA refers to business transacted between
the assessee and any other person as referred to in sub-section (10) of
section 80-IA.
4A.2514 Section 80-IA(10) reads as under:
" Where it appears to the Assessing Officer that, owing to the close
connection between the assessee carrying on the eligible business to which
this section applies and any other person, or for any other reason, the course
of business between them is so arranged that the business transacted
between them produces to the assessee more than the ordinary profits which
might be expected to arise in such eligible business, the Assessing Officer

                                      66
                                            Specified Domestic Transactions

shall, in computing the profits and gains of such eligible business for the
purposes of the deduction under this section, take the amount of profits as
may be reasonably deemed to have been derived therefrom."
" Provided that in case the aforesaid arrangement involves a specified
domestic transaction referred to in section 92BA, the amount of profits
from such transaction shall be determined having regard to arm 's
length price as defined in clause (ii) of section 92F."
4A.2615 Section 80-IA (10) applies to transactions between the assessee
and any other person which results in excessive profits in the hands of the
assessee:
(a)    either owing to close connection with other person; or
(b)    for any other reason.
The dealings between taxpayer and other person get covered by section 80-
IA(10) provided the course of business between them is so arranged that the
transaction produces more than ordinary profits in the eligible business.
4A.2716 Transactions in other provisions to which section 80-
IA(8)/(10) apply
Specified domestic transactions as defined in section 92BA also refer to any
transaction, referred to in any other section under Chapter VI-A or section
10AA, to which provisions of section 80-IA(8) and section 80-IA(10) are
applicable.
The following profit linked incentive provisions under Chapter VI-A are also
governed by provisions of section 80-IA(8) and section 80-IA(10) and hence
will be subject to Domestic TP:-
·      80-IAB- Deductions in respect of profits and gains by an undertaking
       or enterprise engaged in development of Special Economic Zone.
·      80-IAC- Special provisions in respect of specified business
·      80-IB- Deduction in respect of profits and gains from certain industrial
       undertakings other than infrastructure development undertakings
·      80-IBA- Deduction in respect of profits and gains from housing
       projects
·      80-IC- Special provisions in respect of certain undertakings or
       enterprises in certain special category States
·      80-ID- Deduction in respect of profits and gains from business of


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

       hotels and convention centres in specified area
·      80-IE- Special provisions in respect of certain undertakings in North-
       Eastern States




                                     68
                                                               Chapter 5
                                          Arm's Length Price
Meaning and determination
5.1     In commercial parlance, an arm's length price is the price at which
independent enterprises deal with each other, where the conditions of their
commercial and financial relations ordinarily are determined by market
forces. Section 92F(ii) of the Act, however, defines the 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.
5.2   The steps involved in the determination of the arm's length price can
be summarised as follows:
(i)     identification of the "international transaction/(s) " or specified
        domestic transaction/(s);
(ii)    deciding if the international transactions or specified domestic
        transactions are closely linked ­ Rule 10A(d);
(iii)   identification of the functions performed, assets employed and risks
        assumed by the taxpayer and the associated enterprise being parties
        to the transaction/(s);
(iv)    deciding the characterisation of the entities who are party to the
        transaction based on the analysis of functions performed, assets
        employed and risks assumed;
(v)     identification / selection of the tested party (for application of resale
        price method, cost plus method and transactional net margin
        method);
(vi)    identification of the most appropriate method which will inter-alia
        include
        a) identification of an "uncontrolled transaction" - Rule 10A (a);
            ¾     Review of existing internal uncontrolled transaction, if any;
            ¾     Determination of available sources of information on
                  external comparables where such external comparables are
                  needed taking into account their relative reliability.
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

             Identification and comparison of specific characteristics
             embodied in international transactions or specified domestic
             transactions and uncontrolled transactions - Rule 10B (2);
         b) finding out whether uncontrolled transactions and international
            transactions or specified domestic transactions can be compared
            by reconciling/resolving differences, if any - Rule 10B (3);
(vii)    ascertaining the most appropriate method by applying the tests laid
         down - Rule 10C;
(viii)   determination of the arm's length price by applying the method
         chosen - Rule 10B (1).
Please note that step (vi) is a repetitive exercise (in respect of each of the
prescribed methods) until a satisfactory conclusion is reached thereby
leading to selection of the most appropriate method out of the methods
prescribed under Section 92C(1)the Act.
Example ­ ABC India is engaged in distribution of XYZ brand printers in the
Indian market, which are manufactured by ABC Inc. (a US based group
entity) Apart from the distribution of printers, ABC India also imports printer
cartridges and other spares from its group entity ABC Inc, which are used in
the after sales business. The international transactions in this case are
import of printers and import of cartridges & spares.
The pictorial presentation of the typical steps involved in determination of the
arm's length price in the above example could be as follows:
   Identify international transactions
   1. Import of printers;
   2. Import of cartridges and spare parts; and
   3. Reimbursement of expenses

   Decide if the transactions are closely linked
   In the present case, if ABC India follows a business strategy where it
   targets to sell the printers to penetrate the market and thereafter earn
   recurring business of sale of cartridges, then the transaction of import of
   printers and import of cartridges and spares could be said to be closely
   linked, and may be evaluated using aggregation approach.




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                                                           Arm's Length Price

5.3    Section 92C(1) stipulates that the arm's length price is to be
determined by adopting any one of the following methods, being the most
appropriate method:
·       Comparable Uncontrolled Price method (CUP method)
·       Resale Price Method (RPM)
·       Cost Plus Method (CPM)
·       Profit Split Method (PSM)
·       Transactional Net Margin Method (TNMM)
·       Other Method (OM) as prescribed by the Board and provided in Rule
        10AB1 .
5.4     Rule 10C(1) lays down the general guidelines in the selection of the
most appropriate method. The Rule states that the method to be selected
shall be the one best suited to the facts and circumstances of each
international transaction or specified domestic transaction and that provides
the most reliable measure of the arm's length price.
5.5     Rule 10C(2) lists the specific factors that should be taken into
account in the process of selecting the most appropriate method. These
factors are as under:
(i)     nature and class of international transactions or specified domestic
        transactions;
(ii)    class or classes of associated enterprises entering into the
        transaction and the functions performed by them taking into account
        the assets employed or to be employed and risks assumed by such
        enterprises;
(iii)   availability, coverage and reliability of data necessary for application
        of the method. For instance, data relating to transactions entered into
        by the enterprise itself would be more reliable than the data relating
        to transactions entered into by third parties;
(iv)    the degree of comparability existing between the international
        transaction or specified domestic transaction and uncontrolled
        transaction and between enterprises entering into such transactions


1Rule 10AB vide Notification No. 18/2012 [F. NO. 142/5/2012-TPL] dated 23 May
2012, applicable for assessment year 2012-13 and onwards


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

(v)    the extent to which reliable and accurate adjustments can be made to
       account for the difference between the transactions.
(vi)   the nature, the extent and reliability of assumptions required to be
       made in application of a method.
5.6       Rule 10C, inter alia, specifies that the availability, coverage and
reliability of data and whether reasonably accurate and reliable adjustments
could be made as the relevant considerations in selecting the most
appropriate method. In actual practice, the choice of most appropriate
method depends not only on the nature and character of international
transaction or specified domestic transaction but also on the availability of
comparable transactions and data. Hence, the selection of most appropriate
method is a process of applying both the criteria. It may happen that what
appears to be most appropriate method on the basis of nature of
international transaction or specified domestic transaction may not be
eventually selected because of non-availability of comparable data. The
following example would clarify. An enterprise may buy from its AE and resell
in India. The transaction itself suggests that the most appropriate method is
Resale Price Method (RPM). There may not be any internal comparable
transaction available. Even an external comparable may not be available.
Even if an external comparable is available, the available data may not be
sufficient to determine the Arm's length Gross Profit. Therefore, RPM may
not be most appropriate method and some other method is to be chosen.
The selection of most appropriate method is a process of continuously
evaluating the nature and characteristics of international transactions or
specified domestic transactions and the comparable transactions.
5.7      The factors referred to above are to be applied cumulatively in
selecting the most appropriate method. The reference therein to the terms
`best suited' and `most reliable measure' indicates that the most appropriate
method will have to be selected after a meticulous appraisal of the facts and
circumstances of the international transaction or specified domestic
transaction. Further, the selection of the most appropriate method shall be
for each particular international transaction or specified domestic transaction.
The term `transaction' itself is defined in rule 10A(d) to include a number of
closely linked transactions. Therefore, though the reference is to apply the
most appropriate method to each particular transaction, keeping in view, the
definition of the term `transaction', the most appropriate method may be
chosen for a group of closely linked transactions. Two or more transactions
can be said to be linked when these transactions emanate from a common

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                                                             Arm's Length Price

source being an order or a contract or an agreement or an arrangement and
the nature, characteristics and terms of these transactions are substantially
flowing from the said common source.For example, a master purchase order
is issued stating the various terms and conditions and subsequently,
individuals orders are released for specific quantities. The various purchase
transactions are closely linked transactions.
5.8     It may be noted that in order to be closely linked transactions, it is not
necessary that these transactions need to be identical or even similar. For
example, a collaboration agreement may provide for import of raw materials,
sale of finished goods, provision of technical services and payment of
royalty. Different methods may be chosen as the most appropriate methods
for each of the above transactions when considered on a standalone basis.
However, under particular circumstances, one single method may be chosen
as the most appropriate method covering all the above transactions as the
same are closely linked.
5.9     There is yet another category of transactions which may be identical
or similar though not closely linked. For example, independent purchase
transactions having identical or similar nature, characteristics, terms and
conditions are not closely linked transactions because these transactions do
not emanate from a common source. However, under particular
circumstances, one single method may still be chosen as the most
appropriate method covering all the above transactions.
The following examples, [referred in the OECD Transfer Pricing Guidelines
(2010)], may be useful in this regard:
       " Examples may include 1. Some long-term contracts for the supply of
       commodities or services, 2.rights to use intangible property, and 3.
       pricing a range of closely-linked products(e.g. in a product line) when
       it is impractical to determine pricing for each individual product or
       transaction." (Para 3.9)
       " Another example where a taxpayer 's transactions may be combined
       is related to portfolio approaches. A portfolio approach is a business
       strategy consisting of a taxpayer bundling certain transactions for the
       purpose of earning an appropriate return across the portfolio rather
       than necessarily on any single product within the portfolio. For
       instance, some products may be marketed by a taxpayer with a low
       profit or even at a loss, because they create a demand for other
       products and/or related services of the same taxpayer that are then


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

         sold or provided with high profits (e.g. equipment and captive
         aftermarket consumables, such as vending coffee machines and
         coffee capsules, or printers and cartridges). Similar approaches can
         be observed in various industries. Portfolio approaches are an
         example of a business strategy that may need to be taken into
         account in the comparability analysis and when examining the
         reliability of comparables." (Para 3.10)
5.10 It is not uncommon to notice transactions which are not only
dissimilar or unidentical but are also not linked. For example, there may be
transactions of purchase, sale and provision of technical service. In such
case, wherever internal comparables are available, appropriate method
should be used if the circumstances so justify.
5.11 Section 92C(2) provides that most appropriate method referred to in
section 92C(1) shall be applied, for determination of arm's length price, in the
manner as prescribed in Rule 10B. The first proviso to section 92C(2)
provides that where more than one price is determined by the most
appropriate method, the arm's length price shall be taken to be the
arithmetical mean of such prices.
The second proviso to section 92C(2) provides that if the variation between
the arm's length price, so determined and price at which the transaction has
actually been undertaken does not exceed such percentage as may be
notified2 by the Central Government in the Official Gazette, the price at which
the international transaction [ or the specified domestic transaction] has been
undertaken will be deemed to be the arm's length price. The variation is to be
computed with reference to the actual price at which the international
transaction [or the specified domestic transaction] has been undertaken. This
proviso shall be applicable for assessment or reassessment proceedings
pending before an Assessing Officer as on 1 October 2009.

2Notificationdated 14 July 2016 notifies a rate of 1 percent for wholesale trading
transactions and 3 percent in all other cases for financial year 2015-16
CBDT has also defined the term "wholesale trading" as "an International Transaction or a
Specified Domestic Transaction of trading in goods, which fulfils the following conditions,
namely:
a)    purchase cost of finished goods is 80% or more of the total cost pertaining to such
      trading activities; and
b)    average monthly closing inventory of such goods is 10% or less of sales pertaining
      to such trading activities.



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                                                          Arm's Length Price

5.12 The aforesaid amended second proviso refers to arm's length price
(and not `arithmetic mean' ­ as was the case in Finance Act 2002), and a
view can be adopted that it is applicable to any `arms length price'
determined (whether as a single comparable price, or as arithmetic mean of
multiple comparable prices). Notably, only one method out of the 6 methods
can be identified as the most appropriate method for a given transaction.
Such most appropriate method may lead to a single comparable price or
multiple prices. The arm's length price is the single comparable price or
arithmetic mean of multiple comparable prices arrived at by application of the
most appropriate method.
5.13 The proviso provides that the arithmetical mean of such prices shall
be the arm's length price

A. ALP determined by assesse                                            `
CUT1                       ALP1                                          7.600
CUT2                       ALP2                                          7.380
CUT3                       ALP3                                          7.320


Arithmetic mean as per proviso                                           7.433
ALP determined                                       7,433
Assuming that the Indian taxpayer sells a product to its AE, in the above
example, if the transfer price is equal to or above `7,433, it would be treated
as being arm's length from an Indian transfer pricing perspective.
However, if the transfer price was less than `7,433, then it could vary from
ALP only to the extent of the notified percent (not exceeding 3 percent) of the
actual value of international transaction. An example to illustrate this is as
follows:
Scenario 1: Transfer Price is `7,000 and ALP is `7,433

Difference between the
transaction price and arm's
length price                      433
3% of the transaction value       210
Since the difference between
the transaction price and the

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

arm's length price is more
than 3% of the transaction
price, the transaction will be
considered not to be at arm's
length
In case of a wholesale distributor, instead of 3%, 1% of the transaction price
will be considered.
Scenario 2: Transfer Price is `7,250 and ALP is `7,433

Difference between the
transaction price and arm's
length price                     183
3% of the transaction value      218
Since the difference between
the transaction price and the
arm's length price is less
than 3% of the transaction
price, the transaction will be
considered to be at arm's
length
In case of a wholesale distributor, instead of 3%, 1% of the transaction price
will be considered.
5.14 A third proviso to this section has been inserted vide Finance (No. 2)
Act 2014 stating that "where more than one price is determined by the most
appropriate method, the arm's length price in relation to an international
transaction or specified domestic transaction undertaken on or after the 1st
day of April, 2014, shall be computed in such manner as may be prescribed
and accordingly the first and second proviso shall not apply". With
introduction of the new mechanism, the provisions of first and second proviso
(i.e. arithmetic mean and tolerable range) shall not apply.
CBDT vide Notification No. 83/2015 has introduced the use of the range
concept as well as the use of multiple year data. Detailed discussion on the
same in provided in Chapter 1 of this publication.




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                                                           Arm's Length Price

Uncontrolled transaction
5.15 Rule 10A (a) defines an "uncontrolled transaction" to mean "a
transaction between enterprises other than associated enterprises, whether
resident or non-resident". When an uncontrolled transaction has been
entered into, it could be said that it has been contracted under "uncontrolled
conditions".
An uncontrolled transaction can be between:
·      a resident and a non-resident; or
·      a resident and a resident; or
·      a non-resident and a non-resident.
While selecting, uncontrolled transaction / companies, due care should be
taken to identify / make appropriate adjustment for the differences between
the international transaction [or specified domestic transaction] being
evaluated and the comparable transaction so selected to ensure an
appropriate comparison.

Comparable uncontrolled transactions
5.16 Rule 10B (2), lays down the criteria for comparability between
international transactions [or specified domestic transactions] and
uncontrolled transactions. This process is not quantitative but qualitative and
involves exercise of judgment. The criteria listed in Rule 10B(2) are:
·      distinctive nature of the property transferred or services provided;
·      functions performed taking into account the assets employed or to be
       employed;
·      risks assumed by the respective parties;
·      contractual terms of the transaction;
·      market conditions.

Distinctive nature of the property and services
5.17 The following are some of the characteristics to be assessed vis-à-vis
the property transferred or service provided:
·      quality of product/services;


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

·      quantity and value of the transactions;
·      presence of intangibles like brand name, trademarks etc.;
·      material/physical features.
The following examples, taken from New Zealand transfer pricing guidelines,
may be referred to
·      An alkaline battery would sell at a premium to a standard (zinc
       carbon) battery, because the superior quality alkaline battery would
       be expected to last significantly longer than the standard battery.
·      A battery with a known brand would sell for more than an unknown
       brand, even if the quality of the two batteries were identical.Other
       things being equal, consumers would be expected to prefer the
       battery with an established reputation for reliability.
·      A multi coloured battery may sell for more than an equivalent black
       battery, depending on the extent to which consumer 's preference is
       influenced by packaging.
Whether the transactions as illustrated in the aforesaid examples can be
taken as comparable transactions or not would depend on the availability of
data for making the reasonably accurate adjustmentsfor the differences that
affect prices / profits in the open market.
5.18 Further, the following guidance, from the OECD Transfer Pricing
Guidelines (2010), may also be referred to:
       " Para 1.40 Depending on the transfer pricing method, this factor must
       be given more or less weight. Among the methods described at
       Chapter II of these Guidelines, the requirement for comparability of
       property or services is the strictest for the comparable uncontrolled
       price method. Under the comparable uncontrolled price method, any
       material difference in the characteristics of property or services can
       have an effect on the price and would require an appropriate
       adjustment to be considered. Under the resale price method and cost
       plus method, some differences in the characteristics of property or
       services are less likely to have a material effect on the gross profit
       margin or mark-up on costs. Differences in the characteristics of
       property or services are also less sensitive in the case of the
       transactional profit methods than in the case of traditional transaction
       methods. This however does not mean that the question of


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                                                          Arm's Length Price

       comparability in characteristics of property or services can be ignored
       when applying these methods, because it may be that product
       differences entail or reflect different functions performed, assets used
       and/or risks assumed bythe tested party.
       Para 1.41     In practice, it has been observed that comparability
       analyses for methods based on gross or net profit indicators often put
       more emphasis on functional similarities than on product similarities.
       Depending on the facts and circumstances of the case, it may be
       acceptable to broaden the scope of the comparability analysis to
       include uncontrolled transactions involving products that are different,
       but where similar functions are undertaken. However, the acceptance
       of such an approach depends on the effects that the product
       differences have on the reliability of the comparison and on whether
       or not more reliable data are available. Before broadening the search
       to include a larger number of potentially comparable uncontrolled
       transactions based on similar functions being undertaken, thought
       should be given to whether such transactions are likely to offer
       reliable comparables for the controlled transaction."
Analysis of functions performed
5.19 Functions are defined as the activities that each of the entities
engaged in a particular transaction perform as a part of its operations. To
illustrate, provided below are some typical functions undertaken in the
context of manufacturing, research & development and distribution:
·      raw material procurement
·      production scheduling
·      manufacturing of the products
·      inventory management of raw materials and finished goods
·      product research, design and development
·      developing and administering budgets
·      production planning and scheduling
·      quality control
·      packaging and labelling of products
·      warehousing
·      sales andmarketing

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

·      technical services
·      shipping of products to customers
·      administrative services
·      after sales support
Analysis of assets employed
5.20 Transactions that are proposed to be compared should be analysed
for the assets employed. In this context, some of the following points may be
noted;
a)     Whether assets are owned or leased
b)     Whether activity is capital or labour intensive
c)     Presence or absence of intangibles
d)     Are the assets unique in nature (like an Intellectual Property)
Typical intangible assets could be as follows:
·      Patents
·      Unpatented technical know-how
·      Formulae
·      Trademarks and brand names
·      Trade names
·      Copyrights
·      Technical information
·      Customer list
·      Franchises
·      Marketing channel
·      Highly qualified personnel
Intangibles can be ordinarily divided into two categories: manufacturing and
marketing. Manufacturing intangibles are characterised as one of the two
types ­ patents or non-patented technical know-how ­ and arise out of either
research and development activity or the production engineering activities of
the manufacturing plant.




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                                                          Arm's Length Price

Marketing intangibles include trademarks, corporate reputation, the
distribution network and the ability to provide services to customers before
and / or after the sale.
While carrying out the above analysis, it is necessary to assess whether the
assets employed in the respective transactions significantly affect their
comparability.
Further, it is not necessary that the assetsare recorded in the balance sheet
for it to have significant value for transfer pricing purposes. Even in cases
where the assets (say intangibles) are not recorded in the balance sheet, due
consideration should be given to the same while undertaking the functional
analysis.
Analysis of risks assumed
5.21 An entities return is usually a reflective of the risks assumed by it ­
higher the risks, higher are the returns.
Transactions that are proposed to be compared should be analysed for the
risk-content.Some of the significant risks present in a normal transaction are:
  Nature of risks                             Particulars
1. Financial risk      a.   Capital contribution
                       b.   Method of funding
                       c.   Funding of losses
2.   Product risk      a.   Design and development ofproduct
                       b.   Up-gradation of product
                       c.   After Sales Service
                       d.   Risks associated with R & D
                       e.   Product liability risk
                       f.   Intellectual property risk if any
3.   Market risk       a.   Development of market including advertisement
                            and product promotion etc.
                       b.   Business volume risk
                       c.   Assured sales risk
                       d.   Fluctuations in demand and prices.
4.   Credit risk       a.   Risk of bad debts
5.   Foreign           a.   Risk on account of fluctuation of foreign currency
     exchange risk          exchange rates
6.   Capacity          a.   Risks on account of under-utilisation of capacity

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

     utilisation risk


5.22 It is important to align the ability to control and mange risk based on
the actual activities. One cannot bear the risk contractually if there is no
ability to control and manage such a risk. For example: A Co cannot be
considered to be assuming risks in a scenario where it does not have the
ability to control the decisions that lead to arising of such risks or it does not
have financial wherewithal to withstand the loss arising from such risks.
5.23 Further, sometimes the risk profile within the AEs may be contractual
and also backed by substance and it might be difficult to identify third parties
with identical risk profile. For example: Capacity utilisation risk might not be
borne by the customer in a third party scenario which might be the case in
the transaction with the AE. In such a situation, adjustment for difference in
risks should be considered for comparability and arm's length price
computation purposes.
Characterisation
5.24 Characterisation is the process of assessing the nature of the
transacting entity (in a given international transaction or specified domestic
transaction) as a licensed manufacturer / contract manufacturer /
entrepreneur distributor / low risk distributor etc., based on the functional
analysis which facilitates the process of selection of the tested party which in
turn assists in the choice of the most appropriate method and also in the
identification of the uncontrolled transactions for comparability purposes.
Characterisation of the related parties is an importantcomponent to a transfer
pricing analysis and is used as the foundation in conducting the economic
analysis. Characterisation of an entity (for transfer pricing purposes) refers to
the process by which an entity is classified in a particular category based on
the analysis of the functions, assets and risks of the said entity. For eg.
based on an analysis of the functions, assets and risks of a given entity it
could be classified as a manufacturer (entrepreneur, contract, toll etc.) or as
a distributor (entrepreneur, normal risk, low risk etc.) or asa service provider.
To illustrate, say in transaction involving sale of goods by anAE based in US
(a manufacturer) to its Indian subsidiary (a distributor), the entity
characterization could be ascertained as follows:
a) Manufacturing


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                                                             Arm's Length Price

Having regard to illustrative functions / risk / asset, the manufacturer could
be characterized as follows:
Parameters      Full Fledge       Licensed            Contract             Toll
               Manufacturer      Manufacturer      Manufacturer      Manufacturer
Produces       Own behalf        Own behalf        Principal         Principal
on
Intellectual   Owns the IP       Does not own Does not own           Does not own
Property                         the IP but
                                 uses the IP
                                 owned       by
                                 Principal on
                                 license basis
Materials      Owns              Owns           Owns                 Does not own
Production     Does for own      Does for own Done         by        Done        by
scheduling                                      Principal            Principal
Selling and    Performs          Performs       Does      not        Does       not
distribution                                    perform              perform
function
Bears          Yes               Yes               Limited           Limited
market risk
Bears          Yes               Yes               Limited           No
inventory
risk
Bears          Yes               Yes               No                No
capacity
utilisation
risk
Bears credit   Yes               Yes               No                No
risk
b) Distribution set-up
Having regard to illustrative functions / risk / asset, the distributor could be
characterized as follows:
Parameters     Commission         Limited risk      Normal risk      Enterpreneur
                  agent            distributor      distributor        distributor
Takes title    No                Yes               Yes               Yes
Credit risk    No                Limited           Yes               Yes



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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

Parameters       Commission       Limited risk     Normal risk      Enterpreneur
                    agent          distributor     distributor        distributor
Inventory        No              Limited          Yes               Yes
risk
Marketing        No              Limited          Limited           Yes
responsibiliti
es
Foreign          No              No               Yes               Yes
exchange
risks

Tested party
5.25 While Comparable Uncontrolled Price Method is a two sided method
i.e., either of the parties to the international transaction [or the specified
domestic transaction] can be selected as the tested party. However, for the
application of Cost plus Method, Resale Price Method or Transactional Net
Margin Method, it is necessary to choose one of the parties to the transaction
as the tested party whose profitability needs to be tested(i.e. mark-up on
costs, gross margin, or net profit margins)and compare the profitability of the
tested party's transactions with uncontrolled internal or external
comparables, as the case may be.
The choice of the tested party should be consistent with the functional
analysis of the transaction, and the characterisation of the entities.
The tested party generally would be the less complex party to the controlled
transaction and should be the party in respect of which most reliable data for
comparability is available. It may be possible that the tested party could be
the group entity (associated enterprise) which is party to the transaction. To
illustrate, say in a transaction pertaining to the sale of goods by a US
company (an entrepreneur and owner of significant Intellectual Property) to
its India subsidiary (a limited risk distributor), the Indian entity should be
selected as the tested party since its functions are less complex and data of
comparable distributors will be more easily available for the purpose of
benchmarking.
While making such an analysis, even the foreign entity could also be
selected as the tested party. For instance where an Indian entrepreneur
sells goods to its US subsidiary which acts as a low risk distributor, the US
entity should be selected as the tested party. In such scenarios, the


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                                                          Arm's Length Price

members should check if detailed information / analysis is maintained by the
Company.


Contractual terms
5.26 The important contractual terms of the transactions should be
ascertained to determine whether transactions as well as the transaction
pricing / margin are comparable or not. Some of the contractual terms that
need to be examined are:
·      terms of delivery
·      CIF, C&F, FOB
·      terms of payment
·      discount, if any
·      credit period
·      warranty period
·      installation services
An example of how contractual terms may affect transferpricing may be seen
in the following example, which has been taken from Para 5.3.2.34 of the
United Nations Practical Manual on Transfer Pricing for Developing
Countries.
" Consider Company A in one country, an agricultural exporter, which
regularly buys transportation services from Company B (its foreign
subsidiary) to ship its product, cocoa beans, from Company A's country to
overseas markets. Company B occasionally provides transportation services
to Company C, an unrelated domestic corporation in the same country as
Company B. However, the provision of such services to Company C
accounts for only 10 per cent of the gross revenues of Company B and the
remaining 90 per cent of Company B's revenues are attributable to the
provision of transportation services for cocoa beans to Company A. In
determining the degree of comparability between Company B's uncontrolled
transaction with Company C and its controlled transaction with Company A,
the difference in volumes involved in the two transactions, volume discount if
any, and the regularity with which these services are provided must be taken
into account where such factors would have a material effect on the price
charged."
5.27   It should be noted that in practice, information concerning the

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

contractual terms of potentially comparable uncontrolled transactions may
not be available, particularly where external comparables are used for the
analysis. The effect of deficiencies in the information in establishing
comparability will differ depending on the type of transaction being examined
and the transfer pricing method applied.
An example in this regard has been provided below, which has been taken
from Para 1.54 of the OECD Transfer Pricing Guidelines (2010)
" If the controlled transaction is a license agreement for the exploitation of
intellectual property rights and the transfer pricing method is the comparable
uncontrolled price method, information on the key contractual terms of
uncontrolled licenses, such as the license's duration, geographic area,
exclusivity, etc., can be assumed to be critical to assessing whether such
uncontrolled licenses provide reliable comparables for the controlled
transaction."
To the extent possible, adjustments should be attempted to even out the
difference between the comparables and the tested party. In the event such
adjustments are not possible or where the situation requires too many
adjustments, the reliability of the method used as well as the analysis
performed may require a revisit and probably it would be relevant to use an
alternate method.
Market conditions
5.28 The market conditions in which uncontrolled transactions and
international transactions [or the specified domestic transaction] are
conducted must be evaluated to judge their comparability. Some of the
different market conditions are:
·      geographical location and size
·      regulatory laws and government orders
·      cost of labour and capital
·      level of competition
·      nature of market whether wholesale/retail
·      overall economic development
5.29 Many of the above conditions are not amenable to reasonably
accurate adjustments. The market conditions would be more relevant in
determining the comparability only and therefore, unless transactions take
place in the same market conditions, they will not be comparable.


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                                                          Arm's Length Price

An example of impact of the aforesaid differences is provided below:
The taxpayer is engaged in the manufacturing and trading of pharmaceutical
products. The taxpayer has sold Product A to its associated enterprise in
Thailand and also to a third party in Vietnam. The details are provided below:
 Particulars                         Sale to AE          Sale to third party
 Country                              Thailand                Vietnam
 Quantity exported                     30,000                   1,000
 Average selling price per unit          10                       20
 (in USD)
 Usage                            Wholesale Trading        Retail Trading
Prima facie, one may say that the sale of Product A to the associated
enterprise in Thailand is not at arm's length since the same product has been
sold to a third party in Vietnam at a much higher price. However, one has to
analyse the following factors before arriving at a conclusion:
a) Geographical differences, market conditions and size of the
   markets
The price at which a product is sold in one country cannot be compared with
the price at which the same product is sold in another country because of the
impact on account of geographical differences i.e. country specific demand/
supply factors, market conditions, regulations and government orders in
force, level of competition, availability of substitute products, consumer
purchasing power, etc which could have a bearing on the price.
b) Laws and government orders in force
The Government orders which are prevalent in Thailand and Vietnam would
also be relevant and may need to be examined.
As stated above, it would be critical to evaluate if reliably accurate
adjustment on account of the aforesaid differences could be made to
eliminate the differences, and in the absence of such an adjustment the
transaction cannot be considered as comparable.
Business strategies, commercial considerations and
economic principles
5.30 Economic principles and prevailing business conditions are
fundamental to any transfer pricing evaluation. Therefore, business
strategies adopted by enterprises and market conditions faced by taxpayers

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

are relevant factors for determining comparability with uncontrolled
transactions/margins, and must be carefully considered during the
comparability analysis.While the Indian TP regulations do not specifically
recognize / provide for analysis of the business strategies, the OECD
Guidelines duly recognize the need to analyse the business strategies while
undertaking the comparability analysis. Some examples where business
strategies/ economic realities could be relevant are:
·      market strategies such as entry strategies, market penetration, loss
       leadership etc followed by some companies may result in losses in
       the initial /interim years, as a part of a bigger strategy of building
       market share and reaping subsequent benefits therefrom.
·      In case of start up operations, enterprises are generally not able to
       recover their initial set-up costs etc during the initial few years of
       operations. It is not appropriate in such cases to compare the
       taxpayers profit/ margins with the margins earned by established
       comparables that are at a different stage of operations.
5.31 It is not necessary that all the criteria specified in Rule 10B(2) should
be cumulatively applied while selecting comparable transactions. The
relevance of these criteria depends on the method chosen as most
appropriate method. For instance, when CUP is chosen as the most
appropriate method, the nature of the property and service, the functions
performed, risk undertaken and the terms of contract become critical in
choosing the comparable transaction. It can generally be stated that criteria
mentioned in rule 10B (2) need to be applied with more rigour when
comparability is done at transactional level. But when the comparability is
done at enterprise level, it becomes difficult to apply the criteria like
contractual terms, nature of products or services. In other words, rigorous
functions performed, assets used and risk taken (FAR) analysis is difficult
when enterprise level comparisons are made in PSM and TNMM or even
when gross profit margin of an outside enterprise is adopted in CPM.
5.32 The above analysis is carried out to determine whether the
uncontrolled transactions and international transactions or specified domestic
transaction are comparable. Rule 10B(3) states that an uncontrolled
transaction shall be comparable to an international transaction or specified
domestic transaction if:




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                                                            Arm's Length Price

(i)    none of the differences between transactions or enterprises are likely
       to materially affect the price or cost charged or paid in or profit arising
       from, such transactions in the open market; or
(ii)   reasonably accurate adjustments can be made to eliminate material
       effects of differences.
5.33 If there are no differences, the transactions are comparable
straightaway. If the differences can be adjusted with reasonable accuracy,
then the transactions are comparable, subject to adjustments.If, however, the
differences cannot be adjusted with reasonable accuracy, the transactions
are to be ignored and the search for comparable transactions would need to
commence all over again. For instance, under TNMM where margins are to
be compared, the margin of a INR 1,000crore company cannot be compared
with that of a INR10 crore company. The two most obvious reasons are the
size of the two companies and the relative economies of scale under which
they operate. The fact that they operate in the same market on a "level
playing field" may not make them comparable enterprises. Some of the other
factors/ criteria's which could be considered for the purpose of comparability
analysis, in order to identify the uncontrolled transactions are:
 ·     level of fixed assets as a percentage of total sales, level of operating
       expenses as a percentage of sales;
 ·     level of investment in intangible assets; and
 ·     differences in the level of risks assumed by the parties viz. market
       risk, human resources, quality, contract risk, credit/ collection risks
       etc.
5.34 It is important to note that the transactions entered into by associated
enterprises with unrelated party ( "internal comparables") would provide more
reliable and accurate data as compared to transactions by and between third
parties ( "external comparables").OECD's Guidelines on Transfer Pricing
recognize the fact that external comparables are difficult to obtain and, also,
it may be incomplete and difficult to interpret. Hence for these reasons,
internal comparables are preferred to external comparables.
To illustrate say, the controlled transaction involves the sale of watches by
AE1, a watch manufacturer in Country1, to AE 2, a watch importer in Country
2, which purchases, imports and resells the watches to unrelated watch
dealers in Country 2.



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Guidance Note on Report under Section 92E of the Income-tax Act, 1961




In the above example, one can identify the following comparable transactions
(assuming the characteristics of the products are same in all the scenarios)
a)     Internal comparables
       The price charged for watches sold in a comparable uncontrolled
       transaction between AE 1and Unrelated Party C (i.e. transaction #1);
       The price charged for watches sold in a comparable uncontrolled
       transaction between AE 2and Unrelated Party A (i.e. transaction #2)
b)     External comparables
       Th e price paid for watches sold in a comparable uncontrolled
       transaction between Unrelated Party A and Unrelated Party B (i.e.
       transaction #3)
5.35 The analysis of the uncontrolled transactions is made to assess their
comparability with the international transaction or specified domestic
transaction.
5.36 A question arises as to what should be the number of comparable
uncontrolled transactions to be selected. In other words, is it sufficient to
have just one CUT or is it necessary that a reasonable number of CUTs
should be selected? Both the Act and the Rule do not prescribe the number
of CUTs to be chosen. An analysis of section 92C(2) read with the proviso
thereto and Rule 10B(1) would show that selection of even one CUT is
permissible. The proviso to section 92C(2) uses the expression "provided

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                                                            Arm's Length Price

that where more than one price is determined by the most appropriate
method..... ". This indicates that selection of multiple CUTs is not required as
a rule and if an assessee adopts multiple CUTs the proviso would be
applicable. This is further strengthened by the language adopted in Rule
10B(1) which clearly permits adoption of even a single CUT. For example,
Rule 10B(1)(a)(i) uses the expression "......in a comparable uncontrolled
transaction, or a number of such transactions..." (emphasis supplied). Similar
expression is used in other clauses of Rule 10B(1). It is possible to have a
single most appropriate CUT. Therefore, it may be said that if one most
appropriate CUT is selected, such CUT would represent ALP. However, if
more than one CUT is available the proviso to section 92C(2) would be
applicable.
5.37 Rule 10B(4) provides that the data to be used in analysing the
comparability of an uncontrolled transaction with an international
transaction [or a specified domestic transaction] shall be the data relating to
the financial year in which the international transaction [or the specified
domestic transaction] has been entered into. Within the same financial year,
the CUT may precede or succeed an international transaction.
5.38 The proviso to Rule 10B(4), further states that data relating to a
period of not more than 2 years preceding such financial year may also be
considered, if such data reveals facts which could have an influence on the
determination of the transfer prices in relation to transactions being
compared. Multiple year data has been permitted to be used vide Finance
(No. 2) Act 2014.CBDT vide Notification No. 83/2015 has issued detailed
guidance on the use of the multiple year data for the purpose of
comparability analysis. Discussion on the same is detailed in Chapter 1 of
this publication.
5.39 Further, the OECD in its Transfer Pricing Guidelines (2010) in Para
3.76 to 3.79 also supports the use of multiple year data. It states that in order
to obtain a complete understanding of the facts and circumstances
surrounding the controlled transaction, it generally might be useful to
examine data from both the year under examination and prior years. The
analysis of such information might disclose facts that may have influenced
(or should have influenced) the determination of the transfer price. For
example, the use of data from past years will show whether a taxpayer's
reported loss on a transaction is part of a history of losses on similar
transactions, the result of particular economic conditions in a prior year that
increased costs in the subsequent year, or a reflection of the fact that a


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

product is at the end of its life cycle. Such an analysis may be particularly
useful where a transactional profit method is applied. Multiple year data can
also improve the understanding of long term arrangements. Multiple year
data will also be useful in providing information about the relevant business
and product life cycles of the comparables. Differences in business or
product life cycles may have a material effect on transfer pricing conditions
that needs to be assessed in determining comparability. The data from
earlier years may show whether the independent enterprise engaged in a
comparable transaction was affected by comparable economic conditions in
a comparable manner, or whether different conditions in an earlier year
materially affected its price or profit so that it should not be used as a
comparable. Multiple year data can also improve the process of selecting
third party comparables e.g. by identifying results that may indicate a
significant variance from the underlying comparability characteristics of the
controlled transaction being reviewed, in some cases leading to the rejection
of the comparable, or to detect anomalies in third party information.
5.40 The Other Method (OM) offers more flexibility and permits
comparison use of a "price which has been charged or paid, or would have
been charged or paid" thereby allowing use of bonafide quotations, bids,
proposals as comparable transactions or prices, and also economic and
commercially justifiable models and similar approaches.

Power of Assessing Officer
5.41 According to section 92C(3), the Assessing Officer may himself
proceed to determine the arm's length price if any of the following conditions
are satisfied:
 (i)     the price charged or paid in an international transaction or specified
         domestic transaction has not been determined on the basis of the
         most appropriate method.
 (ii)    any information and document relating to an international transaction
         or specified domestic transaction has not been kept and maintained
         as mandated.
 (iii)   the information or data used in computation of the arm's length price
         is not reliable or correct.
 (iv)    the assessee had failed to furnish, within the specified time, any
         information or document which he was required to furnish.


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                                                            Arm's Length Price

5.42 If any of the above conditions are satisfied, the power to determine
the arm's length price may be exercised in any proceeding for the
assessment of income. The Assessing Officer also, is required to determine
the arm's length price in accordance with section 92C(1) and (2) only, which
states that the arm's length price will have to be arrived at on the basis of the
most appropriate method. The Assessing Officer may determine the arm's
length price on the basis of the material or information or document available
with him. Even where such determination is made by the Assessing Officer, if
more than one price may be determined by the most appropriate methods,
the arm's length price shall be taken to be arithmetical mean of such prices.
5.43 The information, which the assessee may be called upon to furnish,
in the absence of which the Assessing Officer would have power to substitute
the arm's length price, should be that which the assessee has in his
possession and is capable of being furnished.
5.44 The substitution of the arm's length price by the Assessing Officer
shall be preceded by an opportunity of hearing being given to the assessee
to show cause why such substitution of the arm's length price should not be
made.
5.45 When the Assessing Officer substitutes the arm's length price on the
basis of material or information or document in his possession, he may
accordingly recompute the total income of the assessee. No deduction under
section 10A or 10B or Chapter VIA shall be allowed in respect of the amount
of income by which the total income of the assessee is enhanced. The
restriction on the admissibility of an exemption / deduction is only under
sections 10A and 10B or Chapter VI-A.It appears that deduction under
section 10C may be available on the enhanced income.
5.46 The income of one of the AE may be recomputed by substituting the
actual price paid/charged to another associated enterprise for any property
or service with the arm's length price. When this substitution takes place it
results in a re-computation of the total income of such AE. This re-
computation would, however, not entitle the other AE to demand a re-
computation of its total income. Consequently, it would not be entitled to a
refund of any tax. For example, if XYZ Ltd. has paid royalty of ` 100 to its AE
ABC Ltd., it would have deducted ` 20 as tax under section 115A read with
section 195 and remitted the balance of ` 80 to ABC Ltd. If the Assessing
Officer computes the arm's length price of royalty to be ` 75 and substitutes it
for the actual amount paid, i.e. ` 100, ABC Ltd., will not able to demand either


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

a re-computation of the royalty income received by it or a refund of tax in
excess of what is due on the basis of the arm's length price.
5.47 Section 92CA(2A) inserted by Finance Act 2011 with effect from 1
June 2011 provides that where an international transaction not referred to
the Transfer Pricing Officer by the Assessing Officer comes to the notice of
the Transfer Pricing Officer, then such international transaction can be
examined by the Transfer Pricing Officer as if it was referred to him. Further,
section 92CA(2B) inserted by Finance Act 2012 with retrospective effect from
1 June 2002 provides that where an assessee has not furnished an
accountant's report under section 92E and an international transaction
comes to the notice of the Transfer Pricing Officer, then such international
transaction can be examined by the Transfer Pricing Officer as if it was
referred to him.




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                                                              Chapter 6
             Methods of Computation of Arm's
                               Length Price
Meaning of relevant terms
6.1     The various methods of computation of arm's length price are
prescribed in rule 10B.For this purpose, certain terms are defined in rule 10A
as under:
Rule 10A - Meaning of expressions used in computation of arm 's length
price.
For the purposes of this rule and rules 10AB to 10E,-
(a)    `uncontrolled transaction' means a transaction between
       enterprises other than AEs, whether resident or non-resident;
(b)    `property' includes goods, articles or things, and intangible
       property;
(c)    `service' includes financial services; and
(d)    `transaction' includes a number of closely linked transactions.
Further, Section 92F(v) of the Act defines the term `transaction' as below:
`Transaction' includes an arrangement, understanding or action in
concert -
(A)    whether or not such arrangement, understanding or action is
       formal or in writing; or
(B)    whether or not such arrangement, understanding or action is
       intended to be enforceable by legal proceeding.
6.2     Rule 10B stipulates the methods of determination of arm's length
price. The relevant portion of the rule dealing with each of the methods
prescribed is extracted here below and suitable explanations thereof are
given along with illustrations encompassing several adjustments for enabling
better understanding of the principles involved and the type of working called
for.
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

Comparable Uncontrolled Price Method (CUP
Method)
6.3    Rule 10B(1)(a) - Comparable uncontrolled price method, by
which,-
(i)     the price charged or paid for property transferred or services
        provided in a comparable uncontrolled transaction, or a number
        of such transactions, is identified;
(ii)    such price is adjusted to account for differences, if any, between
        the international transaction [or the specified domestic
        transaction] and the comparable uncontrolled transactions or
        between the enterprises entering into such transactions, which
        could materially affect the price in the open market;
(iii)   the adjusted price arrived at under sub-clause (ii) is taken to be
        an arm 's length price in respect of the property transferred or
        services provided in the international transaction [or the
        specified domestic transaction].
6.4     The comparable uncontrolled price method is considered as one of
the traditional methods of determining the arm's length price. Two other
traditional methods are the Resale Price Method and the Cost Plus Method.
6.5    Typical transactions in respect of which the comparable uncontrolled
price method may be adopted are:
(a)     Transfer of goods;
(b)     Provision of services;
(c)     Intangibles;
(d)     Interest on loans.
6.6     The OECD in its Transfer Pricing Guidelines observes as under:
" The CUP method is a particularly reliable method where an independent
enterprise sells the same product as is sold between two AEs."
" The CUP method compares the price charged for property or services
transferred in a controlled transaction to the price charged for property or
services transferred in a comparable uncontrolled transaction in comparable
circumstances. If there is any difference between the two prices, this may
indicate that the condition of the commercial and financial relations of the

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                              Methods of Computation of Arm's Length Price

AEs are not at arm's length, and that the price in the uncontrolled transaction
may need to be substituted for the price in the controlled transaction."
6.7     The steps involved in the application of this method are:
(i)     Identify the price charged or paid in comparable uncontrolled
        transactions;
(ii)    The above price should be adjusted for transaction level differences
        on the basis of functions performed, assets used and risks taken
        (FAR) analysis and enterprise level differences if any;
(iii)   The adjusted price is the arm's length price;
6.8     On the aspect of comparability for application of the CUP method, the
UN in its Practical Manual on Transfer Pricing has observed as under:
" 6.2.2.3. Product comparability should be closely examined in applying the
CUP Method. A price may be materially influenced by differences between
the goods or services transferred in the controlled and uncontrolled
transactions. The CUP Method is appropriate especially in cases where an
independent enterprise buys or sells products that are identical or very
similar to those sold in the controlled transaction or in situations where
services are rendered that are identical or very similar to those rendered in
the controlled transaction.
6.2.2.4. Although product comparability is important in applying the CUP
Method, the other comparability factors should not be disregarded.
Contractual terms and economic conditions are also important comparability
factors. Where there are differences between controlled and uncontrolled
transactions, adjustments should be made to enhance reliability" .
6.9    Given that the CUP Method compares the prices of the products, it is
warranted that high degree of similarity on all aspects (such as products /
services, terms of the transaction etc.) be established between the products
being compared.




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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

6.2.2.5 Reasonably accurate adjustment may be made for differences in:
·      The type and quality of the products (E.g. unbranded Kenyan coffee
       beans as compared with unbranded Brazilian coffee beans);
·      Delivery terms. (.g.AE 1 sells similar bicycles to AE 2 and Unrelated
       Party C. All relevant information on the controlled and uncontrolled
       transactions is available toAE1, and hence it is probable that all
       material differences between the transactions can be recognized. The
       uncontrolled price can be adjusted for the difference in delivery terms
       to eliminate the effect of this difference on the price);
·      Volume of sales and related discounts. (E.g.AE 1 sells 5000 bicycles
       to AE 2 for US$90 per bicycle, while it sells 1000 similar bicycles to
       Unrelated Party C. The effect of the differences in volume on price
       should be analysed, and if the effect is material, adjustments should
       be made perhaps based on volume discounts in similar markets);
·      Product characteristics. (E.g. the uncontrolled transactions to an
       unrelated party in Figure 3 involve bicycles on which modifications
       have been made. However, the bicycles sold in the controlled
       transactions do not include these modifications. If the product
       modifications have a material effect on price, then the uncontrolled
       price should be adjusted to take into account this difference in price);
·      Contractual terms. E.g.AE 1 sells the bicycles to AE 2 offering a 90
       day credit term but the contract terms dictate that all sales to
       Unrelated Party C are Cash On Delivery;
·      Risk incurred. E.g.AE 1 is exposed to inventory risk related to sales
       by AE 2 and the risk that customers of AE 2 will default on their
       bicycle purchase loans; whereas in the transaction between AE 1 and
       Unrelated Party C, the latter is exposed to the inventory risk and the
       risk of its customers' default. This difference in risk allocation must be
       analysed and its effect on price quantified before AE 2's prices and
       Unrelated Party C's prices can be considered comparable; and
·      Geographical factors. E.g. AE 1 sells bicycles to AE 2 located in
       South Africa, while Unrelated Party C, to which it also sells the same
       bicycles, is located in Egypt. The only material difference that could
       be identified between the controlled and uncontrolled transactions
       concerns the locale. To perform adjustments to account for this
       difference one might have to consider, for example, differences in


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                             Methods of Computation of Arm's Length Price

       inflation rates between South Africa and Egypt, the competitiveness
       of the bicycle market in the two countries and differences in
       government regulations if relevant.
6.2.2.6. Reasonably accurate adjustments may not be possible for:
·      Unique and valuable trademarks (E.g. assuming AE 1 in Figure 1 is
       engaged in manufacturing high value branded goods, and attaches its
       valuable trademark to the goods transferred in the controlled
       transaction, while uncontrolled transaction #1 concerns the transfer of
       goods that are not branded . The effect of the trademark on the price
       of a watch may be material. However it will be difficult, if not
       impossible, to adjust for effect of the trademark on price since the
       trademark is an intangible asset that is unique. If reasonably accurate
       adjustments cannot be made to account for a material product
       difference the CUP Method may not be the appropriate method for
       the transaction); and
·      Fundamental differences in the products E.g. if the products being
       sold are significantly different from the products sold in the proposed
       comparable transaction it may not be possible to adjust for the
       product differences. In such events, CUP method should not be used
       for the purpose of the analysis.
6.2.2.7. Notwithstanding the difficulties often associated with adjustments to
address the sources of non-comparability described above, the need to make
adjustments should not automatically prevent the use of the CUP Method. It
is often possible to perform reasonably accurate adjustments. If reasonable
adjustments cannot be performed the reliability of the CUP Method is
decreased. In these circumstances another transfer pricing method may be
more appropriate."
Examples where it may not be possible to make reasonably accurate
adjustments are given below:
·      Difference in the position of the entity in the value chain: (E.g.AE 1
       sells bicycles to AE 2 as also to Unrelated Party C. Further, AE 2,
       after purchasing the bicycles from AE 1 sells the same bicycles to
       Unrelated Party C.
       When the bicycles are sold by AE 1 to Unrelated Party C, they are
       sold to the final customers for their own use, whereas the bicycles



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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

       sold to AE 2, are not for the use of AE 2, but for further sales to
       Unrelated Party C.
       From the above, it can be seen that there is an added level in the
       entire value chain, when the sales are to AE 2 vis-a-vis the sales
       made by AE 1 to Unrelated Party C. The position of an entity in the
       value chain impacts the price at which a product is sold due to the
       additional functions that may be performed by the said entity.
       In such a case, it may not be possible to compare the transaction of
       sale of bicycles by AE 1 to Unrelated Party C with the transaction of
       sale by AE 2 to Unrelated Party C, due to the unavailability of
       accurate and reliable data pertaining to the margin earned by AE 1
       from the sales to Unrelated Enterprise C.
·      Difference in the characterisation of the entity: (E.g. AE 1 is a captive
       manufacturer engaged in the manufacturing of bicycles for AE 2. AE
       2 is a full fledge distributor engaged in the distribution of the bicycles
       to the customers. The pricing for the sale made by AE 2 to the
       customers is governed by the prevailing market conditions.
       In such a case, it may not be possible to compare the transaction of
       sale of bicycles by AE 1 to AE 2 with the transaction of sale of
       bicycles by AE 2 to the customers, due to the differences in the
       functions performed, assets employed and the risks undertaken by
       AE1 and AE 2 and the consequent difference in their characterisation
       and position in the value chain with respect to the transaction of sale
       of bicycles.)


                                            AE 1
                                    (Captive Manufacturer)

                                                   Sale


                                              AE 2
                                    (Full fledge Distributor)

                                                   Sale

                                            Customer

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                              Methods of Computation of Arm's Length Price

6.10 The application of the comparable uncontrolled price method can be
understood with the following example:
AE1 Ltd., is an Indian company. The shareholding pattern of AE1 Ltd., is as
follows:
    Shareholder 's name                    Status               % holding
 AE2 Ltd.                         Foreign Company                  30
 AE3 Ltd.                         Indian Company                   30
 Financial Institutions           Indian Company                   10
 Public                                                            30
AE1 Ltd., is a manufacturer of compact disc (CD) writers and its customers,
inter alia, include AE2Ltd, and M Ltd.
AE1 Ltd., during the year has supplied 10,000 nos. of the product to AE2 Ltd.
at a price of ` 2,000 per unit and 200 nos. of the same product to AE3 Ltd., at
a price of ` 2,750 per unit. AE1 Ltd., has sold 100 units of the same product
to M Ltd.at ` 3,000 per unit.
Analysis of the international transaction with comparable uncontrolled
transaction
                International      Comparable
                transaction        uncontrolled
                (with AE2 Ltd.)    transaction
                                   (with M Ltd.)
 Price          FOB                CIF             Freight and insurance
                                                   ` 550
 Quantity       Yes                No              One CD of ` 10 each
 discount                                          for every CD writer
                                                   plus ` 20 per CD
                                                   writer
 Credit         One month          Cash and carry  Cost of credit 1.25%
                                                   per month
 Warranty       No warranty        Six      months Cost of warranty is `
                                   warranty        250 per unit
Factors to be considered while determining ALP:
(a)      In the CUP method, one has to start from the price charged in the
         case of the comparable uncontrolled transaction.

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

(b)    In this illustration one has to start with the price charged by AE1 Ltd.,
       to M Ltd.
(c)    The price charged to AE3 Ltd., cannot be considered as AE3 Ltd., is
       itself an AE of AE1 Ltd.
(d)    The price charged to M Ltd., will have to be increased by the value of
       credit which is at the rate at 1.25% p.m. (i.e. 15% p.a.).If the similar
       credit were offered to M Ltd., the price charged to M Ltd. would have
       been higher, after factoring this cost.
(e)    The price charged to M Ltd., will have to be reduced by the following;
       (i)      ` 550 representing the freight and insurance ­This is for the
                reason that if the price to M Ltd., had been on FOB basis, it
                would have been less by ` 550.
       (ii)     ` 250 per unit representing the estimated cost of warranty
                execution for a period of six months on the basis of a
                technical analysis and past experience - This is for the
                reason that if the warranty was not given, the price to M Ltd.
                would have been lower, without factoring this cost.
       (iii)    ` 10 representing the cost of each CD ­ This is for the
                reason that if similar gift had been offered to M Ltd., the
                effective price to M Ltd., would have been less.
       (iv)     ` 20 representing a quantity discount - This is for the reason
                that if similar discount had been offered to M Ltd., the
                effective price to M Ltd., would have been less.
Computation of arm 's length price under the comparable uncontrolled
price method
The following points are to be noticed:
(i)    All adjustments in the course of applying this method are to be made
       to the price charged in the uncontrolled transaction. The presence or
       absence of any specific features in the uncontrolled transaction as
       compared to the international transaction [or the specified domestic
       transaction] is to be adjusted for. These features are to be evaluated
       in monetary terms. This is a subjective process based on objective
       facts.
(ii)   Only differences that would materially affect the price in the open
       market are required to be adjusted. Two points may be noted. Firstly,

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        materiality would have to be judged in the light of various
        circumstances. If there are numerous adjustments, which are
        individually not material but collectively material, the necessary
        adjustments are required to be made. Secondly, the term `open
        market', though not defined, would mean a transaction between a
        knowledgeable and a willing purchaser and a knowledgeable and
        willing seller where neither of them is influenced or compelled to act
        in a particular manner.

Resale Price Method (RPM)
6.11    Rule 10B(1)(b) resale price method, by which,-
(i)     The price at which property purchased or services obtained by
        the enterprise from an AE is resold or are provided to an
        unrelated enterprise, is identified;
(ii)    such resale price is reduced by the amount of a normal gross
        profit margin accruing to the enterprise or to an unrelated
        enterprise from the purchase and resale of the same or similar
        property or from obtaining and providing the same or similar
        services, in a comparable uncontrolled transaction, or a number
        of such transactions;
(iii)   the price so arrived at is further reduced by the expenses
        incurred by the enterprise in connection with the purchase of
        property or obtaining of services;
(iv)    the price so arrived at is adjusted to take into account the
        functional and other differences, including differences in
        accounting practices, if any, between the international
        transaction [or the specified domestic transaction] and the
        comparable uncontrolled transactions, or between the
        enterprises entering into such transactions, which could
        materially affect the amount of gross profit margin in the open
        market;
(v)     the adjusted price arrived at under sub-clause (iv) is taken to be
        an arm 's length price in respect of the purchase of the property
        or obtaining of the services by the enterprise from the AE.
6.12 Typical transactions where the resale price method may be adopted
are distribution of goods involving little or no value addition. Also, it is


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pertinent to note that while CUP method is a two sided method (wherein the
said method can be applied using details / data of either of the transacting
parties), RPM is a one sided method wherein only the margins earned by one
of the transacting party i.e., the distributor, can be analysed / evaluated.
6.13   The OECD in its Transfer Pricing Guidelines has observed as under:
        "An appropriate resale price margin is easiest to determine where
       the reseller does not add substantially to the value of the product. In
       contrast, it may be more difficult to use the resale price method to
       arrive at an arm's length price where, before resale, the goods are
       further processed or incorporated into a more complicated product so
       that their identity is lost or transformed (e.g. where components are
       joined together in finished or semi-finished goods). Another example
       where the resale price margin requires particular care is where the
       reseller contributes substantially to the creation or maintenance of
       intangible property associated with the product (e.g. trademarks or
       trade names) which are owned by an AE. In such cases, the
       contribution of the goods originally transferred to the value of the final
       product cannot be easily evaluated.
       A resale price margin is more accurate where it is realised within a
       short time of the reseller 's purchase of the goods. The more time that
       elapses between the original purchase and resale the more likely it is
       that other factors ­ changes in the market, in rates of exchange, in
       costs, etc. ­ will need to be taken into account in any comparison."
6.14 On application of RPM, the UN in the Practical Manual on Transfer
Pricing has observed as under:
" 6.2.9.3 While product differences may be more acceptable in applying the
Resale Price Method as compared to the CUP Method, the property
transferred should still be broadly similar in the controlled and uncontrolled
transactions. Broad differences are likely to reflect differences in functions
performed, and therefore gross margins earned, at arm's length.
6.2.9.4 Example:
The compensation for a distribution company should be the same whether it
sells washing machines or dryers, because the functions performed
(including risks assumed and assets used) are similar for the two activities. It
should be noted, however, that distributers engaged in the sale of markedly
different products cannot be compared. The price of a washing machine will,


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                              Methods of Computation of Arm's Length Price

of course, differ from the price of a dryer, as the two products are not
substitutes for each other. Although product comparability is less important
under the resale price method, greater product similarity is likely to provide
more reliable transfer pricing results. It is not always necessary to conduct a
resale price analysis for each individual product line distributed by the sales
company. Instead, the resale price method can be applied more broadly, for
example based on the gross margin a sales company should earn over its full
range of broadly similar products."
From the above, it can be observed that RPM is more tolerant as compared
to CUP toward product differences. RPM thus focuses on functional
comparability. A similar level of compensation is expected for performing
similar functions across different activities.
6.15    The steps involved in the application of this method are:
 (i)    identify the international transaction [or specified domestic
        transaction] of purchase of property or services;
(ii)    identify the price at which such property or services are resold or
        provided to an unrelated party (resale price);
(iii)   identify the normal gross profit margin in a comparable uncontrolled
        transaction whether internal or external. The normal gross profit
        margin is that margin which an enterprise would earn from purchase
        of the similar product from an unrelated party and the resale of the
        same to another unrelated party.
(iv)    deduct the normal gross profit from the resale price.
(v)     deduct expenses incurred in connection with the purchase of goods;
(vi)    adjust the resultant amount for the differences between the
        uncontrolled transaction and the international transaction [or the
        specified domestic transaction].These differences could be functional
        and other differences including differences in accounting practices.
        Further these differences should be such as would materially affect
        the amount of gross profit margin in the open market;
(vii)   the price arrived at is the arm's length price of the international
        transaction [or the specified domestic transaction];
6.16 The application of the resale price method can be understood with
the following example:



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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

AE1 Ltd., is an Indian company. The shareholding pattern of AE1 Ltd., is as
follows;
     Shareholder 's name                   Status               % holding
 AE2 Ltd.                          Foreign Company                 30
 AE3 Ltd.                          Indian Company                  30
 Financial Institutions            Indian Company                  10
 Public                                                            30
AE1 Ltd., trades in compact disc (CD) writers. AE1 Ltd., procures CD writers
both locally and in the international market. Its imports consist of CD writers
purchased from AE2 Ltd. as well as other manufacturers (Non AEs).
AE1 Ltd., during the year purchased 100 CD writers from AE2 Ltd. at ` 2,900
per unit. These are resold to A Ltd., at a price of ` 3,000 per unit.
AE1 Ltd., has also purchased similar products from an unrelated supplier,
viz. K Ltd., and has resold the same to M Ltd., who is also an unrelated party
and has earned a gross profit of 15% on sales.
Analysis of the sales transactions
                 Sales to A Ltd.    Sales to M Ltd.
 Price           Ex shop            FOR Destination        Impact of Freight
                                    with cost of freight   and insurance on
                                    and      insurance     GP is 2% as the
                                    estimated at 2% of     sale          price
                                    GP                     increases       but
                                                           corresponding
                                                           expenses are not
                                                           debited to trading
                                                           account but to
                                                           profit and loss
                                                           account
 Quantity        Yes - the cost No                         Impact of quantity
 discount        of the same is                            discount on GP is
                 estimated at 1%                           1%
                 of GP
 Free gifts      No              One CD pack for As cost of gift is
                                 every CD writer not debited to
                                 with no change in trading account but

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                            Methods of Computation of Arm's Length Price

                Sales to A Ltd.   Sales to M Ltd.
                                  sale price           to P &L Account,
                                                       there is no impact
                                                       on GP
 Warranty       No                6 months warranty    As cost of warranty
                                  (without change in   is not debited to
                                  sale price) - cost   trading account but
                                  of warranty is       to P&L Account,
                                  estimated at ` 250   there is no impact
                                  per unit             on GP

Analysis of the purchase transactions
                Purchase from Purchase from K
                AE2         Ltd. Ltd.
                (International
                transaction)
 Customs        ` 25 per unit     ` 25 per unit         No impact
 duty
 Freight        ` 10 per unit     Nil                   Cost of purchase
 inwards                                                from K Ltd., is
                                                        lower
 Quantity       ` 15 per unit     Nil                   Cost of purchase
 discount                                               from K Ltd., is
                                                        higher
 Warranty       Nil               6 months warranty     No impact
                                  purchase    price
                                  remaining
                                  unchanged

Factors to be considered while determining ALP:
(a)    In the above example, the international transaction is the purchase
       transaction entered into by AE1 Ltd., with AE2 Ltd. which should be
       determined on the basis of arm's length price;

                Purchase from AE2 Ltd.                 Sales to A Ltd.
                                             AE1
                                             Ltd

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(b)    The comparable uncontrolled transaction is the purchase transaction
       entered into by AE1 Ltd., with K Ltd.

                   Purchase from K Ltd.                    Sales to M Ltd.
                                                AE 1 Ltd

(c)    The starting point for arriving at the ALP of such purchase transaction
       is the resale price charged to A Ltd. viz. ` 3,000 [Rule 10B(1)(b)(i)].
(d)    From the said resale price, the normal gross profit margin which AE1
       Ltd., would earn in a comparable uncontrolled transaction should be
       reduced. In this example, the actual gross profit margin earned by AE
       1 Ltd., in respect of its purchase from K Ltd, and its resale to M Ltd, is
       15%.
(e)    The following adjustments are made to arrive at the normal GP;
       Actual gross profit margin with M Ltd.                                15%
       Less :
       1.       Difference between Ex-shop and FOR prices                    2%
       2.       Difference due to quantity discount                          1%
       Normal gross profit margin with M Ltd.                                12%
       Note: While arriving at normal gross profits from the actual gross
       profits, only the differences in the sale transactions of AE1 Ltd., with
       A Ltd., and M Ltd., have been taken. The differences in the purchase
       transactions of AE 1 Ltd., with AE2 Ltd. and K Ltd., affecting the
       gross profits are taken separately as provided in sub rule (iv).
(f)    The resale price of ` 3000. to M Ltd., is reduced by the normal gross
       profit margin of 12%. The resultant cost of sales is ` 2640 (i.e. 3000-
       360) [Rule 10B(1)(b)(ii)].
(g)    The cost of sales so arrived at is reduced by the expenses incurred in
       connection with the purchase (international transaction) i.e. freight of
       ` 10 and customs duty of ` 25. The resultant amount is ` 2605 (i.e.
       2640-25-10) [Rule 10B(1)(b)(iii)].
(h)    The above amount is further adjusted to take into account functional
       and accounting differences between the international transaction and
       the comparable uncontrolled transaction with AE2 Ltd the purchase


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       transaction with K Ltd., which will affect the amount of gross profit
       margin as explained below.
(i)    The aforesaid amount of ` 2605 should be increased by ` 10 being
       the freight incurred by AE1Ltd., in the case of purchase from AE2Ltd.,
       but not incurred in case of purchase from K Ltd., This is for the
       reason that if a similar freight had been paid in respect of transaction
       with K Ltd, the gross profit margin from K Ltd., would have been lower
       and the resultant price would have been higher.
(j)    A decrease by ` 15 representing the quantity discount allowed by AE2
       Ltd., is to be made. This is for the reason that if a similar discount
       had been allowed in respect of transaction with K Ltd, the gross profit
       margin from K Ltd., would have been higher and the resultant price
       would have been lower.
Determination of arm 's length price under resale price method
 1.      AEs                                      :   AE1 Ltd. and AE2 Ltd.
 2.    Other enterprises                          :   K Ltd. and M Ltd.
 3.    International transaction                  :   AE1 Ltd. and AE2 Ltd.
 4.    Bought from AE2Ltd. and resold to          :   A Ltd.
 5.    CUT is purchase from K Ltd. and sales
       to M Ltd.

                             Details                                ` /unit
  Price paid to AE2 Ltd.(FOB)                                           2,900
  Quantity                                                                100
  Purchases cost (actual) (A)                                       2,90,000
  Actual GP Margin on sales to M Ltd.(%)                                    15
  Normal GP Margin on sales to M Ltd.(%)                                    12
  Price charged to A Ltd.                                               3,000
  Less: Normal GP margin                                                  360
  Balance                                                               2640
  Less: Expenses connected with purchase (freight & customs                 35
  duty paid)
  Price before adjustment                                               2,605
  Add:
  Freight incurred in case of purchase from AE2 Ltd.                       10

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                              Details                                   ` /unit
                                                        Sub total                 10
  Less :
  Quantity discount allowed by AE2 Ltd.                                       15
                                                        Sub total             15
  Arm's length price                                                       2,600
  Adjusted purchase cost (B)                                            2,60,000
  Income increases by (A-B)                                               30,000
The following points are to be noticed:
(i)     The resale price method is to be adopted only when goods purchased
        from an AE are resold to unrelated parties.
(ii)    As provided in Rule 10B(1)(b)(iii), the expenses incurred in
        connection with the purchase from AE are to be reduced from cost of
        sales .In resale price method, the arm's length purchase price is
        arrived at reducing the normal gross profit margin from the resale
        price as the first step. If the computation is stopped at this step itself,
        the derived purchase amount would be inclusive of such expenses. It
        is therefore necessary to reduce such expenses in arriving at the
        arm's length purchase price.
(iii)   Adjustments have to be made also for accounting practices apart
        from functional and other differences. Differences in accounting
        practices may be because:
        (a)   sales and purchases have been accounted for inclusive of taxes
              or exclusive of taxes;
        (b)   method of pricing the goods namely, FOB or CIF;
        (c)   fluctuations in foreign exchange.
(iv)    In actual practice, the resale in any financial year may be also out of
        opening stock. Similarly, the goods purchased during the said year
        may remain in closing stock. Under the resale price method, the
        arm's length price of purchases from AE during the financial year
        should be determined. The process of determination under Rule
        10B(1)(b)culminates in the cost of sales rather than value of purchase
        during the year. This `cost of sales' should be converted into `value of
        purchase'. For this purpose, the closing stock of goods purchased


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                               Methods of Computation of Arm's Length Price

         from AE should be added and the opening stock of purchases from
         AE should be deducted.
(v)      Further, it may not possible to reliably compute the gross margin of
         the comparables since in India at this point of time there is no uniform
         accounting convention which is applicable for computing the gross
         margin. The companies could follow different accounting principles
         while recording a particular expense item. Hence, it is not possible to
         ensure that all the expense items have been uniformly accounted by
         all comparables while computing the gross margin. For example ­
         Reporting of discounts, transportation cost, insurance and warranty
         cost, valuations of the inventory, etc. As a result, application of
         Resale Price method using external comparable transaction could be
         a challenge considering the availability of the reliable data.
6.17 It is important to understand the characterisation of the AEs (based
on the detailed functional analysis) before one selects Resale Price Method
as the most appropriate method. This can be explained by way of an
example provided below:
ABC Inc. owns valuable patents to manufacture the bicycles and has a
valuable trade name. ABC Ltd purchases the bicycles from ABC Inc and
resells the bicycles to unrelated dealers in India. The bicycle is new in the
Indian market and is a least known to the Indian consumers. Further, it is
assumed that comparable uncontrolled transactions are not available. The
financial data under two scenarios is provided below:
             Particulars                  Case 1                 Case 2
    Sales to third parties                1,000                  1,000
    Cost of goods sold                     700                    700
    Gross Profit                           300                    300
    Gross Profit / Sales ratio             30%                    30%
    Value     added      expenses           50                    250
    ( `VAE')
    VAE / Sales                              5%                    25%
In this case, it is important to analyse the following aspects before selecting
the most appropriate method:
Case 1
·     It is important to analyse the functions performed, assets employed and

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

    the risks undertaken by ABC Inc. as well as ABC Ltd. with respect to the
    transaction of purchase of bicycles by ABC Ltd. from ABC Inc., to
    determine the characterisation of the above entities and identify the
    tested party.
·   ABC Inc. owns valuable intangibles, performs R&D activities and
    generally has operations that are more complex than those of the sales
    company (i.e. ABC Ltd).
·   On the other hand, ABC Ltd is engaged in purchase of bicycles and
    selling it to the third parties without undertaking any significant value
    addition on its own.
·   VAE/Sales maybe an important factor to evaluate the intensity of
    functions as advocated in the Ruling by the High Court.
·   Since the VAE in case 1 is only 5% of the sales, it can be said that the
    marketing spend needed create customer awareness to facilitate sale of
    product in the Indian market is borne by ABC Inc and the VAE incurred
    by ABC Ltd is with respect to normal selling function.
·   It should be noted that a foreign entity may be selected as the tested
    party if it is the less complex entity and if reliable data in respect of the
    international transaction under consideration is available.
·   From the above functional analysis, ABC Ltd can be characterised as a
    normal risk bearing distributor and ABC Inc is the entrepreneurial entity.
    As seen from the characterisation, ABC Inc is more complex entity and
    therefore, it cannot be considered as a tested party. As result, ABC Ltd
    has been selected as a tested party in this case.
·   Since comparable uncontrolled transactions are not available, CUP
    cannot be applied as the most appropriate method.
·   ABC Ltd is engaged in purchase of bicycles from ABC Inc are further
    selling it to a third party without any significant value addition. The gross`
    profit realised by ABC Ltd can be compared using Resale Price method
    as the most appropriate method in this case.
Case 2
·   The VAE in case 2 is significant i.e. 25% of the sales. It can be said that
    ABC Ltd is engaged in developing the marketing intangible in the Indian
    market for ABC Inc.



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                               Methods of Computation of Arm's Length Price

·      This is the case where the reseller contributes substantially to the
       creation or maintenance of intangible property associated with the
       product (e.g. trademarks or trade names) which are owned by an AE. In
       such cases, the contribution of the goods originally transferred to the
       value of the final product cannot be easily evaluated.
·      Further, this activity of brand building may require to be separately
       evaluated for testing the arm's length nature. In case the activity of
       reselling and brand building are inextricably inter linked and cannot be
       separately evaluated, there may arise a need to evaluate a different
       method for testing the arm's length nature of the aforementioned closely
       linked transactions.
·      In such cases, the resale price method may not be the most appropriate
       method and one has to take recourse to other methods prescribed under
       the Act.
6.18 Further, one should also evaluate the pricing mechanism, contractual
terms, roles and obligations as well as the functional profile of the parties to
a transaction, before the determination of the most appropriate method to
benchmark the international transaction [or the specified domestic
transaction].
For example ­ A distributor could be awarded a net profit on sales for
performing the routine distribution functions. However, in such a scenario
RPM may not be the most appropriate method since RPM takes into account
the gross margin earned by the distributor. In such a situation, TNMM could
be considered as the most appropriate method.
Typically, RPM may be the most appropriate method in case of a normal risk
distributor, who is awarded a reasonable level of gross margin for the
functions performed.

Cost Plus Method (CPM)
6.19      Rule 10B(1)(c)cost plus method, by which,-
(i)       the direct and indirect costs of production incurred by the
          enterprise in respect of property transferred or services
          provided to an AE, are determined;
(ii)      the amount of a normal gross profit mark-up to such costs
          (computed according to the same accounting norms) arising
          from the transfer or provision of the same or similar property or

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

        services by the enterprise, or by an unrelated enterprise, in a
        comparable uncontrolled transaction, or a number of such
        transactions, is determined;
(iii)   the normal gross profit mark-up referred to in sub-clause (ii) is
        adjusted to take into account the functional and other
        differences, if any, between the international transaction [or the
        specified domestic transaction] and the comparable
        uncontrolled transactions, or between the enterprises entering
        into such transactions, which could materially affect such profit
        mark-up in the open market;
(iv)    the costs referred to in sub-clause (i) are increased by the
        adjusted profit mark-up arrived at under sub-clause (iii);
(v)     the sum so arrived at is taken to be an arm 's length price in
        relation to the supply of the property or provision of services by
        the enterprise.
6.20    Typical transactions where the cost plus method may be adopted are:
        (a)    provision of services;
        (b)    joint facility arrangements;
        (c)    transfer of semi finished goods;
        (d)    long term buying and selling arrangements.
6.21    The OECD in its Transfer Pricing Guidelines states as follows :
"This method probably is most useful where semi finished goods are sold
between associated parties, where associated parties have concluded joint
facility agreements or long-term buy-and-supply arrangements, or where the
controlled transaction is the provision of services."
Also, it is pertinent to note that similar to RPM, CPM is also a one sided
method wherein the margins earned by the manufacturer / service provider
can be tested under this method.
6.22    The steps involved in the application of this method are:
(i)     Determine the direct and indirect cost of production in respect of
        property transferred or service provided to an AE.
(ii)    Identify one or more comparable uncontrolled transactions for same
        or similar property or service.


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                              Methods of Computation of Arm's Length Price

(iii)   Determine normal gross profit mark-up on costs in the comparable
        uncontrolled transaction. Such costs should be computed according
        to the same accounting norms. In other words, the components of
        costs of comparable uncontrolled transaction should be the same as
        those of international transaction [or the specified domestic
        transaction].
(iv)    Adjust the gross profit mark-up to account for functional and other
        differences between the international transaction [or the specified
        domestic transaction] and the comparable uncontrolled transaction.
        Such adjustments should also be made for enterprise level
        differences.
(v)     The direct and indirect cost of production in the international
        transaction [or the specified domestic transaction] is increased by
        such adjusted gross profit mark-up.
(vi)    The resultant figure is the arm's length price.
6.23 With respect to the Cost Plus Method, the UN Manual on TP states
as below:
        " As with the RPM, and for the same reasons, close similarity of
        products in the controlled and uncontrolled transactions is less
        important under the Cost Plus Method than under the CUP Method,
        while functional comparability (including comparability of risks
        assumed and assets used) is more important. However, because
        significant differences in products may necessarily result in significant
        differences in the functions, the controlled and uncontrolled
        transactions should ideally involve the manufacturing of products
        within the same product family. (para 6.2.17.2)
        Cost Plus Method is typically applied in cases involving the inter-
        company sale of tangible property where the related party
        manufacturer performs limited manufacturing functions or in the case
        of intra-group provision of services. The method usually assumes the
        incurrence of low risks, because the level of the costs will then better
        reflect the value being added and hence the market price. (para
        6.2.20.1)
        Cost Plus Method is usually not a suitable method to use in
        transactions involving a fully-fledged manufacturer which owns
        valuable product intangibles as it will be very difficult to locate


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

        independent manufacturers owning comparable product intangibles.
        That is, it will be hard to establish a profit markup that is required to
        remunerate the fully-fledged manufacturer for owning the product
        intangibles. In a typical transaction structure involving a fully-fledged
        manufacturer and related sales companies (e.g. commissionaires),
        the sales companies will normally be the least complex entities
        involved in the controlled transactions and will therefore be the tested
        party in the analysis. Resale Price Method is typically more easily
        applied in such cases. (para 6.2.20.3)
6.24    An example on importance of functional similarity is provided below:
A Limited is engaged in manufacturing of pet bottles and sales to third party
customers in the Indian market. It is also engaged in selling the
manufactured pet bottles to the AE outside India. The AE further sells the pet
bottles to third party customers in their respective markets.
The functional profile of A Limited with respect to sales to third parties in
domestic market and AE is provided below:

       Functions performed               Domestic           Export business
                                         business
 Manufacturing function                                              
 Marketing     and   distribution                                    X
 function
 After sales support                                                 X
 Inventory management                                                X


         Risks assumed                   Domestic           Export business
                                         business
 Market risk                                                         X
 Credit risk                                                         X
 Foreign exchange risk                       X                       
 Inventory risk-                                                     X

From the above, one could see that there are differences in the functional
profile of A Limited with respect to sales made to third parties in the domestic


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                              Methods of Computation of Arm's Length Price

market and to AEs. Owing to such differences, while CPM can be used for
analyzing the transaction pertaining to export to the AE (by A Limited),
however the gross margins earned by A Limited from such exports cannot be
compared with the gross margin earned by A Limited from sale to third party
customers in the Indian market.
6.25 The application of the cost plus method can be understood with the
following example:
AE1 Ltd., is an Indian company. The shareholding pattern of AE1 Ltd., is as
follows:
     Shareholder 's name                    Status              % holding
 AE2 Ltd.                        Foreign Company                    30
 AE3 Ltd.                        Indian Company                     30
 Financial Institutions          Indian Company                     10
 Public                                                             30

AE1 Ltd., develops software for various customers, who include AE2 Ltd. and
M Ltd.
AE1 Ltd., during the year billed AE2 Ltd. ` 2,00,000. The total cost (direct and
indirect) for executing this work was ` 1,75,000.
AE1 Ltd., provided similar services to M Ltd., and earned a gross profit (GP)
of 50% on costs.
Analysis of transactions
                     Transactions with AE2 Transactions with M
                     Ltd.                  Ltd.
 Technology          Yes                             No - value of technology
 support                                             support incurred by AE1
                                                     Ltd., is ` 17,500
 Discount            Yes ­ Discount offered is       No
                     ` 8,750
 Business risks Yes ­ Value of the same is           No
 and marketing  estimated at ` 13,125
 Credit              Yes ­ Cost of credit is         No
                     estimated at ` 2,625


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961



Factors to be considered while determining ALP:
(a)    In the CPM, one has to start with the gross profit mark up which the
       enterprise earned in a comparable uncontrolled transaction. In this
       example, the comparable uncontrolled transaction is between AE1
       Ltd., and M Ltd.
(b)    Such gross profit (GP) mark up needs to be adjusted for the
       following:
       Ø      As AE1 Ltd., did not receive the technology support from M
              Ltd., it has priced its services higher resulting in it earning a
              higher GP with M Ltd.. The value of technology support of `
              17,500 received from AE2 Ltd. is 10% of cost. Therefore, the
              GP with M Ltd., has to be reduced by 10%.
       Ø      AE1 Ltd. did not provide discount to M Ltd., as volume of
              business from M Ltd., was not as high as that from AE2 Ltd.
              Had AE1 Ltd., offered similar discount to M Ltd., the GP with
              M Ltd., would have been lower. The discount of ` 8,750
              offered to AE2 Ltd. is 5% of cost. Therefore, the GP with M
              Ltd., has to be decreased by 5%.
       Ø      AE1 Ltd., has incurred ` 15,000 towards marketing functions
              in respect of its transactions with M Ltd., which is 7.5% of its
              cost. However, in its transactions with AE2 Ltd. the said
              functions are assumed by AE2 Ltd. Had AE1 Ltd., not incurred
              similar expenses with M Ltd., it would have settled for a lower
              GP. Therefore, the GP with M Ltd., has to be reduced by
              7.5%.
       Ø      The cost of credit of `2,625 provided by AE1 Ltd., to AE2 Ltd.
              is 1.5% of its cost. However, in its transactions with M Ltd.,
              such credit is not provided. Had AE1 Ltd., provided similar
              credit to M Ltd., it would have increased its price resulting in a
              higher GP. Therefore, the GP with M Ltd., has to be increased
              by 1.5%.
(c)    The resultant gross profit mark up is the arm's length gross profit
       mark up.




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                             Methods of Computation of Arm's Length Price

(d)      The costs of AE1 Ltd., in its transactions with AE2 Ltd. should be
         increased by the arm's length gross profit mark up to arrive at the
         arm's length income.
Determination of arm's length price under costs plus
method
1. AE                                            :   AE1 Ltd. and AE2.
2. Other enterprise                              :   AE1 Ltd. and M Ltd
3. International transaction                     :   AE1 Ltd and AE2 Ltd
4. Comparable uncontrolled transaction           :   AE1 Ltd. and M Ltd

Determination of arm's length gross profit mark up
                                  Details
 Gross profit mark up in case of M Ltd.                              50.00%
 Less :
 1. Technology support from AE2 Ltd.                                 10.00%
 2. Quantity discount to AE2 Ltd not to M Ltd.                       5.00%
 3. Marketing functions performed by AE1Ltd., in respect of M        7.50%
 Ltd.
                                                         Sub total   22.50%
 Add :
 1. Cost of credit to AE2. Ltd.                                      1.50%
 Sub total                                                           1.50%
 Arm's length gross profit mark up                                   29.00%




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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

Determination of arm 's length price
                         Details
  Direct and indirect costs incurred by AE1 Ltd. in                  1,75,000
  respect of transactions with AE2 Ltd.
  Arm's length gross profit mark up                                    29.00%
  Arm's length income (A)                                            2,25,750
  Actual price charged to AE2 Ltd. (B)                               2,00,000
  Income increases by (A-B)                                            25,750

6.26 It is also important to note that the cost plus pricing is different from
Cost Plus method. This could be explained by way of the following example:
A Limited is a captive service provider working with an assured return of 10%
on the total cost incurred in connection with provision of such services to the
Group. In this case, one could see that though the pricing is based on the
cost plus mark-up, the same cannot itself lead to a conclusion that Cost Plus
Method is the most appropriate method. The costs that A Limited would be
recovering from the Group may involve costs incurred below the gross profit
level and thus, Cost Plus Method may not be applicable in such a scenario.
The following points are to be noticed:
(i)    In this method, the direct and indirect costs of production are to be
       determined. The terms `direct' or `indirect' costs are however not
       defined. A reference may therefore be made to the industry practice
       as well as the pronouncements of the ICAI.
       It is important to note that determination of direct and indirect cost of
       manufacturing is not mandated under the mandatory format of
       financials under the Companies Act. This results in difficulty in
       applying CPM for the external comparables and therefore, CPM as
       the most appropriate method may fail.
       Further, in the Indian scenario, it is not possible to reliably compute
       the gross margin of the comparables since there is no uniform
       accounting convention which is applicable for computing the gross
       margin. The companies could follow different accounting principles
       while recording a particular expense item. Hence, it is not possible to
       ensure that all the expense items have been uniformly accounted by
       all comparables while computing the gross margin. For example ­





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                              Methods of Computation of Arm's Length Price

        Reporting of R&D costs, valuations of the inventory, etc. As a result,
        application of Cost Plus method using external comparable
        transaction could be a challenge considering the availability of the
        reliable data.
        Further, reliability of the CPM may also be adversely affected by
        factors such as cost structures, business, management efficiency and
        lack of reliable external comparable data etc.
(ii)    In determining the direct and indirect cost, the following factors have
        to be borne in mind:
        (a)   if the plant has been under utilised the costs may have to be
              suitably adjusted;
        (b)   absorption costing method is normally to be preferred.
(iii)   This method is to be adopted only in cases of supply of property or
        services to an AE. This method is not to be applied when the
        enterprise is in receipt of property or services from an AE. However,
        in such cases, one may still evaluate the applicability of cost plus
        method as the most appropriate method by considering the AE as the
        tested party.

Profit Split Method (PSM)
6.27 Rule 10B(1)(d) profit split method, which may be applicable
mainly in international transactions [or specified domestic transactions]
involving transfer of unique intangibles or in multiple international
transactions [or specified domestic transactions] which are so inter-
related that they cannot be evaluated separately for the purpose of
determining the arm 's length price of any one transaction, by which-
(i)     the combined net profit of the AEs arising from the international
        transaction [or the specified domestic transaction] in which they
        are engaged, is determined;
(ii)    the relative contribution made by each of the AEs to the earning
        of such combined net profit, is then evaluated on the basis of the
        function performed, assets employed or to be employed and
        risks assumed by each enterprise and on the basis of reliable
        external market data which indicates how such contribution
        would be evaluated by unrelated enterprises performing
        comparable functions in similar circumstances;

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

(iii)   the combined net profit is then split amongst the enterprises in
        proportion to their relative contributions, as evaluated under
        sub-clause (II);
(iv)    the profit thus apportioned to the assessee is taken into account
        to arrive at an arm 's length price in relation to the international
        transaction [or specified domestic transaction]:
Provided that the combined net profit referred to in sub-clause (i) may,
in the first instance, be partially allocated to each enterprise so as to
provide it with a basic return appropriate for the type of international
transaction [or specified domestic transaction] in which it is engaged,
with reference to market returns achieved for similar types of
transactions by independent enterprises, and thereafter, the residual
net profit remaining after such allocation may be split amongst the
enterprises in proportion to their relative contribution in the manner
specified under sub-clauses (ii) and (iii), and in such a case the
aggregate of the net profit allocated to the enterprise in the first
instance together with the residual net profit apportioned to that
enterprise on the basis of its relative contribution shall be taken to be
the net profit arising to that enterprise from the international
transaction [or specified domestic transaction].
6.28 Typical transactions where the profit-split method may be used are
transactions involving:
(a)     integrated services provided by more than one enterprise for e.g., in
        case of financial service sector, where the activities performed by
        Indian company and foreign AEs in relation of a merger and
        acquisition transaction are so interrelated that it may not possible to
        segregate them;
(b)     transfer of unique intangibles, for e.g. two AEs contribute their
        respective intangibles to develop a new product or process and earn
        income from such product or process.
6.29 The observations of the OECD, in its Transfer Pricing Guidelines, on
this method are as follows :
"This method aims to determine what division of total profits independent
enterprise would expect in relation to the relevant transactions. The profits
should be split on an economically valid basis that reflects the functions and
risks of each of the parties. In order to apply this method, it is necessary to


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                             Methods of Computation of Arm's Length Price

identify the total profit arising from the related party transactions and split
that profit between the parties according to their respective contributions."
6.30 There are two approaches to this method, namely, total profits split
and residual profit split.
6.31   Total profits split: The steps involved are as follows:
(i)    Determine the combined net profit of the AEs arising from the
       international transactions [or the specified domestic transaction] in
       which they are engaged. Such profits represent the profits earned
       from third parties due to the combined efforts of the AEs. It may be
       noted that the `combined net profit' referred to in the rule is not the
       aggregate of entire profits earned by the AEs. Example:AE1 may
       earn profits from certain transactions wherein there is no contribution
       by AE2and vice versa. Such profits do not enter into the
       determination of combined net profit. Only those profits that are
       earned as a result of joint efforts of AE1 and AE2 should be taken as
       combined net profit.
(ii)   Evaluate relative contribution made by each entity involved in the
       transaction on the basis of:
       (a)      functions performed;
       (b)      assets employed;
       (c)      risks assumed;
       (d)      the reliable external market data indicating how such
                contribution would be evaluated by unrelated enterprises
                performing comparable functions in similar circumstances. It
                may be noted that reference to `external market data'
                indicates comparable uncontrolled transactions. The use of
                word `external' does not preclude use of internal CUT. In the
                process of choosing CUTs, the function performed, assets
                used and risks taken (FAR) of the uncontrolled transactions
                would have been compared with the FAR of the international
                transactions [or the specified domestic transaction].When the
                FAR of the international transaction [or the specified
                domestic transaction] and CUT are similar, the relative
                contribution adopted in the CUT should be applied to the
                international transaction [or the specified domestic



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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

                transaction]. Any significant differences between the two
                should be suitably adjusted.
(iii)   Thereafter, split the combined net profit in proportion to the relative
        contribution determined as above.
(iv)    The profit so apportioned is taken to arrive at the arm's length price in
        relation to the international transaction [or the specified domestic
        transaction].The profits so apportioned to the AE when added to the
        costs incurred by it in relation to international transaction [or the
        specified domestic transaction] would result in arm's length price.
Residual profit split approach
6.32 In this approach, firstly, a basic return is determined for each of the
enterprises and profits of each such enterprise is ascertained. This amount is
reduced from the combined net profits. Residual profits are allocated on the
basis of relative contribution.
Steps involved in this approach are as follows:
(i)     As detailed in paragraph 21.5(i), determine the combined net profit of
        the AEs arising from the international transactions [or the specified
        domestic transaction] in which they are engaged.
(ii)    At the first stage, depending on functions performed, assets
        employed and risks assumed, determine the basic return appropriate
        to the respective activities. Allocate the combined net profit on the
        basis of above. This step results in a partial allocation of the
        combined net profit to each enterprise. For this purpose, the
        allocation is undertaken with reference to margins of comparable
        uncontrolled entities.
(iii)   the balance of the combined net profit is allocated on the basis of the
        evaluation of the relative contribution as discussed in paragraph
        21.5(ii).
(iv)    the total net profit from such two-tier allocation is taken to arrive at
        the arm's length price. The profits so apportioned to the AE when
        added to the costs incurred by it in relation to international
        transaction [or the specified domestic transaction] would result in
        arm's length price.
6.33 The application of the profit split-method can be understood with the
following example:

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                              Methods of Computation of Arm's Length Price

AE1 Ltd., is an Indian company. The shareholding pattern of AE1 Ltd., is as
follows;
      Shareholder 's name                Status               % holding
 AE2 Ltd.                       Foreign Company                   30
 AE3 Ltd.                       Foreign Company                   30
 Financial Institutions         Indian Company                    10
 Public                                                           30

AE1 Ltd., is an investment advisory company, which in association with AE2
Ltd. assists its clients with foreign acquisitions.
AE3 Ltd., which is based in U.S.A., has worldwide presence.AE1 Ltd. is
approached by M for identifying potential target companies for acquisitions in
the USA. In order to serve M, AE1 Ltd. and AE3 Ltd., have each contributed
integrally to identification of potential target and assisting M with the
acquisition process. For the above, AE1 Ltd., received consideration of US$
50,000.The financials are as follows;
                                        AE1 Ltd.              AE3 Ltd.
 Revenue                                    30000               20000
 Cost                                       20000                8000
 Profit                                     10000               12000
Factors to be considered:
(a)       The normal basic return is ordinarily calculated as a percentage of
          the costs incurred or gross revenues or capital employed. In this
          example, it is assumed as a percentage of the cost.
(b)       Based on the FAR analysis, the basic return for AE1 Ltd., and AE3
          Ltd., are determined to be 15% and 10% respectively. Accordingly,
          the normal basic return for AE1 Ltd. in India for the aforesaid
          operation is US$ 3000.The similar returns for AE3 Ltd., US$ 800.The
          total basic return, thus, is US $ 3,800.
(c)       On the basis of functions performed, risks assumed and assets
          employed, the relative contribution may be taken at 70%, 30% for
          AE1 Ltd. and AE3 Ltd., respectively.




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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

Determination of arm 's length price under profit split method:
First Approach: Total Profit Split Method
 1. AEs                                      :   AE1Ltd. and AE3 Ltd.
 2. Ultimate delivery of product is          :   By AE3 Ltd. to M Ltd.
 3. International transaction                :   AE1 Ltd. and AE3 Ltd.


                            Details                                 US$
 Price charged by AE3 Ltd from M Ltd                                     50,000
 AE3 Ltd share of revenue                                                20,000
 AE1 Ltd share of revenue                                                30,000
 Combined total profits                                                  22,000
 Evaluation of relative contribution
 AE1 Ltd : India return ­ 70%                                            15,400
 AE3 Ltd : US return ­ 30%                                                6,600
 Total                                                                   22,000
 Total return for AE1 Ltd                                                15,400
 Total cost of AE1 Ltd                                                   20,000
 Income of AE1 Ltd on arm's length price (A)                             35,400
 Actual revenue (B)                                                      30,000
 Increased income (A-B)                                                   5,400
Note: In this example, the basic return is not required to be taken into
account.
Second Approach: Residual profit split method
                            Details                                  US$
 Price charged by AE3 Ltd from M Ltd                                     50,000
 AE3 Ltd share of revenue                                                20,000
 AE1 Ltd share of revenue                                                30,000
 Combined total profits                                                  22,000
 1.      Basic return


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                                Methods of Computation of Arm's Length Price

                             Details                                 US$
       AE1 Ltd : India return                                            3,000
       AE3 Ltd : US return                                                 800
                                Total                                    3,800
  2.   Residual net profit                                             18,200
       AE1 Ltd: India return ­ 70%                                     12,740
       AE3 Ltd: US return ­ 30%                                          5,460
                                Total                                  18,200
  Total return for AE1 Ltd (12740 + 3000)                              15,740
  Total cost of AE1 Ltd.                                               20,000
  Income of AE1 Ltd. on arm's length price (A)                         35,740
  Actual revenue (B)                                                   30,000
  Increased income (A-B)                                                 5,740

The following points are to be noticed:
(a)    It is the profit from a transaction with the AE that needs to be
       ascertained. If there are other transactions, which contribute to the
       profits, then the profits from transactions with AE may have to be
       arrived at on some approximation.
(b)    The rule itself provides an alternative method to arrive at the arm's
       length price being the two-tier profit split-method;
(c)    If in either of the alternatives, a range of figures is available, the
       arithmetical mean of such figures may be adopted as the arm's length
       price. It may however not be possible to adopt the arithmetical mean
       of the two alternatives.
(d)    Under the two-tier split-method, the basic rate of return may have to
       be adopted having regard to the profits compared to the net worth of
       the enterprise. Such rate of return may not be uniform for all the
       AEs involved in the transaction.
(e)    This is the only method for which the Rule itself has prescribed the
       types of transaction to which it may be applicable.
(f)    Even though the computation proceeds with the profits from a
       transaction, the purpose is only to arrive at the arm's length price of a

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        transaction. It is only by substituting the arm's length price for the
        price in the international transaction [or the specified domestic
        transaction] that an adjustment may be made to the income returned.

Transactional Net Margin Method (TNMM)
6.34    Rule 10B(1)(e) transactional net margin method, by which,-
(i)     the net profit margin realised by the enterprise from an
        international     transaction[or   the    specified   domestic
        transaction] entered into with an AE is computed in relation to
        costs incurred or sales effected or assets employed or to be
        employed by the enterprise or having regard to any other
        relevant base;
(ii)    the net profit margin realised by the enterprise or by an
        unrelated enterprise from a comparable uncontrolled transaction
        or a number of such transactions is computed having regard to
        the same base;
(iii)   the net profit margin referred to in sub-section (ii) arising in
        comparable uncontrolled transactions is adjusted to take into
        account the differences, if any, between the international
        transaction [or the specified domestic transaction] and the
        comparable uncontrolled transactions, or between the
        enterprises entering into such transactions, which could
        materially affect the amount of net profit margin in the open
        market;
(iv)    the net profit margin realised by the enterprise and referred to in
        sub-clause (i) is established to be the same as the net profit
        margin referred to in sub-clause (iii);
(v)     the net profit margin thus established is then taken into account
        to arrive at an arm 's length price in relation to the international
        transaction[or the specified domestic transaction].
6.35 Typical transactions where the transactional net margin method may
be adopted are:
(a)     provision of services;
(b)     distribution of finished products where resale price method cannot be
        applied;


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                             Methods of Computation of Arm's Length Price

(c)    transfer of semi finished goods where cost plus method cannot be
       applied;
(d)    transactions involving intangibles where profit split method cannot be
       applied.
6.36   The steps involved in the application of this method are:
(i)    Identify the net profit margin realised by the enterprise from an
       international transaction [or the specified domestic transaction].
       Where the assessee also has transactions, segments or businesses
       where the international transactions [or the specified domestic
       transaction] with AEs are not relevant, then the net profit margin to
       be considered for the purposes of this TNMM method should be such
       net profit margin as is derived only from the transactions, segments
       or businesses related to the international transaction [or the specified
       domestic transaction]. The net profit margin may be computed in
       relation to costs incurred or sales effected or assets employed or any
       other relevant base.
       For example,
       ·      In case where the assessee acts as a distributor and the
              transaction pertains to import, the revenue may be used as
              base.
       ·      In case the transaction involves export of services/goods,
              costs may be taken as base provided the exporting entity acts
              as a contract service provider / contract manufacturer.

       ·      Return on capital employed or Return on assets are typically
              used in case of a capital intensive manufacturing set-ups
              where the tangible operating assets have a high correlation to
              profitability. For example: Return on capital employed or
              Return on assets could be used in case of a leasing company.
(ii)   Identify the net profit margin from a comparable uncontrolled
       transaction or a number of such transactions having regard to the
       same base; In practice, net profit margin is ascertained at segment
       level where segment data are available. The unallocated expenses
       are allocated on a reasonable basis and the segmental net profit is
       determined. Where segment data are not available, net profit is
       normally determined at enterprise level. Where internal CUT is
       available transaction level net profit may be determined.

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

(iii)   In case internal CUT is not available, external CUT is taken. In such
        case, as discussed above, net profit margin should be taken at
        enterprise level (segmental or enterprise as a whole) of comparable
        companies. A search should be carried out to identify comparable
        companies on the basis of information and data available with the
        assessee. Where such information and data are not available, search
        may be carried out with reference to database in public domain.
(iv)    The net profit margin so identified is adjusted to take into account the
        transaction level and enterprise level differences if any. The
        differences should be those that could materially affect the net profit
        margin in the open market;
(v)     The adjusted net profit margin is taken into account to arrive at the
        arm's length price in relation to the international transaction [or the
        specified domestic transaction].
6.37 The unavailability of reliable data for comparables in case of gross
profit based methods such as cost plus method and resale price method may
pose difficulties in selecting them as the most appropriate method. In such
circumstances, TNMM may be considered as the most appropriate method,
subject to other parameters such as degree of comparability, comparability
factors, functional profile, etc.
6.38 However, this should not be construed as TNMM being a residual
method or method of last resort. Though, TNMM is more tolerant to
differences in the product comparability as compared to the traditional
methods, the comparability standard to be applied to the TNMM requires a
high degree of similarity in several factors between the tested party and the
independent enterprises that may adversely affect the net margins. For
example: contractual terms and conditions, functions performed, risks
assumed and assets employed, pricing mechanism, availability of the
comparable data, etc.
6.39 Net margins may be affected by factors that have no effect or less
significant effect on gross margins or prices due to the variation of operating
expenses between companies. These factors may be unrelated to transfer
pricing. For example ­ Difference in the capacity utilisation level of the tested
party vis-a-vis the comparables.
6.40 Specific factors that may affect net margins include, but are not
limited to:
·       Barriers to entry in the industry;
·       Competitive position;

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                              Methods of Computation of Arm's Length Price

·      Management efficiency;
·      Individual business strategies;
·      Threat of substitute products;
·      Varying cost structures;
·      Difference in the working capital level;
·      Difference in the import vs. domestic content;
·      Difference in the capacity utilisation level;
·      Difference in the business model: say outsourcing of some
       manufacturing processes vs. in-house manufacturing of all the
       processes;
·      Difference in the functions: say undertaking own market / distribution
       channels vs. distribution through individual distributors.
6.41 If material differences between the tested party and the independent
enterprises are affecting the net margins, reasonably accurate adjustments
should be made to account for such differences.
6.42 The application of the transactional net margin method may be
understood with the following example:
AE1 Ltd., is an Indian company
AE1 Ltd., manufactures compact disc (CD) writers and sells the same to AE2
Ltd., which is an AE of AE1 Ltd.
As AE1 Ltd., does not have similar transaction with a non AE, no internal
CUT is available. As AE1 Ltd., does not have information and data to identify
a comparable company, it has used the databases in public domain for
carrying out the search. The result of the search may be summarised as
follows:
                                                        No. of companies
Search on the basis of following keywords:
(a)    Computer                                                          800
(b)    Computer hardware                                                 250
(c)    Computer peripherals                                               66

Sub total                                                              1116

Elimination process :

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

Companies with different activities                                        800
Companies with duplication when multiple database
are used                                                                    75
Companies with no financials                                                90
Companies having significant operations like sales
or purchases with related party                                            100
Companies reporting no operations                                           50

Sub total                                                                 1115

Company/companies selected ­ Z Ltd.                                         1
Note: The search criteria and filters adopted above should be taken as
illustrative only.
The comparison between AE1 Ltd., and Z Ltd., is carried out as follows:
 Financials                                   AE1 Ltd.             Z Ltd.
                                              ` (in crores)    ` (in crores)
 Sales                                             130              200
 Other income                                        5               10
 Total Income                                      135              210

 Operating expenses                                  85            120
 Interest                                            5              7
 Depreciation                                        10            12
 Loss on sale of undertaking                         5              0
 Expenses relating to non         operating          1              3
 income
 Total expenditure                                   106           142
 Net profits                                         24            58

 Operating margin                                AE1 Ltd.          Z Ltd.
                                               ` (in crores)   ` (in crores)
 Sales                                               130           200
 Gross revenue                                       130           200


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                            Methods of Computation of Arm's Length Price

 Operating margin                                AE1 Ltd.          Z Ltd.
                                               ` (in crores)   ` (in crores)
 Operating expenses                                85              120
 Interest                                           5               7
 Depreciation                                      10              12
 Total operating cost                              100             139

 Operating profit                                  30.00          61.00

 Operating margin (before interest and             52.94          66.67
 depreciation)
 Operating margin (after depreciation but          36.84          51.52
 before interest)

6.43 TNMM is less reliable when applied to the aggregate activities of a
complex enterprise engaged in various different transactions or functions.
The TNMM should thus generally not be applied on a companywide basis if
the company is involved in a number of different transactions or functions
which are not properly evaluated on an aggregate basis. However, it may be
possible to apply TNMM when the aggregate activities/transactions are
sufficiently interlinked, as for example when similar sales functions are
conducted for products in similar product lines.
6.44 The Delhi High Court in the case of Sony Ericsson Mobile
Communications India Pvt. Ltd (ITA No 16/2014) has upheld that TNMM
could be effective and reliable when applied to closely-linked or continuous
transactions. The following example explains that segregation of
advertisement, marketing and promotion ( `AMP') expenses as an
independent transaction would lead to absurd results:
 Particular                               Case 1      Case 2      Variation
 Sales                                    1,000       1,000        1,000
 Purchase price                            600         500          500
 Gross margin                              400         500          500
 AMP expense                                50         150           50
 Overhead expense                          300         300          300
 Net profit                                 50          50          150


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

 Particular                                 Case 1       Case 2      Variation
 TP adjustment                                                          100
 Add: Mark-up of 15%                                                    15
 Total profit                                                           265
                                                                     (115+150)
6.45 In case 2, a distributor having significant marketing functions incurred
substantial expenditure on AMP, three times more than in case 1, but the
purchase price being lower, the taxpayer got adequately compensated and
hence, no adjustment. If the AMP in case 2 was INR 50, i.e, identical to case
1, and AMP of INR 100 was incurred as a separate transaction, this would be
absurd if the TPO makes an adjustment, leading to a net profit of 26.5%,
which seems absurd.
Thus, it may be appropriate to aggregate the transaction of purchase and
marketing efforts leading to higher AMP expenses in the instant case.
6.46 However, it is important to compute profit from the international
transaction [or the specified domestic transaction] if the activities are not
interlinked and are separate. This can be achieved by using the segmental
profitability based on appropriate assumptions and scientific allocation keys.
However, in cases where such segmental profitability is not possible,
differences in the profitability at the entity level cannot be loaded entirely on
the international transactions [or the specified domestic transaction] and this
would require application of the `principle of proportionality'.
 Particular                                      Taxpayer         Third party
                                                profitability     profitability
 Sales to AEs                                        40               150
 Sales to Non AEs                                    60
 Purchases                                           80                90
 VAE                                               10.50               30
 Net profit                                         9.50               30
 Net profit / Cost                                10.50%              25%
6.47 From the above, it can be seen that the profitability of the taxpayer is
lower by 14.50% (25%-10.50%). The entire difference cannot be attributable
to the sales since the sales to AEs accounts for only 40% of the total sales.
Therefore, adjustment may need to be restricted to 40% of the difference.
6.48   Rule 10B(e)(iii) requires that transaction level and enterprise level

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                              Methods of Computation of Arm's Length Price

differences should be adjusted if such differences materially affect the
amount of net profit margin.
In this example, following enterprise level differences could be visualised;
(a)     Working capital ­ There may be differences in stock holding,
debtors and creditors. Appropriate adjustment to eliminate the impact of
above difference may be made by taking the prevailing interest rate. For this
purpose, useful reference may be made to the guidelines issued by Internal
Revenue Service of USA. However, in this example, it is assumed that the
difference in the working capital is not significant requiring any adjustment.
(b)    Cost of capital ­ There may be difference in the manner of funding
such as equity, preference, debenture, inter corporate loans etc. In order that
such difference does not impact the net profit, the operating margin on
operating cost before interest is taken as profit level indicator.
(c)    Assets employed ­ There may be difference in assets employed and
the method of providing depreciation. In order that such difference does not
impact the net profit, the operating margin on operating cost before
depreciation is taken as profit level indicator.
(d)     Assured or risk bearing business ­ There may be a difference in
the customer/ revenue model of the assessee vis-à-vis the comparables. For
example, the comparables identified may be entrepreneurs bearing the
market risks of business volume, customer continuity, etc and the assessee's
international transaction [or the specified domestic transaction] is in the
nature of captive service provider or contract manufacturer with assured
volumes and/or assured compensation and/or assured business period, etc.
Such differences may be eliminated by making appropriate adjustment for
low-risk or risk free business.
(e)     Difference in the capacity utilisation ­ There may be difference in
the utilisation of capacity by the tested party and the comparables. For
example: The taxpayer has utilized only 41.39% of its installed capacity (i.e.
58.61% of the fixed overheads remained unabsorbed), whereas the capacity
utilized by the comparables is 80.90%.As a result, the unabsorbed fixed
costs, debited to the profit and loss account due to existing accounting
practices, has, in fact skewed the profit level indicator of the taxpayer for the
period under consideration. As a result, it would be important to compute the
profitability from manufacturing activity after removing unabsorbed fixed
costs (to bring the capacity utilisation of the taxpayer in line with that of the
comparables) with a view to achieve meaningful comparison.

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

6.49 In the above table, the transaction level differences cannot be
noticed. However, some transaction level differences may exist and the same
may be adjusted if requisite information is available. Some of the common
transaction level differences may be as follows;
(a)    Free gifts
(b)    Extended warranty (in addition to the normal one-year)
(c)    Marketing risks
(d)    Pricing - Ex-Shop or FOR-destination.
(e)    Quantity discount
Table 5: Computation of arm 's length price under the transactional net
margin method
1. AE                                         :    AE1 Ltd. and AE2 Ltd.
2. International transaction                  :    AE1Ltd. and AE2 Ltd.
3. Comparable uncontrolled company            :    Z Ltd.


                                                                           %
Net profit margin of Z Ltd. - i.e. operating margin on cost before      51.52
interest and after depreciation
Adjustments for transaction level differences                            0.00
Arm's length net profit margin                                         51.52
                                                                          ( `in
                                                                      crores)
Operating costs before interest and after depreciation                 95.00
Arm's length sale revenue                                             143.94
Actual sales                                                          130.00
Income increases by                                                    13.94
The following points are to be noticed:
(a)    Different bases of determining the net profit margin [i.e. profit level
       indicators (PLI)] are recognised. The same basis of arriving at the net
       profit margin is to be adopted year after year, unless circumstances
       justify an alternate base;
(b)    Whichever base is selected in determining the net profit margin in an
       international transaction [or the specified domestic transaction], the

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                             Methods of Computation of Arm's Length Price

       same basis is to be adopted for arriving at the net profit margin in the
       comparable uncontrolled transaction;
(c)    It is recommended that operating profit margin may be used instead
       of net profit margin. Operating profit margin would eliminate the non-
       operating items (the items of revenue and costs which do not result
       from routine business operations such as profit on sale of assets,
       dividend etc.).
       Further, the operating profit margins should be computed on the
       basis of financial statements of the assessee and the comparable
       company.
(g)    The accounting treatment of expenses and depreciation is also a
       critical factor in computing the arm's length price. Unlike the
       preceding methods, the rule does not explicitly provide for adjustment
       on account of differing accounting practices. Nevertheless, such
       differing practices should also be factored in;
(h)    It is not uncommon to find purchase transaction being an international
       transaction [or the specified domestic transaction] where TNMM is
       used. TNMM requires the determination of the net profit margin from
       an international transaction [or the specified domestic transaction]
       and purchase transaction as such does not result in net profit.
       However, as purchase is inextricably linked to earning net profit,
       TNMM may be used for establishing arm's length purchase value. In
       such case, comparable operating margin should be appropriately
       used to work back the arm's length purchase cost. This may be
       illustrated as follows:
Illustration 1:
 1. Actual Profit and loss account of the assesse
                                    ` in                                 ` in
                                   lakhs                                lakhs
 Opening stock-AE purchases           100 Sales of AE purchases            800
 Opening stock-Non AE                 150 Sales of Non AE                 1200
 purchases                                  purchases
 Purchases from AE                    500 Closing stock-AE                 120
                                            purchases
 Purchases from Non AE              1000 Closing stock-Non AE              160
                                            purchases

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

 Gross profit                           530
                                      2280                                  2280
 Expenses                               200 Gross profit                      530
 Net profit                             330
                                        530                                   530
 2.       Comparable operating margin (PLI being operating profit           35%
          on sale)
 3.       Profit and loss account - recast to compute arm's length price of
          purchase
                                      (` in                                (` in
                                    lakhs)                               lakhs)
 Opening stock-AE purchases             100 Sales of AE purchases             800
 Purchases from                         460 Closing stock-AE                  120
 AE(balancing figure)                         purchases
 Gross profit (brought back)            360
                                        920                                   920
 Expenses-allocated                       80 Gross profit                     360
 (in the ratio of sales)                      (worked back)
 Net profits                            280
 (applying TNMM margin on AE sales)
                                        360                                   360
 4.       Arm's length value of purchase is `460 as against actual value of
          ` 500. Therefore, income increases by ` 40.
Illustration 2 :
 1.     Profit and loss account of the assessee ­ Actual
                                      ` in                                  ` in
                                    lakhs                                 lakhs
 Opening stock of raw material         100 Sale of finished goods          2500
 (AE purchases)
 Opening stock of raw material         150 Closing stock of raw             120
 (Non-AE purchases)                         material (AE purchases)
 Purchases of raw material from        500 Closing stock of raw             160
 AE                                         material (Non-AE
                                            purchases)
 Purchases of raw material from      1000 Closing stock of finished         500
 Non-AE                                     goods

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                              Methods of Computation of Arm's Length Price

 Manufacturing costs                  400
 Admin, selling and finance           200
 expenses
 Net profit                              930
                                       3280                              3280
 2. Comparable operating margin (PLI being operating profit on sale)     45%
 3. Profit and loss account - recast:
                                        ` in                               ` in
                                      lakhs                              lakhs
 Opening stock of raw material           150 Sale of finished goods       2500
 (Non-AE purchases)
 Cost of purchase from AE (net               Closing stock of raw
 of stock)                               405 material                       160
 (balancing figure)                          (Non-AE purchases)
 Purchases of raw material from              Closing stock of finished
 Non AE                                1000 goods                           500
 Manufacturing costs                     400
 Admin, selling and finance
 expenses                                200
 Net profit                            1125
 (arrived on basis of TNMM
 margin)
                                       3280                              3280
 Arm's length Purchase value :
 Cost of purchase from AE (net of stock)                                    405
 Add : Closing stock of Raw Material                                        120
 Add : Closing stock of Raw Material in finished goods (see Note 1
 below)                                                                      20
 Less : Opening stock                                                       100
 Arm's length Purchase value                                                445
 Actual purchase                                                            500
 Excess price paid                                                           55
Notes: 1. In the above example, the raw material cost (of purchases from
AE) built into closing stock of finished goods is assumed to be ` 20.
       2. It is assumed that there is no opening stock of finished goods.

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

Other Method (OM) of determination of arm's
length price
6.50 The CBDT has inserted a new Rule 10AB by notifying the "Other
Method" apart from the five methods already prescribed.
For the purposes of clause (f) of sub-section (1) of section 92C, the
Other Method for determination of the arms' length price in relation to
an international transaction [or the specified domestic transaction]
shall be any method which takes into account the price which has been
charged or paid, or would have been charged or paid, for the same or
similar uncontrolled transaction, with or between non-AEs, under
similar circumstances, considering all the relevant facts.
6.51 The introduction of the Other Method as the sixth method allows the
use of `any method' which takes into account (i) the price which has been
charged or paid or (ii) would have been charged or paid for the same or
similar uncontrolled transactions, with or between non-associated
enterprises, under similar circumstances, considering all the relevant facts.
The various data which may possibly be used for comparability purposes
could be:
(a)    Third party quotations;
(b)    Valuation reports;
(c)    Tender/Bid documents;
(d)    Documents relating to the negotiations;
(e)    Standard rate cards;
(f)    Commercial & economic business models; etc.
6.52 It is relevant to note that the text of Rule 10AB does not describe any
methodology but only provides an enabling provision to use any method that
has been used or may be used to arrive at price of a transaction undertaken
between non AEs. Hence, it provides flexibility to determine the price in
complex transactions where third party comparable prices or transactions
may not exist. The wide coverage of the Other Method would provide
flexibility in establishing arm's length prices, particularly in cases where the
application of the five specific methods is not possible due to reasons such
as difficulties in obtaining comparable data due to uniqueness of transactions
such as intangibles or business transfers, transfer of unlisted shares, sale of


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                             Methods of Computation of Arm's Length Price

fixed assets, revenue allocation/splitting, guarantees provided and received,
etc. However, it would be necessary to justify and document reasons for
rejection of all other five methods while selecting the `Other Method' as the
most appropriate method. The OECD Guidelines also permit the use of any
other method and state that the taxpayer retain the freedom to apply
methods not described in OECD Guidelines to establish prices, provided
those prices satisfy the arm's length principle.
6.53 The application of the sixth method may be understood with the
following example:
Illustration A
AE1 Ltd. is an Indian Company.
AE1 Ltd. owns certain registered patents which it has developed by
undertaking research and development.
It is a subsidiary of AE2 Ltd., a foreign company.
AE1 Ltd. has sold its registered patents to AE2 Ltd., for `50 crores. The price
has been determined based on a valuation report obtained from an
independent valuer.
The sale of patents is a unique transaction and AE1 Ltd or AE2 Ltd. has not
entered into similar transactions with third parties and hence no internal or
external CUP is available.
AE1 Ltd. may select the Other Method as the most appropriate method and
use the independent valuation report for comparability purposes.
Illustration B
An Indian Company (I Co) buys back its equity shares issued to its foreign
AE (AE Co).I Co obtains a valuation report from an external firm identifying
the fair market value of these shares. I Co purchases the shares at the value
determined in the valuation report. This value denotes a price that would
have been charged if a third party would have bought the same shares.
Hence, I Co could use Rule 10AB and rely upon the valuation report to
demonstrate this transaction to be arm's length.
Illustration C
Another example where this method could be used is in cases of cost
allocation arrangements where a taxpayer benefits from certain services
provided by a central entity of the group and has to pay a portion of the total


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

cost incurred by the service provider. These costs are generally allocated on
the basis of allocation keys like headcount, time spent, revenues etc. and a
third party outside the group may not have the capability to provide identical
services. Hence, in the absence of comparable prices or transactions, Rule
10AB may be applied and the cost allocation arrangement could be justified
appropriately.
Most appropriate method
6.54 (1) For the purposes of sub-section (1) of section 92C, the most
appropriate method shall be the method which is best suited to the
facts and circumstances of each particular international transaction [or
the specified domestic transaction] , and which provides the most
reliable measure of an arm 's length price in relation to the international
transaction [or the specified domestic transaction] .
(2)     In selecting the most appropriate method as specified in sub-
rule (1), the following factors shall be taken into account, namely:-
       (a)     the nature and class of the international transaction[or
               the specified domestic transaction];
       (b)     the class or classes of AEs entering into the transaction
               and the functions performed by them taking into account
               assets employed or to be employed and risks assumed by
               such enterprises;
       (c)     the availability, coverage and reliability of data necessary
               for application of the method;
       (d)     the degree of comparability existing between the
               international transaction[or the specified domestic
               transaction] and the uncontrolled transaction and
               between the enterprises entering into such transactions;
       (e)     the extent to which reliable and accurate adjustments can
               be made to account for differences, if any, between the
               international transaction[or the specified domestic
               transaction] and the comparable uncontrolled transaction
               or between the enterprises entering into such
               transactions;
       (f)     the nature, extent and reliability of assumptions required
               to be made in application of a method.[Rule 10C].


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                              Methods of Computation of Arm's Length Price

6.55 No particular method is suitable in every possible situation. It is not
possible to provide specific rules that will cover every case. While selecting
the most appropriate method, the factors prescribed in section 92C of the Act
and Rule 10C(2) should be considered.
Amongst these factors, the functions performed by AEs (including assets
employed and risks assumed) should be given due consideration. It is also
important to ascertain the extent and reliability of the uncontrolled data that is
available. The nature of the available data, and especially the amount and
reliability of detail on the factors entering into a comparability analysis, are
very important issues in the selection and application of a methodology.
Although it is difficult to prescribe general principles for choice of most
appropriate method, the following broad categorisation may be considered as
already indicated under each of the respective methods:
(i)     Comparable uncontrolled price method may be used in case of loans,
        , service fee, transfer of tangibles, sale and purchase of goods, etc;
(ii)    Resale price method is most useful in case of marketing operations of
        finished products, especially in case of distributors not performing
        significant value addition to the product;
(iii)   Cost plus method is normally used where raw materials or semi-
        finished goods are sold; where joint facility agreements or long-term
        buy-and-supply arrangements, or the provision of services are
        involved;
(iv)    Profit split method is normally used in cases where the transactions
        involve provision of integrated services by more than one enterprise.
        For example ­ One enterprise holds technology and the other
        enterprise holds the distribution network and both are the key
        intangibles for the overall success of the Group; freight forwarders
        and supply chain specialists.
(v)     Transactional net margin method could be used in case of
        manufacturing operations, sale of raw materials or semi-finished
        goods where cost plus method is not the most appropriate method,
        and marketing operations of finished products where resale price
        method is not themost appropriate method..
(vi)    Other method may be used in case of royalties, commodities, transfer
        of intangibles and shares, etc.



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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

6.56 For the purposes of sub-rule (1) of rule 10B, the comparability of an
international transaction [or the specified domestic transaction] with an
uncontrolled transaction shall be judged with reference to the following
namely:-
(a)    the specific characteristics of the property transferred or services
       provided in either transaction;
(b)    the functions performed, taking into account assets employed or to be
       employed and the risks assumed, by the respective parties to the
       transactions;
(c)    the contractual terms (whether or not such terms are formal or in
       writing) of the transactions which lay down explicitly or implicitly how
       the responsibilities, risks and benefits are to be divided between the
       respective parties to the transactions;
(d)    conditions prevailing in the markets in which the respective parties to
       the transaction operate, including the geographical location and size
       of the markets, the laws and government orders in force, costs of
       labour and capital in the markets, overall economic development and
       level of competition and whether the markets are wholesale or retail.
6.57 While evaluating each method the distinctive aspects of computation
should be borne in mind. For instance, the Resale Price Method requires
functional and other differences including accounting practices to be adjusted
to the price whereas CPM and TNMM require such differences to be adjusted
to the margin.
6.58 Different methods may be chosen as most appropriate method for
different transactions of the assessee as long as the rationale for each of
such choices are adequately documented. Also, 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.




                                     144
                                                              Chapter 7
                 Documentation and Verification
Type of information and documents
7.1     Rule 10D(1) lays down thirteen different types of information and
documents that a person has to keep and maintain in relation to the
international transactions undertaken in a given financial year. Broadly, these
information and documents may be classified into three types:
(i)     enterprise-wise documents ­ These are documents that describe the
        enterprise, the relationships with other associated enterprise, the
        nature of business carried out, etc. This information is, largely,
        descriptive [clauses (a) to (c)].
(ii)    transaction-specific documents ­ These are documents that explain
        the international transaction in greater detail. It includes information
        with regard to each transaction (nature and terms of the contract,
        etc.), description of the functions performed, assets employed and
        risks assumed by each party to the transaction, economic and market
        analyses, etc. This information is both descriptive and quantitative in
        nature [clauses (d) to (h)].
(iii)   Computation related documents ­ These are documents which
        describe and detail the methods considered, actual working
        assumptions, policies etc., adjustments made to transfer prices and
        any other relevant information, data, document relied for
        determination of arm's length price [clause (i) to (m)].
7.2     The documentation requirements prescribed in section 92D read with
Rule 10D applies not only to international transactions between associated
enterprises but also to the deemed international transactions covered under
Section 92B(2) of the Act as well as the specified domestic transactions
covered under Section 92BA of the Act
7.3    It is pertinent to note that the list of documents provided under Rule
10D are prescriptive in nature and it is not essential that each of the
document be maintained in respect of each international transaction. While
the documents like the one mentioned in point (i) and (ii) above needs to be
maintained in respect of each international transaction, need for maintaining
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

documents mentioned in point (iii) should be critically analysed and
maintained for each of the transaction. The member may exercise his
professional judgment to assess whether the documents mentioned in point
(iii) should be maintained in respect of a given international transaction.
Ownership, profile and business
7.4    A description of the ownership structure of the assessee
enterprise with details of shares or other ownership interest held
therein by other enterprises.[clause (a), Rule 10D(1)].
7.5      It may be noted that the term "other enterprise" should refer to an
associated enterprise with which the taxpayer has undertaken an
international transaction undertaken in a given financial year. If this term
were to be given the meaning provided in section 92F(iii), then it would
virtually include every member in the register of members. No purpose would
then be served by duplicating the contents of that register. Where the person
is a company, the names of members who are associated enterprises, the
number of shares held by each of them and the percentage of their holding to
the total holding has to be stated.
7.6      However, where the number of members is very large, a generic
classification of the ownership structure may be given, namely, holdings by
Government (Central, State), Government companies, public financial
institutions, nationalised and other banks, mutual funds, venture capitalists,
foreign holdings, bodies corporate, directors and relatives, others. The
holdings of associated enterprises must, in any case, be shown separately.
7.7     Where the person is a firm or an association of persons, the names of
the partners of the firm or members of the association of persons and their
profit sharing ratios have to be stated. Similar details, to the extent
applicable, need to be furnished when the person is a body of individuals,
trust, Hindu undivided family, etc. The description of the ownership structure
should be stated as at the day on which one person became an associated
enterprise of another and as at every other day on which there was change
in the ownership interest of that other enterprise.
7.8    For example, assume that A Ltd., India and X Inc., USA, are
associated enterprises, and the holdings of X Inc. in A Ltd. were as under:
 (a)    Total number of ` 10, fully paid equity shares, issued      100,000
        by and subscribed in A Ltd.



                                     146
                                              Documentation and Verification

 (b)     Total number of shares of ` 10, fully paid up, held by X      50,000
         Inc. on 1st April, 2001
 (c)     Total number of shares of ` 10, fully paid up, acquired       10,000
         by X Inc. on 24th November, 2001 (by private
         purchase)
 (d)     Total number of shares of ` 10, fully paid up, disposed       25,000
         off by X Inc. on 24th February, 2002 (by private sale)
Under this clause, A Ltd. will have to report the holdings of its Associated
Enterprise, as follows:
                                Details of ownership structure
                          Period            Period            Period
                       from1.4.2001     from24.11.200     from24.2.2002
 Details
                       to23.11.2001      1to23.2.2002       to31.3.2002
                       No. of    %       No. of    %     No. of      %
                       shares           shares           shares
 (a)   Directors,       50,000    50      40,000    40 65,000           65
       relatives
       and others
 (b)   X Inc., USA      50,000      50     60,000      60     35,000      35
       (Associated
       Enterprise)
Where the ownership structure is complicated, the above tabular statement
may be supplemented by a suitable diagrammatic representation of the
ownership interest held by associated enterprises in the assessee.
7.9     The regulations require the assessee to maintain information
regarding the shareholding pattern. Though there is no prescribed format for
this information, following is the format that the accountant may suggest to
the assessee.
 S.No.                      List of shareholders      Shareholding (%)


Further, ownership interest held by enterprises in the assessee enterprise,
directly or indirectly through intermediaries, also needs to be maintained by
the assessee.
7.10 The accountant shall verify that the assessee maintains information
regarding enterprises having direct or indirect ownership interests, through

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

intermediaries, in the assessee enterprise. The accountant may rely on
representation from the management with regard to the veracity of the same.
7.11 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[or specified domestic
transactions, as the case may be] have been entered into by the
assessee, and ownership linkages among them. [clause (b), Rule
10D(1)].
7.12 As part of the profile of the multinational group, it may be advisable to
maintain, amongst other things, corporate brochures, catalogues and other
similar printed and / or electronic material that describe:
·      The principal line(s) of business in which the group is engaged, such
       as manufacturing of electronic goods, trading in chemicals, wholesale
       trade in food grains, pharmaceuticals, etc.;
·      Geographical areas in which the group one operates;
·      Summarised global financials and other details such as capital
       invested, assets employed, turnovers achieved, incomes earned,
       profits made / losses incurred, etc.
7.13 With respect to each of the associated enterprises/ specified persons
in the group with whom the assessee has entered into international
transaction / specified domestic transaction, the following specific details
must be maintained:
·      Name;
·      Address;
·      Legal status (company, limited liability partnership, firm, etc.);
·      Country of tax residence;
·      Ownership linkages between the assessee and the associated
       enterprise.
Sometimes, the establishment of ownership linkages between the assessee
and other associated enterprises is a problem for the reason that sufficient
reportable information is not available. In such cases, the assessee will have
to provide only the information that is available with him.



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                                             Documentation and Verification

7.14 For example, A Ltd., India, is a 100% subsidiary of H Ltd., U.K., which
itself is a 100% subsidiary of R Inc., USA.R Inc, also, has another subsidiary,
C Ltd., Argentina. If, A Ltd. transacts with C Ltd., it will have to report the
ownership linkage between itself and C Ltd. However, this information may
not be available or even forthcoming from the ultimate holding company, R
Inc.
7.15 The remarks of the OECD in their Transfer Pricing Guidelines on this
issue merits reference:
"Tax administrations further should not require taxpayers to produce
documents that are not in the actual possession or control of the taxpayer or
otherwise reasonably available, e.g., information that cannot be legally
obtained, or that is not actually available to the taxpayer because it is
confidential to the taxpayer 's competitor or because it is unpublished and
cannot be obtained by normal enquiry or market data."
7.16 The assessee is required to maintain a document that describes the
profile of the multinational group. The member may exercise his professional
judgment to determine whether the profile prepared by the assessee
provides sufficient information regarding the group, pertinent to transfer
pricing. Some of the information that may be contained in the profile are as
follows :
·      the name and place of incorporation of the immediate parent
       company;
·      the name and place of incorporation of the ultimate parent company;
·      the major product lines, services offered by the group;
·      a brief description of the technology, brands or other intangibles
       owned by the group;
·      name(s) of major competitors.
Any other information regarding the group that may be pertinent to the
transfer pricing analysis.
7.17 The accountant has to verify if such a profile has been prepared and
based on his understanding of the business of the assessee and a test check
of the documents and records of the assessee, he is required to determine
that the information contained in the profile is not incorrect.




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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

7.18 The assessee is also required to provide a list of associated
enterprises / specified persons from within the group, with whom the
assessee has entered into international transactions / specified domestic
transactions. The following details are required to be maintained by the
assessee:
·      name of the group entity (associated enterprise / specified person)
·      address of the group entity
·      legal status
·      nature of relationship
·      country of tax residence.
7.19 The accountant should obtain written representation from
management (of the taxpayer) providing him with name, address, legal status
and country of tax residence of each of the enterprises comprised in the
group with whom international transactions or specified domestic
transactions have been entered into by the assessee, and ownership
linkages among them. He shall exercise his professional judgement and due
diligence to verify that the same is prima facie correct.
7.20 The accountant shall perform certain checks in regard to the various
categories and situations in which the two enterprises are associated
enterprises as provided in section 92A(1) and clause (a) and (b) of section
92A(2). A reference should be made to the tax audit report.)In respect of
specified domestic transactions with specified persons under Section
40A(2)(b) of the Act reference can be drawn on tax audit report. He should
also check the register of members maintained by the assessee under
section 88of the Companies Act, 2013and the voting rights corresponding to
the shares of the associated enterprise / specified persons.
7.21 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. [Clause
(c), Rule 10D (1)].
7.22 Under this clause, a general explanation of the business carried out
by the assessee and the associated enterprise/ specified person with whom
it has transacted has to be stated. Where the assessee/ associated
enterprise / specified person are engaged in more than one line of business,
the explanation will have to cover all businesses.
7.23   This explanation could typically cover areas such as:


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                                             Documentation and Verification

·      the business model used;
·      technologies employed;
·      products manufactured/traded;
·      markets addressed and competition faced;
·      geographic dispersion of manufacturing facilities etc.
7.24 The broad description of the industry in which the assessee operates
will include reports about the industry, which are available in the public
domain. This could be material published in business newspapers, trade
journals and magazines, etc. all of which provide a macro-economic
perspective to the industry.
7.25 The assessee has to determine whether by virtue of clauses (c) to
(m) of section 92A(2) certain enterprises shall be deemed as associated
enterprises. The accountant shall conduct the following checks to verify if the
assessee has conducted due diligence in determining whether an entity is an
associated enterprise or not.
Clause (c) :The accountant should check the register of loans and
investments maintained by the assessee under section 186 of the
Companies Act, 2013.
Clause (d): The accountant shall obtain details of all the guarantees
pertaining to the borrowing from the management and representation for its
completeness thereof.
Clause (e): The accountant shall obtain a representation from management
detailing composition and appointment of the members of board of directors
or governing board, Executive Directors and Executive Member of the
governing board. Further the member shall check the Register of Directors
maintained by the company under section 170 of the Companies Act, 2013
Clause (f): The accountant shall obtain a representation from the
management detailing composition and appointment of the members of
board of directors or governing board, Executive Directors and Executive
Member of the governing board. Further the member shall check the Register
of Directors maintained by the both companies under section 170of the
Companies Act, 2013
Clause (g): The accountant shall obtain a representation from the
management to the fact that enterprise is wholly dependent upon the
intangible assets such as know-how, patents, copyrights, trademarks,

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licenses, franchises, or other 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 has exclusive right.
Clause (h): The accountant shall obtain the details of all the purchases of
raw material and consumable requirement made by the assessee and
compute the party wise share of business i.e. party-wise purchases. He shall
obtain representation from the management to the fact that the information
provided is correct and complete.
Clause (I): The accountant shall obtain a representation from the
management to the fact that enterprise sold the goods or articles
manufactured or processed by it, 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
Clause (j) (Individual): The accountant shall obtain a representation from
management providing details of controlling interests in all the affiliated
parties so as to determine the common controlling interest in two companies.
Clause (k) (HUF): The accountant shall obtain a representation from
management providing details of controlling interests in all the affiliated
parties so as to determine the common controlling interest in two companies.
Clause (l): The accountant shall obtain the partnership/AOP/BOI agreement
in order to determine whether any enterprise holds not less than ten per cent
interest in other firm, association of persons or body of individuals.
Clause (m): The accountant shall obtain a representation from management
to the effect that there exists or does not exist between the two enterprises,
any relationship of mutual interest in case any such relationship is prescribed
by CBDT. The accountant shall exercise his professional judgement and due
diligence to verify that the same is prima facie correct.
7.26 The accountant should obtain written representation by management
detailing the overview of the business of the assessee and a description of
the business of the associated enterprises / specified persons with whom the
assessee has transacted.
7.27 Following is the illustrative checklist to carry out business analysis of
the assessee:
(a)    year of establishment/incorporation;


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(b)    name and residence of the parent company (holding company);
(c)    details of the place/s (units) from where services are rendered
       (including area occupied, infrastructure, etc.);
(d)    activity in brief (if there is more than one unit, details of activities in
       each unit);
(e)    stake-holding of the parent company;
(f)    legal environment of the industry;
(g)    key value drivers of the industry;
(h)    major players in the industry;
(i)    share of business in the industry;
(j)    trends in profitability, turnover, market share etc.
A similar description of the business of the associated enterprises with whom
the assessee has undertaken international transactions, is also to be
prepared by the assessee. The accountant shall verify if such description is
also maintained.

Details of international transactions / specified
domestic transactions
7.28 The nature and terms (including prices) of international
transactions[or specified domestic transactions, as the case may
be]entered into with each associated enterprise, details of property
transferred or services provided and the quantum and the value of each
such transaction or class of such transaction. [clause (d), Rule 10D(1)].
7.29 The list of individual international transactions / specified domestic
transactions entered into by the assessee with each of its associated
enterprises/ specified persons is required to be stated here. For ease in
comprehension and verification, the details may be compiled and presented
in a tabular form giving the details required.
7.30 While the data may be classified in any convenient manner, for the
purpose of facilitating the study of comparability, it is suggested that the
nature of the property transferred or service provided be used as the primary
key.




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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

7.31 In addition to the standard inclusions such as name of associated
enterprise / specified person, product transferred or service provided,
quantity, price per unit of measurement etc., the data should, also, provide
information on matters such as:
·      form and time of payment;
·      discounts;
·      shipment;
·      purchase commitments;
·      product returns by the customer;
·      supportive services; etc.
The listing should, also, include transactions where the property has been
transferred or service has been provided "free of cost".
7.32 The accountant should examine the details of nature and terms
(including prices) of international transactions/ specified domestic
transactions entered into with each associated enterprise / specified person,
details of property transferred or services provided and the quantum and the
value of each such transaction or class of such transaction. The accountant
should verify the information provided by the assessee, by using standard
examination procedures from the books of accounts maintained by the
assessee and information/explanations obtained during the course of such
examination.
7.33 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[or
specified domestic transaction, as the case may be].[clause (e), Rule
10D(1)].
7.34 The assessee is required to undertake and describe the results of a
detailed functional analysis of the business process involved in the
transaction with the associated enterprise / specified person. In analysing of
the business process, the study should not only cover the activities of the
resident enterprise but, also, the activities of the non-resident enterprise. In
other words, it is the business process that it analysed and not the
enterprise.
7.35 The functional analysis should be made from the perspective of the
"functions performed", "assets employed" and "risks assumed". Simply put, a

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`functional analysis' is a study to determine what economically significant
acts were performed in accomplishing the transactions in question and who
performed them.
7.36   The role of functional analysis is to:
(a)    determine the facts with respect to a given transaction between the
       related parties; and
(b)    set the stage for the choice of tested party followed by the choice of
       the pricing method by providing the framework within which
       comparable transactions may be determined
7.37 The assessee shall undertake a detailed functional analysis of the
company and its associated enterprise / specified person in order to
determine the functions performed, risks assumed and assets employed by
the assessee and by the associated enterprises / specified persons involved
in the international transaction / specified domestic transaction. A functional
analysis is a method of finding and organizing facts about a business in
terms of its functions, risks and intangibles in order to identify how these are
divided up between the companies involved in the transaction under review.
The functions and risks are analyzed to determine the degree of risks
undertaken, the value of the intangibles provided and whether the profits (or
losses) earned by the entities are appropriate to functions performed.
Functional analysis thus helps in assessing the correct characterization of
the parties to the transaction which in turn helps in selecting the appropriate
tested party and consequentially the most appropriate methods and the
comparables.
7.38 A functional analysis attempts to identify all value added activities.
The identification of the relevant value added activity helps in identifying the
specific risks associated with the transaction. In addition, functional analysis
identifies specialized business assets that increase the chances of success
(such as key employees or marketing intangibles).
7.39 To conduct a full functional analysis, it is necessary to gather
information from both within and outside the organization. To execute this,
the company shall either interview or get questionnaires filled by the key
personnel related to the various functions performed by the company.
7.40 The accountant shall obtain a representation from management to the
effect that the functional analysis so done is complete and covers all the
functions performed by the company.


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

Records having a bearing on international
transaction / specified domestic transaction
7.41 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[or specified
domestic transactions, as the case may be] entered into by the
assessee. [clause (f), Rule 10D(1)].
7.42 Whereas under clause (c), above, the study was of the business in
which the assessee operated (macro), under this clause, the study is of the
business which the assessee operates (micro).
7.43 Where assessees, in the normal course of their business, use general
and financial and management tools (such as market analyses, marginal and
absorption costing, capital and revenue budgeting, variance analysis, etc.) to
control and run their business, the data captured in the process may be used
to ascertain whether the arm's length principle has been complied with.
However, where these techniques are not in use, historical data cannot be
used as a substitute.
7.44 The accountant shall obtain copies of budgets or forecasts, if any,
from the management and shall exercise his professional judgement to
ensure its correctness and validity. He shall also obtain the representation
from management to the effect that all the budgets and forecasts prepared
are being provided.
It may so happen that the company is not in the practice of preparing any
forecast, budgets or other financial estimates. The accountant should then
disclose this fact suitably.
7.45 A record of uncontrolled transactions taken into account for
analysing their comparability with the international transactions[or
specified domestic transactions, as the case may be] 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[or specified domestic
transactions , as the case may be]. [clause (g), Rule 10D(1)].
7.46 This record is a compilation of the uncontrolled transactions that were
identified and taken for analyzing whether they would pass the test of


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comparability. This is no more than raw data, prior to processing. In the
process of creating this record, the enterprise has to prove the integrity of the
following two critical parameters:-
(i)    The enterprise must establish that the uncontrolled transactions listed
       include transactions in only those products or services in respect of
       which the enterprise has dealt with associated enterprises / specified
       persons.
       Assume that the enterprise manufactures various types of caustic
       soda (e.g., industrial grade, commercial grade, membrane grade,
       etc.).Also, assume that transactions with associated enterprises have
       been in respect of only one type of caustic soda (say, membrane
       grade).Then, when the required list is being prepared, the enterprise
       must ensure that the uncontrolled transactions that have been
       included must be only of that membrane grade and not include other
       types, which are irrelevant. This is especially relevant in cases where
       Comparable Uncontrolled Price Method is used as the most
       appropriate method for analysis the arm's length nature of the
       concerned international transaction. However, where other methods
       are used, say Cost Plus Method, Resale Price Method, some
       relaxation in the comparability parameters (evaluated for the purpose
       of the analysis) could be adopted whereby overall basket of products
       (say caustic soda in the above example) could be considered as
       comparable. The yardstick could be further relaxed in case
       Transactional Net Margin Method is used whereby companies dealing
       in similar products and having similar functional profiles could be
       considered as comparable. To illustrate, in the above example, in
       case Transactional Net Margin Method is used as the most
       appropriate method, manufacturers of chemicals (having similar
       functional profile as the tested party) could be considered as
       comparables.
(ii)   The enterprise must also confirm that the listing of uncontrolled
       transactions is complete and that no similar or identical transactions
       have been omitted.
7.47 For example, if the enterprise is dealing in electronic components
(integrated circuits and printed circuit boards) and its transactions with
associated enterprises have been conducted throughout the year, the
enterprise must establish that the database from which the list has been


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

compiled at least covers the period during which transactions with the
associated enterprise took place.
The enterprise should maintain / provide detailed reasons as to why
particular set of data points can be or cannot be considered as comparable
to the international transaction / specified domestic transaction under
consideration.
7.48 In order to conduct an analysis the enterprise is required to collect
data regarding comparable uncontrolled transaction or comparable
companies engaged in similar business. The enterprise has to prepare a
search memo detailing the process of identification of comparable
uncontrolled transaction and/or comparable companies. The enterprise has
to provide information regarding the databases used for the search and
economic rationale for the selection/rejection of transaction/companies. The
summary of the selection/rejection process has to be documented through a
search matrix. Further, the enterprise should demonstrate that the analysis
undertaken to determine the comparables is scientific and does not represent
a cherry picking. In summary, the enterprise must prove that the rationale
used by it in the process of searching for and including/excluding
uncontrolled transactions is correct, logical and complete.
7.49 The accountant shall examine details of the comparable
transactions/data compiled by the enterprise. Further, exercising his
professional judgement, the accountant should verify that the data used to
determine / analyse the arm's nature of the price of the international
transaction/ specified domestic transaction is in tune with the findings of the
functional analysis. This would ensure the authenticity of the price so arrived
on the basis of the data.
7.50 A record of the analysis performed to evaluate comparability of
uncontrolled transactions with the relevant international transaction[or
specified domestic transaction , as the case may be]. [clause (h), Rule
10D (1)].
7.51 The process to be described under this clause (record of analysis of
data) is the naturally corollary to the process described in immediately
preceding clause, clause (g) (record of compilation of data).
7.52 In trying to arrive at the comparability between uncontrolled
transactions and international transactions / specified domestic transactions,
the enterprise has to, amongst other things, carryout the process of resolving
any differences that may exist between them. These differences could be for

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the reasons stated in Rule 10B (2) or for any other reason also.Under this
clause, the enterprise has to detail the analysis that he has conducted on
each of the uncontrolled transactions in determining whether or not it is
comparable to an international transaction / specified domestic transaction.
7.53 The accountant shall examine whether the enterprise has prepared a
thorough comparability analysis giving reasons for the need as well the
details of the adjustments made to make the comparability more reliable.

Description of methods considered and working
thereof
7.54 A description of the methods considered for determining the
arm's length price in relation to each international transaction [or
specified domestic transaction, as the case may be]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. [clause (i), Rule 10D(1)].
7.55 The OECD, in their Transfer Pricing Guidelines has set out the
optimal conditions under which a particular method is more suited than
another. For example, the cost plus method is "probably is most useful where
semi finished goods are sold between associated parties, where associated
parties have concluded joint facility agreements or long-term buy-and-supply
arrangements, or where the controlled transaction is the provision of
services."
By using these guidelines and analysing the intrinsic nature of the
international transaction /specified domestic transaction, it may be possible
to determine which is the most appropriate method to be applied to each
transaction.
7.56 In any case, when ascertaining the "most appropriate method", the
provisions of section 92C(1) and Rule 10C must be kept in mind. Given that
the law envisages selection of the "most appropriate method" for ascertaining
the arm's length nature of the international transaction or specified domestic
transaction, it is required that each of the six prescribed methods are duly
analysed before selecting one as the most appropriate.
7.57 Under this clause, the assessee has to describe the nature of the
international transaction / specified domestic transaction, explain why the
method chosen is the most appropriate method (may be, even, explaining


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

why other methods were excluded) and then detail the manner in which the
method was applied to the transaction under examination. In detailing the
manner in which the method was applied, a numerical exercise is not
expected. This is because the detailing of the arithmetic process is included
under clause (j), infra.
7.58 This exercise has to be carried out once for every type of
international transaction / specified domestic transaction; and
7.59 The accountant shall verify the method used to arrive at the arm's
length price and reasons thereof for the choice of the method. The reasons
may be either positive in favour of the method used or negative as to why
other methods were not applied.
7.60 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 [or specified domestic
transaction, as the case may be]and the comparable uncontrolled
transactions, or between the enterprises entering into such
transactions. [clause (j), Rule 10D (1)].
7.61 Once the enterprise has compiled the raw data [clause (g)], analysed
the data for comparability [clause (h)] and chosen the most appropriate
method [clause (i)], the next step would be to perform the actual exercise of
arriving at the arm's length price. This is the process that is contemplated
under this clause.
7.62 Here, the enterprise will have to detail all the mathematical iterations
and arithmetic steps that have been undertaken to arrive at the arm's length
price. Where any assumptions have been made, or where any critical factors
have affected the determination of the arm's length price, the numerical
effect of these factors have not only to be stated but computed. The actual
listing of these assumption, factors, etc. is required to be done under the
provisions of clause (k), infra. Also, detailed working in respect of the
adjustments undertaken by the enterprise needs to be detailed.
7.63 In assigning numbers to qualitative factors such as policies, price
negotiations, etc. there may be an element of subjectivity. The enterprise
may have to conclusively establish that no element of bias has entered the
computational process.


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7.64 The documentation on economic analysis shall also provide for the
details of the data used and data rejected with reasons thereof. Also,
different companies follow different accounting policies and there may be
differences in respect of terms of sale etc, these variations call for certain
adjustments in the financial to make the data comparable. The reasons and
the adjustments so made should also be recorded.
7.65 The accountant should examine the correctness of such working and
the adjustments made with reference to the relevant information and data.
7.66 The assumptions, policies and price negotiations, if any, which
have critically affected the determination of the arm's length price.
[clause (k), Rule 10D (1)].
7.67 This part requires the enterprise to render a narrative description of
the various assumptions, policies, price negotiations that have been
considered in determining the arm's length price.
7.68 An example of an assumption affecting the determination of the arm's
length price could be the buyer 's commitment to purchase certain specified
quantities of the product.
Examples of a policy affecting the determination of the arm's length price
could be
·   the enterprise's decision to make his borrowings in overseas markets
    (where the rates are lower than as compared with indigenous banks) and
    reduce the interest component in his product cost sheet
·   market penetration strategy, wherein the products/ services of the
    enterprise could be priced lower than the market in order to create a
    market for itself. This could also lead to the enterprise making operating
    losses in the start-up phase i.e. first few years of its operations.
·   credit policy of the enterprise, which would lead to different working
    capital cycles between enterprises operating in the same industry,
    thereby also affecting prices and sales realization
·   sales being made by the enterprise to its associated enterprise in order
    to make optimal use of its production capacity (which has no alternate
    use) whereby the concept of marginal costing rather full costing is used
    to derive the transfer price
7.69 An example of a price negotiation affecting the determination of the
arm's length price could be the manner in which the supplies are paid for. For

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

example, a supply to an associated enterprise in China may get a better
price if the payment is received in US Dollars instead of Chinese Yuan.
Another example could be where an associated enterprise in Nigeria may get
a better price if the letter of credit is accepted by a UK Bank rather than a
local bank.
7.70 The accountant shall obtain information about the assumptions,
policies and price negotiations, if any, including understanding of the
business/commercial reasons which influenced the determination of the
arm's length price by way of representation from management. The
accountant shall examine the functional and economic analysis to determine
the assumptions, policies and price negotiations that have been considered
for determining the arm's length price and shall verify if the enterprise has
maintained a document explicitly stating these assumptions, policies and
price negotiations.
7.71 Details of the adjustments, if any, made to transfer prices to
align them with arm's length prices determined under these rules and
consequent adjustment made to the total income for tax purposes.
[clause (l), Rule 10D(1)].
7.72 This process requires the enterprise to prepare a reconciliation
statement detailing how the actual transaction value can be compared with
the arm's length price. This is a critical process in order to ensure a like to
like comparison (to the extent possible). This is a two-stage process,
detailed below.
7.73 Where the international transaction has certain characteristics that
are absent in the uncontrolled transaction, the value of these characteristics
has to be computed and reduced from the value of the international
transaction.
7.74 Correspondingly, where the international transaction/ specified
domestic transaction does not have certain characteristics that are present in
the uncontrolled transaction, the value of these characteristics has to be
computed and included in the value of the international transaction /
specified domestic transaction.
Some common adjustments that are carried out to achieve the above are:
·      Working capital adjustment
·      Risk adjustment
·      Idle capacity adjustment/ Start-up cost adjustment

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·      Depreciation adjustment
The enterprise would need to maintain detailed workings demonstrating the
computation of the adjustments, the basis used to arrive at the same as well
the source of data used to obtain financial information for the computation of
such adjustment.
7.75 In case there is a difference between the transaction price and the
arm's length price, the transaction price is required to be aligned to the arm's
length price.
7.76 The accountant shall verify the alterations made to transfer price of
the company so as to align it with the arm's length prices, as determined
under these rules and verify that consequent adjustment is made to the total
income for tax purposes.
7.77 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. [clause (m), Rule 10D (1)].
7.78 This is a residuary clause that allows the enterprise to use any other
extraneous reasons that may have affected its judgement in the process of
complying with the arm's length principle.
7.79 An example of such a situation could be when a loss-making
enterprise sells goods to an associated enterprise at less than the "arm's
length price" only because this is the only way in which the enterprise may be
able to absorb fixed costs/ overheads.
7.80 Where any other information, data or document has been considered
relevant for the determination of arm's length price by the assessee, the
accountant shall verify the correctness of the same.

Relief from maintenance of specific records
7.81 Nothing contained in sub-rule (1) in so far as it relates to an
international transaction shall apply in a case where the aggregate
value, as recorded in the books of account, of international transactions
entered into by the assessee does not exceed one crore rupees:
Provided that the assessee shall be required to substantiate on the
basis of material available with him, that income arising from
international transactions entered into by him has been computed in
accordance with section 92. [Rule 10D(2)]


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

7.82 The ceiling limit of INR 1 crore is with reference to an assessee and
not with reference to any undertaking or unit. The limit applies with reference
to all the international transactions entered into during a previous year. The
amount is reckoned on the basis of the aggregate value of international
transaction as recorded in the books of account of the assessee.In case of
assessees who fall within this category in a particular previous year, relief
given is from maintaining the specific records and documents prescribed in
rule 10D. There is no exemption for such assessees in obtaining and
furnishing audit report under section 92E of the Act.
7.83 It requires to be mentioned that even in such cases, the onus lies on
the assessee to substantiate that income arising from international
transaction has been computed on the basis of arm's length price. It is,
therefore, necessary for those assessees to maintain such materials or
records as may enable them to discharge the burden of proof cast on
them.The accountant, in such cases, is required to examine the records so
maintained and satisfy himself that the material in the possession of the
assessee is relevant and proper for the purpose of expressing his opinion in
the report to be issued in Form No.3CEB.

Supporting documents
7.84 The information specified in sub-rule (1) shall be supported by
authentic documents, which may include the following:
(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)    agreement and contracts entered into with associated
       enterprises or with unrelated enterprises in respect of
       transactions similar to the international transactions or the
       specified domestic transactions as the case may be;


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(f)    segmented financial statements in accordance with the
       Accounting standards as prescribed;
(g)    letters and other correspondence documenting any terms
       negotiated between the assessee and the associated enterprise;
(h)    documents normally issued in connection with various
       transactions under the accounting practices followed.
                                                               [Rule 10D(3)]
7.85 Rule 10D(3) provides that the information compiled, kept and
maintained by the enterprise, under clauses (a) to (m) of sub-rule (1), shall,
to the extent possible, be further supported by "authentic" documents that
provide additional information of the nature specified therein. Most of the
information required to be provided is global or macro in nature.
7.86 The above documents are required to substantiate the functional and
economic analysis performed by the enterprise. The accountant shall review
the contents of the functional and economic analysis and shall verify whether
the enterprise has maintained back-up data listed above to substantiate the
facts and figures given in the documents listed in Rule 10D(1).

Contemporaneity of data
7.87 The information and documents specified under sub-rules (1),
(2), and (2A), should, as far as possible, be contemporaneous and
should exist latest by the specified date referred to in clause (iv) of
section 92F:
Provided that where an international transaction or specified domestic
transaction continues to have effect over more than one previous year,
fresh documentation need not be maintained separately in respect of
each previous year, unless there is any significant change in the nature
of terms of the international transaction or specified domestic
transaction, in the assumptions made, or in any other factor which
could influence the transfer price, and in case of such significant
change, fresh documentation as may be necessary under sub-rules (1),
(2) and (2A) shall be maintained bringing out the impact of the change
on the pricing of the international transaction or the specified domestic
transaction.[Rule 10D(4)]




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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

The information and documents specified in sub-rules (1), (2) and (2A)
shall be kept and maintained for a period of eight years from the end of
the relevant assessment year.[Rule 10D(5)].
7.88 The accountant may design a questionnaire and conduct interviews
with the client personnel to understand if the enterprise has taken due
diligence with regard to maintaining documentation. The accountant should
determine whether any changes have occurred in the business conditions
under which the enterprise was operating. The enquiries may cover the
following areas:
 ·     changes in business and pricing strategy;
 ·     changes in market conditions [demand / supply] in India and in the
       country where the associated enterprise is located;
 ·     changes in the "key" value drivers of the industry;
 ·     changes in the critical success factors that influence the company's
       position in the market;
 ·     changes in competition;
 ·     changes in terms of contract;
 ·     changes in sales volumes / total revenues arising as a result of the
       international transactions.
7.89 Based on an understanding of the business of the assessee, the
accountant should determine whether any of the above changes would
significantly influence the economic analysis that had been conducted for the
earlier year/years. In case the changes could have an influence on the arm's
length price determined in the earlier year, the enterprise should conduct a
functional and economic analysis again to determine the arm's length price.
7.90 In case the changes above, are not likely to influence the economic
analysis conducted in the earlier year/years, the enterprise's role may be
limited to the following:
 ·     examine whether comparability analysis of the earlier year continues
       to be applicable [a comparable uncontrolled transaction in the earlier
       year may now have become a controlled transaction due to certain
       changes in the business conditions; a comparable company selected
       in the earlier year may now have started transacting with associated
       enterprises; etc.].This is more relevant for transactions whose pricing


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       basis as well the computation mechanism remain changed over a
       period of time (say royalty arrangements).
 ·     update the financial analysis using the fresh list of comparables [after
       rejecting companies / transactions that are no longer comparable]
       and using the financial information for the current year [this is
       because, the Indian economy cannot still be considered a stable
       economy and prices and profit levels may fluctuate significantly from
       year to year].
 ·     determine the arm's length price for the current year using the result
       of the financial analysis conducted in the current year.
7.91 Rule 10D (4) provides that the data, information and documents on
the basis of which the arm's length price has been determined should, as far
as possible, be contemporaneous. At any rate, they should exist by no later
than the specified date by which the report under section 92E is required to
be furnished. Where the international transaction / specified domestic
transaction has longevity that spans one or more previous years, the
enterprise need not prepare fresh documentation in respect of the
transactions conducted in every subsequent previous years.
7.92 However, when there is a significant change in the nature or terms of
the international transaction or specified domestic transaction, in the
assumptions made, or in any other factor, which could influence the transfer
price, then fresh documentation, as appropriate, should be made to bring out
the impact of the changes on the pricing of the international transaction.
7.93 The information and documents required to be maintained under
section 10D shall be preserved for a period of eight years from the end of the
relevant assessment year. This provision assumes significance in view of the
penal and other consequences attracted due to non-production of the
information and documents kept and maintained. Reference is drawn to
CBDT Circular No.12 dated 23.08.2001 (Annexure IV) relaxing this
requirement for transactions entered into during the period from 1.4.2001 to
31.8.2001.
7.94 Supporting documentation in case of specific transactions like
management fees/ royalties charges etc:
Detailed documentary back up to support payment by the assessee for such
charges needs to be maintained by the assessee. Some of the documents/
details in this regard could be:


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

·      analysis detailing the justification of the `benefit test' from a service
       recipient perspective;
·      documents evidencing the receipt of benefits by the service provider
       including correspondence such as mails, brochures, minutes of the
       meetings etc.
·      inter-company agreements;
·      global policy (if any);
·      copy of invoices;
·      independent auditors certificate on costs/charges of the overseas
       entity;
·      copies of policies/manuals and other correspondences indicating the
       details of services/ benefits received by Indian assessee;
·      basis of allocation of costs and charge;
·      other relevant records.




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                                                               Chapter 8
                                                              Penalties
Penalty for concealment of income or furnishing
inaccurate particulars thereof1
8.1     Section 271(1)(c)(iii) provides that if the Assessing Officer or the
Commissioner (Appeals) or the Commissioner is satisfied that any person
has concealed the particulars of his income or furnished inaccurate
particulars of such income, he may direct that such person shall pay by way
of penalty, in addition to any tax payable by him, a sum which shall not be
less than, but which shall not exceed three times, the amount of tax sought
to be evaded by reason of the concealment of particulars of his income or the
furnishing of inaccurate particulars of such income. The said section has
been omitted by Finance Act 2016. Section 271(1)(c) shall not apply to and in
relation to any assessment for the assessment year commencing on or after
the 1st day of April, 2017 and subsequent assessment years and penalty be
levied under the newly inserted section 270A with effect from 1st April, 2017.
8.2     Explanation 7, was inserted to the aforesaid section by Finance Act,
2001 with effect from April 1, 2002.This explanation is invoked only when any
amount is added or disallowed in computing the total income under section
92C(4).The explanation provides that the amount added/disallowed under
this section (i.e, any addition on account of international transaction) shall be
deemed to be concealed income.
8.3     The explanation creates a rebuttable presumption of concealment or
furnishing of inaccurate particulars. The burden of rebuttal is on the
assessee and it does not shift to the Department. The assessee is required
to prove that he has acted in good faith and with due diligence. If it is so
proved, the addition/disallowance shall not be deemed to represent
concealed income.
8.4   While Section 273B states that no penalty shall be imposed if the
assessee proves that there was a reasonable cause for the said failure,
however given that the provisions of section 273B do not apply to a penalty

1   Omitted vide Finance Act 2016
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

under section 271(1)(c), the assessee must discharge the burden laid down
in Explanation 7 only to contest the non-imposition of penalty under the said
section.
8.5    For non-imposition of the penalty under this section, the explanation
requires the assessee to prove that the price charged or paid was computed
in good faith and with due diligence.
8.6   The aforesaid section has been further amended with effect from FY
2012-13 to include therein the reference of specified domestic transactions.

Penalty for under reporting and misreporting of
income
8.7     Section 271(1)(c) has been deleted by the Finance Act 2016 and in
its place section 270A has been inserted which is applicable from 1 April
2017. It seeks to levy penalty on under reporting of income.
8.8     Section 270A inserted vide Finance Act 2016 prescribes penalty for
under-reporting of income and misreporting of income. Section 270A (7) of
the Act prescribes a penalty of 50% of the amount of tax payable on the
under-reported income. Further, Section 270A(6)(d) provides that the under-
reported income for the purpose of Section 270A shall not include the
amount of under-reported income represented by any addition made in
conformity with the arm's length price determined by the Transfer Pricing
Officer, where the assessee had a) maintained information and documents
as prescribed under section 92D, b) declared the international transaction
under Chapter X, and, c) disclosed all the material facts relating to the
transaction.
8.9    Section 270A(8) of the Act provides that where under-reported
income is in consequence of any misreporting thereof by any person, the
penalty shall be equal to two hundred per cent of the amount of tax payable
on under-reported income. Section 270A(9)(f) of the Act provides that the
case of misreporting of income shall be failure to report any international
transaction or any transaction deemed to be an international transaction or
any specified domestic transaction, to which the provisions of Chapter X
apply.




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                                                                    Penalties


Penalty for failure to keep and maintain
information and documents in respect of
international transaction or specified domestic
transaction
8.10 Section 271AA relates to penalty for failure to keep and maintain
information and document in respect of international transactions or specified
domestic transactions.
Section 271AA has been substituted by a new section with effect from 1-7-
2012. It provides that without prejudice to the provisions of section 270A or
section 271 or Section 271BA, if any person in respect of an international
transaction or specified domestic transaction:
(a)    fails to maintain prescribed documents and information as required by
       sub-section (1)or sub-section (2) of section 92D;
(b)    fails to report any such transaction which is required to be
       reported; or
(c)    maintains or furnishes any incorrect information or documents
the Assessing Officer or Commissioner (Appeals) may direct that such
person shall pay, by way of penalty, a sum equal to two percent of the value
of each international transaction entered into by such person.
Further, Section 271AA(2) inserted vide Finance Act 2016 prescribes penalty
for failure to furnish master file by prescribed date as INR 5,00,000.
8.11 The above provision is without prejudice to section 270A or section
271 and Section 271BA and is invoked when `any person' fails to keep and
maintain any such information and document as required by section 92D (1)
and (2) or fails to report any international transaction or maintains or
furnishes any incorrect information or documents.
8.12 The aforesaid section has been further amended with effect from FY
2012-13 to include therein the reference of specified domestic transactions.
8.13 Thus, whether or not an international transaction or specified
domestic transaction is determined at arm's length price, any person who
has entered into such transaction, shall keep and maintain the
information/document in respect of such transaction.
8.14 The penalty is invoked for failure to keep and maintain such
information/documents or report the same. In other words, the person who

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

has entered into international transaction or specified domestic transaction
should both keep as well as maintain such information/documents as well as
report the same. Any failure in respect of the same attracts a penalty of 2%
of the value of each international transaction or specified domestic
transaction entered into by him.

Penalty for failure to furnish report under section
92E
8.15 Section 271BA provides that if any person fails to furnish a report
from an accountant as required by section 92E, the Assessing Officer may
direct that such person shall pay, by way of penalty, a sum of one hundred
thousand rupees.
8.16 This penalty is invoked if any person fails to furnish a report from an
accountant and the same may be levied by the Assessing Officer. The
penalty shall be a sum of INR 1 lakh.

Penalty for failure to furnish information or
document under section 92D
8.17 Section 271G provides that if any person who has entered into an
international transaction or specified domestic transaction fails to furnish any
such information or document as required by sub-section (3) of section 92D,
the Assessing Officer or the Commissioner (Appeals) may direct that such
person shall pay, by way of penalty, a sum equal to two percent, of the value
of the international transaction or specified domestic transaction for each
such failure. The power to levy this penalty has also been extended now to
the Transfer Pricing Officer.
8.18 The aforesaid section has been further amended with effect from
FY 2012-13 to include therein the reference of specified domestic
transactions.

Penalty for failure to furnish information or
documents under Section 286
8.19 Finance Act 2016 introduced Section 286 which requires parent entity
or the alternative reporting entity, resident in India, to furnish a prescribed
report on or before the due date for furnishing the return of income for the
relevant accounting year.


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                                                                        Penalties

Section 271GB of the Act provides for penalty for failure to furnish the
documents prescribed under Section 286. The penalty prescribed under
Section 271GB are as follows:
 Nature of penalty                        Penalty (INR)
 Failure to furnish the prescribed
 documents        required    to    be
 maintained by the India parent
 entity of the international group:
 a. Where period of failure is equal 5,000 per day
 to or less than 1 month
 b. Where period of failure is 15,000 per day
 greater than 1 month
 c. Continuing default after service 50,000 per day
 of penalty order
 Furnishing of inaccurate particulars 5,00,000
 (subject to certain conditions)
 Failure to produce the information Rs 5,000 per day upto service of
 and documents within 30 days penalty order
 (extendable by maximum 30 days)    Rs. 50,000 per day for default
                                    beyond date of service of penalty
                                    order




Penalty for furnishing incorrect information in
reports and certificates
8.20 The Finance Act, 2017 has introduced penalty on accountants,
merchant bankers and registered valuers for furnishing incorrect information
in reports and certificates issued under any provisions of the Act, by inserting
section 271J to the Act.

In order to ensure that the person furnishing report or certificate undertakes due
diligence before making such certification, section 271J provides that if an
accountant or a merchant banker or a registered valuer, furnishes incorrect
information in a report or certificate under any provisions of the Act or the rules
made thereunder, the Assessing Officer or the Commissioner (Appeals) may


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

direct him to pay a sum of ten thousand rupees for each such report or
certificate by way of penalty




                                  174
                                                             Chapter 9
                       Scope of Examination under
                                      Section 92E
Report under section 92E
9.1     According to section 92E every person who has entered into an
international transaction or specified domestic transaction during a previous
year shall obtain a report from an accountant and furnish such report on or
before the specified date in the prescribed form duly signed and verified in
the prescribed manner by such accountant and setting forth such particulars
as may be prescribed. The report is to be given by an accountant in Form
No.3CEB as prescribed under Rule 10E.The Income Tax rules have been
amended to require the filing of the said report electronically. The scope of
examination envisaged by section 92E is restricted to such examination of
accounts and records of the assessee relating to the international transaction
or specified domestic transaction entered into by the assessee during the
previous year under examination.
9.2     Further, the accountant has to give his opinion whether "proper
information and documents as are prescribed" have been kept by the
assessee in respect of the international transactions or specified domestic
transaction entered into by him. The examination under section 92E is not an
audit requiring the opinion of the accountant on the true and fair view of the
financial statements of the enterprise.
9.3   The report consists of three paragraphs dealing with distinct aspects
as summarised hereunder:
The first paragraph contains the declaration about examination of the
accounts and records of the assessee in order to review the international
transaction(s) and the specified domestic transaction(s).
The second paragraph involves rendering of an opinion whether proper
information and documents as are prescribed under Rule 10D are maintained
by the assessee in respect of the identified international transactions and the
specified domestic transaction(s), on the basis of the details furnished in
Annexure to Form No.3CEB.
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

The third and the last paragraph requires expression of the opinion whether
the particulars given in the Annexure to Form No.3CEB are true and
correct .
9.4    Examination of accounts and records
Form No.3CEB
*I/we have examined the accounts and records of .................. .. (name
and address of the assessee with PAN) relating to the international
transaction(s) and the specified domestic transactions entered into by
the assessee during the previous year ending on 31st March, ..........
                                                                [Paragraph 1]
9.5     The expression "accounts and records" appearing in the report should
normally refer to those accounts and records which are to be examined
solely in relation to the international transactions and the specified domestic
transactions entered into by the assessee during the relevant previous year.
As the expression "accounts and records" are limited to those pertaining to
international transactions and the specified domestic transactions only, the
said report does not require the accountant to certify the true and fair view of
the financial statements of the enterprise. Therefore, he should restrict his
examination to such details and matters that in his opinion are sufficient to
determine whether proper documents have been maintained with respect to
international transactions and the specified domestic transactions and
whether the particulars disclosed in the annexure are true and correct.
The extent of examination of the said accounts and records is a matter of
professional judgment of the accountant. However, while the accountant is
expected to make specific inquiries as regards various matters that are the
subject of the Form No 3CEB, his work often comprises checking, by the
application of materiality principles and on a test basis, the evidence
supporting the information presented in the Form No 3CEB. Particularly in
cases where the accountant is relying on financial statements of the
assessee audited by another auditor, it is reasonable to rely on the
correctness of information contained in such audited financial statements,
including as regards its completeness, unless there are any obvious or
significant discrepancies. In the event of such discrepancies, the accountant
would need to obtain necessary information, explanations and reconciliations
as may be required from the assessee, and report on that basis.




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                                   Scope of Examination under Section 92E

The accountant can rely upon the values of the international transactions and
the specified transactions reported in the financial statements / tax audit
report of the Company. However, the auditor should undertake due diligence
to assess the reasonablesreasonableness of the value reported therein (by
undertaking test checks) and also obtain a representation from the
management of the company in this regard.
9.6    The accountant should obtain from the assessee a complete list of
"accounts and records" maintained by him (both financial and non-financial
records) and identify those that need to be produced before him for
examination. He should further obtain suitable representation as regards the
completeness of the "accounts and records" from the assessee.
9.7     Where the certifying accountant is not the statutory auditor of the
assessee he should take the precaution of clearly stating in his report that
the figures from the audited general purpose financial statements have been
used and relied upon. He may also include in his report a reconciliation
between the figures appearing in his report and the figures appearing in the
general-purpose financial statements (as provided in the "Guidance Note on
audit and reports and certificates for special purposes"). Further, the
accountant can clearly state that he has relied upon the work performed by
the other auditors. In this connection, reference can be taken from SA 600 ­
Using the Work of Another Auditor. Further, on using the work of other
experts reference is invited to SA 620 ­ Using the Work of an Auditor 's
Expert.
9.8     In conducting the review and examination the accountant will have to
use his professional skill and expertise and apply such audit tests as the
circumstances of the case may require. He may apply such tests/sampling
techniques as may be deemed proper depending on the internal control
procedures followed by the assessee. The accountant will also have to keep
in mind the concept of materiality depending on the circumstances of each
case. He would be well advised to refer to AASs as well as the guidance
notes issued by the Institute.
9.9     Ensuring completeness of the listing of international transactions and
specified domestic transactions is the responsibility of the assessee. The
assessee should maintain a comprehensive register detailing every
international transaction and specified domestic transaction. The accountant
should use his professional skill and expertise and apply such tests as the
circumstances of the case may require to examine whether the same meets
the requirement of law. Further, in relation to the deemed international

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

transactions, the primary responsibility of identification / analyzing such
transaction rests with the assesse. It is worthwhile to note that w.e.f. FY
2014-15, transactions of the assesse with an Indian company are also
covered within the ambit of `deemed international transaction'. The
Accountant should obtain a representation from the management of the
assessee as to completeness of the listing of such transactions. However,
the Accountant should exercise his professional judgment in this regard.
9.10 The accountant should obtain a written representation from the
assessee providing him with the name, address, legal status and country of
tax residence of each of the enterprises with whom international transactions
and the specified domestic transactions have been entered into by the
assessee, and association linkages among them.
9.11   Maintenance of proper information and documents
       "2. In *my/our opinion proper information and documents as are
       prescribed have been kept by the assessee in respect of the
       international transaction(s) and the specified domestic
       transactions entered into so far as appears from *my/our
       examination of the records of the assessee".
9.12 In paragraph 2 of the report the accountant is required to give his
opinion on the assessee's compliance with the documentation requirements
prescribed under Rule 10D.The accountant should review the documents and
records pertaining to international transactions and the specified domestic
transactions of the assessee and compare the same with those prescribed
under Rule 10D to form an opinion.
9.13 If the accountant is satisfied that specified records have been
properly maintained by the assessee then the certification may be done
without any qualification. If any document is not maintained, then the
accountant should suitably qualify his report or disclose the same in his
report depending upon the facts and circumstances of each case. The
accountant should state the qualification in the report making it
comprehensive and self-explanatory. In this regard the accountant should
follow principles enshrined in the SA 700 "Forming an Opinion and reporting
on Financial Statements", SA 705 on Modifications to the Audit Report and
SA 706 on Emphasis on Matters issued by the Institute.
9.14 An assessee in whose case the aggregate value of international
transaction as recorded in the books of account does not exceed INR1 crore
in aggregate, there is a relief provided under sub-rule (2) of Rule 10D from

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                                    Scope of Examination under Section 92E

maintaining the specified information and documents. However, the proviso
thereunder necessitates such an assessee to substantiate that income
arising from international transactions has been computed in accordance
with section 92 on the basis of material in his possession. Therefore, the
accountant should verify in such cases whether there is any material
available with the assessee in this regard and if available the details thereof
needs to be examined. The accountant shall, in such cases, express his
opinion with or without qualification by exercising his professional judgement
after verification of the material produced for such examination.
The said rule does not provide any such relief by way of monetary threshold
for the purposes of maintaining the information and documents in respect of
the specified domestic transactions. Accordingly, where the aggregate of the
specified domestic transactions during a previous year exceeds Rs. 20
crores, there would be an obligation to maintain specified information and
documents as per sub rule (1) of Rule 10D.
9.15   Certification regarding particulars in Annexure
       "3. The particulars required to be furnished under section 92E
       are given in the Annexure to this Form. In *my/our opinion and to
       the best of my/our information and according to the explanations
       given to *me/us, the particulars given in the Annexure are true
       and correct".
9.16 Paragraph 3 of Form No.3CEB provides that the particulars required
to be furnished under section 92E are given in the Annexure to this Form and
whether in the accountant's opinion and to the best of his information and
according to the explanations given to him, they are true and correct. As
mentioned above, the particulars should be obtained from the assessee, duly
authenticated, which should be reviewed by the accountant. In case of any
negative remark or qualification about this matter, the same should be
properly reported.
9.17 The accountant must limit his scope of work and the review
procedures to the extent certified in Form No.3CEB.For e.g. in the Annexure
the method which has been used to determine the arm's length price needs
to be stated. In this context the accountant is only required to ensure that the
method stated as being used to determine the arm's length price by the
assessee has actually been used and it is not the accountant's responsibility
to ensure that the method so used is the most appropriate method as
prescribed by the Board.


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

9.18 The accountant may mention in the report, wherever necessary, that
the correctness has been ensured only to the extent that the accountant has
carried out an examination and further that the certificate is subject to the
notes stated against the relevant clauses or Annexure to Form No.3CEB.
9.19 The statutory auditor of the assessee has to report that the financial
statements audited by him give a `true and fair ' view. The requirement in
paragraph 3 of Form No.3CEB relating to particulars in Annexure to Form
No.3CEB is that the accountant should report that these particulars are "true
and correct". The terminology "true and fair " is widely understood though not
defined even by the Companies Act, 2013.On the other hand, the words "true
and correct" lay emphasis on factual accuracy of the information. In this
context reference is invited to AS-1 and AS(IT)-I relating to disclosure of
accounting policies. These standards recognise that the major considerations
governing the selection and application of accounting policies are (i)
prudence, (ii) substance over form and (iii) materiality. Therefore, while
examining the particulars in the Annexure to Form No.3CEB these aspects
should be kept in view. In particular, considering the nature of particulars to
be examined in the Annexure to Form No.3CEB, the aspect of materiality
should be considered. In other words qualifications may be given only in
respect of material items as envisaged by the accountant.
Other aspects
Online filing of Form 3CEB
9.20 From AY 2012-13, CBDT has made it mandatory for enterprises to
file their Form 3CEB online, with a view to make the process faster and less
error prone. However, the online filing mode does not provide for a facility for
documenting notes by the accountant in each of the relevant clauses or
Annexure to Form No.3CEB.
9.21 In order to document the position adopted while certifying the Form
3CEB, the Accountant may issue a memo under his/her signature to the
enterprise presenting his/ her notes against the relevant clauses or Annexure
to Form No.3CEB.
Form 3CEB in case of a permanent establishment of an overseas
enterprise
9.22 In the case of an permanent establishment of an overseas enterprise,
the clauses of Rule 10D(1) would apply to the extent relevant. Data which is
not relevant may not be required to be maintained. The accountant should


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                                    Scope of Examination under Section 92E

rely on his professional judgement to verify the relevance and the extent of
details available with the permanent establishment as per Rule 10D(1) in
order to establish the arm's length price.

Annexure to Form No.3CEB
9.23 The statement of particulars given in the Annexure to Form No.3CEB
contains twenty five clauses. The accountant has to report whether the
particulars furnished in Form No.3CEB are true and correct.
9.24 As stated earlier, the accountant should obtain a duly authenticated
statement of particulars in Annexure to Form No.3CEB from the assessee. It
would be advisable for the assessee to take into consideration the following
general principles while preparing the Annexure:
(a)    He can rely upon the judicial pronouncements while taking any
       particular view about inclusion or exclusion of any items in the
       particulars to be furnished under any of the clauses specified in the
       Annexure.
(b)    If there is a conflict of judicial opinion on any particular issue, he may
       refer to the view, which has been followed while giving the particulars
       under any specified clause.
(c)    The Accounting Standards (AS), Guidance Notes, Auditing and
       Assurance Standards (AAS) issued by the Institute from time to time
       should be followed, to the extent applicable.
9.25 While verifying the truth and correctness of the particulars in
Annexure to Form No.3CEB it would be advisable for the accountant to
consider the following:
(a)    If a particular item is covered in more than one of the specified
       clauses in the Annexure, care should be taken to make a suitable
       cross reference to such items at the appropriate places.
(b)    If there is any difference in the opinion of the accountant and that of
       the assessee in respect of any information furnished in the Annexure,
       the accountant should state both the view points and also the
       relevant information in order to enable the tax authority to take a
       decision in the matter.
(c)    If any particular clause in the Annexure is not applicable, the
       accountant should state that the same is not applicable.


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

(d)    In examining the particulars furnished in the Annexure, the
       accountant should keep in view the law applicable in the relevant
       year, even though the form of report may not have been amended to
       bring it in conformity with the amended law.
(e)    The information in the Annexure should be based on the books of
       account, records, documents, information and explanations made
       available to the accountant for his examination.
(f)    The Annexure should be signed by the accountant after he has
       completed his procedures on the particulars given/to be given in the
       Annexure.
9.26   Particulars to be furnished in the Annexure
PART A
       1.       Name of the assessee :
       2.       Address :
       3.       Permanent account number :
       4.       Nature of business or activities of the assessee*
       5.       Status :
       6.       Previous year ended :
       7.       Assessment year :
       8.       Aggregate value of international transactions as per
                books of accounts
       9.       Aggregate value of specified domestic transactions as
                per books of accounts
       *Code for nature of business to be filled in as per instructions for filing Form ITR 6

9.27 Under clause (1) the name of the assessee whose accounts and
records are being examined under section 92E should be given. However, if
the examination is in respect of a branch, name of such branch should be
mentioned along with the name of the assessee (in case a separate branch
certificate is done).
9.28 The address to be mentioned under clause (2) should be the same as
has been communicated by the assessee to the Income-tax Department for
assessment purposes as on the date of signing of the Form. If the
examination is in respect of a branch or a unit, the address of the branch or


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                                   Scope of Examination under Section 92E

the unit should be given. In the case of a company, the address of the
registered office should also be stated. In the case of a new assessee, the
address should be that of the principal place of business.
9.29 Under clause (3) the permanent account number (PAN) allotted to the
assessee should be indicated. If the assessee has not been allotted the
permanent account number as on the date of signing of the Form, that fact
should be indicated. Where PAN is not known/allotted but the general index
register number (GIR) is available, the same may be given.
9.30 Under clause (4) the code for nature of business is to be provided as
per the instructions for filling form ITR 6.
9.31 Under clause (5) the status of the assessee is to be mentioned. This
refers to the different classes of assessees included in the definition of
"person" in section 2(31) of the Act, namely, individual, Hindu undivided
family, company, firm, an association of persons or a body of individuals
whether incorporated or not, a local authority or artificial juridical person.
Furthermore, a person has been defined as `including a permanent
establishment of such person', i.e. even a branch or a project office. In case
of any violations by a liaison office it may come under the purview of this
clause and hence, the same should be disclosed. Further, in case of disputes
regarding status of the assessee, the full facts should be mentioned.
9.32 Under clause (6), since the previous year under the Act uniformly
ends on 31st March, the relevant previous year should be mentioned.
9.33 Under clause (7) the assessment year relevant to the previous year
for which the accounts and records are being examined should be
mentioned.
9.34 Under clause (8) & (9), the aggregate value of international
transactions and specified domestic transactions as per books of accounts
should be mentioned.
PART B
9.35   10.List of associated enterprises with whom the assessee has
       entered into international transactions, with the following
       details:
       (a)     Name of the associated enterprise.
       (b)     Nature of the relationship with the associated enterprise
               as referred to in section 92A(2).

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

       (c)     Brief description of the business carried on by the
               associated enterprise.
9.36 The assessee is required to furnish by way of an attachment, a
complete list of associated enterprises, duly certified by the authorised
person (partner, trustee, managing director etc. depending on the definition
of assessee) with whom the assessee has entered into international
transactions during the previous year. The terms `associated enterprises' and
`international transactions' have been defined in detail in sections 92A and
92B of the Act, respectively. If an enterprise was `associated' with the
assessee for a part of the previous year, details should be furnished with
respect to that period of the previous year.
In this connection, the assessee has to maintain a register with the list of the
transactions and the relevant details. The accountant can rely on the
information provided in the register of associated enterprise for completing
his work.
9.37 The particulars in this clause should be examined on test check basis
from an instrument or agreement or any other document evidencing the
association of enterprises including any supplementary documents related
thereto. In this connection the accountant has to, based on his best
judgement, determine the sampling approach and design the nature and
timing of the audit tests.
9.38 In preparing the list of the associated enterprises, it is possible that
the extent of association may not be precisely ascertainable during the
previous year, i.e. it may be indeterminate or unknown, resulting in a
situation whereby the assessee is not in a position to conclude as to whether
any particular entity is covered under the definition of `associated enterprise',
as detailed in section 92A of the Act. In such circumstances, it is advisable
both from the viewpoint of the assessee and the accountant's perspective
that the relevant fact be stated in the Annexure or in the notes, as the case
may be, and reference to same be made, if considered significant, in the
accountant's report.
9.39 In certain cases the enterprises may be associated in more than one
manner. Since there is no different treatment for any particular form of
association, it may be sufficient if the assessee details any particular
relationship with the associated enterprise under clause 10(b).Although the
assessee may be advised to detail all the relationships, disclosure of any one
relationship is considered sufficient from a compliance perspective.


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9.40 The accountant should obtain a written representation from the
assessee detailing the business of the associated enterprises with whom the
assessee has transacted. Further, since the completeness of the list of the
associated enterprises and transactions with them is the primary
responsibility of the assessee, the accountant should obtain suitable
representation from the management (Board of directors or its equivalent).
9.41 The accountant may be advised to use his professional skill and
expertise, in determining the scope of work to be performed with respect of
getting reasonable comfort on the assessee's list of international transactions
with associated enterprises. The accountant should, however, be aware of
the possibility that transactions with associated enterprises may have been
influenced in large measure by conditions similar to the following:-
(a)    Lack of sufficient working capital or credit to continue the business;
(b)    An urgent desire for a continued favorable earnings record in the
       hope of supporting the price of the assessee's share price, if any;
(c)    An overly optimistic earnings forecast;
(d)    Dependence on a single or relatively few products, customers, or
       transactions for the continuing success of the venture;
(e)    A declining industry characterised by a large number of business
       failures;
(f)    Excess capacity;
(g)    Significant litigation, especially litigation between stockholders and
       management; or
(h)    Significant obsolescence dangers because the assessee is in a high-
       technology industry.
9.42 The accountant should place emphasis on test checking material
transactions with enterprises associated to the assessee. Certain
relationships, such as parent-subsidiary or investor-investee, may be clearly
evident. Determining the existence of others requires the application of
certain procedures, which may include the following:
(a)    Evaluate the Assessee's procedures for identifying and properly
       accounting for international transactions;




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(b)    Request from appropriate management personnel the names of all
       associated enterprises and inquire whether there were any
       transactions with these enterprises during the period;
(c)    Review filings by the reporting entity with regulatory agencies for the
       names of associated enterprises and for other businesses in which
       officers and directors occupy directorship or management positions;
       (example director 's representations on transactions under sections
       297, 299 etc.);
(d)    Review stockholder listings of closely held companies to identify
       principal stockholders;
(e)    Enquire, where possible and considered essential of predecessor,
       principal, or other accountants/accountants of associated enterprises
       concerning their knowledge of existing relationships and the extent of
       management involvement in material transactions;
(f)    Review material investment transactions during the period under
       review to determine whether the nature and extent of investments
       during the period create associated enterprises; and
(g)    Review the mandatory related party disclosure in the audited financial
       (AS 18) [The definition of Associated Enterprise u/s. 92A in relation to
       the International Transactions is different than the definition of related
       party under AS 18 and therefore the accountant should review the
       Associated Enterprises for the purpose of section 92A
       independently].
9.43 Although it is the responsibility of the assessee to furnish a complete
list of associated enterprises and international transactions, the accountant
must exercise reasonable care to ensure that prima facie and, based on the
information that is made available to him, the list of associated enterprises
and list of international transactions furnished by the assessee is reasonably
complete based on financial statements and books of accounts. Further, in
order to ascertain whether the assessee has entered into any transactions
coming within the scope of sub-section (2) of section 92B, the accountant
should obtain appropriate management representation.
9.44   11.    Particulars in respect of transactions in tangible property :
A.     Has the assessee entered into any international transaction(s) in
       respect of purchase / sale of raw material, consumables or any



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     other supplies for assembling / processing / manufacturing of
     goods/articles from/to associated enterprises?        Yes/No
     If 'yes', provide the following details in respect of each
     associated enterprise and each transaction or class of
     transaction:
     (a)    Name and address of the associated enterprise with
            whom the international transaction has been entered into.
     (b)    Description of transaction and quantity purchased/sold.
     (c)    Total amount paid/received or payable/ receivable in the
            transaction-
            (i)    as per books of account.
            (ii)   as computed by the assessee having regard to the
                   arm's length price.
     (d)    Method used for determining the arm's length price. [See
            section 92C(1)].
B.   Has the assessee entered into any international transaction(s) in
     respect of purchase / sale of traded / finished goods?
                                                               Yes/No
     If 'yes' provide the following details in respect of each
     associated enterprise and each transaction or class of
     transaction:
     (a)    Name and address of the associated enterprise with
            whom the international transaction has been entered into.
     (b)    Description of transaction and quantity purchased/sold.
     (c)    Total amount paid / received or payable / receivable in the
            transaction-
            (i)    as per books of account.
            (ii)   as computed by the assessee having regard to the
                   arm's length price.
     (d)    Method used for determining the arm's length price[See
            section 92C(1)]



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C.     Has the assessee entered into any international transaction(s) in
       respect of purchase, sale, transfer, lease or use of any other
       tangible property including transactions specified in Explanation
       (i)(a) below section 92B(2)?                              Yes/No
       If 'yes' provide the following details in respect of each
       associated enterprise and each transaction or class of
       transaction :
       (a)    Name and address of the associated enterprise with
              whom the international transaction has been entered into.
       (b)    Description of the property and nature of transaction.
       (c)    Number of units of each category of tangible property
              involved in the transaction.
       (d)    Amount paid/received or payable/ receivable in each
              transaction of purchase/sale/transfer/use, or lease rent
              paid/ received or payable/receivable in respect of each
              lease provided/entered into:
              (i)    as per books of account.
              (ii)   as computed by the assessee having regard to the
                     arm's length price.
       (e)    Method used for determining the arm's length price. [see
              section 92C(1)].
12.    Particulars in respect of transactions in intangible property:
       Has the assessee entered into any international transaction(s) in
       respect of purchase, sale, transfer, lease or use of intangible
       property including transactions specified in Explanation (i)(b)
       below section 92B(2)?                                    Yes/No
       If 'yes' provide the following details in respect of each
       associated enterprise and each category of intangible property:
       (a)    Name and address of the associated enterprise with
              whom the international transaction has been entered into.
       (b)    Description of intangible property and nature of
              transaction.



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      (c)    Amount paid/received or payable/ receivable for
             purchase/sale/transfer/lease/use of each category of
             intangible property:
             (i)    as per books of account.
             (ii)   as computed by the assessee having regard to the
                    arm's length price.
      (d)    Method used for determining the arm's length price. [see
             section 92C(1)].
13.   Particulars in respect of providing of services:
      Has the assessee entered into any international transaction(s) in
      respect of Services including transactions as specified in
      Explanation (i)(d) below section 92B(2)?                 Yes/No
      If 'yes' provide the following details in respect of each
      associated enterprise and each category of service:
      (a)    Name and address of the associated enterprise with
             whom the international transaction has been entered into.
      (b)    Description of services provided/availed of/ from the
             associated enterprise.
      (c)    Amount paid/received or payable/ receivable for the
             services provided/ taken.
             (i)    as per books of account.
             (ii)   as computed by the assessee having regard to the
                    arm's length price.
      (d)    Method used for determining the arm's length price. [See
             section 92C(1)].
14.   Particulars in respect of lending or borrowing of money:
      Has the assessee entered into any international transaction(s) in
      respect of lending or borrowing of money including any type of
      advance, payments, deferred payments, receivable, non-
      convertible preference shares / debentures or any other debt
      arising during the course of business as specified in Explanation
      (i)(c) below section 92B(2)?                              Yes/No



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       If `yes' provide the following details in respect of each
       associated enterprise and each loan/advance:
       (a)    Name and address of the associated enterprise with
              whom the international transaction has been entered into.
       (b)    Nature of financing agreement.
       (c)    Currency in which transaction has taken place
       (d)    Interest rate charged/paid         in     respect   of   each
              lending/borrowing.
       (e)    Amount paid/received or payable/ receivable in the
              transaction-
              (i)    as per books of account.
              (ii)   as computed by the assessee having regard to the
                     arm's length price.
       (f)    Method used for determining the arm's length price. [See
              section 92C(1)].
15.    Particulars in respect of transactions in the nature of guarantee:
       Has the assessee entered into any international transaction(s) in
       the nature of guarantee?                                 Yes/No
       If Yes, please provide the following details :
       (a)    Name and address of the associated enterprise with
              whom the international transaction has been entered into.
       (b)    Nature of guarantee agreement.
       (c)    Currency in which guarantee transaction was undertaken
       (d)    Compensation / fees charged / paid in respect of the
              transaction
       (e)    Method used for determining the arm's length price. [See
              section 92C(1)].
16.    Particulars in respect of international transactions of purchase
       or sale of marketable securities, issue and buy back of equity
       shares, optionally convertible/ partially convertible/ compulsorily
       convertible debentures/ preference shares:



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                                  Scope of Examination under Section 92E

      Has the assessee entered into any international transaction(s) in
      respect of purchase or sale of marketable securities or issue of
      equity shares including transactions specified in Explanation
      (i)(c) below section 92B(2)?                              Yes/No
      If yes, provide the following details:
      (a)     Name and address of the associated enterprise with
              whom the international transaction has been entered into
      (b)     Nature of transaction
      (c)     Currency in which the transaction was undertaken
      (d)     Consideration charged/ paid in respect of the transaction
      (e)     Method used for determining the arm 's length price [See
              section 92C(1]
17.   Particulars in respect of mutual agreement/ arrangement:
      Has the assessee entered into any international transaction with
      an associated enterprise or enterprises by way of 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? Yes/No
      If 'yes' provide the following details in respect of each
      agreement/arrangement:
      (a)     Name and address of the associated enterprise with
              whom the international transaction has been entered into.
      (b)     Description of such mutual agreement or arrangement.
      (c)     Amount paid/received or payable/ receivable in each such
              transaction:
              (i)    as per books of account.
              (ii)   as computed by the assessee having regard to the
                     arm's length price.
      (d)     Method used for determining the arm's length price. [See
              section 92C(1)]



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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

18.    Particulars in respect of international transactions arising out/
       being part of business restructuring or reorganizations:
       Has the assessee entered into any international transaction(s)
       arising out/being part of any business restructuring or
       reorganization entered into by it with the associated enterprise
       or enterprises as specified in Explanation (i) (e) below section
       92B (2) and which has not been specifically referred to above? Yes/No
       If 'yes' provide the following details:
       (a)    Name and address of the associated enterprise with
              whom the international transaction has been entered into.
       (b)    Nature of transaction
       (c)    Agreement in relation to such business restructuring/
              reorganization
       (d)    Terms of business restructuring/ reorganization
       (e)    Method used for determining the arm 's length price [See
              section 92C(1)
19.    Particulars in respect of any other transaction including the
       transaction having a bearing on the profits, incomes, losses, or
       assets of the assessee:
       Has the assessee entered into any other international
       transaction(s) including a transaction having a bearing on the
       profits, income, losses or assets, but not specifically referred to
       above, with associated enterprise?                          Yes/No
       If 'yes' provide the following details in respect of each
       associated enterprise and each transaction:
       (a)    Name and address of the associated enterprise with
              whom the international transaction has been entered into.
       (b)    Description of the transaction.
       (c)    Amount paid/received or payable/ receivable in each such
              transaction:
              (i)     as per books of account.
              (ii)    as computed by the assessee having regard to the
                      arm's length price.

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       (d)     Method used for determining the arm's length price. [see
               section 92C(1)].
20.    Particulars of deemed international transaction:
       Has the assessee entered into any transaction with a person
       other than an AE in pursuance of a prior agreement in relation to
       the relevant transaction between such other person and the
       associated enterprise?                                   Yes/No
       If 'yes' provide the following details in respect of each of such
       agreement:
       (a)     Name and address of the person other than the
               associated enterprise with whom the deemed
               international transaction has been entered into.
       (b)     Description of the transaction.
       (c)     Amount paid/received or payable/ receivable in the
               transaction:
               (i)     as per books of account.
               (ii)    as computed by the assessee having regard to the
                       arm's length price.
       (d)     Method used for determining the arm's length price. [see
               section 92C(1)].
9.45 Under clause 11A, the assessee has to furnish details of international
transactions in respect of inputs used in the course of assembling,
processing and manufacturing. The items referred to in this clause are
essentially materials worked upon or used in the course of the assessee's
business, namely, raw materials, components, assemblies and sub-
assemblies, consumables, etc. When any of the aforesaid materials are sold
before their consumption during the normal course of business, the details of
these sales are also to be reported under clause 11A.
9.46 Under clause 11B, the assessee has to furnish details of international
transactions in respect of purchase/sales of traded goods and
purchase/sales of finished goods. Under clause 11C, the assessee has to
furnish details of purchase, sale, lease or use of any other tangible property.
9.47 Under clause 12, the assessee has to furnish details about
transaction involving not only commercial/business intangibles such know-


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how, patent, copyrights, marketing related, technology related, contract
related, customer related intangibles but, where applicable even personal
intangibles such as literary and artistic copyrights. Intangibles would also
include human capital related, location related and goodwill related
intangibles. Any other similar item that derives its value from its intellectual
content rather than its physical attributes would also be included as an
intangible. As all the intangibles referred to Explanation (ii) to Section 92B
may not be separately accounted in the books of accounts (such as customer
lists, human capital related intangibles, customer relationship, goodwill, etc),
the accountant may need to rely on the transfer pricing documentation
maintained by the assessee under Rule 10D as well as obtain adequate
representations from the management stating that all the international
transactions relating to intangibles have been disclosed to the accountant.
9.48 Under clause 13, the assessee has to furnish details about
transactions that are in the nature of providing services to associated
enterprises. The services contemplated under this clause include provision of
market research, market development, marketing management,
administration, technical, commercial, repairs, design, scientific research,
legal or accounting service, etc. For example, if A Inc., USA (associated
enterprise) out-sources its entire accounting function to B Ltd. (Indian
subsidiary), such transaction needs to be reported under this clause. Where
the contract with the associated enterprise is a composite contract, involving
both labour and materials, and the individual portions are indivisible, the
details of such contract will have to be included under clause 11 and not
under clause 13.The assessee may, however, make a suitable disclosure of
the facts in both the paragraphs.
9.49 Under clause 14, the nature of the financing arrangements i.e. term
loan, medium term loan, short term loan, project finance, working capital
arrangement, fixed asset financing facility deferred payments / receivables
arrangements, trade advances, non-convertible preference shares, etc.
should be clearly mentioned. Further, any security provided should also be
clearly indicated along with the principal terms of repayment. The currency
denomination of the loan account should be clearly indicated in the form
along with any conversion options and any forward cover contracts taken.
The assessee should disclose the interest rate applicable and along with any
conditions applicable to a change in interest. The accountant should confirm
the rate of interest from the loan agreement, any further correspondence
between the assessee and the associated enterprise and verify the same
from payment details. Further, if the interest is the sum of a fixed and

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variable component, e.g. LIBOR, the same should be clearly stated. The
accountant should also disclose the rate of dividend payable to non-
convertible preference shares.
9.50 Under clause 15, the nature of the guarantee i.e. whether corporate
guarantee or letter of credit, etc. should be clearly mentioned. Further, the
details of the loan for which the guarantee is received / provided, the
currency denomination of the transaction should be clearly indicated in the
form. The assessee should disclose theThe compensation charged / paid
should also be stated.
9.51 Under clause 16, the assessee has to furnish details about
transactions that are in nature of purchase or sale or marketable securities
(for example commercial paper, banker 's acceptances, treasury bills and
other money market instruments) issue and buy back of equity shares,
convertible debentures/ preference shares. Further, the assessee is required
to furnish details such as the name and address of associated enterprise with
whom the transaction has been undertaken, nature of transaction, currency,
consideration charged/ paid as per books and method used for determination
of arm's length price. In disclosing these transactions, it is important for the
assessee to determine whether the said transactions have a taxable impact
in India since the requirement to determine arm's length price would
accordingly, be impacted.
9.52 Under clause 17, the assessee has to furnish the details of
international transactions pertaining to cost contribution/sharing agreements
and mutual arrangements for cost allocation or apportionment thereof. The
Accountant should obtain and examine the copy of relevant agreements to
support the details provided.
9.53 Under clause 18, the assessee has to furnish the details of
international transaction with respect business restructuring or
reorganization. The assessee is required to furnish details such as details of
AE with whom such transaction has been entered into, nature of transaction
and method used for determination of arm's length price. In disclosing such
transactions, it is important to obtain a copy of the governing agreement that
details the terms of the restructuring or reorganization.
9.54 Under clause 19, the assessee is required to furnish details of any
other transaction having a bearing on profits, losses, income or assets i.e. it
is a residual clause to cover any transaction which has not been covered in
the preceding categories. Examples of these transactions could be
reimbursement transactions or transactions which do not involve any charge

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(i.e. free of cost services or goods). These transactions should be identified
and further notes could be provided to explain their nature.
9.55 Under clause 20, the assessee is required to furnish details with
respect to the deemed international transactions. A discussion on what
constitutes a deemed international transaction has already been provided in
Para 4.5 and Para 4.6 above. The assessee is required to furnish details
such as description of the transaction, amount paid/ payable or received/
receivable, and the method used for determination of arm's length price.
9.56 The accountant should audit the information provided by the
assessee, with the documents as he considers essential in connection with
the details of nature and terms (including prices) of international transactions
entered into with each associated enterprise, details of property transferred
or services provided and the quantum and the value of each such transaction
or class of such transaction.
9.57 The accountant should examine the information provided in the
annexure by the assessee, by using standard examining practices from the
books of account maintained by the assessee and from information and
explanations obtained. He should also verify the information provided by the
assessee in the context of the understanding that he has of the assessees
business. Further, in conducting the examination the accountant will have to
use his professional skill and expertise and apply such tests, based on
materiality and sampling, as the circumstances of the case may require.
9.58   For verifying the correctness of the:
(i)    `name and address of the associated enterprise with whom the
       international transaction has been entered into', and
(ii)   `description of transaction and quantity purchased/sold'
the accountant may examine any instrument or agreement or any other
document (invoices, correspondence etc.) evidencing the transaction and
may also verify the books of account of the assessee.
9.59 For determining the correctness of the, `total amount paid/ received
or payable/receivable in the transaction as per books of account' the
accountant may, in addition to examining the information/documents detailed
above, obtain a confirmation for material international transactions from each
associated enterprise, if considered essential. Such confirmation may be
undertaken to obtain evidence from third parties about assertions made by
the assessee in the annexure. In general, it is presumed that when evidential

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matter can be obtained from independent sources outside an entity, it
provides greater assurance of reliability for the purposes of an independent
examination than that secured solely within the entity.
9.60 Confirmation requests can be designed to elicit evidence that
addresses the completeness assertion: that is, if properly designed,
confirmations may provide evidence to aid in assessing whether all
transactions, accounts and amounts that should be included in the annexure
are included. The accountant may require the identified associated enterprise
to seek confirmation from associated parties, the following with respect to the
transactions entered into with the assessee:
(a)    description of transaction and quantity purchased/sold;
(b)    total amount paid/received or payable/receivable in the transaction;
       and
(c)    listing of all transactions without consideration, if any.
Additionally, obtaining of a confirmation from the associated enterprise would
be more advisable in the event that the financial statements / books of
account of the assessee are yet to be audited.
9.61 With regard to the, `total amount paid/received or payable/ receivable
in the transaction as computed by the assessee having regard to the arm's
length price', the accountant should get an authenticated declaration from
the assessee along with a computation statement regarding the total amount
paid/received or payable/receivable in the transaction as well as the arm's
length price as computed by the assessee.
9.62 With regard to the, `method used for determining the arm's length
price', the accountant is at no point of time required to suggest the most
appropriate method to determine the arm's length price nor is he required to
assign any value to any transaction. As stated earlier, the computation of the
arm's length prices and the selection of the most appropriate method is the
responsibility of the assessee and the accountant only needs to verify the
same to ensure that they are in accordance with the accounts and records
maintained by the assessee and that the same are true and correct.
9.63 Clauses 11 to 24 of Annexure to Form No.3CEB list typical
transactions that generally take place. However, these are not exhaustive
and, if there are any transactions that are not specifically covered by these
clauses, the particulars as required under clause 25 should be furnished in
respect of such transactions. Further, in case the assessee has entered into

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transactions involving cost re-imbursements or transfer of assets free of cost
receipts of services free of charge, it is recommended that the accountant
may identify these transactions in the Form No.3CEB and provide notes to
explain their nature.
9.64 It may be noted here that though the accountant is required to make
specific inquiries he is not responsible to ensure completeness of the list of
international transactions entered into by the assessee. Further, it is
advisable to take a representation from the management stating that all
international transactions, whether specifically stated in the Form No.3CEB
or not, have been disclosed to the accountant.
9.65 Often issues arise with respect to the services received or provided
by the assessee free of cost to the associated enterprises. The assessee
may not be able to attribute a cost or benefit from such services. However,
the assessee should mention such services also under clause 25 in the
annexure. These services could include the following:-
(a)    group marketing services on a global level the cost of which has not
       been allocated to the associated company even though the
       associated company may benefit from the same;
(b)    a group website operated by an associated company;
(c)    indirect recruiting services undertaken by an associated company.
9.66 Form No. 3CEB requires the accountant, who signs the report, to
indicate his membership number. As such, the accountant should give his
membership number and firm's registration number with ICAI and indicate
the status, such as proprietor or partner of a firm, in which he has signed the
report.
PART C
9.67 21. List of associated enterprises with whom the assessee has
entered into specified domestic transactions, with the following details:
(a)    Name, address and PAN of the associated enterprise.
(b)    Nature of the relationship with the associated enterprise.
(c)    Brief description of the business carried on by the said
       associated enterprise.
9.68 The assessee is required to furnish by way of an attachment, a
complete list of associated enterprises, with whom the assessee has entered


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into specified domestic transactions during the previous year. The list of
associated enterprises must be duly certified by the authorised person
(partner, trustee, managing director etc. depending on the definition of
assessee). The term `associated enterprises' has been defined in detail in
Rule 10A of the Rules. If an enterprise was `associated' with the assessee for
a part of the previous year, details should be furnished with respect to that
period of the previous year.
In this connection, the assessee has to maintain a register with the list of the
transactions and the relevant details. The accountant can rely on the
information provided in the register of associated enterprise for completing
his work.
9. 69 The particulars in this clause should be examined on test check basis
from an instrument or agreement or any other document evidencing the
association of enterprises including any supplementary documents related
thereto. In this connection the accountant has to, based on his best
judgement, determine the sampling approach and design the nature and
timing of the audit tests.
9.70 In preparing the list of the associated enterprises, it is possible that
the extent of association may not be precisely ascertainable during the
previous year, i.e. it may be indeterminate or unknown, resulting in a
situation whereby the assessee is not in a position to conclude as to whether
any particular entity is covered under the definition of `associated enterprise',
as detailed in Rule 10A. In such circumstances, it is advisable both from the
viewpoint of the assessee and the accountant's perspective that the relevant
fact be stated in the Annexure or in the notes, as the case may be, and
reference to same be made, if considered significant, in the accountant's
report.
9.71 In certain cases the enterprises may be associated in more than one
manner. Since there is no different treatment for any particular form of
association, it may be sufficient if the assessee details any particular
relationship with the associated enterprise under clause 21(b). Although the
assessee may be advised to detail all the relationships, disclosure of any one
relationship is considered sufficient from a compliance perspective.
9.72 The accountant should obtain a written representation from the
assessee detailing the business of the associated enterprises with whom the
assessee has transacted. Further, since the completeness of the list of the
associated enterprises is the primary responsibility of the assessee, the


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

accountant should obtain suitable representation from the management
(Board of directors or its equivalent).
9.73 The accountant should use his professional skill and expertise, in
determining the scope of work to be performed with respect of getting
reasonable comfort on the assessee's list of specified domestic transactions
with associated enterprises.
9.74 The accountant should place emphasis on test checking material
transactions with enterprises associated to the assessee. Certain
relationships, such as parent-subsidiary or investor-investee, may be clearly
evident. Determining the existence of others requires the application of
certain procedures, which may include the following:
(a)    Evaluate the assessee procedures for identifying and properly
       accounting for specified domestic transactions;
(b)    Request from appropriate management personnel the names of all
       associated enterprises and inquire whether there were any
       transactions with these enterprises during the period;
(c)    Review filings by the reporting entity with regulatory agencies for the
       names of associated enterprises and for other businesses in which
       officers and directors occupy directorship or management positions;
       (example director 's representations on transactions under sections
       297, 299184,188,189 etc.);
(d)    Review stockholder listings of closely held companies to identify
       principal stockholders;
(e)    Enquire, where possible and considered essential of predecessor,
       principal, or other accountants/accountants of associated enterprises
       concerning their knowledge of existing relationships and the extent of
       management involvement in material transactions;
(f)    Review material investment transactions during the period under
       review to determine whether the nature and extent of investments
       during the period create associated enterprises; and
(g)    Review the mandatory related party disclosure in the audited financial
       (AS 18).[The definition of Associated Enterprise in Rule 10A r.w.s.
       40A(2)(b) in relation to the specified domestic transactions is different
       than the definition of related party under AS 18 and therefore the
       accountant should review the Associated Enterprises for the purpose
       of section 92BA independently]

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                                   Scope of Examination under Section 92E

(h)    Review the income tax return of assessee to determine any tax
       holiday status claimed by assessee.
9.75 Although it is the responsibility of the assessee to furnish a complete
list of associated enterprises and specified domestic transactions, the
accountant must exercise reasonable care to ensure that prima facie and,
based on the information that is made available to him, the list of associated
enterprises and list of specified domestic transactions furnished by the
assessee is reasonably complete.
9.76   22.   Particulars in respect of transactions in the nature of any
       expenditure:
       Has the assessee entered into any specified domestic
       transaction(s) being in respect of which payment has been made
       or is to be made to any person referred to in section 40A(2)(b)?
                                                                      Yes/No
       If 'yes', provide the following details in respect of each of such
       person and each transaction or class of transaction:
       (a)     Name of person with whom the specified domestic
               transaction has been entered into.
       (b)     Description of transaction along with quantitative details,
               if any
       (c)     Total amount paid or payable in the transaction-
               (i)    as per books of account.
               (ii)   as computed by the assessee having regard to the
                      arm's length price.
       (d)     Method used for determining the arm's length price. [See
               section 92C(1)].
23.    Particulars in respect of transactions in the nature of transfer or
       acquisition of any goods or services:
A.     Has any undertaking or unit or enterprise or eligible business of
       the assessee [as referred to in section 80A(6), 80IA(8) or
       section10AA)]transferred any goods or services to any other
       business carried on by the assessee?
                                                                  Yes/No


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

       If 'yes' provide the following details in respect of each unit or
       enterprise or eligible business:
       (a)    Name and details of business to which goods or services
              have been transferred.
       (b)    Description of goods or services transferred.
       (c)    Amount received / receivable for transferring of such
              goods or services -
              (i)    as per books of account.
              (ii)   as computed by the assessee having regard to the
                     arm's length price.
       (d)    Method used for determining the arm's length price[See
              section 92C(1)]
B.     Has any undertaking or unit or enterprise or eligible business of
       the assessee [as referred to in section 80A(6), 80IA(8) or
       section10AA)]acquired any goods or services from another
       business of the assessee?                                  Yes/No
       If 'yes' provide the following details in respect of each unit or
       enterprise or eligible business:
       (a)    Name and details of business from which goods or
              services have been acquired.
       (b)    Description of goods or services acquired.
       (c)    Amount paid / payable for acquiring of such goods or
              services -
              (i)    as per books of account.
              (ii)   as computed by the assessee having regard to the
                     arm's length price.
       (d)    Method used for determining the arm's length price [See
              section 92C(1)]
24.    Particulars in respect of specified domestic transactions in the
       nature of any business transacted:
       Has the assessee entered into any specified domestic
       transaction(s) with any associated enterprise which has resulted


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                                   Scope of Examination under Section 92E

       in more than ordinary profits to an eligible business to which
       section 80IA(10) or section 10AA applies?               Yes/No
       If 'yes' provide the following details:
       (a)    Name of the person with whom the specified domestic
              transaction has been entered into
       (b)    Description of the transaction including quantitative
              details, if any
       (c)    Total amount received/receivable or paid/payable in the
              transaction-
              (i)     as per books of account.
              (ii)    as computed by the assessee having regard to the
                      arm's length price.
        (a) Method used for determining the arm's length price [See
            section 92C(1)]
25.    Particulars in respect of any other transactions:
       Has the assessee entered into any other specified domestic
       transactions(s) not specifically referred to above, with an
       associated enterprise?                               Yes/No
       If 'yes' provide the following details in respect of each
       associated enterprise and each transaction:
       (a)    Name of the associated enterprise with whom the
              specified domestic transaction has been entered into:
       (b)    Description of the transaction.
       (c)    Amount paid/received or payable/receivable in the
              transaction -
              (i)     as per books of account.
              (ii)    as computed by the assessee having regard to the
                      arm's length price.
       (d)    Method used for determining the arm's length price [See
              section 92C(1)]
9.77 Under clause 22, the assessee has to furnish details of specififed
domestic transactions in respect of expenditure for which payment has been


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

made or to be made to any person referred in section 40A(2)(b). The
expenditure referred to in this clause includes all types of revenue
transactions with related persons such as purchases of goods or services.
Even when the payment is not made to the related person, the details of
these transactions are required to be reported under clause 22. However, in
light of amendment in section 92BA of the Act vide Finance Act 2017
(effective from assessment year 2017-18), transactions with persons referred
to section 40A(2)(b) are not within the ambit of specified domestic
transactions.
9.78 Under clause 23A, the assessee has to furnish details of specified
domestic transactions respect of sale of goods/services from the assessee's
eligible business to assessee's other business.
9.79 Under clause 23B, the assessee has to furnish details of specified
domestic transactions respect of purchase of goods/services by the
assessee's eligible business from assessee's other business.
9.80 Under clause 24, the assessee has to furnish details of specified
domestic transactions which has enabled assessee to earn more than
ordinary profits for a business to which section 80IA(10) or section 10AA is
applicable. In case the assessee is of the opinion that a transaction under
Section 80IA(10) or Section 10AA does not result in more than ordinary
profits to the assessee, the assessee does not have to disclose such
transaction as specified domestic transaction under clause 24. However, the
assessee has to maintain robust documentation as prescribed under Rule
10D of the rules to substantiate that such transaction has not resulted in
more than ordinary profits to the assessee.
9.81 Under clause 25, the assessee has to furnish details of other
specified domestic transactions, which are not superficially covered in the
above discussed clauses.
9.82 With respect to other reporting requirements in above mentioned
clauses such as details of the person, description of the transaction, amount
paid/payable or received/receivable, method for computing the arms length
nature of the transaction accountant can refer to the guidance elaborated in
the previous paragraphs which are relevant for international transactions.




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                                                             Annexure I
                                       Statutory Provisions
1.      The Finance Act, 2001 has introduced with effect from A.Y. 2002-03
sections 92 to 92F in the Act. These provisions are commonly known as
transfer pricing regulations.
2.      The object behind introduction of the provisions as stated by the
Finance Minister in his Budget Speech and as explained in the Memorandum
explaining the provisions of the Finance Act, 2001 are reproduced below:
"The presence of multinational enterprises in India and their ability to allocate
profits in different jurisdictions by controlling prices in intra-group
transactions has made the issue of transfer pricing a matter of serious
concern, I had set up an Expert Group in November, 1999 to examine the
issues relating to transfer pricing. Their report has been received proposing a
detailed structure for transfer pricing legislation. Necessary legislative
changes are being made in the Finance Bill based on these
recommendations".
Vide the Finance Act 2012; specified domestic transactions have also been
brought under the purview of transfer pricing provisions.
3.       The relevant provisions of the Act dealing with the computation of
income from international transactions/specified domestic transactions,
certification by a chartered accountant and penalty for non compliance
thereof are given below:
CHAPTER X
SPECIAL PROVISIONS RELATING TO AVOIDANCE OF TAX
3.1    Section 92 - Computation of income from international
transaction having regard to arm 's length price.
(1)   Any income arising from an international transaction shall be
computed having regard to the arm's length price.
Explanation. For the removal of doubts, it is hereby clarified that the
allowance for any expense or interest arising from an international
transaction shall also be determined having regard to the arm's length price.
(2)    Where in an international transaction or specified domestic
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

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 or expense allocated or apportioned to, or,
as the case may be, contributed by, any such enterprise shall be determined
having regard to the arm's length price of such benefit, service or facility, as
the case may be.
(2A) Any allowance for an expenditure or interest or allocation of any cost or
expense or any income in relation to the specified domestic transaction shall
be computed having regard to the arm's length price.
(3)     The provisions of this section shall not apply in a case where the
computation of income under sub-section (1) or sub section (2A) or the
determination of the allowance for any expense or interest under that sub-
section, or the determination of any cost or expense allocated or
apportioned, or, as the case may be, contributed under sub-section (2) or
sub section (2A) has the effect of reducing the income chargeable to tax or
increasing the loss, as the case may be, computed on the basis of entries
made in the books of account in respect of the previous year in which the
international transaction or specified domestic transaction was entered into.
3.2    Section 92A - Meaning of associated enterprise.
(1)     For the purposes of this section and sections 92, 92B, 92C, 92D, 92E
and 92F, "associated enterprise", in relation to another enterprise, means an
enterprise -
       (a)   which participates, directly or indirectly, or through one or more
             intermediaries, in the management or control or capital of the
             other enterprise; or
       (b)   in respect of which one or more persons who participate,
             directly or indirectly, or through one or more intermediaries, in
             its management or control or capital, are the same persons who
             participate, directly or indirectly, or through one or more
             intermediaries, in the management or control or capital of the
             other enterprise.
(2)    For the purposes of sub-section (1), two 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 per cent of the voting power in the other
             enterprise; or

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                                                             Annexure I

(b)   any person or enterprise holds, directly or indirectly, shares
      carrying not less than twenty-six per cent 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 per cent 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 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

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

       (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, association of persons or body of
             individuals; or
       (m) there exists between the two enterprises, any relationship of
           mutual interest, as may be prescribed.
3.3    Section 92B - Meaning of international transaction.
(1)     For the purposes of this section and sections 92, 92C, 92D and 92E,
"international transaction" means a transaction between two or more
associated enterprises, either or both of whom are non-residents, 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
associated enterprises 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.
(2)     A transaction entered into by an enterprise with a person other than
an associated enterprise shall, for the purposes of sub-section (1), be
deemed to be an international transaction entered into between two
associated enterprises, if there exists a prior agreement in relation 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 where
the enterprise or the associated enterprise or both of them are non-residents
irrespective of whether such other person is a non-resident or not.
Explanation--For the removal of doubts, it is hereby clarified that--
(i)    the expression "international transaction" shall include--
(a)    the purchase, sale, transfer, lease or use of tangible property
       including building, transportation vehicle, machinery, equipment,
       tools, plant, furniture, commodity or any other article, product or
       thing;

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                                                                    Annexure I

(b)    the purchase, sale, transfer, lease or use of intangible property,
       including the transfer of ownership or the provision of use of rights
       regarding land use, copyrights, patents, trademarks, licences,
       franchises, customer list, marketing channel, brand, commercial
       secret, know-how, industrial property right, exterior design or practical
       and new design or any other business or commercial rights of similar
       nature;
(c)    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;
(d)    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;
(e)    a transaction of business restructuring or reorganisation, entered into
       by an enterprise with an associated enterprise, 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;
(ii)   the expression "intangible property" shall include--
(a)    marketing related intangible assets, such as, trademarks, trade
       names, brand names, logos;
(b)    technology related intangible assets, such as, process patents, patent
       applications, technical documentation such as laboratory notebooks,
       technical know-how;
(c)    artistic related intangible assets, such as, literary works and
       copyrights, musical compositions, copyrights, maps, engravings;
(d)    data processing related intangible assets, such as, proprietary
       computer software, software copyrights, automated databases, and
       integrated circuit masks and masters;
(e)    engineering related intangible assets, such as, industrial design,
       product patents, trade secrets, engineering drawing and schema-tics,
       blueprints, proprietary documentation;
(f)    customer related intangible assets, such as, customer lists, customer
       contracts, customer relationship, open purchase orders;


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

(g)    contract related intangible assets, such as, favourable supplier,
       contracts, licence agreements, franchise agreements, non-compete
       agreements;
(h)    human capital related intangible assets, such as, trained and
       organised work force, employment agreements, union contracts;
(i)    location related intangible assets, such as, leasehold interest, mineral
       exploitation rights, easements, air rights, water rights;
(j)    goodwill related intangible assets, such as, institutional goodwill,
       professional practice goodwill, personal goodwill of professional,
       celebrity goodwill, general business going concern value;
(k)    methods, programmes, systems, procedures, campaigns, surveys,
       studies, forecasts, estimates, customer lists, or technical data;
(l)    any other similar item that derives its value from its intellectual
       content rather than its physical attributes.
3.4    Section 92BA - Meaning of specified domestic transaction
For the purposes of this section and sections 92, 92C, 92D and 92E,
"specified domestic transaction" in case of an assessee means any of the
following transactions, not being an international transaction, namely:--
i.     any expenditure in respect of which payment has been made or is to
       be made to a person referred to in clause (b) of sub-section (2) of
       section 40A; Omitted w.e.f 1.4.2017
ii.    any transaction referred to in section 80A;
iii.   any transfer of goods or services referred to in sub-section (8) of
       section 80-IA;
iv.    any business transacted between the assessee and other person as
       referred to in sub-section (10) of section 80-IA;
v.     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; or
vi.    any other transaction as may be prescribed,
and where the aggregate of such transactions entered into by the assessee
in the previous year exceeds a sum of twenty crore rupees.




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                                                                   Annexure I

3.5    Section 92C - Computation of arm 's length price.
(1)     The arm's length price in relation to an international transaction or
specified domestic transaction shall be determined by any of the following
methods, being the most appropriate method, having regard to the nature of
transaction or class of transaction or class of associated persons or functions
performed by such persons or such other relevant factors as the Board may
prescribe, namely :
( 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.
(2)     The most appropriate method referred to in sub-section (1) shall be
applied, for determination of arm's length price, in the manner as may be
prescribed :
Provided that where more than one price is determined by the most
appropriate method, the arm's length price shall be taken to be the
arithmetical mean of such prices:
Provided further that if the variation between the arm's length price so
determined and price at which the international transaction or specified
domestic transaction has actually been undertaken does not exceed such
percentage not exceeding three per cent of the latter, as may be notified by
the Central Government in the Official Gazette in this behalf, the price at
which the international transaction [or specified domestic transaction] has
actually been undertaken shall be deemed to be the arm's length price.
"Provided also that where more than one price is determined by the most
appropirate method, the arm's length price in relation to an international
transaction or specified domestic transaction undertaken on or after the 1st
day of April, 2014, shall be computed in such manner as may be prescribed
and accordingly the first and second proviso shall not apply.
Explanation.--For the removal of doubts, it is hereby clarified that the
provisions of the second proviso shall also be applicable to all assessment or
reassessment proceedings pending before an Assessing Officer as on the
1st day of October, 2009.

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

(2A) Where the first proviso to sub-section (2) as it stood before its
amendment by the Finance (No. 2) Act, 2009 (33 of 2009), is applicable in
respect of an international transaction for an assessment year and the
variation between the arithmetical mean referred to in the said proviso and
the price at which such transaction has actually been undertaken exceeds
five per cent of the arithmetical mean, then, the assessee shall not be
entitled to exercise the option as referred to in the said proviso.
(2B) Nothing contained in sub-section (2A) shall empower the Assessing
Officer either to assess or reassess under section 147 or pass an order
enhancing the assessment or reducing a refund already made or otherwise
increasing the liability of the assessee under section 154 for any assessment
year the proceedings of which have been completed before the 1st day of
October, 2009.
(3)   Where during the course of any proceeding for the assessment of
income, the Assessing Officer is, on the basis of material or information or
document in his possession, of the opinion that -
( a)   the price charged or paid in an international transaction or specified
       domestic transaction has not been determined in accordance with
       sub-sections (1) and (2); or
( b)   any information and document relating to an international transaction
       or specified domestic 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; or
( c)   the information or data used in computation of the arm's length price
       is not reliable or correct; or
( d)   the assessee has 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 or specified domestic transaction
in accordance with sub-sections (1) and (2), on the basis of such material or
information or document available with him.
Provided that an opportunity shall be given by the Assessing Officer by
serving a notice calling upon the assessee to show cause, on a date and
time to be specified in the notice, why the arm's length price should not be so
determined on the basis of material or information or document in the
possession of the Assessing Officer.
(4)    Where an arm's length price is determined by the Assessing Officer

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                                                                    Annexure I

under sub-section (3), the Assessing Officer may compute the total income of
the assessee having regard to the arm's length price so determined :
Provided that no deduction under section 10A or section 10AA or section 10B
or under Chapter VI-A shall be allowed in respect of the amount of income by
which the total income of the assessee is enhanced after computation of
income under this sub-section:
Provided further that where the total income of an associated enterprise is
computed under this sub-section on determination of the arm's length price
paid to another associated enterprise from which tax has been deducted or
was deductible under the provisions of Chapter XVIIB, the income of the
other associated enterprise shall not be recomputed by reason of such
determination of arm's length price in the case of the first mentioned
enterprise.
3.6    Section 92CA - Reference to Transfer Pricing Officer
(1)     Where any person, being the assessee, has entered into an
international transaction or specified domestic transaction in any previous
year, and the Assessing Officer considers it necessary or expedient so to do,
he may, with the previous approval of the Principal Commissioner or
Commissioner, refer the computation of the arm's length price in relation to
the said international transaction or specified domestic transaction under
section 92C to the Transfer Pricing Officer.
(2)     Where a reference is made under sub-section (1), the Transfer
Pricing Officer shall serve a notice on the assessee requiring him to produce
or cause to be produced on a date to be specified therein, any evidence on
which the assessee may rely in support of the computation made by him of
the arm's length price in relation to the international transaction or specified
domestic transaction referred to in sub-section (1).
(2A) Where any other international transaction [other than an international
transaction referred under sub-section (1)], comes to the notice of the
Transfer Pricing Officer during the course of the proceedings before him, the
provisions of this Chapter shall apply as if such other international
transaction is an international transaction referred to him under sub-section
(1).
(2B) Where in respect of an international transaction, the assessee has not
furnished the report under section 92E and such transaction comes to the
notice of the Transfer Pricing Officer during the course of the proceeding
before him, the provisions of this Chapter shall apply as if such transaction is

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

an international transaction referred to him under sub-section (1).
(2C) Nothing contained in sub-section (2B) shall empower the Assessing
Officer either to assess or reassess under section 147 or pass an order
enhancing the assessment or reducing a refund already made or otherwise
increasing the liability of the assessee under section 154, for any
assessment year, proceedings for which have been completed before the 1st
day of July, 2012.
(3)     On the date specified in the notice under sub-section (2), or as soon
thereafter as may be, after hearing such evidence as the assessee may
produce, including any information or documents referred to in sub-section
(3) of section 92D and after considering such evidence as the Transfer
Pricing Officer may require on any specified points and after taking into
account all relevant materials which he has gathered, the Transfer Pricing
Officer shall, by order in writing, determine the arm's length price in relation
to the international transaction or specified domestic transaction in
accordance with sub-section (3) of section 92C and send a copy of his order
to the Assessing Officer and to the assessee.
(3A) Where a reference was made under sub-section (1) before the 1st
day of June, 2007 but the order under sub-section (3) has not been made by
the Transfer Pricing Officer before the said date, or a reference under sub-
section (1) is made on or after the 1st day of June, 2007, an order under sub-
section (3) may be made at any time before sixty days prior to the date on
which the period of limitation referred to in section 153, or as the case may
be, in section 153B for making the order of assessment or reassessment or
recomputation or fresh assessment, as the case may be, expires.
Provided that in the circumstances referred to in clause (ii) or clause (x)
of Explanation 1 to section 153, if the period of limitation available to the Transfer
Pricing Officer for making an order is less than sixty days, such remaining period
shall be extended to sixty days and the aforesaid period of limitation shall be
deemed to have been extended accordingly.
(4)     On receipt of the order under sub-section (3), the Assessing Officer
shall proceed to compute the total income of the assessee under sub-section
(4) of section 92C in conformity with the arm's length price as so determined
by the Transfer Pricing Officer.
(5)    With a view to rectifying any mistake apparent from the record, the
Transfer Pricing Officer may amend any order passed by him under sub-
section (3), and the provisions of section 154 shall, so far as may be, apply


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accordingly.
(6)    Where any amendment is made by the Transfer Pricing Officer under
sub-section (5), he shall send a copy of his order to the Assessing Officer
who shall thereafter proceed to amend the order of assessment in conformity
with such order of the Transfer Pricing Officer.
(7)     The Transfer Pricing Officer may, for the purposes of determining the
arm's length price under this section, exercise all or any of the powers
specified in clauses (a) to ( d) of sub-section (1) of section 131 or sub-section
(6) of section 133 or section 133A.
Explanation--For the purposes of this section, Transfer Pricing Officer
means a Joint Commissioner or Deputy Commissioner or Assistant
Commissioner authorised by the Board to perform all or any of the functions
of an Assessing Officer specified in sections 92C and 92D in respect of any
person or class of persons.
3.7    92CB- Power of Board to make safe harbour rules
(1)   The determination of arm's length price under section 92C or section
92CA shall be subject to safe harbour rules.
(2)    The Board may, for the purposes of sub-section (1), make rules for
safe harbour.
Explanation.--For the purposes of this section, "safe harbour" means
circumstances in which the income-tax authorities shall accept the transfer
price declared by the assessee.]
3.8    92CC- Advance Pricing Agreement
(1)     The Board, with the approval of the Central Government, may enter
into an advance pricing agreement with any person, determining the arm's
length price or specifying the manner in which arm's length price is to be
determined, in relation to an international transaction to be entered into by
that person.
(2)    The manner of determination of arm's length price referred to in sub-
section (1), may include the methods referred to in sub-section (1) of section
92C or any other method, with such adjustments or variations, as may be
necessary or expedient so to do.
(3)    Notwithstanding anything contained in section 92C or section 92CA,
the arm's length price of any international transaction, in respect of which the
advance pricing agreement has been entered into, shall be determined in


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

accordance with the advance pricing agreement so entered.
(4)    The agreement referred to in sub-section (1) shall be valid for such
period not exceeding five consecutive previous years as may be specified in
the agreement.
(5)    The advance pricing agreement entered into shall be binding--
(a)    on the person in whose case, and in respect of the transaction in
       relation to which, the agreement has been entered into; and
(b)    on the Principal Commissioner or Commissioner, and the income-tax
       authorities subordinate to him, in respect of the said person and the
       said transaction.
(6)    The agreement referred to in sub-section (1) shall not be binding if
there is a change in law or facts having bearing on the agreement so
entered.
(7)     The Board may, with the approval of the Central Government, by an
order, declare an agreement to be void ab initio, if it finds that the agreement
has been obtained by the person by fraud or misrepresentation of facts.
(8)    Upon declaring the agreement void ab initio,--
(a)    all the provisions of the Act shall apply to the person as if such
       agreement had never been entered into; and
(b)    notwithstanding anything contained in the Act, for the purpose of
       computing any period of limitation under this Act, the period
       beginning with the date of such agreement and ending on the date of
       order under sub-section (7) shall be excluded:
Provided that where immediately after the exclusion of the aforesaid period,
the period of limitation, referred to in any provision of this Act, is less than
sixty days, such remaining period shall be extended to sixty days and the
aforesaid period of limitation shall be deemed to be extended accordingly.
(9)     The Board may, for the purposes of this section, prescribe a scheme
specifying therein the manner, form, procedure and any other matter
generally in respect of the advance pricing agreement.
"(9A) The agreement referred to in sub-section (1), may, subject to such
conditions, procedure and manner as may be prescribed, provide for
determining the arm's length price or specify the manner in which arm's
length price shall be determined in relation to the international transaction
entered into by the person during any period not exceeding four previous

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years preceding the first of the previous years referred to in sub-section (4),
and the arm's length price of such international transaction shall be
determined in accordance with the said agreement.
(10) Where an application is made by a person for entering into an
agreement referred to in sub-section (1), the proceeding shall be deemed to
be pending in the case of the person for the purposes of the Act.
3.9    92CD- Effect to advance pricing agreement
(1)     Notwithstanding anything to the contrary contained in section 139,
where any person has entered into an agreement and prior to the date of
entering into the agreement, any return of income has been furnished under
the provisions of section 139 for any assessment year relevant to a previous
year to which such agreement applies, such person shall furnish, within a
period of three months from the end of the month in which the said
agreement was entered into, a modified return in accordance with and limited
to the agreement.
(2)    Save as otherwise provided in this section, all other provisions of this
Act shall apply accordingly as if the modified return is a return furnished
under section 139.
(3)    If the assessment or reassessment proceedings for an assessment
year relevant to a previous year to which the agreement applies have been
completed before the expiry of period allowed for furnishing of modified
return under sub-section (1), the Assessing Officer shall, in a case where
modified return is filed in accordance with the provisions of sub-section (1),
proceed to assess or reassess or recompute the total income of the relevant
assessment year having regard to and in accordance with the agreement.
(4)     Where the assessment or reassessment proceedings for an
assessment year relevant to the previous year to which the agreement
applies are pending on the date of filing of modified return in accordance with
the provisions of sub-section (1), the Assessing Officer shall proceed to
complete the assessment or reassessment proceedings in accordance with
the agreement taking into consideration the modified return so furnished.
(5)     Notwithstanding anything contained in section 153 or section 153B or
section 144C,--
(a)    the order of assessment, reassessment or recomputation of total
       income under sub-section (3) shall be passed within a period of one
       year from the end of the financial year in which the modified return
       under sub-section (1) is furnished;


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

(b)      the period of limitation as provided in section 153 or section 153B or
         section 144C for completion of pending assessment or reassessment
         proceedings referred to in sub-section (4) shall be extended by a
         period of twelve months.
(6)      For the purposes of this section,--
(i)      "agreement" means an agreement referred to in sub-section (1) of
         section 92CC;
(ii)     the assessment or reassessment proceedings for an assessment
         year shall be deemed to have been completed where--
         (a)    an assessment or reassessment order has been passed; or
         (b)    no notice has been issued under sub-section (2) of section
                143 till the expiry of the limitation period provided under the
                said section.

3.10 Section 92CE- Secondary adjustment in certain cases (wef 1-04-2018).

(1) Where a primary adjustment to transfer price,--
       (i) has been made suo motu by the assessee in his return of income;
       (ii) made by the Assessing Officer has been accepted by the assessee;
       (iii) is determined by an advance pricing agreement entered into by the
       assessee under section 92CC;
       (iv) is made as per the safe harbour rules framed under section 92CB; or
       (v) is arising as a result of resolution of an assessment by way of the
       mutual agreement procedure under an agreement entered into under
       section 90 or section 90A for avoidance of double taxation,

the assessee shall make a secondary adjustment:

Provided that nothing contained in this section shall apply, if,--
       (i) the amount of primary adjustment made in any previous year does not
       exceed one crore rupees; and
       (ii) the primary adjustment is made in respect of an assessment year
       commencing on or before the 1st day of April, 2016.

(2) Where, as a result of primary adjustment to the transfer price, there is an
increase in the total income or reduction in the loss, as the case may be, of the
assessee, the excess money which is available with its associated enterprise, if
not repatriated to India within the time as may be prescribed, shall be deemed to

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be an advance made by the assessee to such associated enterprise and the
interest on such advance, shall be computed in such manner as may be
prescribed.

(3) For the purposes of this section,--
(i) "associated enterprise" shall have the meaning assigned to it in sub-section
(1) and sub-section (2) of section 92A;
(ii) "arm's length price" shall have the meaning assigned to it in clause (ii) of
section 92F;
(iii) "excess money" means the difference between the arm's length price
determined in primary adjustment and the price at which the international
transaction has actually been undertaken;
(iv) "primary adjustment" to a transfer price, means the determination of transfer
price in accordance with the arm's length principle resulting in an increase in the
total income or reduction in the loss, as the case may be, of the assessee;
(v) "secondary adjustment" means an adjustment in the books of account of the
assessee and its associated enterprise to reflect that the actual allocation of
profits between the assessee and its associated enterprise are consistent with
the transfer price determined as a result of primary adjustment, thereby removing
the imbalance between cash account and actual profit of the assessee.


3.911 Section 92D - Maintenance and keeping of information and
document by persons entering into an international transaction or
specified domestic transaction
(1)     Every person who has entered into an international transaction or
specified domestic transaction shall keep and maintain such information and
document in respect thereof, as may be prescribed.
Provided that the person, being a constituent entity of an international group,
shall also keep and maintain such information and document in respect of an
international group as may be prescribed.
Explanation.--For the purposes of this section,--
(A)      "constituent entity" shall have the meaning assigned to it in clause (d) of
        sub-section (9) of section 286;
(B)     "international group" shall have the meaning assigned to it in clause (g)
        of sub-section (9) of section 286.
(2)   Without prejudice to the provisions contained in sub-section (1), the
Board may prescribe the period for which the information and document shall


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

be kept and maintained under that sub-section.
(3)     The Assessing Officer or the Commissioner (Appeals) may, in the
course of any proceeding under this Act, require any person who has entered
into an international transaction or specified domestic transaction to furnish
any information or document in respect thereof, as may be prescribed under
sub-section (1), within a period of thirty days from the date of receipt of a
notice issued in this regard :
Provided that the Assessing Officer or the Commissioner (Appeals) may, on
an application made by such person, extend the period of thirty days by a
further period not exceeding thirty days.
(4) Without prejudice to the provisions of sub-section (3), the person referred to
in the proviso to sub-section (1) shall furnish the information and document
referred to in the said proviso to the authority prescribed under sub-section (1)
of section 286, in such manner, on or before the date, as may be prescribed.
3.10 12 Section 92E - Report from an accountant to be furnished by
persons entering into international transaction
Every person who has entered into an international transaction or specified
domestic transaction during a previous year shall obtain a report from an
accountant and furnish such report on or before the specified date in the
prescribed form duly signed and verified in the prescribed manner by such
accountant and setting forth such particulars as may be prescribed.
3.11 13 Section 92F - Definitions of certain terms relevant to
computation of arm 's length price, etc.
In sections 92, 92A, 92B, 92C, 92D and 92E, unless the context otherwise
requires,-
( i)     "accountant" shall have the same meaning as in the Explanation
         below sub-section (2) of section 288;
( ii)    "arm's length price" means a price which is applied or proposed to be
         applied in a transaction between persons other than associated
         enterprises, in uncontrolled conditions;
( iii)   "enterprise" means a person (including a permanent establishment of
         such person) who is, or has been, or is proposed to be, engaged in
         any activity, relating to the production, storage, supply, distribution,
         acquisition or control of articles or goods, or know-how, patents,
         copyrights, trade-marks, licences, franchises or any other business or
         commercial rights of similar nature, or any data, documentation,

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                                                                        Annexure I

          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 the provision of services of any kind, or in carrying out any work in
          pursuance of a contract, or in investment, or providing loan or in the
          business of acquiring, holding, underwriting or dealing with shares,
          debentures or other securities of any other body corporate, whether
          such activity or business is carried on, directly or through one or more
          of its units or divisions or subsidiaries, or whether such unit or
          division or subsidiary is located at the same place where the
          enterprise is located or at a different place or places;
( iiia)   "permanent establishment", referred to in clause ( iii), includes a fixed
          place of business through which the business of the enterprise is
          wholly or partly carried on;
( iv)     "specified date" shall have the same meaning as assigned to due
          date in Explanation 2 below sub-section (1) of section 139;
( v)      "transaction" includes an arrangement, understanding or action in
          concert,
          ( A)    whether or not such arrangement, understanding or action is
                  formal or in writing; or
          ( B) whether or not such arrangement, understanding or action is
                  intended to be enforceable by legal proceeding.


 3.1214 Section 270A - Penalty for under reporting and misreporting of
 income.
(1)      The Assessing Officer or the Commissioner (Appeals) or the Principal
Commissioner or Commissioner may, during the course of any proceedings
under this Act, direct that any person who has under-reported his income shall
be liable to pay a penalty in addition to tax, if any, on the under-reported income.
(2)       A person shall be considered to have under-reported his income, if--
          ( a)   the income assessed is greater than the income determined in the
                 return processed under clause (a) of sub-section (1) of section
                 143;
          ( b)   the income assessed is greater than the maximum amount not
                 chargeable to tax, where no return of income has been furnished;


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

       ( c)   the income reassessed is greater than the income assessed or
              reassessed immediately before such reassessment;
       ( d)   the amount of deemed total income assessed or reassessed as
              per the provisions of section 115JB or section 115JC, as the case
              may be, is greater than the deemed total income determined in
              the return processed under clause (a) of sub-section (1) of section
              143;
       ( e)   the amount of deemed total income assessed as per the
              provisions of section 115JB or section 115JC is greater than the
              maximum amount not chargeable to tax, where no return of
              income has been filed;
       (f)    the amount of deemed total income reassessed as per the
              provisions of section 115JB or section 115JC, as the case may
              be, is greater than the deemed total income assessed or
              reassessed immediately before such reassessment;
       ( g)    the income assessed or reassessed has the effect of reducing the
              loss or converting such loss into income.
(3)    The amount of under-reported income shall be,--
(i)    in a case where income has been assessed for the first time,--
        (a)   if return has been furnished, the difference between the amount of
              income assessed and the amount of income determined under
              clause (a) of sub-section (1) of section 143;
       (b)    in a case where no return has been furnished,--
              (A)   the amount of income assessed, in the case of a company,
                    firm or local authority; and
              (B)   the difference between the amount of income assessed
                    and the maximum amount not chargeable to tax, in a case
                    not covered in item (A);
(ii)   in any other case, the difference between the amount of income
       reassessed or recomputed and the amount of income assessed,
       reassessed or recomputed in a preceding order:
Provided that where under-reported income arises out of determination of
deemed total income in accordance with the provisions of section 115JB or
section 115JC, the amount of total under-reported income shall be determined
in accordance with the following formula--

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       (A -- B) + (C -- D)
       where,
       A = the total income assessed as per the provisions other than the
       provisions contained in section 115JB or section 115JC (herein called
       general provisions);
       B = the total income that would have been chargeable had the total
       income assessed as per the general provisions been reduced by the
       amount of under-reported income;
       C = the total income assessed as per the provisions contained in section
       115JB or section 115JC;
       D = the total income that would have been chargeable had the total
       income assessed as per the provisions contained in section
       115JB or section 115JC been reduced by the amount of under-reported
       income:
Provided further that where the amount of under-reported income on any issue
is considered both under the provisions contained in section 115JB or section
115JC and under general provisions, such amount shall not be reduced from
total income assessed while determining the amount under item D.
Explanation.--For the purposes of this section,--
( a)   "preceding order" means an order immediately preceding the order
       during the course of which the penalty under sub-section (1) has been
       initiated;
( b)   in a case where an assessment or reassessment has the effect of
       reducing the loss declared in the return or converting that loss into
       income, the amount of under-reported income shall be the difference
       between the loss claimed and the income or loss, as the case may be,
       assessed or reassessed.
(4) Subject to the provisions of sub-section (6), where the source of any
receipt, deposit or investment in any assessment year is claimed to be an
amount added to income or deducted while computing loss, as the case may be,
in the assessment of such person in any year prior to the assessment year in
which such receipt, deposit or investment appears (hereinafter referred to as
"preceding year") and no penalty was levied for such preceding year, then, the
under-reported income shall include such amount as is sufficient to cover such
receipt, deposit or investment.


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

(5) The amount referred to in sub-section (4) shall be deemed to be amount of
income under-reported for the preceding year in the following order--
(a)    the preceding year immediately before the year in which the receipt,
       deposit or investment appears, being the first preceding year; and
(b)    where the amount added or deducted in the first preceding year is not
       sufficient to cover the receipt, deposit or investment, the year
       immediately preceding the first preceding year and so on.
(6)     The under-reported income, for the purposes of this section, shall not
include the following, namely:--
(a)    the amount of income in respect of which the assessee offers an
       explanation and the Assessing Officer or the Commissioner (Appeals) or
       the Commissioner or the Principal Commissioner, as the case may be, is
       satisfied that the explanation is bona fide and the assessee has
       disclosed all the material facts to substantiate the explanation offered;
(b)    the amount of under-reported income determined on the basis of an
       estimate, if the accounts are correct and complete to the satisfaction of
       the Assessing Officer or the Commissioner (Appeals) or the
       Commissioner or the Principal Commissioner, as the case may be, but
       the method employed is such that the income cannot properly be
       deduced therefrom;
(c)    the amount of under-reported income determined on the basis of an
       estimate, if the assessee has, on his own, estimated a lower amount of
       addition or disallowance on the same issue, has included such amount in
       the computation of his income and has disclosed all the facts material to
       the addition or disallowance;
(d)    the amount of under-reported income represented by any addition made
       in conformity with the arm's length price determined by the Transfer
       Pricing Officer, where the assessee had maintained information and
       documents as prescribed under section 92D, declared the international
       transaction under Chapter X, and, disclosed all the material facts relating
       to the transaction; and
(e)    the amount of undisclosed income referred to in section 271AAB.
(7)     The penalty referred to in sub-section (1) shall be a sum equal to fifty
per cent of the amount of tax payable on under-reported income.
(8)    Notwithstanding anything contained in sub-section (6) or sub-section (7),
where under-reported income is in consequence of any misreporting thereof by

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                                                                      Annexure I

any person, the penalty referred to in sub-section (1) shall be equal to two
hundred per cent of the amount of tax payable on under-reported income.
(9)     The cases of misreporting of income referred to in sub-section (8) shall
be the following, namely:--
(a)    misrepresentation or suppression of facts;
(b)    failure to record investments in the books of account;
(c)    claim of expenditure not substantiated by any evidence;
(d)    recording of any false entry in the books of account;
(e)    failure to record any receipt in books of account having a bearing on total
       income; and
(f)    failure to report any international transaction or any transaction deemed
       to be an international transaction or any specified domestic transaction,
       to which the provisions of Chapter X apply.
(10)   The tax payable in respect of the under-reported income shall be--
(a)    where no return of income has been furnished and the income has been
       assessed for the first time, the amount of tax calculated on the under-
       reported income as increased by the maximum amount not chargeable to
       tax as if it were the total income;
(b)    where the total income determined under clause (a) of sub-section (1)
       of section 143 or assessed, reassessed or recomputed in a preceding
       order is a loss, the amount of tax calculated on the under-reported
       income as if it were the total income;
(c)    in any other case determined in accordance with the formula--
       (X-Y)
       where,
        X = the amount of tax calculated on the under-reported income as
       increased by the total income determined under clause (a) of sub-section
       (1) of section 143 or total income assessed, reassessed or recomputed
       in a preceding order as if it were the total income; and
       Y = the amount of tax calculated on the total income determined under
       clause (a) of sub-section (1) of section 143 or total income assessed,
       reassessed or recomputed in a preceding order.
(11) No addition or disallowance of an amount shall form the basis for
imposition of penalty, if such addition or disallowance has formed the basis of

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

imposition of penalty in the case of the person for the same or any other
assessment year.
(12) The penalty referred to in sub-section (1) shall be imposed, by an order
in writing, by the Assessing Officer, the Commissioner (Appeals), the
Commissioner or the Principal Commissioner, as the case may be.
3.1315 Section 271(1)(c)(iii) ­ Concealment of Income
If the Assessing Officer or the Commissioner (Appeals) or the Commissioner
in the course of any proceedings under this Act, is satisfied that any person
has concealed the particulars of his income or furnished inaccurate
particulars of such income, he may direct that such person shall pay by way
of penalty, in addition to tax, if any payable by him, a sum which shall not be
less than, but which shall not exceed three times the amount of tax sought to
be evaded by reason of the concealment of particulars of his income or fringe
benefits or the furnishing of inaccurate particulars of such income or fringe
benefits.
Explanation 7 ­ Where in the case of an assessee who has entered into an
international transaction or specified domestic transaction defined in section
92B, any amount is added or disallowed in computing the total income under
sub-section (4) of section 92C, then, the amount so added or disallowed
shall, for the purposes of clause (c) of this sub-section, be deemed to
represent the income in respect of which particulars have been concealed or
inaccurate particulars have been furnished, unless the assessee proves to
the satisfaction of the Assessing Officer or Commissioner (Appeals) or the
Principal Commissioner or Commissioner that the price charged or paid in
such transaction was computed in accordance with the provisions contained
in section 92C and in the manner prescribed under that section, in good faith
and with due diligence.
Following sub-section (7) has been inserted after sub-section (6) of section
271 by the Finance Act, 2016, w.e.f. 1-4-2017:
(7)     The provision of this section shall not apply to and in relation to any
assessment for the assessment year commencing on or after the 1st day of
April, 2017.
3.1416 Section 271AA ­ Penalty for failure to keep and maintain
information and document, etc., in respect of certain transactions.
(1)    Without prejudice to the provisions of section 271 or section 271BA, if
any person in respect of an international transaction or specified domestic
transaction--

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                                                                     Annexure I

(i)     fails to keep and maintain any such information and document as
        required by sub-section (1) or sub-section (2) of section 92D;
(ii)    fails to report such transaction which he is required to do so; or
(iii)   maintains or furnishes an incorrect information or document,
the Assessing Officer or Commissioner (Appeals) may direct that such
person shall pay, by way of penalty, a sum equal to two per cent of the value
of each international transaction or specified domestic transaction entered
into by such person..
(2) If any person fails to furnish the information and the document as required
under sub-section (4) of section 92D, the prescribed income-tax authority
referred to in the said sub-section may direct that such person shall pay, by way
of penalty, a sum of five hundred thousand rupees.
3.1517 Section 271BA ­ Penalty for failure to furnish report under
section 92E.
If any person fails to furnish a report from an accountant as required by
section 92E, the Assessing Officer may direct that such person shall pay, by
way of penalty, a sum of one hundred thousand rupees.
3.1618 Section 271G ­ Penalty for failure to furnish information or
document under section 92D.
If any person who has entered into an international transaction or specified
domestic transaction fails to furnish any such information or document as
required by sub-section (3) of section 92D, the Assessing Officer or or the
Transfer Pricing Officer as referred to in section 92CA, or the Commissioner
(Appeals) may direct that such person shall pay, by way of penalty, a sum
equal to two per cent of the value of the international transaction or specified
domestic transaction for each such failure.
3.19  Section 271J - Penalty for furnishing incorrect information in
reports or certificates.
Without prejudice to the provisions of this Act, where the Assessing Officer or
the Commissioner (Appeals), in the course of any proceedings under this
Act, finds that an accountant or a merchant banker or a registered valuer has
furnished incorrect information in any report or certificate furnished under any
provision of this Act or the rules made thereunder, the Assessing Officer or
the Commissioner (Appeals) may direct that such accountant or merchant
banker or registered valuer, as the case may be, shall pay, by way of
penalty, a sum of ten thousand rupees for each such report or certificate.

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

Explanation.--For the purposes of this section,--
 (a) "accountant" means an accountant referred to in the Explanation below
sub-section (2) of section 288;
 (b) "merchant banker" means Category I merchant banker registered with
the Securities and Exchange Board of India established under section 3 of
the Securities and Exchange Board of India Act, 1992 (15 of 1992);
(c) "registered valuer" means a person defined in clause (oaa) of section 2
of the Wealth-tax Act, 1957 (27 of 1957)].




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                                                           Annexure II
                            Relevant Rules and Forms
Rules relevant to section 92 to 92F are reproduced below:
1.     Rule 10A - Meaning of expressions used in computation of arm 's
length price.
For the purposes of this rule and rules 10AB to 10E,-
(a)    "associated enterprise" shall,-
       (i)    have the same meaning as assigned to it in section 92A; and
       (ii)   in relation to a specified domestic transaction entered into by an
              assessee, include -
              (A) the persons referred to in clause (b) of sub-section (2) of
                  section 40A in respect of a transaction referred to in clause
                  (a) of sub-section (2) of the said section;
              (B) other units or undertakings or businesses of such
                  assessee in respect of a transaction referred to in section
                  80A or, as the case may be, subsection (8) of section 80-
                  IA;
              (C) any other person referred to in sub-section (10) of section
                  80-IA in respect of a transaction referred to therein;
              (D) other units, undertakings, enterprises or business of such
                  assessee, or other person referred to in sub-section (10) of
                  section 80-IA, as the case may be, in respect of a
                  transaction referred to in section 10AA or the transactions
                  referred to in Chapter VI-A to which the provisions of sub-
                  section (8) or, as the case may be, the provisions of sub-
                  section (10) of section 80-IA are applicable;
(aa)   "enterprise" shall have the same meaning as assigned to it in clause
       (iii) of section 92F and shall, for the purposes of a specified domestic
       transaction, include a unit, or an enterprise, or an undertaking or a
       business of a person who undertakes such transaction;'.
(ab)   "uncontrolled transaction" means a transaction between enterprises
       other than associated enterprises, whether resident or non-resident;
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

(b)     "property" includes goods, articles or things, and intangible property;
(c)     "services" include financial services;
(d)     "transaction" includes a number of closely linked transactions.
3.     Rule 10AB- Other method of determination of arm's length price.
For the purposes of clause (f) of sub-section (1) of section 92C, the other
method for determination of the arms' length price in relation to an
international transaction or a specified domestic transaction shall be any
method which takes into account the price which has been charged or paid,
or would have been charged or paid, for the same or similar uncontrolled
transaction, with or between non associated enterprises, under similar
circumstances, considering all the relevant facts.
4.     Rule 10B - Determination of arm 's length price under section
92C.
(1)     For the purposes of sub-section (2) of section 92C, the arm's length
price in relation to an international transaction or a specified domestic
transaction shall be determined by any of the following methods, being the
most appropriate method, in the following manner, namely:-
(a)    comparable uncontrolled price method, by which,-
       (i)     the price charged or paid for property transferred or services
               provided in a comparable uncontrolled transaction, or a
               number of such transactions, is identified;
       (ii)    such price is adjusted to account for differences, if any,
               between the international transaction or the specified
               domestic transaction and the comparable uncontrolled
               transactions or between the enterprises entering into such
               transactions, which could materially affect the price in the
               open market;
       (iii)   the adjusted price arrived at under sub-clause (ii) is taken to
               be an arm's length price in respect of the property transferred
               or services provided in the international transaction or the
               specified domestic transaction;
(b)    resale price method, by which,-
       (i)     the price at which property purchased or services obtained by
               the enterprise from an associated enterprise is resold or are
               provided to an unrelated enterprise, is identified;

                                      230
                                                                  Annexure II

      (ii)    such resale price is reduced by the amount of a normal gross
              profit margin accruing to the enterprise or to an unrelated
              enterprise from the purchase and resale of the same or
              similar property or from obtaining and providing the same or
              similar services, in a comparable uncontrolled transaction, or
              a number of such transactions;
      (iii)   the price so arrived at is further reduced by the expenses
              incurred by the enterprise in connection with the purchase of
              property or obtaining of services;
      (iv)    the price so arrived at is adjusted to take into account the
              functional and other differences, including differences in
              accounting practices, if any, between the international
              transaction or the specified domestic transaction and the
              comparable uncontrolled transactions, or between the
              enterprises entering into such transactions, which could
              materially affect the amount of gross profit margin in the open
              market;
      (v)     the adjusted price arrived at under sub-clause (iv) is taken to
              be an arm's length price in respect of the purchase of the
              property or obtaining of the services by the enterprise from
              the associated enterprise;
(c)   cost plus method, by which,-
      (i)     the direct and indirect costs of production incurred by the
              enterprise in respect of property transferred or services
              provided to an associated enterprise, are determined;
      (ii)    the amount of a normal gross profit mark-up to such costs
              (computed according to the same accounting norms) arising
              from the transfer or provision of the same or similar property
              or services by the enterprise, or by an unrelated enterprise, in
              a comparable uncontrolled transaction, or a number of such
              transactions, is determined;
      (iii)   the normal gross profit mark-up referred to in sub-clause (ii) is
              adjusted to take into account the functional and other
              differences, if any, between the international transaction or
              the specified domestic transaction and the comparable
              uncontrolled transactions, or between the enterprises entering
              into such transactions, which could materially affect such
              profit mark-up in the open market;


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

       (iv)    the costs referred to in sub-clause (i) are increased by the
               adjusted profit mark-up arrived at under sub-clause (iii);
       (v)     the sum so arrived at is taken to be an arm's length price in
               relation to the supply of the property or provision of services
               by the enterprise;
(d)    profit split method, which may be applicable mainly in international
       transaction or specified domestic transaction involving transfer of
       unique intangibles or in multiple international transaction or specified
       domestic transaction which are so interrelated that they cannot be
       evaluated separately for the purpose of determining the arm's length
       price of any one transaction, by which -
       (i)     the combined net profit of the associated enterprises arising
               from the international transaction or the specified domestic
               transaction in which they are engaged, is determined;
       (ii)    the relative contribution made by each of the associated
               enterprises to the earning of such combined net profit, is then
               evaluated on the basis of the functions performed, assets
               employed or to be employed and risks assumed by each
               enterprise and on the basis of reliable external market data
               which indicates how such contribution would be evaluated by
               unrelated enterprises performing comparable functions in
               similar circumstances;
       (iii)   the combined net profit is then split amongst the enterprises
               in proportion to their relative contributions, as evaluated under
               sub-clause (ii);
       (iv)    the profit thus apportioned to the assessee is taken into
               account to arrive at an arm's length price in relation to the
               international transaction or a specified domestic transaction:
       Provided that the combined net profit referred to in sub-clause (i)
       may, in the first instance, be partially allocated to each enterprise so
       as to provide it with a basic return appropriate for the type of
       international transaction or specified domestic transaction in which it
       is engaged, with reference to market returns achieved for similar
       types of transactions by independent enterprises, and thereafter, the
       residual net profit remaining after such allocation may be split
       amongst the enterprises in proportion to their relative contribution in
       the manner specified under sub-clauses (ii) and (iii), and in such a

                                     232
                                                                   Annexure II

       case the aggregate of the net profit allocated to the enterprise in the
       first instance together with the residual net profit apportioned to that
       enterprise on the basis of its relative contribution shall be taken to be
       the net profit arising to that enterprise from the international
       transaction or the specified domestic transaction;
(e)    transactional net margin method, by which,-
       (i)     the net profit margin realised by the enterprise from an
               international transaction or a specified domestic transaction
               entered into with an associated enterprise is computed in
               relation to costs incurred or sales effected or assets employed
               or to be employed by the enterprise or having regard to any
               other relevant base;
       (ii)    the net profit margin realised by the enterprise or by an
               unrelated enterprise from a comparable uncontrolled
               transaction or a number of such transactions is computed
               having regard to the same base;
       (iii)   the net profit margin referred to in sub-clause (ii) arising in
               comparable uncontrolled transactions is adjusted to take into
               account the differences, if any, between the international
               transaction or the specified domestic transaction and the
               comparable uncontrolled transactions, or between the
               enterprises entering into such transactions, which could
               materially affect the amount of net profit margin in the open
               market;
       (iv)    the net profit margin realised by the enterprise and referred to
               in sub-clause (i) is established to be the same as the net profit
               margin referred to in sub-clause (iii);
       (v)     the net profit margin thus established is then taken into
               account to arrive at an arm's length price in relation to the
               international transaction or the specified domestic transaction.
(f)    Any other method as provided in rule 10AB.
(2)    For the purposes of sub-rule (1), the comparability of an international
transaction or a specified domestic transaction with an uncontrolled
transaction shall be judged with reference to the following, namely:-
(a)    the specific characteristics of the property transferred or services
       provided in either transaction;


                                     233
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

(b)    the functions performed, taking into account assets employed or to be
       employed and the risks assumed, by the respective parties to the
       transactions;
(c)    the contractual terms (whether or not such terms are formal or in
       writing) of the transactions which lay down explicitly or implicitly how
       the responsibilities, risks and benefits are to be divided between the
       respective parties to the transactions;
(d)    conditions prevailing in the markets in which the respective parties to
       the transactions operate, including the geographical location and size
       of the markets, the laws and Government orders in force, costs of
       labour and capital in the markets, overall economic development and
       level of competition and whether the markets are wholesale or retail.
(3)    An uncontrolled transaction shall be comparable to an international
transaction or a specified domestic transaction if -
(i)    none of the differences, if any, between the transactions being
       compared, or between the enterprises entering into such transactions
       are likely to materially affect the price or cost charged or paid in, or
       the profit arising from, such transactions in the open market; or
(ii)   reasonably accurate adjustments can be made to eliminate the
       material effects of such differences.
(4)      The data to be used in analysing the comparability of an uncontrolled
transaction with an international transaction or a specified domestic
transaction shall be the data relating to the financial year ( hereafter in this
rule and in rule 10 CA referred to as the `current year ') in which the
international transaction or the specified domestic transaction has been
entered into :
Provided that data relating to a period not being more than two years prior to
the current year may also be considered if such data reveals facts which
could have an influence on the determination of transfer prices in relation to
the transactions being compared.
Provided further that the first proviso shall not apply while analysing the
comparability of an uncontrolled transaction with an international transaction
or a specified domestic transaction, entered into on or after the 1st day of
April, 2014.
(5) In a case where the most appropriate method for determination of the
arm's length price of an international transaction or a specified domestic


                                      234
                                                                   Annexure II

transaction, entered into on or after the 1st day of April, 2014, is the method
specified in clause (b), clause (c) or clause (e) of sub-section (1) of section
92 C , then, notwithstanding anything contained in sub-rule (4), the data to
be used for analysing the comparability of an uncontrolled transaction with
an international transaction or a specified domestic transaction shall be,-
(i) the data relating to the current year ; or
(ii) the data relating to the financial year immediately preceding the current
year, if the data relating to the current year is not available at the time of
furnishing the return of income by the assessee , for the assessment year
relevant to the current year:
Provided that where the data relating to the current year is subsequently
available at the time of determination of arm's length price of an international
transaction or a specified domestic transaction during the course of any
assessment proceeding for the assessment year relevant to the current year,
then, such data shall be used for such determination irrespective of the fact
that the data was not available at the time of furnishing the return of income
of the relevant assessment year.
5.      Rule 10C - Most appropriate method
(1)    For the purposes of sub-section (1) of section 92C, the most
appropriate method shall be the method which is best suited to the facts and
circumstances of each particular international transaction or specified
domestic transaction, and which provides the most reliable measure of an
arm's length price in relation to the international transaction or the specified
domestic transaction, as the case may be.
(2)      In selecting the most appropriate method as specified in sub-rule (1),
the following factors shall be taken into account, namely:
(a)     the nature and class of the international transaction or the specified
        domestic transaction;
(b)     the class or classes of associated enterprises entering into the
        transaction and the functions performed by them taking into account
        assets employed or to be employed and risks assumed by such
        enterprises;
(c)     the availability, coverage and reliability of data necessary for
        application of the method;
(d)     the degree of comparability existing between the international
        transaction or the specified domestic transaction and the uncontrolled

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

       transaction and between the enterprises entering into such
       transactions;
(e)    the extent to which reliable and accurate adjustments can be made to
       account for differences, if any, between the international transaction
       or the specified domestic transaction and the comparable
       uncontrolled transaction or between the enterprises entering into
       such transactions;
(f)    the nature, extent and reliability of assumptions required to be made
       in application of a method.
6. Rule 10CA- Computation of arm 's length price in certain cases
(1)     Where in respect of an international transaction or a specified
domestic transaction, the application of the most appropriate method referred
to in sub-section (1) of section 92 C results in determination of more than
one price, then the arm's length price in respect of such international
transaction or specified domestic transaction shall be computed in
accordance with the provisions of this rule.
(2)    A dataset shall be constructed by placing the prices referred to in
sub-rule (1) in an ascending order and the arm's length price shall be
determined on the basis of the dataset so constructed:
       Provided that in a case referred to in clause (i) of sub-rule (5) of rule
       10B, where the comparable uncontrolled transaction has been
       identified on the basis of data relating to the current year and the
       enterprise undertaking the said uncontrolled transaction, [not being
       the enterprise undertaking the international transaction or the
       specified domestic transaction referred to in sub-rule (1)], has in
       either or both of the two financial years immediately preceding the
       current year undertaken the same or similar comparable uncontrolled
       transaction then,-
       (i)    the most appropriate method used to determine the price of the
              comparable uncontrolled transaction undertaken in the current
              year shall be applied in similar manner to the comparable
              uncontrolled transaction or transactions undertaken in the
              aforesaid period and the price in respect of such uncontrolled
              transactions shall be determined; and
       (ii)   the weighted average of the prices, computed in accordance
              with the manner provided in sub-rule (3) , of the comparable
              uncontrolled transactions undertaken in the current year and in

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                                                                    Annexure II

              the aforesaid period preceding it shall be included in the dataset
              instead of the price referred to in sub-rule (1) :
       Provided further that in a case referred to in clause (ii) of sub-rule (5)
       of rule 10B, where the comparable uncontrolled transaction has been
       identified on the basis of the data relating to the financial year
       immediately preceding the current year and the enterprise
       undertaking the said uncontrolled transaction, [not being the
       enterprise undertaking the international transaction or the specified
       domestic transaction referred to in sub-rule (1)], has in the financial
       year immediately preceding the said financial year undertaken the
       same or similar comparable uncontrolled transaction then, -
       (i)    the price in respect of such uncontrolled transaction shall be
              determined by applying the most appropriate method in a similar
              manner as it was applied to determine the price of the
              comparable uncontrolled transaction undertaken in the financial
              year immediately preceding the current year; and
       (ii)   the weighted average of the prices, computed in accordance
              with the manner provided in sub-rule (3) , of the comparable
              uncontrolled transactions undertaken in the aforesaid period of
              two years shall be included in the dataset instead of the price
              referred to in sub-rule (1):
Provided also that where the use of data relating to the current year in terms
of the proviso to sub-rule (5) of rule 10 B establishes that,-
       (i)    the enterprise has not undertaken same or similar uncontrolled
              transaction during the current year ; or
       (ii)   the uncontrolled transaction undertaken by an enterprise in the
              current year is not a comparable uncontrolled transaction,
              then, irrespective of the fact that such an enterprise had
              undertaken comparable uncontrolled transaction in the financial
              year immediately preceding the current year or the financial
              year immediately preceding such financial year, the price of
              comparable uncontrolled transaction or the weighted average of
              the prices of the uncontrolled transactions, as the case may be,
              undertaken by such enterprise shall not be included in the
              dataset.
(3)    Where an enterprise has undertaken comparable uncontrolled
transactions in more than one financial year, then for the purposes of sub-

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

rule (2) the weighted average of the prices of such transactions shall be
computed in the following manner, namely:-
(i)     where the prices have been determined using the method referred to
        in clause (b) of sub-rule (1) of rule 10 B , the weighted average of the
        prices shall be computed with weights being assigned to the quantum
        of sales which has been considered for arriving at the respective
        prices;
(ii)    where the prices have been determined using the method referred to
        in clause (c) of sub-rule (1) of rule 10 B , the weighted average of the
        prices shall be computed with weights being assigned to the quantum
        of costs which has been considered for arriving at the respective
        prices ;
(iii)   where the prices have been determined using the method referred to
        in clause (e) of sub-rule (1) of rule 10 B, the weighted average of the
        prices shall be computed with weights being assigned to the quantum
        of costs incurred or sales effected or assets employed or to be
        employed, or as the case may be, any other base which has been
        considered for arriving at the respective prices.
(4)    Where the most appropriate method applied is a method other than
the method referred to in clause (d) or clause (f) of sub-section (1) of section
92 C and the dataset constructed in accordance with sub-rule (2) consists of
six or more entries, an arm's length range beginning from the thirty-fifth
percentile of the dataset and ending on the sixty-fifth percentile of the
dataset shall be constructed and the arm's length price shall be computed in
accordance with sub-rule(5) and sub-rule (6).
(5)     If the price at which the international transaction or the specified
domestic transaction has actually been undertaken is within the range
referred to in sub-rule (4), then, the price at which such international
transaction or the specified domestic transaction has actually been
undertaken shall be deemed to be the arm's length price.
(6)     If the price at which the international transaction or the specified
domestic transaction has actually been undertaken is outside the arm's
length range referred to in sub-rule (4), the arm's length price shall be taken
to be the median of the dataset.
(7)     In a case where the provisions of sub-rule (4) are not applicable, the
arm's length price shall be the arithmetical mean of all the values included in
the dataset:
        Provided that, if the variation between the arm's length price so

                                      238
                                                                     Annexure II

       determined and price at which the international transaction or
       specified domestic transaction has actually been undertaken does not
       exceed such percentage not exceeding three percent. of the latter, as
       may be notified by the Central Government in the Official Gazette in
       this behalf, the price at which the international transaction or
       specified domestic transaction has actually been undertaken shall be
       deemed to be the arm's length price .
(8) For the purposes of this rule,-
       (a) " the thirty-fifth percentile" of a dataset, having values arranged
           in an ascending order, shall be the lowest value in the dataset
           such that at least thirty five percent. of the values included in the
           dataset are equal to or less than such value :
             Provided that, if the number of values that are equal to or less
             than the aforesaid value is a whole number , then the thirty-fifth
             percentile shall be the arithmetic mean of such value and the
             value immediately succeeding it in the dataset ;
       (b) " the sixth-fifth percentile" of a dataset, having values arranged in
              an ascending order, shall be the lowest value in the dataset
              such that at least sixty five percent. of the values included in the
              dataset are equal to or less than such value:
              Provided that, if the number of values that are equal to or less
             than the aforesaid value is a whole number , then the sixty-fifth
             percentile shall be the arithmetic mean of such value and the
             value immediately succeeding it in the dataset;
       (c)   " the median" of the dataset, having values arranged in an
             ascending order, shall be the lowest value in the dataset such
             that at least fifty percent. of the values included in the dataset
             are equal to or less than such value :
              Provided that, if the number of values that are equal to or less
             than the aforesaid value is a whole number , then the median
             shall be the arithmetic mean of such value and the value
             immediately succeeding it in the dataset.
Illustration 1. The data for the current year of the comparable uncontrolled
transactions or the entities undertaking such transactions is available at the
time of furnishing return of income by the assessee and based on the same,
seven enterprises have been identified to have undertaken the comparable
uncontrolled transaction in the current year. All the identified comparable

                                      239
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

enterprises have also undertaken comparable uncontrolled transactions in a
period of two years preceding the current year. The Profit level Indicator
(PLI) used in applying the most appropriate method is operating profit as
compared to operating cost (OP/OC). The weighted average shall be based
upon the weight of OC as computed below:
Sl.   Name     Year 1       Year 2         Year3      Aggregation of   Weighted
No.                                       [Current     OC and OP           Average
                                            Year]
1     2       3             4            5            6                7
1     A       OC        =   OC       =   OC = 225     Total OC = 475   OP/OC         =
              100           150          OP = 35      Total OP = 57    12%
              OP = 12       OP = 10
2     B       OC = 80       OC       =   OC = 100     Total OC = 305   OP/OC         =
              OP = 10       125          OP = 10      Total OP = 25    8.2%
                            OP = 5
3     C       OC        =   OC       =   OC = 250     Total OC = 730   OP/OC         =
              250           230          OP = 18      Total OP = 66    9%
              OP = 22       OP = 26


4     D       OC        =   OC       =   OC = 150     Total OC = 550   OP/OC =
              180           220          OP = 20      Total OP = 33    6%
              OP = (-)      OP = 22
              9
5     E       OC        =   OC       =   OC = 125     Total OC = 365   OP/OC         =
              140           100          OP = (-) 5   Total OP = 8     2.2%
              OP = 21       OP = (-)
                            8
6     F       OC        =   OC       =   OC = 140     Total OC = 420   OP/OC         =
              160           120          OP = 15      Total OP = 50    11.9 %
              OP = 21       OP = 14
7     G       OC        =   OC       =   OC = 155     Total OC = 435   OP/OC         =
              150           130          OP = 13      Total OP = 46    10.57%
              OP = 21       OP = 12

From the above, the dataset will be constructed as follows:


                                          240
                                                                   Annexure II

 S.I. No.   1       2     3       4      5         6         7
 Values     2.2% 6% 8.2% 9% 10.57% 11.9% 12%

For construction of the arm's length range the data place of thirty-fifth and
sixty-fifth percentile shall becomputed in the following manner, namely:
       Total no. of data points in dataset * (35/100)
       Total no. of data points in dataset * (65/100) Thus, the data place of
       the thirty-fifth percentile = 7*0.35 = 2.45.
Since this is not a whole number, the next higher data place, i.e; the value at
the third place would have at least thirty five percent. of the values below it.
The thirty-fifth percentile is therefore value at the third place, i.e, 8.2%.
The data place of the sixth-fifth percentile is = 7*0.65 = 4.55.
Since this is not a whole number, the next higher data place, i.e; the value at
the fifth place would have at least sixty five percent. of the values below it.
The sixty-fifth percentile is therefore value at fifth place, i.e, 10.57%.
The arm's length range will be beginning at 8.2% and ending at 10.57%.
Therefore, if the transaction price of the international transaction or the
specified domestic transaction has OP/OC percentage which is equal to or
more than 8.2% and less than or equal to 10.57%, it is within the range. The
transaction price in such cases will be deemed to be the arm's length price
and no adjustment shall be required.However, if the transaction price is
outside the arm's length range, say 6.2%, then for the purpose of
determining the arm's length price the median of the dataset shall be first
determined in the following manner:
The data place of median is calculated by first computing the total number of
data point in the data set * (50/100). In this case it is 7 * 0.5 = 3.5.
Since this is not a whole number, the next higher data place, i.e; the value at
the fourth place would have at least fifty percent. of the values below it
(median).
The median is the value at fourth place, i.e., 9%. Therefore, the arm's length
price shall be considered as 9% and adjustment shall accordingly be made.
Illustration 2. The data of the current year is available in respect of
enterprises A , C, E, F and G at the time of furnishing the return of income by
the assessee and the data of the financial year preceding the current year
has been used to identify comparable uncontrolled transactions undertaken


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

by enterprises B and D . Further, if the enterprises have also undertaken
comparable uncontrolled transactions in earlier years as detailed in the table,
the weighted average and dataset shall be computed as below:
 Sl.     Name Year 1         Year 2         Year    3 Aggregati Weighted
 No.                                        [Current on of OC Average
                                            Year]     and OP
     1       2        3           4            5            6           7
 1       A       OC = 100     OC = 150      OC = 225   Total OC OP/OC =
                 OP = 12      OP = 10       OP = 35    = 475    12%
                                                       Total OP
                                                       = 57
 2       B       OC = 80         OC = 125                        Total OC =
                 OP = 10         OP = 5                          205 OP/OC
                                                                 = 7.31%
                                                                 Total OP =
                                                                 15


 3       C       OC = 250     OC = 230      OC = 250   Total OC
                 OP = 22      OP = 26       OP = 18    = 730
                                                       Total OP
                                                       = 66
 4       D                            OC = 220
                                      OP = 22               OP = 22


 5       E                                                 OC = 100 OP/OC
                                                           = (-)5%
                                                           OP = (-) 5 Total
                                                           OC = 100
                                                            Total OP = (-)5


 6       F       OC = 160     OC = 120      OC = 140   Total OC OP/OC =
                 OP = 21      OP = 14       OP = 15    = 420    11.9 %
                                                       Total OP
                                                       = 50
 7       G       OC = 150     OC = 130      OC = 155   Total OC OP/OC =

                                      242
                                                              Annexure II




 Sl.   Name Year 1         Year 2          Year     3  Aggregati Weighted
 No.                                       [Current    on of OC Average
                                           Year]       and OP
                 OP = 21     OP = 12        OP = 13    = 435     10.57%
                                                       Total OP
                                                       = 46
From the above, the dataset will be constructed as follows:
 S.I. No.   1      2       3     4         5        6     7
 Values     (-)5% 7.31% 9% 10% 10.57% 11.9% 12%




                                     243
If during the course of assessment proceedings, the data of the current year
is available and the use of such data indicates that B has failed to pass any
qualitative or quantitative filter or for any other reason the transaction
undertaken is not a comparable uncontrolled transaction, then, B shall not be
considered for inclusion in the dataset. Further, if the data available at this
stage indicates a new comparable uncontrolled transaction undertaken by
enterprise H, then, it shall be included. The weighted average and dataset
shall be recomputed as under:
 Sl.     Name     Year 1     Year 2 Year 3           Aggre-      Weighted
 No.                               [Current         gation of    Average
                                     Year]         OC and OP
     1       2      3        4         5                6            7
 1       A       OC =100 OC     = OC = 225         Total OC = OP/OC =
                 OP = 12 150      OP = 35          475          12%
                         OP = 10                   Total OP =
                                                   57
 2       C       OC =250 OC= 230       OC = 250 Total OC = OP/OC =
                 OP = 22 OP = 26       OP = 18     730          9%
                                                   Total OP =
                                                   66
 3       D                  OC     =   OC = 150 Total OC = OP/OC =
                            220        370                      11.35%
                            OP = 20    OP = 20 Total OP = 42
 4       E                              OC = 100 Total OC = 100
                                       OP = (-)5% Total OP = (-)5 OP/OC =
                                       (-)5%
 5       F       OC     = OC    =      OC = 140 Total OC = OP/OC =
                 160      120          OP = 15     420         11.9 %
                 OP = 21 OP = 14                   Total OP =
                                                   50
 6       G       OC     = OC    =      OC = 155 Total OC = OP/OC =
                 150      130          OP = 13     435         10.57%
                 OP = 21 OP = 12                   Total OP =
                                                   46
 7       H       OC     =               OC = 80 Total OC = OP/OC =
                 150                   230                     9.56 %
                 OP = 12                OP = 10 Total OP = 22
                                                                     Annexure II

From the above, the dataset will be constructed as follows:
 S.I. No.   1        2     3        4          5        6        7
 Values     (-)5% 9% 9.56% 10.57% 11.35% 11.9% 12%
Illustration 3. In a given case the dataset of 20 prices arranged in ascending
order is as under:
 Sl. No.    Profits (in ` Thousand)
    1                   2
 1                    42.00
 2                    43.00
 3                    44.00
 4                    44.50
 5                    45.00
 6                    45.25
 7                    47.00
 8                    48.00
 9                    48.15
 10                   48.35
 11                   48.45
 12                   48.48
 13                   48.50
 14                   49.00
 15                   49.10
 16                   49.35
 17                   49.50
 18                   49.75
 19                   50.00
 20                   50.15
Applying the formula given in the Illustration 1, the data place of the thirty-
fifth and sixty-fifth percentile is determined as follows:
Thirty-fifth percentile place = 20* (35/100) = 7.
Sixty-fifth percentile place =20* (65 /100) = 13.
Since the thirty-fifth percentile place is a whole number, it shall be the


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

average of the prices at the seventh and next higher, i.e; eighth place. This is
(47+48) /2 =` 47,500
Similarly, the sixty-fifth percentile will be average of thirteenth and fourteenth
place prices. This is (48.5+49) / 2 = ` 48,750
The median of the range (the fiftieth percentile place) = 20* (50/100)= 10
Since the fiftieth percentile place is a whole number, it shall be the average
of the prices at the tenth and next higher, i.e; eleventh place. This is
(48.35+48.45) / 2 =` 48,400
Thus, the arm's length range in this case shall be from ` 47,500 to ` 48,750.
Consequently, any transaction price which is equal to or more than ` 47,500
but less than or equal to ` 48,750 shall be considered to be within the arm's
length range.
7.    Rule 10D - Information and documents to be kept and maintained
under section 92D.
(1)     Every person who has entered into an international transaction or a
specified domestic transaction shall keep and maintain the following
information and documents, namely:
(a)    a description of the ownership structure of the assessee enterprise
       with details of 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 or specified domestic transactions,
       as the case may be, 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 or
       specified domestic transactions entered into with each associated
       enterprise, details of 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

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      employed or to be employed by the assessee and by the associated
      enterprises involved in the international transaction or the specified
      domestic 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 or the
      specified domestic transactions entered into by the assessee;
(g)   a record of uncontrolled transactions taken into account for analysing
      their comparability with the international transactions or the specified
      domestic 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 or the specified domestic transactions as
      the case may be;
(h)   a record of the analysis performed to evaluate comparability of
      uncontrolled transactions with the relevant international transaction or
      specified domestic transaction;
(i)   a description of the methods considered for determining the arm's
      length price in relation to each international transaction or specified
      domestic 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 or the specified domestic
      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 arm's length prices determined under these rules and
      consequent adjustment made to the total income for tax purposes;
(m)   any other information, data or document, including information or data

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

       relating to the associated enterprise, which may be relevant for
       determination of the arm's length price.
(2)     Nothing contained in sub-rule (1), in so far as it relates to an
international transaction, shall apply in a case where the aggregate value, as
recorded in the books of account, of international transactions entered into
by the assessee does not exceed one crore rupees :
Provided that the assessee shall be required to substantiate, on the basis of
material available with him, that income arising from international
transactions entered into by him has been computed in accordance with
section 92.
(2A) Nothing contained in sub-rule (1), in so far as it relates to an eligible
specified domestic transaction referred to in rule 10THB, shall apply in a case
of an eligible assessee mentioned in rule 10THA and--
(a)    the eligible assessee, referred to in clause (i) of rule 10THA, shall keep
       and maintain the following information and documents, namely:--
       (i) a description of the ownership structure of the assessee enterprise
           with details of shares or other ownership interest held therein by
           other enterprises;
       (ii) 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;
       (iii) the nature and terms (including prices) of specified domestic
             transactions entered into with each associated enterprise and the
             quantum and value of each such transaction or class of such
             transaction;
       (iv) a record of proceedings, if any, before the regulatory commission
            and orders of such commission relating to the specified domestic
            transaction;
       (v) a record of the actual working carried out for determining the transfer
           price of the specified domestic transaction;
       (vi) the assumptions, policies and price negotiations, if any, which have
            critically affected the determination of the transfer price; and
       (vii) any other information, data or document, including information or
             data relating to the associated enterprise, which may be relevant for
             determination of the transfer price;


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(b)    the eligible assessee, referred to in clause (ii) of rule 10THA, shall keep
       and maintain the following information and documents, namely:--
       (i) a description of the ownership structure of the assessee co-
           operative society with details of shares or other ownership interest
           held therein by the members;
       (ii) description of members including their addresses and period of
            membership;
       (iii) the nature and terms (including prices) of specified domestic
             transactions entered into with each member and the quantum and
             value of each such transaction or class of such transaction;
       (iv) a record of the actual working carried out for determining the transfer
            price of the specified domestic transaction;
       (v) the assumptions, policies and price negotiations, if any, which have
           critically affected the determination of the transfer price;
       (vi) the documentation regarding price being routinely declared in
            transparent manner and being available in public domain; and
       (vii) any other information, data or document which may be relevant for
             determination of the transfer price.]
(3)    The information specified in sub-rule (1) and (2A) shall be supported
by authentic documents, which may include the following :
(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 transaction or the specified domestic transaction;
(f)    letters and other correspondence documenting any terms negotiated


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

         between the assessee and the associated enterprise;
(g)      documents normally issued in connection with various transactions
         under the accounting practices followed.
(4)     The information and documents specified under sub-rules (1), (2) and
(2A), should, as far as possible, be contemporaneous and should exist latest
by the specified date referred to in clause (iv) of section 92F:
Provided that where an international transaction or the specified domestic
transaction continues to have effect over more than one previous year, fresh
documentation need not be maintained separately in respect of each
previous year, unless there is any significant change in the nature or terms of
the international transaction or the specified domestic transaction as the
case may be, in the assumptions made, or in any other factor which could
influence the transfer price, and in the case of such significant change, fresh
documentation as may be necessary under sub-rules (1), (2) and (2A) shall
be maintained bringing out the impact of the change on the pricing of the
international transaction or the specified domestic transaction.
(5)     The information and documents specified in sub-rules (1), (2) and
(2A) shall be kept and maintained for a period of eight years from the end of
the relevant assessment year.
8.     Rule 10E - Report from an accountant to be furnished under
section 92E.
The report from an accountant required to be furnished under section 92E by
every person who has entered into an international transaction or the
specified domestic transaction during a previous year shall be in Form
No.3CEB and be verified in the manner indicated therein.
9.    Rule 10F - Meaning of expressions used in matters in respect of
advance pricing agreement .
 For the purposes of this rule and rules 10G to 10T,--
( a)   "agreement" means an advance pricing agreement entered into
       between the Board and the applicant, with the approval of the Central
       Government, as referred to in sub-section (1) of section 92CC of the
       Act;
( b)   "application" means an application for advance pricing agreement made
       under rule 10-I;
[(ba) "applicant" means a person who has made an application;]


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( c)   "bilateral agreement" means an agreement between the Board and the
       applicant, subsequent to, and based on, any agreement referred to in
       rule 44GA between the competent authority in India with the competent
       authority in the other country regarding the most appropriate transfer
       pricing method or the arms' length price;
( d)   "competent authority in India" means an officer authorised by the
       Central Government for the purpose of discharging the functions as
       such for matters in respect of any agreement entered into under section
       90 or 90A of the Act;
( e)   "covered transaction" means the international transaction               or
       transactions for which agreement has been entered into;
( f)   "critical assumptions" means the factors and assumptions that are so
       critical and significant that neither party entering into an agreement will
       continue to be bound by the agreement, if any of the factors or
       assumptions is changed;
( g)   "most appropriate transfer pricing method" means any of the transfer
       pricing method, referred to in sub-section (1) of section 92C of the Act,
       being the most appropriate method, having regard to the nature of
       transaction or class of transaction or class of associated persons or
       function performed by such persons or such other relevant factors
       prescribed by the Board under rules 10B and 10C;
( h)   "multilateral agreement" means an agreement between the Board and
       the applicant, subsequent to, and based on, any agreement referred to
       in rule 44GA between the competent authority in India with the
       competent authorities in the other countries regarding the most
       appropriate transfer pricing method or the arms' length price;
 (ha) "rollback year" means any previous year, falling within the period not
      exceeding four previous years, preceding the first of the previous years
      referred to in sub-section (4) of section 92CC;
( i)   "tax treaty" means an agreement under section 90, or section 90A of
       the Act for the avoidance of double taxation;
(j)    "team" means advance pricing agreement team consisting of income-
       tax authorities as constituted by the Board and including such number
       of experts in economics, statistics, law or any other field as may be
       nominated by the Director General of Income-tax (International
       Taxation);


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

(k)     "unilateral agreement" means an agreement between the Board and the
        applicant which is neither a bilateral nor multilateral agreement.
10.      Rule 10G- Persons eligible to apply
Any person who--
(i)      has undertaken an international transaction; or
(ii)     is contemplating to undertake an international transaction,
shall be eligible to enter into an agreement under these rules.
11. Rule 10H - Pre-filing consultation
(1)     Any person proposing to enter into an agreement under these
rules may, by an application in writing, make a request for a pre-filing
consultation.
(2)     The request for pre-filing consultation shall be made in Form No. 3CEC
to the Director General of Income-tax (International Taxation).
(3)      On receipt of the request in Form No. 3CEC, the team shall hold pre-
filing consultation with the person referred to in rule 10G.
(4)    The competent authority in India or his representative shall be
associated in pre-filing consultation involving bilateral or multilateral agreement.
(5)      The pre-filing consultation shall, among other things,--
(i)      determine the scope of the agreement;
(ii)     identify transfer pricing issues;
(iii)    determine the suitability of international transaction for the agreement;
(iv)     discuss broad terms of the agreement.
(6)      The pre-filing consultation shall--
(i)      not bind the Board or the person to enter into an agreement or initiate the
         agreement process;
(ii)     not be deemed to mean that the person has applied for entering into an
         agreement.
12.      Rule 10-I - Application for advance pricing agreement.
(1)   Any person, referred to in rule 10G may, if desires to enter into an
agreement furnish an application in Form No. 3CED along with the requisite
fee.
(2)      The application shall be furnished to Director General of Income-tax

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(International Taxation) in case of unilateral agreement and to the
competent authority in India in case of bilateral or multilateral agreement.
(3)     Application in Form No. 3CED may be filed by the person referred to
in rule 10G at any time--
(i)     before the first day of the previous year relevant to the first assessment
        year for which the application is made, in respect of transactions which
        are of a continuing nature from dealings that are already occurring; or
(ii)    before undertaking the transaction in respect of remaining transactions.
(4)    Every application in Form No. 3CED shall be accompanied by the proof
of payment of fees as specified in sub-rule (5).
(5)    The fees payable shall be in accordance with following table based on
the amount of international transaction entered into or proposed to be
undertaken in respect of which the agreement is proposed:
  Amount of international transaction entered into or proposed        Fee
  to be undertaken in respect of which agreement is proposed
  during the proposed period of agreement.
  Amount not exceeding ` 100 crores                                   10 lacs
  Amount not exceeding ` 200 crores                                   15 lacs
  Amount exceeding ` 200 crores                                       20 lacs
13.     Rule 10J - Withdrawal of application for agreement.
(1)     The applicant may withdraw the application for agreement at any time
before the finalisation of the terms of the agreement.
(2)     The application for withdrawal shall be in Form No. 3CEE.
(3)     The fee paid shall not be refunded on withdrawal of application by the
applicant.
14.     Rule 10K - Preliminary processing of application.
(1)    Every application filed in Form No. 3CED shall be complete in all
respects and accompanied by requisite documents.
(2)     If any defect is noticed in the application in Form No. 3CED or if any
relevant document is not attached thereto or the application is not in accordance
with understanding reached in any pre-filing consultation referred to in rule 10H,
the Director General of Income-tax (International Taxation) (for unilateral
agreement) and competent authority in India (for bilateral or multilateral


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

agreement) shall serve a deficiency letter on the applicant before the expiry of
one month from the date of receipt of the application.
(3)     The applicant shall remove the deficiency or modify the application
within a period of fifteen days from the date of service of the deficiency letter or
within such further period which, on an application made in this behalf, may be
extended, so however, that the total period of removal of deficiency or
modification does not exceed thirty days.
(4)    The Director General of Income-tax (International Taxation) or the
competent authority in India, as the case may be, on being satisfied, may pass
an order providing that application shall not be allowed to be proceeded with if
the application is defective and defect is not removed by applicant in
accordance with sub-rule (3).
(5)    No order under sub-rule (4) shall be passed without providing an
opportunity of being heard to the applicant and if an application is not allowed to
be proceeded with, the fee paid by the applicant shall be refunded.
15.     Rule 10L - Procedure.
(1)     If the application referred to in rule 10K has been allowed to be
proceeded with, the team or the competent authority in India or his
representative shall process the same in consultation and discussion with the
applicant in accordance with provisions of this rule.
(2)   For the purpose of sub-rule (1), it shall be competent for the team or the
competent authority in India or its representative to--
(i)     hold meetings with the applicant on such time and date as it deem fit;
(ii)    call for additional document or information or material from the applicant;
(iii)   visit the applicant's business premises; or
(iv)    make such inquiries as it deems fit in the circumstances of the case.
(3)    For the purpose of sub-rule (1), the applicant may, if he considers it
necessary, provide further document and information for consideration of the
team or the competent authority in India or his representative.
(4)    For bilateral or multilateral agreement, the competent authority shall
forward the application to Director General of Income-tax (International
Taxation) who shall assign it to one of the teams.
(5)     The team, to whom the application has been assigned under sub-rule
(4), shall carry out the enquiry and prepare a draft report which shall be
forwarded by the Director General of Income-tax (International Taxation) to the

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competent authority in India.
(6)      If the applicant makes a request for bilateral or multilateral agreement in
its application, the competent authority in India shall in addition to the procedure
provided in this rule invoke the procedure provided in rule 44GA.
(7)      The Director General of Income-tax (International Taxation) (for
unilateral agreement) or the competent authority in India (for bilateral or
multilateral agreement) and the applicant shall prepare a proposed mutually
agreed draft agreement enumerating the result of the process referred to in sub-
rule (1) including the effect of the arrangement referred to in sub-rule (5) of rule
44GA which has been accepted by the applicant in accordance with sub-rule (8)
of the said rule.
(8)       The agreement shall be entered into by the Board with the applicant
after its approval by the Central Government.
(9)    Once an agreement has been entered into the Director General of
Income-tax (International Taxation) or the competent authority in India, as the
case may be, shall cause a copy of the agreement to be sent to the
Commissioner of Income-tax having jurisdiction over the assessee.
16.     Rule 10M - Terms of the agreement.
(1)     An agreement may among other things, include--
(i)     the international transactions covered by the agreement;
(ii)    the agreed transfer pricing methodology, if any;
(iii)   determination of arm's length price, if any;
(iv)    definition of any relevant term to be used in item (ii) or (iii);
( v)    critical assumptions;
(va)    rollback provision referred to in rule 10MA;
(vi)    the conditions if any other than provided in the Act or these rules.
(2)     The agreement shall not be binding on the Board or the assessee if
there is a change in any of critical assumptions or failure to meet conditions
subject to which the agreement has been entered into.
(3)     The binding effect of agreement shall cease only if any party has given
due notice of the concerned other party or parties.
(4)    In case there is a change in any of the critical assumptions or failure to
meet the conditions subject to which the agreement has been entered into, the
agreement can be revised or cancelled, as the case may be.

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

(5)       The assessee which has entered into an agreement shall give a notice
in writing of such change in any of the critical assumptions or failure to meet
conditions to the Director General of Income-tax (International Taxation) as soon
as it is practicable to do so.
(6)     The Board shall give a notice in writing of such change in critical
assumptions or failure to meet conditions to the assessee, as soon as it comes
to the knowledge of the Board.
(7)      The revision or the cancellation of the agreement shall be in accordance
with rules 10Q and 10R respectively.
17.     Rule 10MA - Roll Back of the Agreement.
(1)     Subject to the provisions of this rule, the agreement may provide for
determining the arm's length price or specify the manner in which arm's length
price shall be determined in relation to the international transaction entered into
by the person during the rollback year (hereinafter referred to as "rollback
provision").
(2)      The agreement shall contain rollback provision in respect of an
international transaction subject to the following, namely:--
(i)     the international transaction is same as the international transaction to
        which the agreement (other than the rollback provision) applies;
(ii)    the return of income for the relevant rollback year has been or is
        furnished by the applicant before the due date specified in Explanation 2
        to sub-section (1) of section 139;
(iii)   the report in respect of the international transaction had been furnished
        in accordance with section 92E;
(iv)    the applicability of rollback provision, in respect of an international
        transaction, has been requested by the applicant for all the rollback years
        in which the said international transaction has been undertaken by the
        applicant; and
(v)     the applicant has made an application seeking rollback in Form 3CEDA
        in accordance with sub-rule (5);
(3)      Notwithstanding anything contained in sub-rule (2), rollback provision
shall not be provided in respect of an international transaction for a rollback
year, if,--
(i)     the determination of arm's length price of the said international
        transaction for the said year has been subject matter of an appeal

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        before the Appellate Tribunal and the Appellate Tribunal has passed an
        order disposing of such appeal at any time before signing of the
        agreement; or
(ii)    the application of rollback provision has the effect of reducing the total
        income or increasing the loss, as the case may be, of the applicant as
        declared in the return of income of the said year.
(4)      Where the rollback provision specifies the manner in which arm's length
price shall be determined in relation to an international transaction undertaken in
any rollback year then such manner shall be the same as the manner which has
been agreed to be provided for determination of arm's length price of the same
international transaction to be undertaken in any previous year to which the
agreement applies, not being a rollback year.
(5)     The applicant may, if he desires to enter into an agreement with rollback
provision, furnish along with the application, the request for the same in Form
No. 3 CEDA with proof of payment of an additional fee of five lakh rupees:
Provided that in a case where an application has been filed on or before the
31st day of March, 2015, Form No.3CEDA along with proof of payment of
additional fee may be filed at any time on or before the 30th day of June, 2015
or the date of entering into the agreement whichever is earlier:
Provided further that in a case where an agreement has been entered into on
or before the 31st day of March, 2015, Form No.3CEDA along with proof of
payment of additional fee may be filed at any time on or before the 30th day of
June, 2015 and, notwithstanding anything contained in rule 10Q, the agreement
may be revised to provide for rollback provision in the said agreement in
accordance with this rule.
18.     Rule 10N - Amendments to Application.
(1)     An applicant may request in writing for an amendment to an application
at any stage, before the finalisation of the terms of the agreement.
(2)      The Director General of Income-tax (International Taxation) (for
unilateral agreement) or the competent authority in India (for bilateral or
multilateral agreement) may, allow the amendment to the application, if such an
amendment does not have effect of altering the nature of the application as
originally filed.
(3)     The amendment shall be given effect only if it is accompanied by the
additional fee, if any, necessitated by such amendment in accordance with fee
as provided in rule 10-I.


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19.     Rule 10-O - Furnishing of Annual Compliance Report.
(1)     The assessee shall furnish an annual compliance report to Director
        General of Income-tax (International Taxation) for each year covered in
        the agreement.
(2)     The annual compliance report shall be in Form 3CEF.
(3)     The annual compliance report shall be furnished in quadruplicate, for
        each of the years covered in the agreement, within thirty days of the due
        date of filing the income-tax return for that year, or within ninety days of
        entering into an agreement, whichever is later.
(4)     The Director General of Income-tax (International Taxation) shall send
        one copy of annual compliance report to the competent authority in
        India, one copy to the Commissioner of Income-tax who has the
        jurisdiction over the income-tax assessment of the assessee and one
        copy to the Transfer Pricing Officer having the jurisdiction over the
        assessee.
20. Rule 10P - Compliance Audit of the agreement.
(1)     The Transfer Pricing Officer having the jurisdiction over the assessee
shall carry out the compliance audit of the agreement for each of the year
covered in the agreement.
(2)    For the purposes of sub-rule (1), the Transfer Pricing Officer may
require--
(i)     the assessee to substantiate compliance with the terms of the
        agreement, including satisfaction of the critical assumptions, correctness
        of the supporting data or information and consistency of the application
        of the transfer pricing method;
(ii)    the assessee to submit any information, or document, to establish that
        the terms of the agreement has been complied with.
(3)     The Transfer Pricing Officer shall submit the compliance audit report, for
each year covered in the agreement, to the Director General of Income-tax
(International Taxation) in case of unilateral agreement and to the competent
authority in India, in case of bilateral or multilateral agreement, mentioning
therein his findings as regards compliance by the assessee with terms of the
agreement.
(4)     The Director General of Income-tax (International Taxation) shall

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forward the report to the Board in a case where there is finding of failure on part
of assessee to comply with terms of agreement and cancellation of the
agreement is required.
(5)      The compliance audit report shall be furnished by the Transfer Pricing
Officer within six months from the end of the month in which the Annual
Compliance Report referred to in rule 10-O is received by the Transfer Pricing
Officer.
(6)    The regular audit of the covered transactions shall not be undertaken by
the Transfer Pricing Officer if an agreement has been entered into under rule
10L except where the agreement has been cancelled under rule 10R.
21.     Rule 10Q - Revision of an agreement.
(1)     An agreement, subsequent to it having been entered into, may be
revised by the Board, if,--
(a)     there is a change in critical assumptions or failure to meet a condition
        subject to which the agreement has been entered into;
(b)     there is a change in law that modifies any matter covered by the
        agreement but is not of the nature which renders the agreement to be
        non-binding ; or
(c)     there is a request from competent authority in the other country
        requesting revision of agreement, in case of bilateral or multilateral
        agreement.
(2)    An agreement may be revised by the Board either suo motu or on
request of the assessee or the competent authority in India or the Director
General of Income-tax (International Taxation).
(3)     Except when the agreement is proposed to be revised on the request of
the assessee, the agreement shall not be revised unless an opportunity of being
heard has been provided to the assessee and the assessee is in agreement
with the proposed revision.
(4)   In case the assessee is not in agreement with the proposed revision the
agreement may be cancelled in accordance with rule 10R.
(5)      In case the Board is not in agreement with the request of the assessee
for revision of the agreement, the Board shall reject the request in writing giving
reason for such rejection.
(6)     For the purpose of arriving at the agreement for the proposed revision,
the procedure provided in rule 10L may be followed so far as they apply.

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

(7)    The revised agreement shall include the date till which the original
agreement is to apply and the date from which the revised agreement is to
apply.
22.     Rule 10R - Cancellation of an agreement.
(1)    An agreement shall be cancelled by the Board for any of the following
reasons:
(i)     the compliance audit referred to in rule 10P has resulted in the finding of
        failure on the part of the assessee to comply with the terms of the
        agreement;
(ii)    the assessee has failed to file the annual compliance report in time;
(iii)   the annual compliance report furnished by the assessee contains
        material errors; or
(iv)    the agreement is to be cancelled under sub-rule (4) of rule 10Q or sub-
        rule (7) of rule 10RA.
(2)     The Board shall give an opportunity of being heard to the assessee,
before proceeding to cancel an application.
(3)     The competent authority in India shall communicate with the competent
authority in the other country or countries and provide reason for the proposed
cancellation of the agreement in case of bilateral or multilateral agreement.
(4)    The order of cancellation of the agreement shall be in writing and shall
provide reasons for cancellation and for non-acceptance of assessee's
submission, if any.
(5)     The order of cancellation shall also specify the effective date of
cancellation of the agreement, where applicable.
(6)    The order under the Act, declaring the agreement as void ab initio, on
account of fraud or misrepresentation of facts, shall be in writing and shall
provide reason for such declaration and for non-acceptance of assessee's
submission, if any.
(7)     The order of cancellation shall be intimated to the Assessing Officer and
the Transfer Pricing Officer, having jurisdiction over the assessee.
23.   Rule 10RA - Procedure for giving effect to rollback provision of an
Agreement.
(1)    The effect to the rollback provisions of an agreement shall be given in
accordance with this rule.


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(2)     The applicant shall furnish modified return of income referred to in
section 92CD in respect of a rollback year to which the agreement applies along
with the proof of payment of any additional tax arising as a consequence of and
computed in accordance with the rollback provision.
(3)     The modified return referred to in sub-rule(2) shall be furnished along
with the modified return to be furnished in respect of first of the previous years
for which the agreement has been requested for in the application.
(4)     If any appeal filed by the applicant is pending before the Commissioner
(Appeals), Appellate Tribunal or the High Court for a rollback year, on the issue
which is the subject matter of the rollback provision for that year, the said appeal
to the extent of the subject covered under the agreement shall be withdrawn by
the applicant before furnishing the modified return for the said year.
(5)     If any appeal filed by the Assessing Officer or the Principal
Commissioner or Commissioner is pending before the Appellate Tribunal or the
High Court for a rollback year, on the issue which is subject matter of the
rollback provision for that year, the said appeal to the extent of the subject
covered under the agreement shall be withdrawn by the Assessing Officer or the
Principal Commissioner or the Commissioner, as the case may be, within three
months of filing of modified return by the applicant.
(6)    The applicant, the Assessing Officer or the Principal Commissioner or
the Commissioner, shall inform the Dispute Resolution Panel or the
Commissioner (Appeals) or the Appellate Tribunal or the High Court, as the
case may be, the fact of an agreement containing rollback provision having
been entered into along with a copy of the same as soon as it is practicable to
do so.
(7)      In case effect cannot be given to the rollback provision of an agreement
in accordance with this rule, for any rollback year to which it applies, on account
of failure on the part of applicant, the agreement shall be cancelled.
24. Rule 10S - Renewing an agreement.
Request for renewal of an agreement may be made as a new application for
agreement, using the same procedure as outlined in these rules except pre-filing
consultation as referred to in rule 10H.
25. Rule 10T - Miscellaneous
(1)     Mere filing of an application for an agreement under these rules shall not
prevent the operation of Chapter X of the Act for determination of arms' length
price under that Chapter till the agreement is entered into.


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961


(2)      The negotiation between the competent authority in India and the
competent authority in the other country or countries, in case of bilateral or
multilateral agreement, shall be carried out in accordance with the provisions of
the tax treaty between India and the other country or countries.
26. Rule 44GA - Procedure to deal with requests for bilateral or
multilateral advance pricing agreements
(1)     Where a person has made request for a bilateral or multilateral advance
pricing agreement in an application filed in Form No. 3CED in accordance with
rule 10-I, the request shall be dealt with subject to provisions of this rule.
(2)      The process for bilateral or multilateral advance pricing agreement shall
not be initiated unless the associated enterprise situated outside India has
initiated process of advance pricing agreement with the competent authority in
the other country.
(3)     The competent authority in India shall, on intimation of request of the
applicant for a bilateral or multilateral agreement, consult and ascertain
willingness of the competent authority in other country or countries, as the case
may be, for initiation of negotiation for this purpose.
(4)     In case of willingness of the competent authority in other country or
countries, as the case may be, the competent authority in India shall enter into
negotiation in this behalf and endeavour to reach a set of terms which are
acceptable to the competent authority in India and the competent authority in the
other country or countries, as the case may be.
(5)     In case of an agreement after consultation, the competent authority in
India shall formalise a mutual agreement procedure arrangement with the
competent authority in other country or countries, as the case may be, and
intimate the same to the applicant.
(6)     In case of failure to reach agreement on such terms as are mutually
acceptable to parties mentioned in sub-rule (4), the applicant shall be informed
of the failure to reach an agreement with the competent authority in other
country or countries.
(7)     The applicant shall not be entitled to be part of discussion between
competent authority in India and the competent authority in the other country or
countries, as the case may be; however the applicant can communicate or meet
the competent authority in India for the purpose of entering into an advance
pricing agreement.


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                                                                         Annexure II

(8)      The applicant shall convey acceptance or otherwise of the agreement
within thirty days of it being communicated.
(9)     The applicant, in case the agreement is not acceptable may at its option
continue with process of entering into an advance pricing agreement without
benefit of mutual agreement process or withdraw application in accordance with
rule 10J.
Safe Harbour Rules for International Transactions
27.    Rule 10TA - Definitions
For the purposes of this rule and rule 10TB to rule 10TG,--
(a)    "accountant" means an accountant referred to in the Explanation below
       sub-section (2) of section 288 of the Act and includes any person
       recognised for undertaking cost certification by the Government of the
       country where the associated enterprise is registered or incorporated or
       any of its agencies, who fulfills the following conditions, namely:--
(I)    if he is a member or partner in any entity engaged in rendering
       accountancy or valuation services then,--
       (i)      the entity or its affiliates have presence in more than two
                countries; and
       (ii)     the annual receipt of the entity in the year preceding the year in
                which cost certification is undertaken exceeds ten crore rupees;
(II)   if he is pursuing the profession of accountancy individually or is a valuer
       then,--
       (i) his annual receipt in the year preceding the year in which cost
       certification is undertaken, from the exercise of profession, exceeds one
       crore rupees; and
       (ii) he has professional experience of not less than ten years.


(aa)   "contract research and development services wholly or partly relating to
       software development" means the following, namely:--
       (i)    research and development producing new theorems and algorithms
              in the field of theoretical computer science;
       (ii)   development of information technology at the level of operating
              systems, programming languages, data management,
              communications software and software development tools;

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

        (iii) development of Internet technology;
        (iv) research into methods of designing, developing, deploying or
             maintaining software;
        (v)    software development that produces advances in generic
               approaches for capturing, transmitting, storing, retrieving,
               manipulating or displaying information;
        (vi) experimental development aimed at filling technology knowledge
             gaps as necessary to develop a software programme or system;
        (vii) research and development on software tools or technologies in
              specialised areas of computing (image processing, geographic data
              presentation, character recognition, artificial intelligence and such
              other areas);or
        (viii) upgradation of existing products where source code has been
               made available by the principal, except where the source code has
               been made available to carry out routine functions like debugging
               of the software ;
( b)    "core auto components" means,--
        (i)    engine and engine parts, including piston and piston rings, engine
               valves and parts cooling systems and parts and power train
               components;
        (ii)   transmission and steering parts, including gears, wheels, steering
               systems, axles and clutches;
        (iii) suspension and braking parts, including brake and brake
              assemblies, brake linings, shock absorbers and leaf springs;
( c)    "corporate guarantee" means explicit corporate guarantee extended by a
        company to its wholly owned subsidiary being a non-resident in respect
        of any short-term or long-term borrowing.
        Explanation.--For the purposes of this clause, explicit corporate
        guarantee does not include letter of comfort, implicit corporate
        guarantee, performance guarantee or any other guarantee of similar
        nature;
`(ca)   "employee cost" includes,___
        (i)      salaries and wages;
        (ii)     gratuities;


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                                                                         Annexure II

       (iii)      contribution to P rovident Fund and other funds;
       (iv)        the value of perquisites as specified in clause (2) of section 17 of
                  the Act;
       (v)        employment related allowances, like medical allowance,
                  dearness allowance, travel allowance and any other allowance;
       (vi)       bonus or commission by whatever name called;
       (vii)      lumpsum payments received at the time of termination of service
                  or superannuation or voluntary retirement, such as gratuity,
                  severance pay, leave encashment, voluntary retrenchment
                  benefits, commutation of pension and similar payments;
       (viii)     expenses incurred on contractual employment of persons
                  performing tasks similar to those performed by the regular
                  employees;
        (ix)      outsourcing expenses, to the extent of employee cost, wherever
                  ascertainable, embedded in the total outsourcing expenses:
                   Provided that where the extent of employee cost embedded in
                   the total outsourcing expenses is not ascertainable, eighty per
                   cent. of the total outsourcing expenses shall be deemed to be
                   the employee cost embedded in the total outsourcing expenses;
       (x) recruitment expenses;
       (xi) relocation expenses;
       (xii) training expenses;
       (xiii) staff welfare expenses; and
       (xiv) any other expenses related to employees or the employment;
( d)   "generic pharmaceutical drug" means a drug that is comparable to a drug
       already approved by the regulatory authority in dosage form, strength,
       route of administration, quality and performance characteristics, and
       intended use;
( e)   "information technology enabled services" means the following business
       process outsourcing services provided mainly with the assistance or use
       of information technology, namely:--
       (i)      back office operations;
       (ii)     call centres or contact centre services;


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

       (iii) data processing and data mining;
       (iv) insurance claim processing;
       (v)    legal databases;
       (vi) creation and maintenance of medical transcription excluding
            medical advice;
       (vii) translation services;
       (viii) payroll;
       (ix) remote maintenance;
       (x) revenue accounting;
       (xi) support centres;
       (xii) website services;
       (xiii) data search integration and analysis;
       (xiv) remote education excluding education content development; or
       (xv) clinical database management services excluding clinical trials,
       but does not include any research and development services whether or
       not in the nature of contract research and development services;
(f)    "intra-group loan" means loan advanced to wholly owned subsidiary
       being a non-resident, where the loan--
       (i)    is sourced in Indian rupees;
       (ii) is not advanced by an enterprise, being a financial company
            including a bank or a financial institution or an enterprise engaged
            in lending or borrowing in the normal course of business; and
       (iii) does not include credit line or any other loan facility which has no
             fixed term for repayment;
( g)   "knowledge process outsourcing services" means the following business
       process outsourcing services provided mainly with the assistance or use
       of information technology requiring application of knowledge and
       advanced analytical and technical skills, namely:--
       (i)    geographic information system;
       (ii)   human resources services;
       (iii) engineering and design services;


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                                                                         Annexure II

       (iv) animation or content development and management;
       (v)     business analytics;
       (vi) financial analytics; or
       (vii) market research,
       but does not include any research and development services whether or
       not in the nature of contract research and development services;
(ga)   "low value-adding intra-group services" means services that are
       performed by one or more members of a multinational enterprise group
       on behalf of one or more other members of the same multinational
       enterprise group and which,___
       (i)       are in the nature of support services;
       (ii)      are not part of the core business of the multinational enterprise
                 group, i.e., such services neither constitute the profit-earning
                 activities nor contribute to the economically significant activities
                 of the multinational enterprise group;
       (iii)     are not in the nature of shareholder services or duplicate
                 services;
       (iv)      neither require the use of unique and valuable intangibles nor
                 lead to the creation of unique and valuable intangibles;
       (v)       neither involve the assumption or control of significant risk by the
                 service provider nor give rise to the creation of significant risk for
                 the service provider; and
       (vi)      do not have reliable external comparable services that can be
                 used for determining their arm's length price, but does not
                 include the following services, namely:___
                 (i)     research and development services;
                 (ii)    manufacturing and production services;
                 (iii)    information technology (software development) services;
                 (iv)    knowledge process outsourcing services;
                 (v)     business process outsourcing services;
                 (vi)    purchasing activities of raw materials or other materials
                         that are used in the manufacturing or production process;
                 (vii)   sales, marketing and distribution activities;

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

                  (viii)   financial transactions;
                  (ix)     extraction, exploration, or processing of natural
                           resources; and
                  (x)      insurance and reinsurance;"
( h)     "non-core auto components" mean auto components other than core
         auto components;
(i)      "no tax or low tax country or territory" means a country or territory in
         which the maximum rate of income-tax is less than fifteen per cent;
(j)    "operating expense" means the costs incurred in the previous year by the
       assessee in relation to the international transaction during the course of its
       normal operations including costs relating to Employee Stock Option Plan
       or similar stock-based compensation provided for by the associated
       enterprises of the assessee to the employees of the assessee,
       reimbursement to associated enterprises of expenses incurred by the
       associated enterprises on behalf of the assessee, amounts recovered from
       associated enterprises on account of expenses incurred by the assessee
       on behalf of those associated enterprises and which relate to normal
       operations of the assessee and depreciation and amortisation expenses
       relating to the assets used by the assessee, but not including the
       following, namely:--
         (i)    interest expense;
         (ii)   provision for unascertained liabilities;
         (iii) pre-operating expenses;
         (iv) loss arising on account of foreign currency fluctuations;
         (v)    extraordinary expenses;
         (vi) loss on transfer of assets or investments;
         (vii) expense on account of income-tax; and
         (viii) other expenses not relating to normal operations of the assessee;
                Provided that reimbursement to associated enterprises of expenses
                incurred by the associated enterprises on behalf of the assessee
                shall be at cost:
                Provided further that amounts recovered from associated
                enterprises on account of expenses incurred by the assessee on
                behalf of the associated enterprises and which relate to normal
                operations of the assesse shall be at cost;

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                                                                      Annexure II


( k)   "operating revenue" means the revenue earned by the assessee in the
       previous year in relation to the international transaction during the course
       of its normal operations including costs relating to Employee Stock
       Option Plan or similar stock-based compensation provided for by the
       associated enterprises of the assessee to the employees of the
       assessee but not including the following, namely:--
       (i)    interest income;
       (ii)   income arising on account of foreign currency fluctuations;
       (iii) income on transfer of assets or investments;
       (iv) refunds relating to income-tax;
       (v)    provisions written back;
       (vi) extraordinary incomes; and
       (vii) other incomes not relating to normal operations of the assessee
(l)    "operating profit margin" in relation to operating expense means the ratio
       of operating profit, being the operating revenue in excess of operating
       expense, to the operating expense expressed in terms of percentage;
(la)   "relevant previous year" means the previous year relevant to the
       assessment year in which the option for safe harbour is validly
       exercised;".
(m)    "software development services" means,--
        (i)   business application software and information system development
              using known methods and existing software tools;
       (ii)   support for existing systems;
       (iii) converting or translating computer languages;
       (iv) adding user functionality to application programmes;
       (v)    debugging of systems;
       (vi) adaptation of existing software; or
       (vii) preparation of user documentation,


28.    Rule 10TB - Eligible assessee
(1) Subject to the provisions of sub-rules (2) and (3), the 'eligible assessee'

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

means a person who has exercised a valid option for application of safe harbour
rules in accordance with rule 10TE, and--
(i)     is engaged in providing software development services or information
        technology enabled services or knowledge process outsourcing services,
        with insignificant risk, to a non-resident associated enterprise (hereinafter
        referred as foreign principal);
(ii)    has made any intra-group loan;
(iii)   has provided a corporate guarantee;
(iv)    is engaged in providing contract research and development services
        wholly or partly relating to software development, with insignificant risk,
        to a foreign principal;
(v)     is engaged in providing contract research and development services
        wholly or partly relating to generic pharmaceutical drugs, with
        insignificant risk, to a foreign principal; or
(vi)    is engaged in the manufacture and export of core or non-core auto
        components and where ninety per cent or more of total turnover during
        the relevant previous year is in the nature of original equipment
        manufacturer sales. or
(vii)   is in receipt of low value-adding intra-group services from one or more
        members of its group.
(2)      For the purposes of identifying an eligible assessee, with insignificant
risk, referred to in item (i) of sub-rule (1), the Assessing Officer or the Transfer
Pricing Officer, as the case may be, shall have regard to the following factors,
namely:--
( a)    the foreign principal performs most of the economically significant
        functions involved, including the critical functions such as
        conceptualisation and design of the product and providing the strategic
        direction and framework, either through its own employees or through its
        other associated enterprises, while the eligible assessee carries out the
        work assigned to it by the foreign principal;
( b)    the capital and funds and other economically significant assets including
        the intangibles required, are provided by the foreign principal or its other
        associated enterprises, and the eligible assessee is only provided a
        remuneration for the work carried out by it;
( c)    the eligible assessee works under the direct supervision of the foreign
        principal or its associated enterprise which not only has the capability to




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                                                                      Annexure II

       control or supervise but also actually controls or supervises the activities
       carried out through its strategic decisions to perform core functions as
       well as by monitoring activities on a regular basis;
( d)   the eligible assessee does not assume or has no economically significant
       realised risks, and if a contract shows that the foreign principal is
       obligated to control the risk but the conduct shows that the eligible
       assessee is doing so, the contractual terms shall not be the final
       determinant;
( e)   the eligible assessee has no ownership right, legal or economic, on any
       intangible generated or on the outcome of any intangible generated or
       arising during the course of rendering of services, which vests with the
       foreign principal as evident from the contract and the conduct of the
       parties.
(3) For the purposes of identifying an eligible assessee, with insignificant risk,
referred to in items (iv) and (v) of sub-rule (1), the Assessing Officer or the
Transfer Pricing Officer, as the case may be, shall have regard to the following
factors, namely:--
( a)   the foreign principal performs most of the economically significant
       functions involved in research or product development cycle, including
       the critical functions such as conceptualisation and design of the product
       and providing the strategic direction and framework, either through its
       own employees or through its other associated enterprises while the
       eligible assessee carries out the work assigned to it by the foreign
       principal;
( b)   the foreign principal or its other associated enterprises provides the
       funds or capital and other economically significant assets including
       intangibles required for research or product development and also
       provides a remuneration to the eligible assessee for the work carried out
       by it;
( c)   the eligible assessee works under the direct supervision of the foreign
       principal or its other associated enterprise which has not only the
       capability to control or supervise but also actually controls or supervises
       research or product development, through its strategic decisions to
       perform core functions as well as by monitoring activities on a regular
       basis;
( d)   the eligible assessee does not assume or has no economically significant
       realised risks, and if a contract shows that the foreign principal is
       obligated to control the risk but the conduct shows that the eligible


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

         assessee is doing so, the contractual terms shall not be the final
         determinant;
29. Rule 10TC - Eligible international transaction.
'Eligible international transaction' means an international transaction between the
eligible assessee and its associated enterprise, either or both of whom are non-
resident, and which comprises of:
(i)      provision of software development services;
(ii)     provision of information technology enabled services;
(iii)    provision of knowledge process outsourcing services;
(iv)     advance of intra-group loan;
( v)     provision of corporate guarantee, where the amount guaranteed,--
         ( a)   does not exceed one hundred crore rupees; or
         ( b)   exceeds one hundred crore rupees, and the credit rating of the
                associated enterprise, done by an agency registered with the
                Securities and Exchange Board of India, is of the adequate to
                highest safety;
(vi)     provision of contract research and development services wholly or partly
         relating to software development;
(vii)    provision of contract research and development services wholly or partly
         relating to generic pharmaceutical drugs;
(viii)   manufacture and export of core auto components; or
(ix)     manufacture and export of non-core auto components ;or
(x)      receipt of low value-adding intra-group services from one or more
         members of its group,
by the eligible assessee.
30.      Rule 10TD - Safe Harbour
(1) Where an eligible assessee has entered into an eligible international
transaction and the option exercised by the said assessee is not held to be
invalid under rule 10TE, the transfer price declared by the assessee in respect of
such transaction shall be accepted by the income-tax authorities, if it is in
accordance with the circumstances as specified in sub-rule (2) or, as the case
may be, sub-rule (2A).



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                                                                       Annexure II

(2) The circumstances referred to in sub-rule (1) in respect of the eligible
international transaction specified in column (2) of the Table below shall be as
specified in the corresponding entry in column (3) of the said Table:--
 Sl. Eligible International               Circumstances
 No. Transaction
 (1)               (2)                                       (3)
 1.     Provision         of     software The operating profit margin declared
        development services referred by the eligible assessee from the
        to in item (i) of rule 10TC.      eligible international transaction in
                                          relation to operating expense incurred
                                          is -
                                             (i) not less than 20 per cent, where
                                                   the aggregate value of such
                                                   transactions entered into during
                                                   the previous year does not
                                                   exceed a sum of five hundred
                                                   crore rupees; or
                                         (ii) not less than 22 per cent, where
                                                the aggregate value of such
                                                transactions entered into during
                                                the previous year exceeds a sum
                                                of five hundred crore rupees.
 2.     Provision of information         The     operating profit margin declared
        technology enabled services by the eligible assessee from the
        referred to in item (ii) of rule eligible international transaction in
                                         relation to operating expense is -
        10TC.
                                             (i) not less than 20 per cent, where
                                                   the aggregate value of such
                                                   transactions entered into during
                                                   the previous year does not
                                                   exceed a sum of five hundred
                                                   crore rupees; or
                                          (ii) not less than 22 per cent, where
                                                the aggregate value of such
                                                transactions entered into during
                                                the previous year exceeds a sum
                                                of five hundred crore rupees.
 3.     Provision   of    knowledge The operating profit margin declared
        process outsourcing services by the eligible assessee from the

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

 Sl. Eligible International            Circumstances
 No. Transaction
     referred to in item (iii) of rule eligible international transaction in
     10TC.                             relation to operating expense is not
                                       less than 25 per cent.
 4.    Advancing of intra-group            The Interest rate declared in relation to
       loans referred to in item (iv) of   the eligible international transaction is
       rule 10TC where the amount          not less than the base rate of State
       of loan does not exceed fifty       Bank of India as on 30th June of the
       crore rupees.                       relevant previous year plus 150 basis
                                           points.


 5.    Advancing of intra-group            The Interest rate declared in relation to
       loans referred to in item (iv) of   the eligible international transaction is
       rule 10TC where the amount          not less than the base rate of State
       of loan exceeds fifty crore         Bank of India as on 30th June of the
       rupees.                             relevant previous year plus 300 basis
                                           points.
 6.    Providing corporate guarantee The commission or fee declared in
       referred to in sub-item (a) of relation to the eligible international
       item (v) of rule 10TC.         transaction is at the rate not less than
                                      2 per cent per annum on the amount
                                      guaranteed.
 7.    Providing corporate guarantee The commission or fee declared in
       referred to in sub-item (b) of relation to the eligible international
       item (v) of rule 10TC.         transaction is at the rate not less than
                                      1.75 per cent. per annum on the
                                      amount guaranteed.
 8.    Provision of contract research      The operating profit margin declared
       and development services            by the eligible assessee from the
       wholly or partly relating to        eligible international transaction in
       software          development       relation to operating expense incurred
       referred to in item (vi) of rule    is not less than 30 per cent.
       10TC.
 9.    Provision of contract research The operating profit margin declared
       and development services by the eligible assessee from the
       wholly or partly relating to eligible international transaction in


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                                                                           Annexure II

 Sl. Eligible International            Circumstances
 No. Transaction
     generic pharmaceutical drugs relation to operating expense incurred
     referred to in item (vii) of rule is not less than 29 per cent.
     10TC.


 10.     Manufacture and export of              The operating profit margin declared
         core      auto     components          by the eligible assessee from the
         referred to in item (viii) of rule     eligible international transaction in
         10TC.                                  relation to operating expense is not
                                                less than 12 per cent.
 11.     Manufacture and export of              The operating profit margin declared
         non-core auto components               by the eligible assessee from the
         referred to in item (ix) of rule       eligible international transaction in
         10TC.                                  relation to operating expense is not
                                                less than 8.5 per cent.



(2A) The circumstances referred to in sub-rule (1) in respect of the eligible
international transaction specified in column (2) of the Table below shall be as
specified in the corresponding entry in column (3) of the said Table:--
 Sl.        Eligible International                       Circumstances
 No.             Transaction

  (1)                (2)                                       (3)
 1.     Provision of software             The operating profit margin declared by the
        development          services     eligible assessee from the eligible
        referred to in item (i) of rule   international transaction in relation to
        10TC.                             operating expense incurred is -
                                              (i) not less than 17 per cent, where the
                                                   value of international transaction
                                                   does not exceed a sum of one
                                                   hundred crore rupees; or
                                              (ii) not less than 18 per cent, where the
                                                    value of international transaction
                                                    exceeds a sum of one hundred crore
                                                    rupees but does not exceed a sum of



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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

                                              two hundred crore rupees.

 2.   Provision of information        The operating profit margin declared by the
      technology          enabled     eligible assessee from the eligible
      services referred to in item    international transaction in relation to
      (ii) of rule 10TC.              operating expense is -
                                          (i) not less than 17 per cent, where the
                                               aggregate value of such transactions
                                               entered into during the previous year
                                               does not exceed a sum of one
                                               hundred crore rupees; or
                                         (ii) not less than 18 per cent, where the
                                               aggregate value of such transactions
                                               entered into during the previous year
                                               exceeds a sum of one hundred crore
                                               rupees but does not exceed a sum of
                                               two hundred crore rupees.

 3.   Provision of knowledge          The value of international transaction does
      process           outsourcing   not exceed a sum of two hundred crore
      services referred to in item    rupees and the operating profit margin
      (iii) of rule 10TC.             declared by the eligible assessee from the
                                      eligible international transaction in relation to
                                      operating expense is -
                                           (i) not less than 24 per cent. and the
                                               Employee Cost in relation to the
                                               Operating Expense is at least sixty
                                               per cent.
                                         (ii) not less than 21 per cent. and the
                                               Employee Cost in relation to the
                                               Operating Expense is forty per cent.
                                               or more but less than sixty per cent.
                                               or
                                        (iii) not less than 18 per cent and the
                                              Employee Cost in relation to the
                                              Operating Expense does not exceed
                                              forty per cent.

 4.   Advancing of intra-group The interest rate declared in relation to the
      loans referred to in item (iv) eligible international transaction is not less
      of rule 10TC where the than the one-year marginal cost of funds

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     amount of loan      is lending rate of State Bank of India as on 1st
     denominated in Indian April of the relevant previous year plus,-
     Rupees (INR).              (i) 175 basis points, where the associated
                                     enterprise has CRISIL credit rating
                                     between AAA to A or its equivalent;
                               (ii) 325 basis points, where the associated
                                     enterprise has CRISIL credit rating of
                                     BBB-, BBB or BBB+ or its equivalent;
                              (iii) 475 basis points, where the associated
                                     enterprise has CRISIL credit rating
                                     between BB to B or its equivalent;
                                        (iv) 625 basis points, where the associated
                                              enterprise has CRISIL credit rating
                                              between C to D or its equivalent; or
                                        (v) 425 basis points, where credit rating of
                                             the associated enterprise is not
                                             available and the amount of loan
                                             advanced to the associated
                                             enterprise including loans to all
                                             associated enterprises in Indian
                                             Rupees does not exceed a sum of
                                             one hundred crore rupees in the
                                             aggregate as on 31st March of the
                                             relevant previous year.

5.   Advancing of intra-group         The interest rate declared in relation to the
     loans referred to in item (iv)   eligible international transaction is not less
     of rule 10TC where the           than the six-month London Inter-Bank Offer
     amount of loan              is   Rate of the relevant foreign currency as on
     denominated in foreign           30th September of the relevant previous
     currency.                        year plus, -
                                          (i) 150 basis points, where the associated
                                                enterprise has CRISIL credit rating
                                                between AAA to A or its equivalent;
                                          (ii) 300 basis points, where the associated
                                                enterprise has CRISIL credit rating of
                                                BBB-, BBB or BBB+ or its equivalent;
                                         (iii) 450 basis points, where the associated
                                                enterprise has CRISIL credit rating


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

                                               between BB to B or its equivalent;
                                         (iv) 600 basis points, where the associated
                                               enterprise has CRISIL credit rating
                                               between C to D or its equivalent; or
                                         (v) 400 basis points, where credit rating of
                                              the associated enterprise is not
                                              available and the amount of loan
                                              advanced to the associated
                                              enterprise including loans to all
                                              associated enterprises does not
                                              exceed a sum equivalent to one
                                              hundred crore Indian rupees in the
                                              aggregate as on 31st March of the
                                              relevant previous year.

 6.   Providing            corporate   The commission or fee declared in relation
      guarantee referred to in         to the eligible international transaction is at
      sub-item (a) or sub-item (b)     the rate not less than one per cent per
      of item (v) of rule 10TC.        annum on the amount guaranteed.

 7.   Provision       of   contract    The operating profit margin declared by the
      research and development         eligible assessee from the eligible
      services wholly or partly        international transaction in relation to
      relating      to     software    operating expense incurred is not less than
      development referred to in       24 per cent, where the value of the
      item (vi) of rule 10TC.          international transaction does not exceed a
                                       sum of two hundred crore rupees.

 8.   Provision     of   contract      The operating profit margin declared by the
      research and development         eligible assessee from the eligible
      services wholly or partly        international transaction in relation to
      relating     to     generic      operating expense incurred is not less than
      pharmaceutical       drugs       24 per cent, where the value of the
      referred to in item (vii) of     international transaction does not exceed a
      rule 10TC.                       sum of two hundred crore rupees.

 9.   Manufacture and export of        The operating profit margin declared by the
      core auto components             eligible assessee from the eligible
      referred to in item (viii) of    international transaction in relation to
      rule 10TC.                       operating expense is not less than 12 per
                                       cent.



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                                                                     Annexure II

 10. Manufacture and export of      The operating profit margin declared by the
     non-core auto components       eligible assessee from the eligible
     referred to in item (ix) of    international transaction in relation to
     rule 10TC.                     operating expense is not less than 8.5 per
                                    cent.

 11. Receipt of low value-adding The entire value of the international
     intra-group services in item transaction, including a mark-up not
     (x) of rule 10TC.            exceeding 5 per cent., does not exceed a
                                  sum of ten crore rupees:
                                  Provided that the method of cost pooling,
                                  the exclusion of shareholder costs and
                                  duplicate costs from the cost pool and the
                                  reasonableness of the allocation keys used
                                  for allocation of costs to the assessee by the
                                  overseas associated enterprise, is certified
                                  by an accountant.

(3)    The provisions of subrules (1) and (2) shall apply for the assessment
year 2013-14 and four assessment years immediately following that assessment
year.
(3A) The provisions of sub-rules (1) and (2A) shall apply for the assessment year
2017-18 and two assessment years immediately following that assessment year:
Provided that where an eligible assessee is eligible to exercise option under
sub-rule (2) or, as the case may be, sub-rule (2A) above, the assessee shall
have the right to choose the option which is most beneficial to him.
(4) No comparability adjustment and allowance under the second proviso to sub-
section (2) of section 92C shall be made to the transfer price declared by the
eligible assessee and accepted under sub-rules (1) and (2) or, as the case may
be, (2A) above.
(5) The provisions of sections 92D and 92E in respect of an international
transaction shall apply irrespective of the fact that the assessee exercises his
option for safe harbour in respect of such transaction.
31. Rule 10TE - Procedure
(1)      For the purposes of exercise of the option for safe harbour, the assessee
shall furnish a Form 3CEFA, complete in all respects, to the Assessing Officer on
or before the due date specified in Explanation 2 below sub-section (1) of section
139 for furnishing the return of income for--


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

(i)       the relevant assessment year, in case the option is exercised only for
          that assessment year; or
(ii)      the first of the assessment years, in case the option is exercised for more
          than one assessment year:
Provided that the return of income for the relevant assessment year or the first
of the relevant assessment years, as the case may be, is furnished by the
assessee on or before the date of furnishing of Form 3CEFA.
(2) The option for safe harbour validly exercised shall continue to remain in force
for the period specified in Form 3CEFA or a period of five years whichever is
less:
Provided that the assessee shall, in respect of the assessment year or years
following the initial assessment year, furnish a statement to the Assessing Officer
before furnishing return of income of that year, providing details of eligible
transactions, their quantum and the profit margins or the rate of interest or
commission shown:
Provided further that an option for safe harbour shall not remain in force in
respect of any assessment year following the initial assessment year, if--
       (i)     the option is held to be invalid for the relevant assessment year by
               the Transfer Pricing Officer under sub-rule (11) or by the
               Commissioner under sub-rule (8) in respect of an objection filed by
               the assessee against the order of the Transfer Pricing Officer under
               sub-rule (11), as the case may be; or
       (ii)    the eligible assessee opts out of the safe harbour, for the relevant
               assessment year, by furnishing a declaration to that effect, to the
               Assessing Officer.
          Provided also that in case of the option for safe harbour validly exercised
          under sub-rule (2A) of rule 10TD, the word "three" shall be substituted for
          "five".;
(3)       On receipt of Form 3CEFA, the Assessing Officer shall verify whether--
(i)       the assessee exercising the option is an eligible assessee; and
(ii)      the transaction in respect of which the option is exercised is an eligible
          international transaction,
before the option for safe harbour by the assessee is treated to be validly
exercised.
(4)       Where the Assessing officer doubts the valid exercise of the option for

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                                                                        Annexure II

the safe harbour by an assessee, he shall make a reference to the Transfer
Pricing Officer for determination of the eligibility of the assessee or the
international transaction or both for the purposes of the safe harbour.
(5)     For the purposes of sub-rule (4) and sub-rule (10), the Transfer Pricing
Officer may require the assessee, by notice in writing, to furnish such information
or documents or other evidence as he may consider necessary, and the
assessee shall furnish the same within the time specified in such notice.
(6)     Where--
( a)    the assessee does not furnish the information or documents or other
        evidence required by the Transfer Pricing Officer; or
( b)    the Transfer Pricing Officer finds that the assessee is not an eligible
        assessee; or
( c)    the Transfer Pricing Officer finds that the international transaction in
        respect of which the option referred to in sub-rule (1) has been exercised
        is not an eligible international transaction,
the Transfer Pricing Officer shall, by order in writing, declare the option exercised
by the assessee under sub-rule (1) to be invalid and cause a copy of the said
order to be served on the assessee and the Assessing Officer:
Provided that no order declaring the option exercised by the assessee to be
invalid shall be passed without giving an opportunity of being heard to the
assessee.
(7)      If the assessee objects to the order of the Transfer Pricing Officer under
sub-rule (6) or sub-rule (11) declaring the option to be invalid, he may file his
objections with the Commissioner, to whom the Transfer Pricing Officer is
subordinate, within fifteen days of receipt of the order of the Transfer Pricing
Officer.
(8)     On receipt of the objection referred to in sub-rule (7), the Commissioner
shall after providing an opportunity of being heard to the assessee pass
appropriate orders in respect of the validity or otherwise of the option exercised
by the assessee and cause a copy of the said order to be served on the
assessee and the Assessing Officer.
(9)      In a case where option exercised by the assessee has been held to be
valid, the Assessing officer shall proceed to verify whether the transfer price
declared by the assessee in respect of the relevant eligible international
transactions is in accordance with the circumstances specified in sub-rule (2) or,
as the case may be, sub-rule (2A) of rule 10 TD and, if it is not in accordance

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

with the said circumstances, the Assessing Officer shall adopt the operating
profit margin or rate of interest or commission specified in sub-rule (2) or, as the
case may be, sub-rule (2A) of rule 10TD.
(10) Where the facts and circumstances on the basis of which the option
exercised by the assessee was held to be valid have changed and the Assessing
Officer has reason to doubt the eligibility of an assessee or the international
transaction for any assessment year other than the initial Assessment Year
falling within the period for which the option was exercised by the assessee, he
shall make a reference to the Transfer Pricing Officer for determination of
eligibility of the assessee or the international transaction or both for the purpose
of safe harbour.
Explanation.--For purposes of this sub-rule the facts and circumstances
include:--
( a)    functional profile of the assessee in respect of the international
        transaction;
( b)    the risks being undertaken by the assessee;
( c)    the substantive contractual conditions governing the role of the assessee
        in respect of the international transaction;
( d)    the conduct of the assessee as referred to in sub-rule (2) or sub-rule (3)
        of rule 10TB; or
( e)    the substantive nature of the international transaction.
(11) The Transfer Pricing Officer on receipt of a reference under sub-rule (10)
shall, by an order in writing, determine the validity or otherwise of the option
exercised by the assessee for the relevant year after providing an opportunity of
being heard to the assessee and cause a copy of the said order to be served on
the assessee and the Assessing Officer.
(12) Nothing contained in this rule shall affect the power of the Assessing
Officer to make a reference under section 92CA in respect of international
transaction other than the eligible international transaction.
(13) Where no option for safe harbour has been exercised under sub-rule (1)
by an eligible assessee in respect of an eligible international transaction entered
into by the assessee or the option exercised by the assessee is held to be
invalid, the arm's length price in relation to such international transaction shall be
determined in accordance with the provisions of sections 92C and 92CA without
having regard to the profit margin or the rate of interest or commission as
specified in sub-rule (2) or, as the case may be, sub-rule (2A) of rule 10TD.

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(14)    For the purposes of this rule,--
 (i)    no reference under sub-rule(4) shall be made by an Assessing Officer
        after expiry of a period of two months from the end of the month in which
        Form 3CEFA is received by him;
(ii)    no order under sub-rule (6) or sub-rule (11) shall be passed by the
        Transfer Pricing Officer after expiry of a period of two months from the
        end of the month in which the reference from the Assessing officer under
        sub-rule(4) or sub-rule (10), as the case may be, is received by him;
(iii)   the order under sub-rule (8) shall be passed by the Commissioner within
        a period of two months from the end of the month in which the objection
        filed by the assessee under sub-rule (7) is received by him.
(15) If the Assessing Officer or the Transfer Pricing Officer or the
Commissioner, as the case may be, does not make a reference or pass an order,
as the case may be, within the time specified in sub-rule (14), then the option for
safe harbour exercised by the assessee shall be treated as valid.]
32.     Rule 10TF - Safe harbour rules not to apply in certain cases.
Nothing contained in rules 10TA, 10TB, 10TC, 10TD or rule 10TE shall apply in
respect of eligible international transactions entered into with an associated
enterprise located in any country or territory notified under section 94A or in a no
tax or low tax country or territory.
33.     Rule 10TG - Mutual Agreement Procedure not to apply.
10TG. Where transfer price in relation to an eligible international transaction
declared by an eligible assessee is accepted by the income-tax authorities under
section 92CB, the assessee shall not be entitled to invoke mutual agreement
procedure under an agreement for avoidance of double taxation entered into with
a country or specified territory outside India as referred to in section 90 or 90A.
34.   Rule 10TH - Safe Harbour Rules for Specified Domestic
Transactions
10TH. Definitions.-- For the purposes of this rule and rules 10THA to
10THD,--
(a)     "Appropriate Commission" shall have the same meaning as assigned to
        it in sub-section (4) of section 2 of the Electricity Act, 2003 (36 of 2003);
(b)     "Government company" shall have the same meaning as assigned to it in
        sub-section (45) of section 2 of the Companies Act, 2013 (18 of 2013);
 35.    Rule 10THA - Eligible assessee

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

 The 'eligible assessee' means a person who has exercised a valid option for
 application of safe harbour rules in accordance with the provisions of rule
 10THC, 2 [ and--
(i)          is a Government company engaged in the business of generation, 3
             [supply,] transmission or distribution of electricity; or
(ii)         is a co-operative society engaged in the business of procuring and
             marketing milk and milk products.
 36.         Rule 10THB - Eligible specified domestic transaction.
 The "Eligible specified domestic transaction" means a specified domestic
 transaction undertaken by an eligible assessee and which comprises of :--
(i)          supply of electricity 1a[***] or
(ii)         transmission of electricity; or
(iii)        wheeling of electricity; ] 2 [ or
(iii)        purchase of milk or milk products by a co-operative society from its
             members.
 37.         Rule 10THC - Safe Harbour
 (1)    Where an eligible assessee has entered into an eligible specified
 domestic transaction in any previous year relevant to an assessment year and
 the option exercised by the said assessee is treated to be validly exercised
 under rule 10THD, the transfer price declared by the assessee in respect of
 such transaction for that assessment year shall be accepted by the income-tax
 authorities, if it is in accordance with the circumstances as specified in sub-rule
 (2).
 (2)     The circumstances referred to in sub-rule (1) in respect of the eligible
 specified domestic transaction specified in column (2) of the Table below shall
 be as specified in the corresponding entry in column (3) of the said Table:--
       S.          Eligible specified                        Circumstances
       No.       domestic transaction
        1.                   2.                                     3.
   1.           Supply of electricity,           The tariff in respect of supply of
                transmission              of     electricity, transmission of electricity,
                electricity, wheeling of         wheeling of electricity, as the case may
                electricity referred to in       be, is determined 3[or the methodology
                clause (i), (ii) or (iii) of     for determination of the tariff is

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                                                                      Annexure II

  S.            Eligible specified                  Circumstances
  No.         domestic transaction
      1.                2.                                 3.
             rule 10THB, as the case approved] by      the        Appropriate
             may be                  Commission in accordance with the
                                     provisions of the Electricity Act, 2003
                                     (36 of 2003).
 2.          Purchase of milk or milk    The price of milk or milk products is
             products referred to in     determined at a rate which is fixed on
             clause (iv) of rule         the basis of the quality of milk, namely,
             10THB.                      fat content and Solid Not FAT (SNF)
                                         content of milk ; and--
                                        (a) the said rate is irrespective of,--
                                         (i) the quantity of milk procured;
                                        (ii) the percentage of shares held by
                                             the members in the co-operative
                                             society;
                                        (iii) the voting power held by the
                                              members in the society; and
                                        (b) such prices are routinely declared
                                        by the co-operative society in a
                                        transparent manner and are available in
                                        public domain.]

(3)      No comparability adjustment and allowance under the second proviso to
sub-section (2) of section 92C shall be made to the transfer price declared by
the eligible assessee and accepted under sub-rule (1).
(4)     The provisions of sections 92D and 92E in respect of a specified
domestic transaction shall apply irrespective of the fact that the assessee
exercises his option for safe harbour in respect of such transaction.
38.        Rule 10THD - Procedure
(1)     For the purposes of exercise of the option for safe harbour, the
assessee shall furnish a Form 3CEFB, complete in all respects, to the
Assessing Officer on or before the due date specified in Explanation 2 to sub-
section (1) of section 139 for furnishing the return of income for the relevant
assessment year:


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

Provided that the return of income for the relevant assessment year is furnished
by the assessee on or before the date of furnishing of Form 3CEFB:
Provided further that in respect of eligible specified domestic transactions,
other than the transaction referred to in clause (iv) of rule 10THB, undertaken
during the previous year relevant to the assessment year beginning on the 1st
day of April, 2013 or beginning on the 1st day of April, 2014 or beginning on the
1st day of April, 2015, Form 3CEFB may be furnished by the assessee on or
before the 31st day of March, 2016:
Provided also that in respect of eligible specified domestic transactions,
referred to in clause (iv) of rule 10THB, undertaken during the previous year
relevant to the assessment year beginning on the 1st day of April, 2013 or
beginning on the 1st day of April, 2014 or beginning on the 1st day of April, 2015,
Form 3CEFB may be furnished by the assessee on or before the 31st day of
December, 2015.
(2)     On receipt of Form 3CEFB, the Assessing Officer shall verify whether--
(i)     the assessee exercising the option is an eligible assessee; and
(ii)    the transaction in respect of which the option is exercised is an eligible
        specified domestic transaction,
before the option for safe harbour by the assessee is treated to be validly
exercised.
(3)      Where the Assessing Officer doubts the valid exercise of the option for
the safe harbour by an assessee, he may require the assessee, by notice in
writing, to furnish such information or documents or other evidence as he may
consider necessary, and the assessee shall furnish the same within the time
specified in such notice.
(4)     Where--
(a)     the assessee does not furnish the information or documents or other
        evidence required by the Assessing Officer; or
(b)     the Assessing Officer finds that the assessee is not an eligible assessee;
        or
(c)     the Assessing Officer finds that the specified domestic transaction in
        respect of which the option referred to in sub-rule (1) has been exercised
        is not an eligible specified domestic transaction; or
(d)     the tariff is not in accordance with the circumstances specified in sub-rule
        (2) of rule 10THC,

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                                                                      Annexure II

the Assessing Officer shall, by order in writing, declare the option exercised by
the assessee under sub-rule (1) to be invalid and cause a copy of the said order
to be served on the assessee:
Provided that no order declaring the option exercised by the assessee to be
invalid shall be passed without giving an opportunity of being heard to the
assessee.
(5)       If the assessee objects to the order of the Assessing Officer under sub-
rule (4) declaring the option to be invalid, he may file his objections with the
Principal Commissioner or the Commissioner or the Principal Director or the
Director, as the case may be, to whom the Assessing Officer is subordinate,
within fifteen days of receipt of the order of the Assessing Officer.
(6)     On receipt of the objection referred to in sub-rule (5), the Principal
Commissioner or the Commissioner or the Principal Director or the Director, as
the case may be, shall after providing an opportunity of being heard to the
assessee, pass appropriate orders in respect of the validity or otherwise of the
option exercised by the assessee and cause a copy of the said order to be
served on the assessee and the Assessing Officer.
(7)     For the purposes of this rule,--
(i)     no order under sub-rule (4) shall be made by an Assessing Officer after
        expiry of a period of three months from the end of the month in which
        Form 3CEFB is received by him;
(ii)     the order under sub-rule (6) shall be passed by the Principal
        Commissioner or Commissioner or Principal Director or Director, as the
        case may be, within a period of two momnths from the end of the month
        in which the objection filed by the assessee under sub-rule (5) is
        received by him.
(8)      If the Assessing Officer or the Principal Commissioner or the
Commissioner or the Principal Director or the Director, as the case may be,
does not pass an order within the time specified in sub-rule (7), then the option
for safe harbour exercised by the assessee shall be treated as valid.]




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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

                           FORM NO.3CEB
                            [See rule 10E]
Report from an accountant to be furnished under section 92E relating to
  international transaction(s) and specified domestic transaction(s)
1.     *I/We have examined the accounts and records of ........................ ..
(name and address of the assessee with PAN) relating to the international
transaction (s) and specified domestic transaction (s) entered into by the
assessee during the previous year ending on 31st March, ............
2.      In *my/our opinion proper information and documents as are
prescribed have been kept by the assessee in respect of the international
transaction (s) and specified domestic transaction (s) entered into so far as
appears from *my/our examination of the records of the assessee.
3.      The particulars required to be furnished under section 92E are given
in the Annexure to this Form. In *my/our opinion and to the best of *my/our
information and according to the explanations given to *me/us, the
particulars given in the Annexure are true and correct.
                                                                  ____________
                                                         **Signed ___________
                                                       Name : ______________
                                                    Address : ______________
                                                                _____________
                                             Membership No. _______________
Place:
Date:
Notes:
1.       *Delete whichever is not applicable
2.       **This report has to be signed by -
         (i)    a chartered accountant within the meaning of the Chartered
                Accountant Act, 1949 (38 of 1949); or
         (ii)   any person who, in relation to any State, is, by virtue of the
                provisions in sub-section (2) of section 226 of the Companies
                Act, 1956 (1 of 1956), entitled to be appointed to act as an
                auditor of companies registered in that State.


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                                                                     Annexure II

                      ANNEXURE TO FORM NO. 3CEB
Particulars relating to international transactions and specified domestic
transactions required to be furnished under section 92E of the Income-
                               tax Act, 1961
PART A
1.     Name of the assessee
2.     Address
3.     Permanent account number
4.      Nature of business or activities of the assessee*
5.     Status
6.     Previous year ended
7.     Assessment year
8.    Aggregate value of international transactions as per books of accounts
9.    Aggregate value of specified domestic transactions as per books of
      accounts
* Code for nature of business to be filled in as per instructions for filling Form
  ITR 6
                    PART B (International transactions)
10.      List of associated enterprises with whom the assessee has entered
into international transactions, with the following details:
(a)    Name of the associated enterprise
(b)    Nature of the relationship with the associated enterprise as referred
       to in section 92A(2).
(c)    Brief description of the business carried on by the associated
       enterprise.
11.    Particulars in respect of transactions in tangible property
A.     Has the assessee entered into any international transaction(s) in
respect of purchase/sale of raw material, consumables or any other supplies
for assembling/ processing/ manufacturing of goods/articles from/ to
associated enterprises?                                             Yes/No
If `yes', provide the following details in respect of each associated enterprise
and each transaction or class of transaction:


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

(a)    Name and address of the associated enterprise with whom the
       international transaction has been entered into.
(b)    Description of transaction and quantity purchased/ sold.
(c)    Total amount paid/received or payable/ receivable in the transaction -
       i)      as per books of account.
       ii)     as computed by the assessee having regard to the arm's
               length price.
(d)    Method used for determining the arm's length price [See section
       92C(1)]
B.     Has the assessee entered into any international transaction(s) in
respect of purchase/sale of traded/finished goods?
If `yes' provide the following details in respect of each associated enterprise
and each transaction or class of transaction:                          Yes/No
(a)    Name and address of the associated enterprise with whom the
       international transaction has been entered into.
(b)    Depreciation of transaction and quantity purchased/sold.
(c)    Total amount paid/received or payable/receivable in the transaction ­
       i)      as per books of account.
       ii)     as computed by the assessee having regard to the arm's
               length price.
(d)    Method used for determining the arm's length price [See section
       92C(1)]
C.      Has the assessee entered into any international transaction(s) in
respect of purchase/sale, transfer, lease or use of any other tangible property
including transactions specified in Explanation (i)(a) below section 92B(2)?
                                                                       Yes/No
If `yes' provide the following details in respect of each associated enterprise
and each transaction or class of transaction:
(a)    Name and address of the associated enterprise with whom the
       international transaction has been entered into.
(b)    Description of the property and nature of transaction.
(c)    Number of units of each category of tangible property involved in the
       transaction.


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                                                                    Annexure II

(d)    amount paid/received or payable/ receivable in each transaction of
       purchase/sale/transfer/use, or lease rent paid/ received or payable/
       receivable in the in respect of each lease provided/entered into­
       i)      as per books of account.
       ii)     as computed by the assessee having regard to the arm's
               length price.
(e)    Method used for determining the arm's length price [See section
       92C(1)]
12.    Particulars in respect of transactions in intangible property:
Has the assessee entered into any international transaction(s) in respect of
purchase/sale/transfer/lease/use of intangible property including transactions
specified in Explanation (i)(b) below section 92B(2)?                  Yes/No
If `yes' provide the following details in respect of each associated enterprise
and each category of intangible property:
(a)    Name and address of the associated enterprise with whom the
       international transaction has been entered into.
(b)    Description of intangible property and nature of transaction.
(c)    Amount paid/received or payable/ receivable for purchase/sale/
       transfer/lease/use of each category of intangible property­
       i)      as per books of account;
       ii)     as computed by the assessee having regard to the arm's
               length price.
(d)    Method used for determining the arm's length price [See section
       92C(1)].
13.    Particulars in respect of providing of services:
Has the assessee entered into any international transaction(s) in respect of
services including transactions as specified in Explanation (i)(d) below
section 92B(2)?                                                      Yes/No
If `yes' provide the following details in respect of each associated enterprise
and each category of service:
(a)    Name and address of the associated enterprise with whom the
       transaction has been entered into.
(b)    Description of services provided/ availed to/from the associated
       enterprise.

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

(c)    Amount paid/received or payable/ receivable for the services
       provided/taken ­
       (i)     as per books of account;
       (ii)    as computed by the assessee having regard to the arm's
               length price.
(d)    Method used for determining the arm's length price [See section
       92C(1)]
14.    Particulars in respect of lending or borrowing of money:
Has the assessee entered into any international transaction(s) in respect of
lending or borrowing of money including any type of advance, payments,
deferred payments, receivable, non-convertible preference shares /
debentures or any other debt arising during the course of business as
specified in Explanation (i)(c) below section 92B(2)?                Yes/No
If `yes' provide the following details in respect of each associated enterprise
and each loan/advance:
(a)    Name and address of the associated enterprise with whom the
       international transaction has been entered into.
(b)    Nature of financing agreement.
(c)    Currency in which transaction has taken place.
(d)    Interest rate charged/paid in respect of each lending/borrowing
(e)    Amount paid/received or payable/ receivable in the transaction -
       (i)     as per books of account;
       (ii)    as computed by the assessee having regard to the arm's
               length price.
(f)    Method used for determining the arm's length price [See section
       92C(1)].
15.    Particulars in respect of transactions in the nature of guarantee:
Has the assessee entered into any international transaction(s) in the nature
of guarantee?                                                        Yes/No
If Yes, please provide the following details :
(a)    Name and address of the associated enterprise with whom the
       international transaction has been entered into.


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(b)     Nature of guarantee agreement.
(c)     Currency in which guarantee transaction was undertaken
(d)     Compensation / fees charged / paid in respect of the transaction
(e)     Method used for determining the arm's length price. [see section
        92C(1)].
16.    Particulars in respect of international transactions of purchase or sale
of marketable securities, issue and buy back of equity shares, optionally
convertible/ partially convertible/ compulsorily convertible debentures/
preference shares:
Has the assessee entered into any international transaction(s) in respect of
purchase or sale of marketable securities or issue of equity shares including
transactions specified in Explanation (i)(c) below section 92B(2)?    Yes/No
If yes, provide the following details:
(a)1.   Name and address of the associated enterprise with whom the
        international transaction has been entered into
(b)2.   Nature of transaction
(c)3.   Currency in which the transaction was undertaken
(d)4.   Consideration charged/ paid in respect of the transaction
(e)5.   Method used for determining the arm's length price [See section
        92C(1]
17.     Particulars in respect of mutual agreement or arrangement:
Has the assessee entered into any international transaction with an
associated enterprise or enterprises by way of 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?                                                        Yes/No
If 'yes' provide the following details in respect of each agreement/
arrangement:
(a)     Name and address of the associated enterprise with whom the
        international transaction has been entered into.
(b)     Description of such mutual agreement or arrangement.
(c)     Amount paid/received or payable/ receivable in each such
        transaction:

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

        (i)    as per books of account.
        (ii)   as computed by the assessee having regard to the arm's
               length price.
(d)     Method used for determining the arm's length price. [see section
        92C(1)].
18.     Particulars in respect of international transactions arising out/ being
part of business restructuring or reorganizations:
Has the assessee entered into any international transaction(s) arising
out/being part of any business restructuring or reorganization entered into by
it with the associated enterprise or enterprises as specified in Explanation (i)
(e) below section 92B (2) and which has not been specifically referred to
above?                                                                 Yes/No
If 'yes' provide the following details:
(a)     Name and address of the associated enterprise with whom the
        international transaction has been entered into.
(b)     Nature of transaction
(c)     Agreement in relation to such business restructuring/ reorganization
(d)     Terms of business restructuring/ reorganization
(e)     Method used for determining the arm's length price [See section
        92C(1)
19.    Particulars in respect of any other transaction including the
transaction having a bearing on the profits, incomes, losses, or assets of the
assessee:
Has the assessee entered into any international transaction(s) including a
transaction having a bearing on the profits, income, losses or assets, but not
specifically referred to above, with associated enterprise?            Yes/No
If 'yes' provide the following details in respect of each associated enterprise
and each transaction:
(a)     Name and address of the associated enterprise with whom the
        international transaction has been entered into.
(b)     Description of the transaction.
(c)     Amount paid/received or payable/ receivable in each such
        transaction:


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                                                                    Annexure II

       (i)    as per books of account.
       (ii)   as computed by the assessee having regard to the arm's
              length price.
(d)    Method used for determining the arm's length price. [see section
       92C(1)].
20.    Particulars of deemed international transaction:
Has the assessee entered into any transaction with a person other than an
AE in pursuance of a prior agreement in relation to the relevant transaction
between such other person and the associated enterprise?             Yes/No
If 'yes' provide the following details in respect of each of such agreement:
(a)    Name and address of the associated enterprise with whom the
       international transaction has been entered into.
(b)    Description of the transaction.
(c)    Amount paid/received or payable/ receivable in each such
       transaction:
       (i)    as per books of account.
       (ii)   as computed by the assessee having regard to the arm's
              length price.
(d)    Method used for determining the arm's length price. [see section
       92C(1)].
PART C (Specified Domestic transactions)
21.     List of associated enterprises with whom the assessee has entered
into specified domestic transactions, with the following details:
(a)    Name, address and PAN of the associated enterprise.
(b)    Nature of the relationship with the associated enterprise.
(c)    Brief description of the business carried on by the said associated
       enterprise.
22.    Particulars in respect of transactions in the nature of any expenditure:
Has the assessee entered into any specified domestic transaction(s) being in
respect of which payment has been made or is to be made to any person
referred to in section 40A(2)(b)?                                   Yes/No


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

If 'yes', provide the following details in respect of each of such person and
each transaction or class of transaction:
(a)    Name of person with whom the specified domestic transaction has
       been entered into.
(b)    Description of transaction along with quantitative details, if any
(c)    Total amount paid or payable in the transaction-
       (i)    as per books of account.
       (ii)   as computed by the assessee having regard to the arm's
              length price.
(d)    Method used for determining the arm's length price. [See section
       92C(1)].
23.     Particulars in respect of transactions in the nature of transfer or
acquisition of any goods or services:
A.     Has any undertaking or unit or enterprise or eligible business of the
       assessee [as referred to in section 80A(6), 80IA(8) or section
       10AA)]transferred any goods or services to any other business
       carried on by the assessee?                                  Yes/No
       If 'yes' provide the following details in respect of each unit or
       enterprise or eligible business:
       (a)     Name and details of business to which goods or services
               have been transferred.
       (b)     Description of goods or services transferred.
       (c)     Amount received / receivable for transferring of such goods or
               services -
               (i)    as per books of account.
               (ii)   as computed by the assessee having regard to the
                      arm's length price.
       (d)     Method used for determining the arm's length price [See
               section 92C(1)]
B.     Has any undertaking or unit or enterprise or eligible business of
       the assessee [as referred to in section 80A(6), 80IA(8) or section
       10AA)]acquired any goods or services to any other business carried
       on by the assessee?                                        Yes/No


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                                                                   Annexure II

       If 'yes' provide the following details in respect of each unit or
       enterprise or eligible business:
       (a)     Name and details of business to which goods or services
               have been acquired.
       (b)     Description of goods or services acquired.
       (c)     Amount paid / payable for transferring of such goods or
               services -
               (i)     as per books of account.
               (ii)    as computed by the assessee having regard to the
                       arm's length price.
       (d)     Method used for determining the arm's length price [See
               section 92C(1)]
24.     Particulars in respect of specified domestic transactions in the nature
of any business transacted:
       Has the assessee entered into any specified domestic transaction(s)
       with any associated enterprise which has resulted in more than
       ordinary profits to an eligible business to which section 80IA(10) or
       section 10AA applies?                                         Yes/No
       If 'yes' provide the following details:
       (a)     Name of the person with whom the specified domestic
               transaction has been entered into
       (b)     Description of the transaction including quantitative details, if
               any
       (c)     Amount received/receivable or paid/payable for transferring of
               such goods or services -
               (i)     as per books of account.
               (ii)    as computed by the assessee having regard to the
                       arm's length price.
       (d) Method used for determining the arm's length price [See section
       92C(1)]
25.    Particulars in respect of any other transactions:
       Has the assessee entered into any other specified domestic
       transactions(s) not specifically referred to above, with an associated
       enterprise?


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

                                                                         Yes/No
         If 'yes' provide the following details in respect of each associated
         enterprise and each transaction:
         (a)    Name of the associated enterprise with whom the specified
                domestic transaction has been entered into:
         (b)    Description of the transaction.
         (c)    Amount paid/received or payable/receivable in the transaction
                -
                (i)     as per books of account.
                (ii)    as computed by the assessee having regard to the
                        arm's length price.
         (d)    Method used for determining the arm's length price [See section
                92C(1)]
                                                             _______________
                                                      **Signed _____________
                                                  Name:____________________
                                              Address:____________________
                                                       ____________________
Place:
Date:
Notes: **This Annexure has to be signed by ­
 (a)     a chartered accountant within the meaning of Chartered Accountants
         Act,1949 (38 of 1949)
 (b)     any person who in relation to any State, is ,by virtue of the provisions
         in sub-section(2) of section 226 of the Companies Act,1956 (1 of
         1956), entitled to be appointed to act as an auditor of the Companies
         registered in that State.




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                                                          Annexure III
          Extracts from the Memorandum
explaining the provisions in the Finance
   Bill, 2001, Finance Bill, 2002, Finance
Bill 2006, Finance Bill 2007, Finance Bill
     2009, Finance Bill 2011, Finance Bill
 2012, Finance (No.2) Bill, 2014, Finance
   Bill, 2015, and Finance Bill, 2016 and
                        Finance Bill, 2017
1.     Memorandum explaining the provisions of the Finance Bill, 2001.
Measures to curb tax avoidance
New Legislation to curb tax avoidance by abuse of transfer pricing
"The increasing participation of multinational groups in economic activities in
the country has given rise to new and complex issues emerging from
transactions entered into between two or more enterprises belonging to the
same multinational group. The profits derived by such enterprises carrying on
business in India can be controlled by the multinational group, by
manipulating the prices charged and paid in such intra-group transactions,
thereby, leading to erosion of tax revenues.
With a view to provide a statutory framework which can lead to computation
of reasonable, fair and equitable profits and tax in India, in the case of such
multinational enterprises, new provisions are proposed to be introduced in
the Income-tax Act. These provisions relate to computation of income from
international transactions having regard to the arm's length price, meaning of
associated enterprise, meaning of international transaction, determination of
arm's length price, keeping and maintaining of information and documents by
persons entering into international transactions, furnishing of a report from an
accountant by persons entering into such transactions and definitions of
certain expressions occurring in the said sections."
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

2.     Memorandum explaining the provisions of the Finance Bill, 2002.
Clarification regarding provisions of Transfer Pricing
"Under the existing provisions contained in section 92 of the Income-tax Act,
any income arising from an international transaction shall be computed
having regard to the arm's length price.
The intention underlying the provision is to prevent avoidance of tax by
shifting taxable income to a jurisdiction outside India, through abuse of
transfer pricing. With a view to clarify this intention, it is proposed to
substitute the section so as to provide that even where the international
transaction comprises of only an outgoing, the allowance for such expenses
or interest arising from the international transaction shall also be determined
having regard to the arm's length price, and that the provision would not be
applicable in a case where the application of arm's length price results in a
downward revision in the income chargeable to tax in India.
The existing provision contained in section 92A of the Income-tax Act to
provide as to when two enterprises shall be deemed to be associated
enterprises.
It is proposed to amend sub-section (2) of the said section to clarify that the
mere fact of participation by one enterprise in the management or control or
capital of the other enterprise, or the participation of one or more persons in
the management or control or capital of both the enterprises shall not make
them associated enterprises, unless the criteria specified in sub-section (2)
are fulfilled.
Under the existing provisions contained in the proviso to sub-section (2) of
section 92C of the Income-tax Act, if the application of the most appropriate
method leads to determination of more than one price, the arithmetical mean
of such prices shall be taken to be the arm's length price in relation to the
international transaction.
With a view to allow a degree of flexibility in adopting an arm's length price, it
is proposed to amend the proviso to sub-section (2) of the said section to
provide that where the most appropriate method results in more than one
price, a price which differs from the arithmetical mean by an amount not
exceeding five per cent of such mean may be taken to be the arm's length
price, at the option of the assessee.
Under the existing provisions contained in the second proviso to sub-section
(4) of section 92C, where the total income of an enterprise is computed by
the Assessing Officer on determination of the arm's length price paid to the

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associated enterprise from which tax has been deducted under the
provisions of Chapter XVII-B, the income of the associated enterprise shall
not be recomputed by reason of such determination of arm's length price in
the case of the first mentioned enterprise.
It is proposed to amend the said second proviso to clarify that the provisions
contained therein apply not only in a case where tax has been deducted
under Chapter XVII-B, but also in cases where such tax was deductible, even
if not actually deducted.
Section 92F of the Income-tax Act provides definitions of certain terms
relevant to computation of arm's length price. It is proposed to amend the
definition of `enterprise' contained therein so as to include the business of
construction as one of the activities in which an enterprise may be engaged,
and to provide a separate definition of permanent establishment on the lines
of the definition found in tax treaties entered into by India, and to amend the
definition of "specified date" to provide that it shall have the same meaning
as assigned to "due date" for furnishing of return."
These amendments being of clarificatory nature will take effect
retrospectively from 1st April, 2002 and will accordingly, apply to the
assessment year 2002-03 and subsequent years.
3.     Memorandum explaining the provisions of the Finance Bill, 2006.
Rationalisation of provisions relating to Transfer Pricing
The existing provisions contained in section 92C provide for computation of
arm's length price. Sub-section (2) of the said section provides that the most
appropriate method shall be applied for computation of arm's length price.
Sub-section (3) of the said section lays down the conditions under which the
Assessing Officer can determine the arm's length price in a case. Under sub-
section (4) it has been provided that on the basis of the arm's length price so
determined, the Assessing Officer may compute the total income of an
assessee. The first proviso to sub-section (4) provides that where the total
income of an assessee as compute by the Assessing Officer is higher than
the income declared by the assessee, no deduction under section 10A or
section 10B or under Chapter VI-A shall be allowed into respect of the
amount of income by which the total income of the assessee is enhance after
computation of income under this sub-section.
Sections 10A and 10B provide deductions in respect of the profits and gains
derived from exports. Section 10AA also provides for deduction of profits and
gains derived from exports, in respect of newly established units in Special

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

Economic Zones. With a view to rationalize the provisions of sub-section (4)
of section 92C, it is proposed to amend the first proviso to the said sub-
section so as to provide that no deduction under section 10AA shall be
allowed in respect of the amount of income by which the total income of the
assessee is enhanced after computation of income under sub-section (4).
This amendment will take effect from 1st April, 2007and will, accordingly,
apply in relation to the assessment year 2007- 08 and subsequent years.
4.     Memorandum explaining the provisions of the Finance Bill, 2007.
Extension of Time limitation for making assessment where a reference is
made to the Transfer Pricing Officer
Under the existing provisions of the Income-tax Act, there is no extra time
available to the Assessing Officer for competing the assessment or
reassessment in cases where a reference is made by him under sub-section
92CA to the Transfer Pricing Officer for determination of the Arm's length
price of an international transaction. Since the time limit for selection of
cases for scrutiny is one year from the end of the month in which the return
was filed, references to Transfer Pricing Officers are made mostly after one
year of filing of the return. Thus, Transfer Pricing Officers are not getting
adequate time to make a meaningful audit of transfer price in cases referred
to them.
With a view that the Transfer Pricing Officers as well as the Assessing
Officers get sufficient time to make the audit of transfer price and the
assessment in cases involving international transactions, it has been
proposed to revise the time limits specified in sections 153 and 153B for
making the assessment or reassessment in cases where a reference has
been made to the Transfer Pricing Officer. The revised time limits in such
cases shall be the time limits specified under the aforesaid sections, as
increased by twelve months. It is further proposed to provide that the
Transfer Pricing Officer shall determine the Arm's length pricing at least two
months before the expiry new statutory time limit for making the assessment
or reassessment.
Under the existing provisions of sub-section (4) of section 92CA, it has been
provided that on receipt of the order under sub-section (3) of said section,
the Assessing Officer shall proceed to compute the total income of the
assessee under sub-section (4) of section 92C having regard to the Arm's
length price determined under sub-section (3) by the Transfer Pricing Officer.
It has been proposed to amend said sub-section (4) of section 92CA so as to

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                                                                 Annexure III

provide that, on receipt of the order under sub-section (3) of section 92CA,
the Assessing Officer shall proceed to compute the total income of the
assessee under sub-section (4) of section 92C in conformity with the Arm's
length price determine under sub-section (3) of section 92CA by the Transfer
Pricing Officer.
These amendments will take effect from 1st June, 2007and shall also be
applicable in cases where a reference to the Transfer Pricing Officer was
made prior to 1.7.2007 but the Transfer Pricing Officer did not pass the order
under sub-section (3) section 92CA before the said date.
5.     Memorandum explaining the provisions of the Finance Bill (No.
2), 2009.
Determination of arm's length price in cases of international
transactions
Section 92C of the Income-tax Act provides for adjustment in the transfer
price of an international transaction with an associated enterprise if the
transfer price is not equal to the arm's length price. As a result, a large
number of such transactions are being subjected to adjustment giving rise to
considerable dispute. Therefore, it is proposed to empower the Board to
formulate safe harbour rules i.e. to provide the circumstances in which the
Income-tax authorities shall accept the transfer price declared by the
assessee.
This amendment will take effect from 1st April, 2009.
Further, the proviso to sub-section (2) of section 92C provides that where
more than one price is determined by 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 five per cent of such arithmetical mean.
The above provision has been subject to conflicting interpretation by the
assessee and the Income Tax Department. The assessee's view is that the
arithmetical mean should be adjusted by 5 per cent to arrive at the arm's
length price. However, the department's contention is that if the variation
between the transfer price and the arithmetical mean is more than 5 per cent
of the arithmetical mean, no allowance in the arithmetical mean is required to
be made.
With a view to resolving this controversy, it is proposed to amend the proviso
to section 92C to provide that where more than one price is determined by
the most appropriate method, the arm's length price shall be taken to be the

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

arithmetical mean of such price. However, if the arithmetical mean, so
determined, is within five per cent of the transfer price, then the transfer price
shall be treated as the arm's length price and no adjustment is required to be
made.
This amendment will take effect from 1st October, 2009 and shall accordingly
apply in relation to all cases in which proceedings are pending before the
Transfer Pricing Officer (TPO) on or after such date.
Provision for constitution of alternate dispute resolution mechanism
The dispute resolution mechanism presently in place is time consuming and
finality in high demand cases is attained only after a long drawn litigation till
Supreme Court. Flow of foreign investment is extremely sensitive to
prolonged uncertainity in tax related matter. Therefore, it is proposed to
amend the Income-tax Act to provide for an alternate dispute resolution
mechanism which will facilitate expeditious resolution of disputes in a fast
track basis.
The salient features of the proposed alternate dispute resolution mechanism
are as under:--
(1)    The Assessing Officer shall, forward a draft of the proposed order of
       assessment (hereinafter in this section referred to as the draft order)
       to the eligible assessee if he proposes to make, on or after the 1st
       day of October, 2009, any variation in the income or loss returned
       which is prejudicial to the interest of such assessee.
(2)    On receipt of the draft order, the eligible assessee shall, within thirty
       days of the receipt by him of the draft order,-
       (a)     File his acceptance of the variations to the Assessing Officer; or
       (b)     File his objections, if any, to such variation with,--
               (i)    The Dispute Resolution Panel; and
               (ii)   The Assessing Officer.
(3)    The Assessing Officer shall complete the assessment on the basis of
       the draft order, if --
       (a)     The assessee intimates to the Assessing Officer the
               acceptance of the variation; or
       (b)     No objections are received within the period specified in sub-
               section (2).


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                                                                   Annexure III

(4)    The Assessing Officer shall, notwithstanding anything contained in
       section 153, pass the assessment order under sub-section (3) within
       one month from the end of the month in which,--
       (a)    The acceptance is received; or
       (b)    The period of filing of objections under sub-section (2)
              expires.
(5)    The Dispute Resolution Panel shall, in a case where any objections
       are received under sub-section (2), issue such directions, as it thinks
       fit, for the guidance of the Assessing Officer to enable him to
       complete the assessment.
(6)    The Dispute Resolution Panel shall issue the directions referred to in
       sub-section (5), after considering the following, namely:--
       (a)    Draft order;
       (b)    Objections filed by the assessee;
       (c)    Evidence furnished by the assessee;
       (d)    Report, if any, of the Assessing Officer, Valuation Officer or
              Transfer Pricing Officer or any other authority;
       (e)    Records relating to the draft order;
       (f)    Evidence collected by, or caused to be collected by, it; and
       (g)    Result of any enquiry made by, or caused to be made by it.
(7)    The Dispute Resolution Panel may, before issuing any directions
       referred to in sub-section (5), -
       (a)    Make such further enquiry, as it thinks fit; or
       (b)    Cause any further enquiry to be made by any income tax
              authority and report the result of the same to it.
(8)    The Dispute Resolution Panel may confirm, reduce or enhance the
       variations proposed in the draft order so, however, that it shall not set
       aside any proposed variation or issue any direction under sub-section
       (5) for further enquiry and passing of the assessment order.
(9)    If the members of the Dispute Resolution Panel differ in opinion on
       any point, the point shall be decided according to the opinion of the
       majority of the members.
(10)   Every direction issued by the Dispute Resolution Panel shall be
       binding on the Assessing Officer.


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

(11)   No direction under sub-section (5) shall be issued unless an
       opportunity of being heard is given to the assessee and the
       Assessing Officer on such directions which are prejudicial to the
       interest of the assessee or the interest of the revenue, respectively.
(12)   No direction under sub-section (5) shall be issued after nine months
       from the end of the month in which the draft order is forwarded to the
       eligible assessee.
(13)   Upon receipt of the directions issued under sub-section (5), the
       Assessing Officer shall, in conformity with the directions, complete,
       notwithstanding anything to the contrary contained in section 153, the
       assessment without providing any further opportunity of being heard
       to the assessee, within one month from the end of the month in which
       the direction is received.
(14)   The Board may make rules for the efficient functioning of the Dispute
       Resolution Panel and expeditious disposal of the objections filed,
       under sub-section(2), by the eligible assessee.
(15)   For the purposes of this section,--
       (a)    "Dispute Resolution Panel" means a collegium comprising of
              three commissioners of Income-tax constituted by the Board
              for this purpose;
       (b)    "eligible assessee" means,-
              (i)     any person in whose case the variation referred to in
                      sub-section (1) arises as a consequence of the order
                      of the Transfer Pricing Officer passed under sub-
                      section (3) of section 92CA; and
              (ii)    any foreign company.
       Further, it is proposed to make consequential amendments--
       (i)    in sub-section (1) of section 131 so as to provide that "Dispute
              Resolution Panel" shall have the same powers as are vested
              in a Court under the Code of Civil Procedure, 1908 (5 of
              1908);
       (ii)   in clause (a) of sub-section (1) of section 246 so as to exclude
              the order of assessment passed under sub-section (3) of
              section 143 in pursuance of directions of "Dispute Resolution
              Panel" as an appealable order and in clause (c) of sub-section


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                                                                     Annexure III

                (1) of section 246 so as to exclude an order passed under
                section 154 of such order as an appealable order;
        (iii)   in sub-section (1) of section 253 so as to include an order of
                assessment passed under sub-section (3) of section 143 in
                pursuance of directions of "Dispute Resolution Panel" as an
                appealable order.
        These amendments will take effect from 1st October, 2009.
6.      Memorandum explaining the provisions of the Finance Bill, 2011.
Rationalisation of provisions relating to Transfer Pricing
A.      Section 92C of the Income-tax Act provides the procedure for
computation of the Arm's Length Price (ALP). The section provides the
methods of computing the ALP and mandates that the most appropriate
method should be chosen to compute ALP. It is also provided that if more
than one price is determined by the chosen method, the ALP shall be taken
to be the arithmetical mean of such prices. The second proviso to section
92C(2) provides that if the variation between the actual price of the
transaction and the ALP, as determined above, does not exceed 5% of the
actual price, then, no adjustment will be made and the actual price shall be
treated as the ALP.
A fixed margin of 5% across all segments of business activity and range of
international transactions has out-lived its utility. It is, therefore, proposed to
amend section 92C of the Act to provide that instead of a variation of 5%, the
allowable variation will be such percentage as may be notified by Central
Government in this behalf.
This amendment is proposed to take effect from 1st April, 2012 and it shall
accordingly apply in relation to the Assessment Year 2012-13 and
subsequent years.
B.     Section 92CA of the Act provides that the Transfer Pricing Officer
(TPO) can determine the ALP in relation to an international transaction,
which has been referred to the TPO by the Assessing Officer.
It is proposed to amend section 92CA so as to specifically provide that the
jurisdiction of the Transfer Pricing Officer shall extend to the determination of
the ALP in respect of other international transactions, which are noticed by
him subsequently, in the course of proceedings before him. These
international transactions would be in addition to the international
transactions referred to the TPO by the Assessing Officer.


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C.       Section 92CA(7) provides that for the purpose of determining the
ALP, the TPO can exercise powers available to an assessing officer under
section 131(1) and section 133(6). These are powers of summoning or
calling for details for the purpose of inquiry or investigation into the matter.
In order to enable the TPO to conduct on-the-spot enquiry and verification, it
is proposed to amend section 92CA(7) so as to enable the TPO to also
exercise the power of survey conferred upon an income-tax authority under
section 133A of the Act.
These amendments are proposed to take effect from 1st June 2011.
D.      Section 139 of the Income-tax Act stipulates 30th September of the
assessment year as the due date for filing of return of income in case of
corporate assessees. In addition to filing a return of income, assessees who
have undertaken international transactions are also required (under the
provisions of section 92E) to prepare and file a transfer pricing report in Form
3CEB before the due date for filing of return of income.
Corporate assessees face practical difficulties in accessing contemporary
comparable data before 30th September in order to furnish a report in
respect of their international transactions. It is, therefore, proposed to amend
section 139 to extend the due date for filing of return of income by such
corporate assessees to 30th November of the assessment year.
This amendment is proposed to take effect from 1st April 2011.
7.     Memorandum explaining the provisions of the Finance Bill, 2012.
Rationalization of Transfer Pricing Provisions
Advance Pricing Agreement (APA)
Advance Pricing Agreement is an agreement between a taxpayer and a
taxing authority on an appropriate transfer pricing methodology for a set of
transactions over a fixed period of time in future. The APAs offer better
assurance on transfer pricing methods and are conducive in providing
certainty and unanimity of approach.
It is proposed to insert new sections 92CC and 92CD in the Act to provide a
framework for advance pricing agreement under the Act. The proposed
sections provide the following. ­
1.     It empowers Board, to enter into an advance pricing agreement with
       any person undertaking an international transaction.
2.     Such APAs shall include determination of the arm's length price or

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      specify the manner in which arm's length price shall be determined, in
      relation to an international transaction which the person undertake.
3.    The manner of determination of arm's length price in such cases shall
      be any method including those provided in subsection (1) of section
      92C, with necessary adjustments or variations.
4.    The arm's length price of any international transaction, which is
      covered under such APA, shall be determined in accordance with the
      APA so entered and the provisions of section 92C or section 92CA
      which normally apply for determination of arm's length price would be
      modified to this extent and arm's length price shall be determined in
      accordance with APA.
5.    The APA shall be valid for such previous years as specified in the
      agreement which in no case shall exceed five consecutive previous
      years.
6.    The APA shall be binding only on the person and the Commissioner
      (including income-tax authorities subordinate to him) in respect of the
      transaction in relation to which the agreement has been entered into.
      The APA shall not be binding if there is any change in law or facts
      having bearing on such APA.
7.    The Board is empowered to declare, with the approval of Central
      Government, any such agreement to be void ab initio, if it finds that
      the agreement has been obtained by the person by fraud or
      misrepresentation of facts. Once an agreement is declared void ab-
      initio, all the provisions of the Act shall apply to the person as if such
      APA had never been entered into.
8.    For the purpose of computing any period of limitation under the Act,
      the period beginning with the date of such APA and ending on the
      date of order declaring the agreement void ab-initio shall be
      excluded. However if after the exclusion of the aforesaid period, the
      period of limitation referred to in any provision of the Act is less than
      sixty days, such remaining period shall be extended to sixty days.
9.    The Board is empowered to prescribe a Scheme providing for the
      manner, form, procedure and any other matter generally in respect of
      the advance pricing agreement.
10.   Where an application is made by a person for entering into such an
      APA, proceedings shall be deemed to be pending in the case of the
      person for the purposes of the Act like for making enquiries under

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       section 133(6) of the Act.
11.    The person entering in to such APA shall necessarily have to furnish
       a modified return within a period of three months from the end of the
       month in which the said APA was entered in respect of the return of
       income already filed for a previous year to which the APA applies.
       The modified return has to reflect modification to the income only in
       respect of the issues arising from the APA and in accordance with it.
12.    Where the assessment or reassessment proceedings for an
       assessment year relevant to the previous year to which the
       agreement applies are pending on the date of filing of modified
       return, the Assessing Officer shall proceed to complete the
       assessment or reassessment proceedings in accordance with the
       agreement taking into consideration the modified return so filed and
       normal period of limitation of completion of proceedings shall be
       extended by one year.
13.    If the assessment or reassessment proceedings for an assessment
       year relevant to a previous year to which the agreement applies has
       been completed before the expiry of period allowed for furnishing of
       modified return ,the Assessing Officer shall, in a case where modified
       return is filed, proceed to assess or reassess or recompute the total
       income of the relevant assessment year having regard to and in
       accordance with the APA and to such assessment, all the provisions
       relating to assessment shall apply as if the modified return is a return
       furnished under section 139 of the Act. The period of limitation for
       completion of such assessment or reassessment is one year from the
       end of the financial year in which the modified return is furnished.
14.    All the other provisions of this Act shall apply accordingly as if the
       modified return is a return furnished under section 139.
These amendments will take effect from 1st July, 2012.
Examination by the Transfer Pricing               Officer   of   international
transactions not reported by the Assessee
Section 92CA of the Act provides that the Assessing Officer, if he considers it
necessary or expedient to do so, may with the previous approval of
Commissioner of Income tax, refer the matter of determination of Arm's
Length Price in respect of an international transaction to the Transfer Pricing
Officer (TPO). Once reference is made to the TPO, TPO is competent to
exercise all powers that are available to the Assessing Officer under sub-

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section (3) of Section 92C for determination of ALP and consequent
adjustment. Further under section 92E of the Act, there is reporting
requirement on the taxpayer and the taxpayer is under obligation to file an
audit report in prescribed form before the Assessing Officer (AO) containing
details of all international transactions undertaken by the taxpayer during the
year.
This audit report is the primary document with the Assessing Officer, which
contains the details of international transactions undertaken by the taxpayer.
If the assessee does not report such a transaction in the report furnished
under section 92E then the Assessing Officer would normally not be aware of
such an International Transaction so as to make a reference to the Transfer
Pricing Officer. The Transfer Pricing Officer may notice such a transaction
subsequently during the course of proceeding before him. In absence of
specific power, the determination of Arm's Length Price by the Transfer
Pricing Officer would be open to challenge even though the basis of such an
action is non-reporting of transaction by the taxpayer at first instance.
It is proposed to amend the section 92CA of the Act retrospectively to
empower Transfer Pricing Officer (TPO) to determine Arm's Length Price of
an international transaction noticed by him in the course of proceedings
before him, even if the said transaction was not referred to him by the
Assessing Officer, provided that such international transaction was not
reported by the taxpayer as per the requirement cast upon him under section
92E of the Act.
This amendment will take effect retrospectively from 1st June, 2002.
It is also proposed to provide an explanation to effect that due to
retrospectivity of the amendment no reopening of any proceeding would be
undertaken only on account of such an amendment.
This amendment will take effect from 1st July, 2012.
Transfer Pricing Regulations to apply to certain domestic transactions
Section 40A of the Act empowers the Assessing Officer to disallow
unreasonable expenditure incurred between related parties. Further, under
Chapter VI-A and section 10AA, the Assessing Officer is empowered to re-
compute the income (based on fair market value) of the undertaking to which
profit linked deduction is provided if there are transactions with the related
parties or other undertakings of the same entity. However, no specific
method to determine reasonableness of expenditure or fair market value to

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re-compute the income in such related transactions is provided under these
sections.
The Supreme Court in the case of CIT Vs. Glaxo SmithKline Asia (P) Ltd., in
its order has, after examining the complications which arise in cases where
fair market value is to be assigned to transactions between domestic related
parties, suggested that Ministry of Finance should consider appropriate
provisions in law to make transfer pricing regulations applicable to such
related party domestic transactions.
The application and extension of scope of transfer pricing regulations to
domestic transactions would provide objectivity in determination of income
from domestic related party transactions and determination of
reasonableness of expenditure between related domestic parties. It will
create legally enforceable obligation on assessees to maintain proper
documentation. However, extending the transfer pricing requirements to all
domestic transactions will lead to increase in compliance burden on all
assessees which may not be desirable.
Therefore, the transfer pricing regulations need to be extended to the
transactions entered into by domestic related parties or by an undertaking
with other undertakings of the same entity for the purposes of section 40A,
Chapter VI-A and section 10AA. The concerns of administrative and
compliance burden are addressed by restricting its applicability to the
transactions, which exceed a monetary threshold of ` 5 crores in aggregate
during the year. In view of the circumstances which were present in the case
before the Supreme Court, there is a need to expand the definition of related
parties for purpose of section 40A to cover cases of companies which have
the same parent company.
It is, therefore, proposed to amend the Act to provide applicability of transfer
pricing regulations (including procedural and penalty provisions) to
transactions between related resident parties for the purposes of
computation of income, disallowance of expenses etc. as required under
provisions of sections 40A, 80-IA, 10AA, 80A, sections where reference is
made to section 80-IA, or to transactions as may be prescribed by the Board,
if aggregate amount of all such domestic transactions exceeds Rupees 5
crore in a year. It is further proposed to amend the meaning of related
persons as provided in section 40A to include companies having the same
holding company.
This amendment will take effect from 1st April, 2013 and will, accordingly,
apply in relation to the Assessment Year 2013-14 and subsequent
assessment years.

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Determination of Arm 's Length Price (ALP)
I.      Section 92C of the Act provides for computation of arms lengths
price. Sub-section (1) of this section provides the set of methods for
determination of arms length price and mandates application of the most
appropriate method for determination of arms length price (ALP). Sub-
Section (2) of section 92C provides that where more than one price is
determined by application of most appropriate method, the arms length price
shall be taken to be the arithmetic mean of such prices. The proviso to this
sub-section was inserted by Finance Act, 2002 with effect from 01.04.2002 to
ensure that in case variation of transaction price from the arithmetic mean is
within the tolerance range of 5%, no adjustment was required to be made to
transaction value.
Subsequently, disputes arose regarding the interpretation of the proviso.
Whether the tolerance band is a standard deduction or not, in case variation
of ALP and transaction value exceeded the tolerance band. Different courts
interpreted it differently.
In order to bring more clarity and resolving the controversy the proviso was
substituted by Finance Act (No.2), 2009. The substituted proviso not only
made clear the intent that 5% tolerance band is not a standard deduction but
also changed the base of determination of the allowable band, linked it to the
transaction price instead of the earlier base of Arithmetic mean. The
amendment clarified the ambiguity about applicability of 5% tolerance band,
not being a standard deduction.
However, the position prior to amendment by Finance (No.2) Act, 2009 still
remained ambiguous with varying judicial decisions. Some favouring
departmental stand and others the stand of tax payer. There is, therefore, a
need to bring certainty to the issue by clarifying the legislative intent in
respect of first proviso to sub-section (2) which was inserted by the Finance
Act, 2002.
It is, therefore, proposed to amend the Income Tax Act to provide clarity with
retrospective effect in respect of first proviso to section 92C(2) as it stood
before its substitution by Finance Act (No.2), 2009 so that the tolerance band
of 5% is not taken to be a standard deduction while computing Arm's Length
Price and to ensure that due to such retrospective amendment already
completed assessments or proceedings are not reopened only on this
ground.



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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

The amendments proposed above shall be effective retrospectively from 1st
April, 2002 and shall accordingly apply in relation to the Assessment Year
2002-03 and subsequent Assessment Years.
II.     In respect of amendment, which was brought by the Finance (No. 2)
Act, 2009, the explanatory memorandum clearly mentioned the legislative
intent of the amended provision to be applicable to all proceedings pending
as on 01.10.2009 before the Transfer Pricing Officer. However, subsequent
decisions of certain judicial authorities have created doubts about
applicability of this proviso to proceedings pending as on 01.10.2009. There
is need to clarify the legislative intent of making the proviso applicable for all
assessment proceedings pending as on 01.10.2009 instead of it being
attracted only in respect of proceeding for assessment year 2010-11 and
subsequent assessment years.
It is, therefore, proposed to amend the Income Tax Act to provide clarity that
second proviso to section 92C shall also be applicable to all proceedings
which were pending as on 01.10.2009. [The date of coming in force of
second proviso inserted by Finance (No.2) Act, 2009].
The amendments will take effect retrospectively from 1st October, 2009.
Filing of return of income, definition of international transaction,
tolerance band for ALP, penalties and reassessment in transfer pricing
cases
I.     Section 139 of the Act provides for due date of filing return of income
in case of various categories of persons. In addition to filing of return of
income, the assesses who have undertaken international transactions are
also required to prepare and file a Transfer Pricing report in Form 3CEB, as
per Section 92E of the Act, before the due date of filing of return of income.
Vide the Finance Act, 2011 the due date for filing of return of income in case
of corporate assesses who were required to obtain and file Transfer Pricing
report (required under section 92E of the Act), was extended to 30th
November of the assessment year.
It has been noted that assesses other than companies are also faced with
similar constraints of absence of sufficient contemporary data in public
domain by 30th September which is currently the due date of filing of return
of income and Transfer Pricing report in their cases.
Therefore, there is a need to extend the due date for filing of return of income
in case of non-corporate taxpayers, who have undertaken international
transactions and are required to obtain and file Transfer Pricing report as per

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Section 92E of the Act. The due date of filing of return of income in case of
non-corporate assesses be extended to 30th November of the assessment
year.
It is proposed to amend Section 139 of the Act, to provide that in case of all
assesses who are required to obtain and file Transfer Pricing report as per
Section 92E of the Act, the due date would be 30th November of the
assessment year.
This amendment will take effect retrospectively from 1st April, 2012 and will,
accordingly, apply in relation to the assessment year 2012-13 and
subsequent assessment years.
II.     Section 92B of the Act, provides an exclusive definition of
International Transaction. Although, the definition is worded broadly, the
current definition of International Transaction leaves scope for its
misinterpretation.
The definition by its concise nature does not mention all the nature and
details of transactions, taking benefit of which large number of International
Transactions are not being reported by taxpayers in transfer pricing audit
report. In the definition, the term "intangible property" is included. Still, due to
lack of clarity in respect of scope of intangible property, the taxpayer have
not reported several such transactions.
Certain judicial authorities have taken a view that in cases of transactions of
business restructuring etc. where even if there is an international transaction
Transfer Pricing provisions would not be applicable if it does not have
bearing on profits or loss of current year or impact on profit and loss account
is not determinable under normal computation provisions other than transfer
pricing regulations. The present scheme of Transfer pricing provisions does
not require that international transaction should have bearing on profits or
income of current year.
Therefore, there is a need to amend the definition of international transaction
in order to clarify the true scope of the meaning of the term. "international
transaction" and to clarify the term "intangible property" used in the definition.
It is, therefore, proposed to amend section 92B of the Act, to provide for the
explanation to clarify meaning of international transaction and to clarify the
term intangible property used in the definition of international transaction and
to clarify that the `international transaction' shall include a transaction of
business restructuring or reorganisation, entered into by an enterprise with
an associated enterprise, irrespective of the fact that it has bearing on the

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profit, income, losses or assets or such enterprises at the time of the
transaction or at any future date.
This amendment will take effect retrospectively from 1st April, 2002 and will,
accordingly, apply in relation to the assessment year 2002-03 and
subsequent assessment years.
III.    Section 92C provides methods for determination of Arm's Length
Price (ALP). Sub section (1) of the said section prescribes the methods of
computation of Arm's Length Price. Sub section (2) of the said sub section
provides that if the appropriate method results in more than one price then
the arithmetic mean of these prices would be the ALP. The proviso to sub
section (2) of section 92C which was amended by Finance Act, 2011
provides that the Central Government may notify a percentage and if
variation between the ALP so determined and the transaction price is within
the notified percentage (of transaction price), no adjustment shall be made to
the transaction price.
There is a need to put an upper ceiling on such tolerance range, which is to
be notified, in the legislation.
It is, therefore, proposed to amend Section 92C (2) of the Act, so as to
provide an upper ceiling of 3% in respect of power of Central Government to
notify the tolerance range for determination of arms length price.
This amendment will take effect from 1st April, 2013 and will, accordingly,
apply in relation to the assessment year 2013-14 and subsequent
assessment years.
IV.    Section 271BA of the Income Tax Act provides a penalty of ` 1 lakh in
cases where any person fails to furnish a report from an accountant as
required by Section 92E.
Section 271AA provides penalty for failure to keep and maintain information
and document in respect of International Transaction.
Section 271G provides penalty for failure to furnish information or document
under Section 92D which requires maintenance of certain information and
documents in the prescribed proforma by persons entering into an
International Transaction.
The above scheme of penalty provisions allows for misuse of provisions due
to lack of effective deterrent. In order to suppress information about
international transactions, some taxpayers may not furnish the report or get
the Transfer Pricing audit done. The meager penalty of ` 1 lakh as compared


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to the quantum of international transactions is not an effective deterrent.
There is presently no penalty for non-reporting of an international transaction
in report filed under section 92E or maintenance or furnishing of incorrect
information or documents. Therefore, there is need to provide effective
deterrent based on transaction value to enforce compliance with Transfer
Pricing regulations.
It is, therefore, proposed to amend Section 271AA to provide levy of a
penalty at the rate of 2% of the value of the international transaction, if the
taxpayer.-
i.     fails to maintain prescribed documents or information or;
ii.    fails to report any international transaction which is required to be
       reported, or;
iii.   maintains or furnishes any incorrect information or documents.
This penalty would be in addition to penalties in section 271BA and 271G.
This amendment will take effect from 1st July, 2012.
V.     Section 147 of the Act, provides for reopening of the cases of the
previous years, if any income chargeable to tax has escaped assessment.
Explanation to this section provides certain circumstances where it will be
deemed that income has escaped assessments.
Under the Act, income from an international transactions has to be computed
in accordance with arm's length principle and transfer pricing provisions
apply to such transactions. Therefore, in each and every case of international
transaction, the income arising from such transaction has to be tested
against the benchmark of arm's length price. In certain transactions,
transaction value is at arm's length price and no adjustment takes place
whereas in others it may lead to adjustments. If an international transaction
is not reported by the assessee, such transaction never gets benchmarked
against arm's length principle. It is, therefore, imperative that non-reporting of
international transactions should lead to a presumption of escapement of
income.
It is, therefore, proposed to amend Section 147 of the Act, to provide that in
all cases where it is found that an international transaction has not been
reported either by non-filing of report or otherwise by not including such
transaction in the report mentioned in section 92E then such non-reporting
would be considered as a case of deemed escapement of income and such a
case can be reopened under section 147 of the Act.
This amendment will take effect from 1st July, 2012.


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

Appeal against the directions of the Dispute Resolution Panel (DRP)
The institution of Dispute Resolution Panel (DRP) was created by Finance
Act, 2009 with a view to bring about speedy resolution of disputes in the case
of international transactions particularly involving Transfer Pricing issues.
Under the provisions of sub-section (8) of section 144C, the DRP has the
power to confirm, reduce or enhance the variations proposed in the draft
order. The Income Tax Department does not have the right to appeal against
the directions given by the DRP. The taxpayer has been given a right to
appeal directly to the Income Tax Appellate Tribunal (ITAT) against the order
passed by the Assessing Officer in pursuance of the directions of the DRP.
As the directions given by the DRP are binding on the Assessing Officer, it is
accordingly proposed to provide that the Assessing Officer may also file an
appeal before the ITAT against an order passed in pursuance of directions of
the DRP.
It is therefore proposed to amend the provisions of section 253 and section
254 of the Income-tax Act to provide for filing of appeal by the Assessing
Officer against an order passed in pursuance of directions of the DRP in
respect of an objection filed on or after 1st July, 2012.
These amendments will take effect from the 1st day of July, 2012.
Power of the DRP to enhance variations
Dispute Resolution Panel (DRP) had been constituted with a view to
expeditiously resolve the cases involving transfer pricing issues in the case
of any person having international transactions or in case of a foreign
company. It has been provided under sub-section (8) of section 144C that
DRP may confirm, reduce or enhance the variations proposed in the draft
order of the Assessing Officer.
In a recent judgement, it was held that the power of DRP is restricted only to
the issues raised in the draft assessment order and therefore it cannot
enhance the variation proposed in the order as a result of any new issue
which comes to the notice of the panel during the course of proceedings
before it.
This is not in accordance with the legislative intent.
It is accordingly proposed to insert an Explanation in the provisions of section
144C to clarify that the power of the DRP to enhance the variation shall
include and shall always be deemed to have included the power to consider
any matter arising out of the assessment proceedings relating to the draft

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assessment order. This power to consider any issue would be irrespective of
the fact whether such matter was raised by the eligible assessee or not.
This amendment will be effective retrospectively from the 1st day of April,
2009 and will accordingly apply to assessment year 2009-10 and subsequent
assessment years.
Completion of assessment in search cases referred to DRP
Under the provisions of section 144C of the Income-tax Act where an eligible
assessee files an objection against the draft assessment order before the
Dispute Resolution Panel (DRP), then, the time limit for completion of
assessments are as provided in section 144C notwithstanding anything in
section 153. A similar provision is proposed to be made where assessments
are framed as a result of search and seizure to provide that for such
assessments, time limit specified in section 144C will apply, notwithstanding
anything in section 153B.
It is also proposed to provide for exclusion of such orders passed by the
Assessing Officer in pursuance of the directions of the DRP, from the
appellate jurisdiction of the Commissioner (Appeals) and to provide for filing
of appeals directly to ITAT against such orders. Accordingly, consequential
amendments are proposed to be made in the provisions of section 246A and
253 of the Income-tax Act.
These amendments in the provisions of the Income-tax Act will take effect
retrospectively from the 1st day of October, 2009.
8. Memorandum explaining the provisions of the Finance (No.2) Act,
2014
Roll back provision in Advance Pricing Agreement Scheme
Section 92CC of the Act provides for Advance Pricing Agreement (APA). It
empowers the Central Board of Direct Taxes, with the approval of the Central
Government, to enter into an APA with any person for determining the Arm's
Length Price (ALP) or specifying the manner in which ALP is to be
determined in relation to an international transaction which is to be entered
into by the person. The agreement entered into is valid for a period, not
exceeding 5 previous years, as may be mentioned in the agreement. Once
the agreement is entered into, the ALP of the international transaction, which
is subject matter of the APA, would be determined in accordance with such
an APA.
In many countries the APA scheme provides for "roll back" mechanism for


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dealing with ALP issues relating to transactions entered into during the
period prior to APA. The "roll back" provisions refers to the applicability of the
methodology of determination of ALP, or the ALP, to be applied to the
international transactions which had already been entered into in a period
prior to the period covered under an APA. However, the "roll back" relief is
provided on case to case basis subject to certain conditions. Providing of
such a mechanism in Indian legislation would also lead to reduction in large
scale litigation which is currently pending or may arise in future in respect of
the transfer pricing matters.
Therefore, it is proposed to amend the Act to provide roll back mechanism in
the APA scheme. The APA may, subject to such prescribed conditions,
procedure and manner, provide for determining the arm's length price or for
specifying the manner in which arm's length price is to be determined in
relation to an international transaction entered into by a person during any
period not exceeding four previous years preceding the first of the previous
years for which the advance pricing agreement applies in respect of the
international transaction to be undertaken in future.
This amendment will take effect from 1st October, 2014.
Rationalisation of the Definition of International Transaction
The existing provisions of section 92B of the Act define 'International
transaction' as a transaction in the nature of purchase, sale, lease, provision
of services, etc. between two or more associated enterprises, either or both
of whom are non-residents.
Sub-section (2) of the said section extends the scope of the definition of
international transaction by providing that a transaction entered into with an
unrelated person shall be deemed to be a transaction with an associated
enterprise, if there exists a prior agreement in relation to the transaction
between such other person and the associated enterprise, or the terms of the
relevant transaction are determined in substance between the other person
and the associated enterprise. The sub-section as presently worded has led
to a doubt whether or not, for the transaction to be treated as an international
transaction, the unrelated person should also be a non-resident.
Therefore, it is proposed to amend section 92B of the Act to provide that
where, in respect of a transaction entered into by an enterprise with a person
other than an associated enterprise, there exists a prior agreement in relation
to the relevant transaction between the other person and the associated
enterprise or, where the terms of the relevant transaction are determined in


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substance between such other person and the associated enterprise, and
either the enterprise or the associated enterprise or both of them are non-
resident, then such transaction shall be deemed to be an international
transaction entered into between two associated enterprises, whether or not
such other person is a non-resident.
This amendment will take effect from 1st April, 2015 and will, accordingly,
apply in relation to the assessment year 2015-16 and subsequent
assessment years.
Levy of Penalty under section 271G by Transfer Pricing Officers
The existing provisions of section 271G of the Act provide that if any person
who has entered into an international transaction or specified domestic
transaction fails to furnish any such document or information as required by
sub-section (3) of section 92D, then such person shall be liable to a penalty
which may be levied by the Assessing Officer or the Commissioner
(Appeals).
Section 92CA provides that an Assessing Officer may make reference to a
Transfer Pricing Officer (TPO) for determination of arm's length price (ALP).
TPO has been defined in the said section to mean a Joint Commissioner or
Deputy Commissioner or Assistant Commissioner who is authorised by the
Board to perform all or any of the functions of an Assessing Officer specified
in sections 92C and 92D. The determination of arm's length price in several
cases is done by the TPO. It is, therefore, proposed to amend section 271G
of the Act to include TPO, as referred to in Section 92CA, as an authority
competent to levy the penalty under section 271G in addition to the
Assessing Officer and the Commissioner (Appeals).
This amendment will take effect from 1st October, 2014.
9.   Memorandum explaining the provisions of the Finance Act, 2015
Raising the threshold for specified domestic transaction
The existing provisions of section 92BA of the Act define "specified domestic
transaction" in case of an assessee to mean any of the specified
transactions, not being an international transaction, where the aggregate of
such transactions entered into by the assessee in the previous year exceeds
a sum of five crore rupees.
In order to address the issue of compliance cost in case of small businesses
on account of low threshold of five crores rupees, it is proposed to amend
section 92BA to provide that the aggregate of specified transactions entered


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

into by the assessee in the previous year should exceed a sum of twenty
crore rupees for such transaction to be treated as `specified domestic
transaction'.
This amendment will take effect from 1st April, 2016 and will, accordingly,
apply in relation to the assessment year 2016-17 and subsequent
assessment years.
10. Memorandum explaining the provisions of the Finance Bill, 2016
BEPS action plan - Country-By-Country Report and Master file
Sections 92 to 92F of the Act contain provisions relating to transfer pricing
regime. Under provision of section 92D, there is requirement for maintenance
of prescribed information and document relating to the international
transaction and specified domestic transaction.
The OECD report on Action 13 of BEPS Action plan provides for revised
standards for transfer pricing documentation and a template for country-by-
country reporting of income, earnings, taxes paid and certain measure of
economic activity. India has been one of the active members of BEPS
initiative and part of international consensus. It is recommended in the BEPS
report that the countries should adopt a standardised approach to transfer
pricing documentation. A three-tiered structure has been mandated
consisting of:-
(i)     a master file containing standardised information relevant for all
        multinational enterprises (MNE) group members;
(ii)    a local file referring specifically to material transactions of the local
        taxpayer; and
(iii)   a country-by-country report containing certain information relating to
        the global allocation of the MNE's income and taxes paid together
        with certain indicators of the location of economic activity within the
        MNE group.
The report mentions that taken together, these three documents (country-by-
country report, master file and local file) will require taxpayers to articulate
consistent transfer pricing positions and will provide tax administrations with
useful information to assess transfer pricing risks. It will facilitate tax
administrations to make determinations about where their resources can
most effectively be deployed, and, in the event audits are called for, provide
information to commence and target audit enquiries.
The country-by-country report requires multinational enterprises (MNEs) to

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report annually and for each tax jurisdiction in which they do business; the
amount of revenue, profit before income tax and income tax paid and
accrued. It also requires MNEs to report their total employment, capital,
accumulated earnings and tangible assets in each tax jurisdiction. Finally, it
requires MNEs to identify each entity within the group doing business in a
particular tax jurisdiction and to provide an indication of the business
activities each entity engages in. The Country-by-Country (CbC) report has
to be submitted by parent entity of an international group to the prescribed
authority in its country of residence. This report is to be based on
consolidated financial statement of the group.
The master file is intended to provide an overview of the MNE groups
business, including the nature of its global business operations, its overall
transfer pricing policies, and its global allocation of income and economic
activity in order to assist tax administrations in evaluating the presence of
significant transfer pricing risk. In general, the master file is intended to
provide a high-level overview in order to place the MNE group's transfer
pricing practices in their global economic, legal, financial and tax context.
The master file shall contain information which may not be restricted to
transaction undertaken by a particular entity situated in particular country. In
that aspect, information in master file would be more comprehensive than the
existing regular transfer pricing documentation. The master file shall be
furnished by each entity to the tax authority of the country in which it
operates.
In order to implement the international consensus, it is proposed to provide a
specific reporting regime in respect of CbC reporting and also the master file.
It is proposed to include essential elements in the Act while remaining
aspects can be detailed in rules.
The elements relating to CbC reporting requirement and matters related to it
proposed to be included through amendment of the Act are:--
(i)     the reporting provision shall apply in respect of an international group
        having consolidated revenue above a threshold to be prescribed.
(ii)    the parent entity of an international group, if it is resident in India
        shall be required to furnish the report in respect of the group to the
        prescribed authority on or before the due date of furnishing of return
        of income for the Assessment Year relevant to the Financial Year
        (previous year) for which the report is being furnished;
(iii)   the parent entity shall be an entity which is required to prepare


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

         consolidated financial statement under the applicable laws or would
         have been required to prepare such a statement, had equity share of
         any entity of the group been listed on a recognized stock exchange in
         India;
(iv)     every constituent entity in India, of an international group having
         parent entity that is not resident in India, shall provide information
         regarding the country or territory of residence of the parent of the
         international group to which it belongs. This information shall be
         furnished to the prescribed authority on or before the prescribed date;
(v)      the report shall be furnished in prescribed manner and in the
         prescribed form and would contain aggregate information in respect
         of revenue, profit & loss before Income-tax, amount of Income-tax
         paid and accrued, details of capital, accumulated earnings, number of
         employees, tangible assets other than cash or cash equivalent in
         respect of each country or territory along with details of each
         constituent's residential status, nature and detail of main business
         activity and any other information as may be prescribed. This shall be
         based on the template provided in the OECD BEPS report on Action
         Plan 13;
(vi)     an entity in India belonging to an international group shall be required
         to furnish CbC report to the prescribed authority if the parent entity of
         the group is resident ;-
         (a)   in a country with which India does not have an arrangement for
               exchange of the CbC report; or
         (b)   such country is not exchanging information with India even
               though there is an agreement; and
         (c)   this fact has been intimated to the entity by the prescribed
               authority;
(vii)    If there are more than one entities of the same group in India, then
         the group can nominate (under intimation in writing to the prescribed
         authority) the entity that shall furnish the report on behalf of the
         group. This entity would then furnish the report;
(viii)   If an international group, having parent entity which is not resident in
         India, had designated an alternate entity for filing its report with the
         tax jurisdiction in which the alternate entity is resident, then the
         entities of such group operating in India would not be obliged to
         furnish report if the report can be obtained under the agreement of

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                                                                    Annexure III

         exchange of such reports by Indian tax authorities;
(ix)     The prescribed authority may call for such document and information
         from the entity furnishing the report for the purpose of verifying the
         accuracy as it may specify in notice. The entity shall be required to
         make submission within thirty days of receipt of notice or further
         period if extended by the prescribed authority, but extension shall not
         be beyond 30 days;
(x)      For non-furnishing of the report by an entity which is obligated to
         furnish it, a graded penalty structure would apply:-
         (a)   if default is not more than a month, penalty of ` 5000/- per day
               applies;
         (b)   if default is beyond one month, penalty of ` 15000/- per day for
               the period exceeding one month applies;
         (c)   for any default that continues even after service of order
               levying penalty either under (a) or under (b), then the penalty
               for any continuing default beyond the date of service of order
               shall be @ ` 50,000/- per day;
(xi)     In case of timely non-submission of information before prescribed
         authority when called for, a penalty of Rs5000/- per day applies.
         Similar to the above, if default continues even after service of penalty
         order, then penalty of ` 50,000/- per day applies for default beyond
         date of service of penalty order;
(xii)    If the entity has provided any inaccurate information in the report
         and,-
         (a)   the entity knows of the inaccuracy at the time of furnishing the
               report but does not inform the prescribed authority; or
         (b)   the entity discovers the inaccuracy after the report is furnished
               and fails to inform the prescribed authority and furnish correct
               report within a period of fifteen days of such discovery; or
         (c)   the entity furnishes inaccurate information or document in
               response to notice of the prescribed authority, then penalty of `
               500,000/- applies;
(xiii)   The entity can offer reasonable cause defence for non-levy of
         penalties mentioned above. The proposed amendment in the Act in
         respect of maintenance of master file and furnishing it are: -


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961


       (i)     the entities being constituent of an international group shall, in
               addition to the information related to the international
               transactions, also maintain such information and document as
               is prescribed in the rules. The rules shall thereafter prescribe
               the information and document as mandated for master file
               under OECD BEPS Action 13 report;
       (ii)    the information and document shall also be furnished to the
               prescribed authority within such period as may be prescribed
               and the manner of furnishing may also be provided for in the
               rules;
       (iii)   for non-furnishing of the information and document to the
               prescribed authority, a penalty of ` 5 lakh shall be leviable.
               However, reasonable cause defence against levy of penalty
               shall be available to the entity.
As indicated above, the CbC reporting requirement for a reporting year does
not apply unless the consolidated revenues of the preceding year of the
group, based on consolidated financial statement, exceeds a threshold to be
prescribed. The current international consensus is for a threshold of  750
million equivalent in local currency. This threshold in Indian currency would
be equivalent to ` 5395 crores (at current rates). Therefore, CbC reporting for
an international group having Indian parent, for the previous year 2016-17,
shall apply only if the consolidated revenue of the international group in
previous year 2015-16 exceeds ` 5395 crore (the equivalent would be
determinable based on exchange rate as on the last day of previous year
2015-16).
The amendments will be effective from 1st April, 2017 and shall apply for the
Assessment year 2017-18 and subsequent assessment years.
Rationalisation of penalty provisions
Under the existing provisions, penalty on account of concealment of
particulars of income or furnishing inaccurate particulars of income is leviable
under section 271(1)(c) of the Income-tax Act. In order to rationalize and
bring objectivity, certainty and clarity in the penalty provisions, it is proposed
that section 271 shall not apply to and in relation to any assessment for the
assessment year commencing on or after the 1stday of April, 2017 and
subsequent assessment years and penalty be levied under the newly
inserted section 270A with effect from 1stApril, 2017. The new section 270A

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                                                                   Annexure III

provides for levy of penalty in cases of under reporting and misreporting of
income. Sub-section (1) of the proposed new section 270A seeks to provide
that the Assessing Officer, Commissioner (Appeals) or the Principal
Commissioner or Commissioner may levy penalty if a person has under
reported his income.
It is proposed that a person shall be considered to have under reported his
income if,-
(a)    the income assessed is greater than the income determined in the
       return processed under clause (a) of sub-section (1) of section 143;
(b)    the income assessed is greater than the maximum amount not
       chargeable to tax, where no return of income has been furnished;
(c)    the income reassessed is greater than the income assessed or
       reassessed immediately before such re-assessment;
(d)    the amount of deemed total income assessed or reassessed as per
       the provisions of section 115JB or 115JC, as the case may be, is
       greater than the deemed total income determined in the return
       processed under clause (a) of sub-section (1) of section 143;
(e)    the amount of deemed total income assessed as per the provisions of
       section 115JB or 115JC is greater than the maximum amount not
       chargeable to tax, where no return of income has been filed;
(f)    the income assessed or reassessed has the effect of reducing the
       loss or converting such loss into income.
The amount of under-reported income is proposed to be calculated in
different scenarios as discussed herein. In a case where return is furnished
and assessment is made for the first time the amount of under reported
income in case of all persons shall be the difference between the assessed
income and the income determined under section 143(1)(a). In a case where
no return has been furnished and the return is furnished for the first time, the
amount of under-reported income is proposed to be:
(i)    for a company, firm or local authority, the assessed income;
(ii)   for a person other than company, firm or local authority, the
       difference between the assessed income and the maximum amount
       not chargeable to tax.
In case of any person, where income is not assessed for the first time, the
amount of under reported income shall be the difference between the income
assessed or determined in such order and the income assessed or
determined in the order immediately preceding such order.

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

It is further proposed that in a case where under reported income arises out
of determination of deemed total income in accordance with the provisions of
section 115JB or section 115JC, the amount of total under reported income
shall be determined in accordance with the following formula-
(A - B) + (C - D)
where,
         A = the total income assessed as per the provisions other than the
         provisions contained in section 115JB or section 115JC (herein called
         general provisions);
         B = the total income that would have been chargeable had the total
         income assessed as per the general provisions been reduced by the
         amount of under reported income;
         C = the total income assessed as per the provisions contained in
         section 115JB or section 115JC;
         D = the total income that would have been chargeable had the total
         income assessed as per the provisions contained in section 115JB or
         section 115JC been reduced by the amount of under reported
         income.
However, where the amount of under reported income on any issue is
considered both under the provisions contained in section 115JB or section
115JC and under general provisions, such amount shall not be reduced from
total income assessed while determining the amount under item D.
It is clarified that in a case where an assessment or reassessment has the
effect of reducing the loss declared in the return or converting that loss into
income, the amount of under reported income shall be the difference
between the loss claimed and the income or loss, as the case may be,
assessed or reassessed.
Calculation of under-reported income in a case where the source of any
receipt, deposit or investment is linked to earlier year is proposed to be
provided based on the existing Explanation 2 to sub-section (l) of section 271
(1).
It is also proposed that the under-reported income under this section shall
not include the following cases:
(i)      where the assessee offers an explanation and the income-tax
         authority is satisfied that the explanation is bona fide and all the
         material facts have been disclosed;


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                                                                    Annexure III

(ii)    where such under-reported income is determined on the basis of an
        estimate, if the accounts are correct and complete but the method
        employed is such that the income cannot properly be deducted
        therefrom;
(iii)   where the assessee has, on his own, estimated a lower amount of
        addition or disallowance on the issue and has included such amount
        in the computation of his income and disclosed all the facts material
        to the addition or disallowance;
(iv)    where the assessee had maintained information and documents as
        prescribed under section 92D, declared the international transaction
        under Chapter X and disclosed all the material facts relating to the
        transaction;
(v)     where the undisclosed income is on account of a search operation
        and penalty is leviable under section 271AAB.
It is proposed that the rate of penalty shall be fifty per cent of the tax payable
on under-reported income. However in a case where under reporting of
income results from misreporting of income by the assessee, the person
shall be liable for penalty at the rate of two hundred per cent of the tax
payable on such misreported income. The cases of misreporting of income
have been specified as under:
(i)     misrepresentation or suppression of facts;
(ii)    non-recording of investments in books of account;
(iii)   claiming of expenditure not substantiated by evidence;
(iv)    recording of false entry in books of account;
(v)     failure to record any receipt in books of account having a bearing on
        total income;
(vi)    failure to report any international transaction or deemed international
        transaction under Chapter X.
It is also proposed that in case of company, firm or local authority, the tax
payable on under reported income shall be calculated as if the under-
reported income is the total income. In any other case the tax payable shall
be thirty per cent of the under-reported income.
It is also proposed that no addition or disallowance of an amount shall form
the basis for imposition of penalty, if such addition or disallowance has
formed the basis of imposition of penalty in the case of the person for the
same or any other assessment year.


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

These amendments will take effect from 1st day of April, 2017 and will,
accordingly apply in relation to assessment year 2017-2018 and subsequent
years.
Consequential amendments have been proposed in sections 119, 253, 271A,
271AA, 271AAB, 273A and 279 to provide reference to newly inserted
section 270A.
The provisions of section 270A are illustrated through examples as below:
Example 1. Case is of a firm liable to tax at the rate of 30 per cent.:
                                                           (Figures in ` lakh)
 Returned total Income                                             100
 Total Income determined under section 143(1)(a)                   110
 Total Income assessed under section 143(3)                        150
 Total Income reassessed under section 147 180                     180
Considering that none of the additions or disallowances made in assessment
or reassessment as above qualifies under sub-section (6) of section 270A,
the penalty would be calculated as under:
 Under-reported Income       (150-110) = 40             (180-150) = 30
 Tax Payable on under-       30 % of 40 = 12            30 % of 30 = 9
 reported Income
 Penalty Leviable*           50 % of 12 = 6             50 % of 9 = 4.5
* Considering under-reported income is not on account of misreporting
Example 2. Case is of an individual below 60 years of age and no return of
income has been furnished:
                                              (Figures in `)
 Total Income assessed under section 10,00,000
 143(3)
 Under-reported Income                10,00,000-2,50,000*
                                      =7,50,000
 Tax Payable on under-reported Income 30 % of 7,50,000 = 2,25,000
 Penalty Leviable**                   50 % of 2,25,000 = 1,12,500
* Being maximum amount not chargeable to tax
** Considering under-reported income is not on account of misreporting



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                                                                    Annexure III

Example 3. Case is of a company liable to tax at the rate of 30 per cent.:
                                                    (Figures in ` lakh)
Returned total Income (loss)                        (-)100


Total Income (loss) determined under section        (-)90
143(1)(a)


Total Income (loss) assessed under section          (-)40
143(3)

                                                    20
Total Income reassessed under section 147


Considering that none of the additions or disallowances made in assessment
or reassessment as above qualifies under sub-section (6) of section 270A,
the penalty would be calculated as under:
                                 Assessment under             Re-assessment
                                  section 143 (3)            under section 147
 Under-reported Income         (-)40 minus (-)90 = 50        20 minus (-)40 = 60
 Tax Payable on under-         30 % of 50 = 15               30 % of 60 = 18
 reported Income
 Penalty Leviable*          50 % of 15 = 7.5           50 % of 18 = 9
* Considering under-reported income is not on account of misreporting
Extension of time limit to Transfer Pricing Officer in certain cases
As per the existing provisions, the Transfer Pricing Officer (TPO) has to pass
his order sixty days prior to the date on which the limitation for making
assessment expires. It is noted that at times seeking information from foreign
jurisdictions becomes necessary for determination of arm's length price by
the TPO and at times proceedings before the TPO may also be stayed by a
court order.
It is proposed to amend sub-section (3A) of section 92CA to provide that
where assessment proceedings are stayed by any court or where a reference
for exchange of information has been made by the competent authority, the
time available to the Transfer Pricing Officer for making an order after

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

excluding the time for which assessment proceedings were stayed or the
time taken for receipt of information, as the case may be, is less than sixty
days, then such remaining period shall be extended to sixty days.
The amendment will take effect from 1st day of June, 2016.
Immunity from penalty and prosecution in certain cases by inserting
new section 270AA
It is proposed to provide that an assessee may make an application to the
Assessing Officer for grant of immunity from imposition of penalty under
section 270A and initiation of proceedings under section 276C, provided he
pays the tax and interest payable as per the order of assessment or
reassessment within the period specified in such notice of demand and does
not prefer an appeal against such assessment order. The assessee can
make such application within one month from the end of the month in which
the order of assessment or reassessment is received in the form and
manner, as may be prescribed.
It is proposed that the Assessing Officer shall, on fulfilment of the above
conditions and after the expiry of period of filing appeal as specified in sub-
section (2) of section 249, grant immunity from initiation of penalty and
proceeding under section 276C if the penalty proceedings under section
270A has not been initiated on account of the following, namely:--
(a)    misrepresentation or suppression of facts;
(b)    failure to record investments in the books of account;
(c)    claim of expenditure not substantiated by any evidence;
(d)    recording of any false entry in the books of account;
(e)    failure to record any receipt in books of account having a bearing on
       total income; or
(f)    failure to report any international transaction or any transaction
       deemed to be an international transaction or any specified domestic
       transaction to which the provisions of Chapter X apply.
It is proposed that the Assessing Officer shall pass an order accepting or
rejecting such application within a period of one month from the end of the
month in which such application is received. However, in the interest of
natural justice, no order rejecting the application shall be passed by the
Assessing Officer unless the assessee has been given an opportunity of
being heard. It is proposed that order of Assessing Officer under the said
section shall be final.


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                                                                  Annexure III

It is proposed that no appeal under section 246A or an application for
revision under section 264 shall be admissible against the order of
assessment or reassessment referred to in clause (a) of sub-section (1), in a
case where an order under section 270AA has been made accepting the
application.
Clause (b) of sub-section (2) of section 249 provides that an appeal before
the Commissioner (Appeals) is to be made within thirty days of the receipt of
the notice of demand relating to an assessment order.
It is proposed to provide that in a case where the assessee makes an
application under section 270AA of the Income-tax Act seeking immunity
from penalty and prosecution, then, the period beginning from the date on
which such application is made to the date on which the order rejecting the
application is served on the assessee shall be excluded for calculation of the
aforesaid thirty days period. The proposed amendment is consequential to
the insertion of section 270AA.
These amendments will take effect from the 1st day of April, 2017 and will,
accordingly, apply in relation to the assessment year 2017 -2018 and
subsequent years.

11. Memorandum explaining the provisions of the Finance Bill, 2017

Scope of section 92BA of the Income-tax Act relating to Specified
Domestic Transactions

The existing provisions of section 92BA of the Act, inter-alia provide that any
expenditure in respect of which payment has been made by the assessee to
certain "specified persons" under section 40A(2)(b) are covered within the
ambit of specified domestic transactions.

As a matter of compliance and reporting, taxpayers need to obtain the
chartered accountant's certificate in Form 3CEB providing the details such as
list of related parties, nature and value of specified domestic transactions
(SDTs), method used to determine the arm's length price for SDTs, positions
taken with regard to certain transactions not considered as SDTs, etc. This
has considerably increased the compliance burden of the taxpayers.

In order to reduce the compliance burden of taxpayers, it is proposed to
provide that expenditure in respect of which payment has been made by the
assessee to a person referred to in under section 40A(2)(b) are to be

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

excluded from the scope of section 92BA of the Act. Accordingly, it is also
proposed to make a consequential amendment in section 40(A)(2)(b) of the
Act.

These amendments will take effect from 1st April, 2017 and will, accordingly,
apply in relation to the assessment year 2017- 18 and subsequent years.


Secondary adjustments in certain cases

"Secondary adjustment" means an adjustment in the books of accounts of
the assessee and its associated enterprise to reflect that the actual allocation
of profits between the assessee and its associated enterprise are consistent
with the transfer price determined as a result of primary adjustment, thereby
removing the imbalance between cash account and actual profit of the
assessee. As per the OECD's Transfer Pricing Guidelines for Multinational
Enterprises and Tax Administrations (OECD transfer pricing guidelines),
secondary adjustment may take the form of constructive dividends,
constructive equity contributions, or
constructive loans.

The provisions of secondary adjustment are internationally recognised and
are already part of the transfer pricing rules of many leading economies in
the world. Whilst the approaches to secondary adjustments by individual
countries vary, they represent an internationally recognised method to align
the economic benefit of the transaction with the arm's length position.

In order to align the transfer pricing provisions in line with OECD transfer
pricing guidelines and international best practices , it is proposed to insert a
new section 92CE to provide that the assessee shall be required to carry out
secondary adjustment where the primary adjustment to transfer price, has
been made suo motu by the assessee in his return of income; or made by the
Assessing Officer has been accepted by the assessee; or is determined by
an advance pricing agreement entered into by the assessee under section
92CC; or is made as per the safe harbour rules framed under section 92CB;
or is arising as a result of resolution of an assessment by way of the mutual
agreement procedure under an agreement entered into under section 90 or
90A.

It is proposed to provide that where as a result of primary adjustment to the
transfer price, there is an increase in the total income or reduction in the
loss, as the case may be, of the assessee, the excess money which is


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                                                                   Annexure III

available with its associated enterprise, if not repatriated to India within the
time as may be prescribed, shall be deemed to be an advance made by the
assessee to such associated enterprise and the interest on such advance,
shall be computed as the income of the assessee , in the manner as may be
prescribed.

It is also proposed to provide that such secondary adjustment shall not be
carried out if, the amount of primary adjustment made in the case of an
assessee in any previous year does not exceed one crore rupees and the
primary adjustment is made in respect of an assessment year commencing
on or before 1st April,2016.

This amendment will take effect from 1st April, 2018 and will, accordingly,
apply in relation to the assessment year 2018-19 and subsequent years.




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                                                          Annexure IV
                                                             Circulars
1.     Circular No.12 of 2001 dated 23rd August, 2001
To
All the Chief Commissioners/
Director-General of Income-tax
Subject: Provisions governing transfer price in an international
transaction - regarding.
The Finance Act, 2001, has substituted the existing section 92 of the Income-
tax Act by new sections 92 and 92A to 92F. These new provisions lay down
that income arising from an international transaction between associated
enterprises shall be computed having regard to the arm's length price. The
term "associated enterprise" has been defined in section 92A. Section 92B
defines an "international transaction" between two or more associated
enterprises. The provisions contained in section 92C provide for methods to
determine the arm's length price in relation to an international transaction,
and the most appropriate method to be followed out of the specified
methods. While the primary responsibility of determining and applying an
arm's length price is on the assessee, sub-section (3) of section 92C
empowers the Assessing Officer to determine the arm's length price and
compute the total income of the assessee accordingly, subject to the
conditions provided therein. Section 92D provides for certain information and
documents required to be maintained by persons entering into international
transactions, and section 92E provides for a report of an accountant to be
furnished along with the return of income.
The Board have prescribed rules 10A to 10E in the Income-tax Rules, 1962,
giving the manner and the circumstances in which different methods would
be applied in determining arm's length price and the factors governing the
selection of the most appropriate method. The form of the report of the
accountant and the documents and information required to be maintained by
the assessees have also been prescribed.
The aforesaid provisions have been enacted with a view to provide a
statutory framework which can lead to computation of reasonable, fair and
equitable profit and tax in India so that the profits chargeable to tax in India
                                                                  Annexure IV

do not get diverted elsewhere by altering the prices charged and paid in
intra-group transactions leading to erosion of our tax revenues.
However, this is a new legislation. In the initial years of its implementation,
there may be room for different interpretations leading to uncertainties with
regard to determination of arm's length price of an international transaction.
While it would be necessary to protect our tax base, there is a need to
ensure that the taxpayers are not put to avoidable hardship in the
implementation of these regulations.
In this background the Board have decided the following:
(i)     The Assessing Officer shall not make any adjustment to the arm's
        length price determined by the taxpayer, if such price is up to 5 per
        cent less or up to 5 per cent more than the price determined by the
        Assessing Officer. In such cases the price declared by the taxpayer
        may be accepted.
(ii)    The provisions of sections 92 and 92A to 92F come into force with
        effect from 1st April, 2002, and are accordingly applicable to the
        assessment year 2002-03 and subsequent years. The law requires
        the associated enterprises to maintain such documents and
        information relating to international transactions as may be
        prescribed. However, the necessary rules could be framed by the
        Board only after the Finance Bill received the assent of the President
        and have just been notified. Therefore, where an assessee has failed
        to maintain the prescribed information or documents in respect of
        transactions entered into during the period 1.4.2001 to 31.8.2001 the
        provisions of section 92C(3) should not be invoked for such failure.
        Penalty proceedings under section 271AA or 271G should also not be
        initiated for such default.
(iii)   It should be made clear to the concerned Assessing Officers that
        where an international transaction has been put to a scrutiny, the
        Assessing Officer can have recourse to sub-section (3) of section
        92C only under the circumstances enumerated in clauses (a) to (d) of
        that sub-section and in the vent of material information or documents
        in his possession on the basis of which an opinion can be formed that
        any such circumstance exists. In all other cases, the value of the
        international transaction should be accepted without further scrutiny.



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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

This may be brought to the notice of all the officers working in your region.


                                                                Yours faithfully
                                                       (Sd.) Batsala Jha Yadav
                                                      Under Secretary (TPL-IV)
                                                        F.No.142/41/2001-TPL]
2.     Extracts from Explanatory Circular No.14 on provisions relating
to Finance Act, 2001
" New Legislation to curb tax avoidance by abuse of transfer pricing
55.1 The increasing participation of multi-national groups in economic
activities in the country has given rise to new and complex issues emerging
from transactions entered into between two or more enterprises belonging to
the same multi-national group. The profits derived by such enterprises
carrying on business in India can be controlled by the multi-national group,
by manipulating the prices charged and paid in such intra-group transactions,
thereby, leading to erosion of tax revenues.
55.2 Under the existing section 92 of the Income-tax Act, which was the
only section dealing specifically with cross border transactions, an
adjustment could be made to the profits of a resident arising from a business
carried on between the resident and a non-resident, if it appeared to the
Assessing Officer that owing to the close connection between them, the
course of business was so arranged so as to produce less than expected
profits to the resident. Rule 11 prescribed under the section provided a
method of estimation of reasonable profits in such cases. However, this
provision was of a general nature and limited in scope. It did not allow
adjustment of income in the case of non-residents. It referred to a "close
connection" which was undefined and vague. It provided for adjustment of
profits rather than adjustment of prices, and the rule prescribed for estimating
profits was not scientific. It also did not apply to individual transactions such
as payment of royalty, etc., which are not part of a regular business carried
on between a resident and a non-resident. There were also no detailed rules
prescribing the documentation required to be maintained.
55.3 With a view to provide a detailed statutory framework which can lead
to computation of reasonable, fair and equitable profits and tax in India, in
the case of such multi-national enterprises, the Act has substituted section
92 with a new section, and has introduced new section 92A to 92F in the
Income-tax Act, relating to computation of income from an international

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                                                                  Annexure IV

transaction having regard to the arm's length price, meaning of associated
enterprise, meaning of international transaction, computation of arm's length
price, maintenance of information and documents by persons entering into
international transactions, furnishing of a report from an accountant by
persons entering into international transactions and definitions of certain
expressions occurring in the said sections.
55.4 The newly substituted section 92 provides that income arising from
an international transaction between associated enterprises shall be
computed having regard to the arm's length price. Any expense or outgoing
in an international transaction is also to be computed having regard to the
arm's length price. Thus in the case of a manufacturer, for example, the
provisions will apply to exports made to the associated enterprise as also to
imports from the same or any other associated enterprise. The provision is
also applicable in a case where the international transaction comprises only
an outgoing from the Indian assessee.
55.5 The new section further provides that the cost or expenses allocated
or apportioned between two or more associated enterprises under a mutual
agreement or arrangement shall be at arm's length price. Examples of such
transactions could be where one associated enterprise carries out
centralized functions which also benefit one or more other associated
enterprises, or two or more associated enterprises agree to carry out a joint
activity, such as research and development, for their mutual benefit.
55.6 The new provision is intended to ensure that profits taxable in India
are not understated (or losses are not overstated) by declaring lower receipts
or higher outgoings than those which would have been declared by persons
entering into similar transactions with unrelated parties in the same or similar
circumstances. The basic intention underlying the new transfer pricing
regulations is to prevent shifting out of profits by manipulating prices charges
or paid in international transactions, thereby eroding the country's tax base.
The new section 92 is, therefore, not intended to be applied in cases where
the adoption of the arm's length price determined under the regulations
would result in a decrease in the overall tax incidence in India in respect of
the parties involved in the international transaction.
55.7 The substituted new sections 92A and 92B provide meanings of the
expressions "associated enterprise" and "international transaction" with
reference to which the income is to be computed under the new section 92.
While sub-section (1) of section 92A gives a general definition of associated
enterprises, based on the concept of participation in management, control or

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

capital, sub-section (2) specifies the circumstances under which the two
enterprises shall be deemed to be associated enterprises.
55.8 Section 92B provides a broad definition of an international
transaction, which is to be read with the definition of transaction given in
section 92F. An international transaction is essentially a cross border
transaction between associated enterprises in any sort of property, whether
tangible or intangible, or in the provision of services, lending of money etc. At
least one of the parties to the transaction must be a non-resident. The
definition also covers a transaction between two non-residents, where the
example, one of them has a permanent establishment whose income is
taxable in India.
55.9 Sub-section (2) of section 92B extends the scope of the definition of
international transaction by providing that a transaction entered into with an
unrelated person shall be deemed to be a transaction with an associated
enterprise, if there exists a prior agreement in relation to the transaction
between such other person and the associated enterprise, or the terms of the
relevant transaction are determined by the associated enterprise. An
illustration of such a transaction could be where the assessee, being an
enterprise resident in India, exports goods to an unrelated person abroad,
and there is a separate arrangement or agreement between the unrelated
person and an associated enterprise which influences the price at which the
goods are exported. In such a case the transaction with the unrelated
enterprise will also be subject to transfer pricing regulations.
55.10 The new section 92C provides that the arm's length price in relation
to an international transaction shall be determined by (a) comparable
uncontrolled price method; or (b) resale price method; or (c) cost plus
method; or (d) profits split method; or (e) transactional net margin method; or
(f) any other method which may be prescribed by the Board. For the present,
no additional method has been prescribed. One of the five specified methods
shall be the most appropriate method in respect of a particular international
transaction, and shall be applied for computation of arm's length price in the
manner specified by the rules. Rules 10A to 10E, which have been
separately notified vide S.O. 808(E), dated 21.8.2001 inter alia, provide for
the factors which are to be considered in selecting the most appropriate
method. The major considerations in this regard have been specified to be
the availability, coverage and reliability of data necessary for application of
the method, the extent and reliability of assumptions required to be made
and the degree of comparability existing between the international


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                                                                  Annexure IV

transaction and the uncontrolled transaction. The rules also lay down in
detail the manner in which the methods are to be applied in determining the
arm's length price.
55.11 Applying the most appropriate method to different sets of comparable
data can possibly result in computation of more than one arm's length price.
With a view to avoid unnecessary disputes, the proviso to section 92C(2)
provides that in such a case the arithmetic mean of the prices shall be
adopted as the arm's length price. In normal course, if the different sets of
comparable data are equally reliable there may not be any significant
divergence between the various arm's length prices determined.
55.12 Under the new provisions the primary onus is on the tax payer to
determine an arm's length price in accordance with the rules, and to
substantiate the same with the prescribed documentation. Where such onus
is discharged by the assessee and the data used for determining the arm's
length price is reliable and correct, there can be no intervention by the
Assessing Officer. This is made clear by sub-section (3) of section 92C which
provides that the Assessing Officer may intervene only if he is, on the basis
of material or information or document in his possession, of the opinion that
the price charged in the international transaction has not been determined in
accordance with sub-sections (1) and (2), or information and documents
relating to the 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 thereunder; or the information or data
used in computation of the arm's length price is not reliable or correct; or the
assessee has 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. If any one of such circumstances exists, the
Assessing Officer may reject the price adopted by the assessee and
determine the arm's length price in accordance with the same rules.
However, an opportunity has to be given to the assessee before determining
such price. Thereafter, as provided in sub-section (4) of section 92C, the
Assessing Officer may compute the total income on the basis of the arm's
length price so determined by him.
55.13 The first proviso to section 92C(4) recognizes the commercial reality
that even when a transfer pricing adjustment is made under that sub-section,
the amount represented by the adjustment would not actually have been
received in India or would have actually gone out of the country. Therefore it
has been provided that no deductions under section 10A or 10B or under
Chapter VI-A shall be allowed in respect of the amount of adjustment.


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

55.14 The second proviso to section 92C(4) refers to a case where the
amount involved in the international transaction has already been remitted
abroad after deducting tax at source and subsequently, in the assessment of
the resident payer, an adjustment is made to the transfer price involved and,
thereby, the expenditure represented by the amount so remitted is partly
disallowed. Under the Income-tax Act, a non-resident in receipt of income
from which tax has been deducted at source has the option of filing a return
of income in respect of the relevant income. In such cases, a non-resident
could claim a refund of a part of the tax deducted at source, on the ground
that an arm's length price has been adopted by the Assessing Officer in the
case of the resident and the same price should be considered in determining
the taxable income of the non-resident. However, the adoption of the arm's
length price in such cases would not alter the commercial reality that the
entire amount claimed earlier would have actually been received by the entity
located abroad. It has therefore been made clear in the second proviso that
income of one associated enterprise shall not be recomputed merely by
reason of an adjustment made in the case of the other associated enterprise
on determination of arm's length price by the Assessing Officer.
55.15 The new section 92D provides that every person who has undertaken
an international transaction shall keep and maintain such information and
documents as may be specified by rules made by the Board. The Board may
also specify by rules the period for which the information and documents are
required to be retained. The documentation required to be maintained has
been prescribed under rule 10D. Such documentation includes background
information on the commercial environment in which the transaction has
been entered into, and information regarding the international transaction
entered into, the analysis carried out to select the most appropriate method
and to identify comparable transactions, and the actual working out of the
arm's length price of the transaction. The documentation should be available
with the assessee by the specified date defined in section 92F and should be
retained for a period of 8 years. During the course of any proceedings under
the Act, an Assessing Officer or Commissioner (Appeals) may require any
person who has undertaken an international transaction to furnish any of the
information and documents specified under the rules with a period of thirty
days from the date of receipt of a notice issued in this regard, and such
period may be extended by a further period not exceeding thirty days.
55.16 The new section 92E provides that every person who has entered
into an international transaction during a previous year shall obtain a report
from accountant and furnish such report on or before the specified date in

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                                                                   Annexure IV

the prescribed form and manner. Rule 10E and Form No.3CEB have been
notified in this regard. The accountants' report only requires furnishing of
factual information relating to the international transaction entered into, the
arm's length price determined by the assessee and the method applied in
such determination. It also requires an opinion as to whether the prescribed
documentation has been maintained.
55.17 The new section 92F defines the expression "accountant", "arm's
length price", "enterprise", "specified date" and "transaction" used in sections
92, 92A, 92B, 92C, 92D and 92E. The definition of enterprise is broad and
includes a permanent establishment, even though a PE is not a separate
legal entity. Consequently, transactions between a foreign enterprise and its
PE, for example, between the head office abroad and a branch in India, are
also subject to these transfer pricing regulations. Also the regulation 33
would apply to transactions between a foreign enterprise and a PE of another
foreign enterprise. The term permanent establishment has not been defined
in the provisions but its meaning may be understood with reference to the tax
treaties entered into by India.
55.18 With a view to ensure that multinational enterprises comply with the
requirements of the new regulations, the Act has also amended section 271
and inserted new sections 271AA, 271BA and 271G in the Income-tax Act,
so as to provide for penalty to be levied in cases of non-compliance with
procedural requirements, and in cases of understatement of profits through
fraud or willful negligence.
55.19 The new Explanation 7 to sub-section (1) of section 271 provides that
where in the case of an assessee who has entered into an international
transaction, any amount is added or disallowed in computing the total income
under sub-sections (1) and (2) of section 92, then, the amount so added or
disallowed shall be deemed to represent income in respect of which
particulars have been concealed or inaccurate particulars have been
furnished. However, no penalty under section 271(1)(c) shall be levied where
the assessee proves to the satisfaction of the Assessing Officer or the
Commissioner (Appeals) that the price charged or paid in such transaction
has been determined in accordance with section 92C in good faith and with
due diligence.
55.20 The new section 271AA provides that if any person who has entered
into an international transaction fails to keep and maintain any such
information and documents as specified under section 92D, the Assessing
Officer or Commissioner (Appeals) may direct that such person shall pay, by

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

way of penalty, a sum equal to two per cent of the value of the international
transaction entered into by such person.
55.21 The new section 271BA provides that if any person fails to furnish a
report from an accountant as required by section 92E, the Assessing Officer
may direct that such person shall pay by way of penalty, a sum of one lakh
rupees.
55.22 The new section 271G provides that if any person who has entered
into an international transaction fails to furnish any information or documents
as required under sub-section (3) of section 92D, the Assessing Officer or
the Commissioner (Appeals) may direct that such person shall pay, by way of
penalty, a sum equal to two per cent of the value of the international
transaction.
55.23 The Act has also amended section 273B to provide that the above
mentioned penalties under sections 271AA, 271BA and 271G shall not be
imposable if the assessee proves that there was reasonable cause for such
failures.
55.24 These amendments will take effect from 1st April, 2002 and will
accordingly apply to the assessment year 2002-2003 and subsequent years."
[Circular No.14/2001]
F.No.142/13/2010-SO (TPL)
Government of India, Ministry of Finance, Department of Revenue
Central Board of Direct Taxes
New Delhi, the 30th September, 2010
CORRIGENDUM
No.__________(F.No.142/13/2010-SO(TPL). In partial modification of
Circular No.5 / 2010 dated 03.06.2010,
(i)    in para 37.5 of the said Circular, for the lines
       "the above amendment has been made applicable with effect from 1st
       April, 2009 and will accordingly apply in respect of assessment year
       2009-10 and subsequent years."
       the following lines shall be read;
       "the above amendment has been made applicable with effect from 1st
       October 2009 and shall accordingly apply in relation to all cases in
       which proceedings are pending before the Transfer Pricing Officer
       (TPO) on or after such date."


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                                                                       Annexure IV

(ii)      in para 38.3, for the date "1st October, 2009", the following date shall
          be read : "1st April, 2009 ".


                                                         (Pawan K. Kumar )
                                                           Director (TPL-IV)
                           Corrigendum No.5/2010 (F.No.142/13/2010-SO(TPL)
3.    SECTION 92C OF THE INCOME-TAX ACT, 1961, READ WITH RULE
10B OF THE INCOME-TAX RULES, 1962 - TRANSFER PRICING -
COMPUTATION OF ARM'S LENGTH PRICE - APPLICATION OF PROFIT
SPLIT METHOD
CIRCULAR NO. 2/2013 [F. NO. 500/139/2012], DATED 26-3-2013
       [WITHDRAWN BY CIRCULAR NO. 5/2013 [F. NO.500/139/2012-FTD-I],
                          DATED 29-6-2013]
 It has been brought to the notice of CBDT that clarification is needed for
 selection of profit split method (PSM) as most appropriate method. The issue
 has been examined in CBDT. It is hereby clarified that while selecting PSM as
 the most appropriate method, the following points may be kept in mind:
1.        Since there is no correlation between cost incurred on R&D activities and
          return on an intangible developed through R&D activities, the use of
          transfer pricing methods [like Transactional Net Margin Method] that
          seek to estimate the value of intangible based on cost of intangible
          development (R&D cost) plus a return, is generally discouraged.
2.        Rule 10B(1)(d) of Income-tax Rules, 1962 (the Rules) provides that profit
          split method (PSM) may be applicable mainly in international
          transactions involving transfer of unique intangibles or in multiple
          international transactions which are so interrelated that they cannot be
          evaluated separately for the purpose of determining the arm's length
          price of any one transaction. The PSM determines appropriate return on
          intangibles on the basis of relative contributions made by each
          associated enterprise.
3.        Selection and application of PSM will depend upon following factors as
          prescribed under rule 10C(2) of the Rules :
          ·   the nature and class of the international transaction;
          ·   the class or classes of associated enterprises entering into the
              transaction and the functions performed by them taking into


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

            account assets employed or to be employed and risks assumed
            by such enterprise;
       ·    the availability, coverage and reliability of data necessary for
            application of the method;
       ·    the degree of comparability existing between the international
            transaction and the uncontrolled transaction and between the
            enterprise entering into such transactions;
       ·    the extent to which reliable and accurate adjustments can be
            made to account for differences, if any, between the international
            transaction and the comparable uncontrolled transaction or
            between the enterprise entering into such transactions;
       ·    the nature, extent and reliability of assumptions required to be
            made in application of a method.
4.     It is evident from the above that rule 10C(2) of the Rules stipulates
       availability, coverage and reliability of data necessary for the application
       of the method as one of the several factors in selection of most
       appropriate method. Accordingly, in a case, where the Transfer Pricing
       Officer (TPO) is of view that PSM cannot be applied to determine the
       arm's length price of international transactions involving intangibles due
       to non-availability of information and reliable data required for application
       of the method, he must record reasons for non-applicability of PSM
       before considering TNMM or comparable uncontrolled price method
       (CUP) as most appropriate method depending upon facts and
       circumstances of the case.
5.     Application of Profit Split Method requires information mainly about the
       taxpayer and associated enterprises. Section 92D of the Income-tax Act,
       1961 provides for maintenance of relevant information and documents by
       the taxpayer as prescribed under rule 10D of the Rules. Therefore, there
       should be good and sufficient reason for non-availability of such
       information with the taxpayer.
6.     Depending upon facts and circumstances of the case, TPO may consider
       TNMM or CUP method as appropriate method by selecting comparables
       engaged in development of intangibles in same line of business and
       make upward adjustments taking into account transfer of intangibles
       without additional remuneration, location savings and location specific
       advantages
The above may be brought to the notice of all concerned.

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                                                                       Annexure IV

4.    SECTION 92C OF THE INCOME-TAX ACT, 1961 - TRANSFER
PRICING - COMPUTATION OF ARM'S LENGTH PRICE - CLARIFICATIONS
ON FUNCTIONAL PROFILE OF DEVELOPMENT CENTRES ENGAGED IN
CONTRACT R&D SERVICES WITH INSIGNIFICANT RISK - CONDITIONS
RELEVANT TO IDENTIFY SUCH DEVELOPMENT CENTRES
CIRCULAR NO. 3/2013 [F NO. 500/139/2012], DATED 26-3-2013 [SEE ALSO
AMENDMENT MADE BY CIRCULAR NO. 6/2013, DATED 29-6-2013]
It has been brought to the notice of CBDT that there is divergence of views
amongst the field officers and taxpayers regarding the functional profile of
development centres engaged in contract R&D services for the purposes of
transfer pricing audit. Moreover, while at times taxpayers have been insisting
that they are contract R&D service providers with insignificant risk, the TPOs are
treating them as full or significant risk-bearing entities and making transfer
pricing adjustments accordingly. The issue has been examined in CBDT. It is
hereby clarified that a development centre in India may be treated as a contract
R&D service provider with insignificant risk if the following conditions are
cumulatively complied with :
1       Foreign principal performs most of the economically significant functions
        involved in research or product development cycle whereas Indian
        development centre would largely be involved in economically
        insignificant functions;
2.      The principal provides funds/ capital and other economically significant
        assets including intangibles for research or product development and
        Indian development centre would not use any other economically
        significant assets including intangibles in research or product
        development;
3.      Indian development centre works under direct supervision of foreign
        principal who not only has capability to control or supervise but also
        actually controls or supervises research or product development through
        its strategic decisions to perform core functions as well as monitor
        activities on regular basis;
4.      Indian development centre does not assume or has no economically
        significant realized risks. If a contract shows the principal to be
        controlling the risk but conduct shows that Indian development centre is
        doing so, then the contractual terms are not the final determinant of
        actual activities. In the case of foreign principal being located in a
        country/territory widely perceived as a low or no tax jurisdiction, it will be


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

       presumed that the foreign principal is not controlling the risk. However,
       the Indian development centre may rebut this presumption to the
       satisfaction of the revenue authorities; and
5.     Indian development centre has no ownership right (legal or economic) on
       outcome of research which vests with foreign principal, and that it shall
       be evident from conduct of the parties.
The satisfaction of all the above mentioned conditions should be borne out by
the conduct of the parties and not merely by the contractual terms.
The above may be brought to the notice of all concerned.
5.    SECTION 92C OF THE INCOME-TAX ACT, 1961 - TRANSFER
PRICING - COMPUTATION OF ARM'S LENGTH PRICE - CLARIFICATIONS
ON FUNCTIONAL PROFILE OF DEVELOPMENT CENTERS ENGAGED IN
CONTRACT R&D SERVICES WITH INSIGNIFICANT RISK - CONDITIONS
RELEVANT TO IDENTIFY SUCH DEVELOPMENT CENTERS - AMENDMENT
OF CIRCULAR NO. 3/2013, DATED 26-3-2013
CIRCULAR NO.06/2013 [F NO. 500/139/2012], DATED 29-6-2013
It has been brought to the notice of CBDT that there is divergence of views
amongst the field officers and taxpayers regarding the functional profile of
development centres engaged in contract R&D services for the purposes of
determining arm's length price/transfer pricing. In some cases, while taxpayers
insist that they are contract R&D service providers with insignificant risk, the
TPOs treat them as full or significant risk-bearing entities and make transfer
pricing adjustments accordingly. The issue has been examined in the CBDT.
The Research and Development Centres set up by foreign companies can be
classified into three broad categories based on functions, assets and risk
assumed by the centre established in India. These are:
1.     Centres which are entrepreneurial in nature;
2.     Centres which are based on cost-sharing arrangements; and
3.     Centres which undertake contract research and development.
While the three categories are not water-tight compartments, it is possible to
distinguish them based on functions, assets and risk. It will be obvious that in
the first case the Development Centre performs significantly important functions
and assumes substantial risks. In the third case, it will be obvious that the
functions, assets and risk are minimal. The second case falls between the first
and the third cases.



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                                                                     Annexure IV

More often than not, the assessee claims that the Development Centre in India
must be treated as a contract R&D service provider with insignificant risk.
Consequently, the assessee claims that in such cases the Transactional Net
Margin Method (TNMM) must be adopted as the most appropriate method.
The CBDT has carefully considered the matter and lays down the following
guidelines for identifying the Development Centre as a contract R&D service
provider with insignificant risk.
1.     Foreign principal performs most of the economically significant functions
       involved in research or product development cycle either through its own
       employees or through its associated enterprises while the Indian
       Development Centre carries out the work assigned to it by the foreign
       principal. Economically significant functions would include critical
       functions such as conceptualization and design of the product and
       providing the strategic direction and framework;
2.     The foreign principal or its associated enterprise(s) provides funds/capital
       and other economically significant assets including intangibles for
       research or product development. The foreign principal or its associated
       enterprise(s) also provides a remuneration to the Indian Development
       Centre for the work carried out by the latter;
3.     The Indian Development Centre works under the direct supervision of the
       foreign principal or its associated enterprise which has not only the
       capability to control or supervise but also actually controls or supervises
       research or product development through its strategic decisions to
       perform core functions as well as monitor activities on regular basis;
4.     The Indian Development Centre does not assume or has no
       economically significant realized risks. If a contract shows that the
       foreign principal is obligated to control the risk but the conduct shows
       that the Indian Development Centre is doing so, then the contractual
       terms are not the final determinant of actual activities;
5.     In the case of a foreign principal being located in a country/territory
       widely perceived as a low or no tax jurisdiction, it will be presumed that
       the foreign principal is not controlling the risk. However, the Indian
       Development Centre may rebut this presumption to the satisfaction of the
       revenue authorities. Low tax jurisdiction shall mean any country or
       territory notified in this behalf under section 94A of the Act or any other
       country or territory that may be notified for the purpose of Chapter X of
       the Act;


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

6.      Indian Development Centre has no ownership right (legal or economic)
        on the outcome of the research which vests with the foreign principal and
        that this is evident from the contract as well as from the conduct of the
        parties.
The Assessing Officer or the Transfer Pricing Officer, as the case may be, shall
have regard to the guidelines above and shall take a decision based on the
totality of the facts and circumstances of the case. In doing so, the Assessing
Officer or the Transfer Pricing Officer, as the case may be, shall be guided by the
conduct of the parties and not merely by the terms of the contract.
The Assessing Officer or the Transfer Pricing Officer, as the case may be, shall
bear in mind the provisions of section 92C of the Act and Rule 10A to Rule 10C
of the Rules. He shall also apply the guidelines enumerated above and select the
'most appropriate method'.
The above may be brought to the notice of all concerned.
6.    Clarifications on Rollback Provisions of Advance Pricing
Agreement Scheme
Circular No. 10/2015[F.No. 500/7/2015-APA-II] DATED 10-06-2015
The Advance Pricing Agreement provisions were introduced in 2012 through
insertion of sections 92CC and 92CD in the Income-tax Act, 1961 by the Finance
Act, 2012. Subsequently, the Advance Pricing Agreement Scheme was notified
vide S.O. 2005 (E), dated 30/8/2012, thereby inserting Rules 10F to 10T and
Rule 44GA in the Income-tax Rules, 1962.
2.       Rollback provisions in the APA Scheme were introduced through
subsection (9A) inserted in section 92CC by the Finance (No. 2) Act, 2014 and
the relevant rules, namely, Rules 10MA and 10RA, have been notified recently
vide S.O. 758(E) dated 14th March, 2015 and S.O. 915(E) dated 1st April, 2015.
Subsequent to the notification of the rules, requests for clarification regarding
certain issues have been received in the Central Board of Direct Taxes. In order
to clarify such issues, the Board has decided to adopt a Question and Answer
format and the clarifications are hereby provided as below:
Q.1     Under rule 10 MA(2)(ii) there is a condition that the return of income for
the relevant roll back year has been or is furnished by the applicant before the
due date specified in Explanation 2 to sub-section (1) of section 139 of the
Income tax
Act (hereinafter referred to as the `Act'). It is not clear as to whether applicants
who have filed returns under section 139(4) or 139(5) of the Act would be eligible
for roll back.


                                        350
                                                                      Annexure IV

Answer:
The return of income under section 139(5) of the Act can be filed only when a
return under section 139(1) has already been filed. Therefore, the return of
income filed under section 139(5) of the Act, replaces the original return of
income filed under section 139(1) of the Act. Hence, if there is a return which is
filed under section 139(5) of the Act to revise the original return filed before the
due date specified in Explanation 2 to sub-section (1) of section 139, the
applicant would be entitled for rollback on this revised return of income.
However, rollback provisions will not be available in case of a return of income
filed under section 139(4) because it is a return which is not filed before the due
date.
Q.2     Rule 10MA (2)(i) mandates that the rollback provision shall apply in
respect of an international transaction that is same as the international
transaction to which the agreement (other than the rollback provision) applies. It
is not clear what is the meaning of the word "same". Further, it is not clear
whether this restriction also applies to the Functions, Assets, Risks (FAR)
analysis.
Answer:
The international transaction for which a rollback provision is to be allowed
should be the same as the one proposed to be undertaken in the future years
and in respect of which the agreement has been reached. There cannot be a
situation where rollback is finalised for a transaction which is not covered in the
agreement for future years. The term same international transaction implies that
the transaction in the rollback year has to be of same nature and undertaken with
the same associated enterprise(s), as proposed to be undertaken in the future
years and in respect of which agreement has been reached. In the context of
FAR analysis, the restriction would operate to ensure that rollback provisions
would apply only if the FAR analysis of the rollback year does not differ materially
from the FAR validated for the purpose of reaching an agreement in respect of
international transactions to be undertaken in the future years for which the
agreement applies. The word "materially" is generally being defined in the
Advance Pricing Agreements being entered into by CBDT. According to this
definition, the word "materially" will be interpreted consistently with its ordinary
definition and in a manner that a material change of facts and circumstances
would be understood as a change which could reasonably have resulted in an
agreement with significantly different terms and conditions.
Q.3     Rule 10MA (2)(iv) requires that the application for rollback provision, in
respect of an international transaction, has to be made by the applicant for all the

                                        351
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

rollback years in which the said international transaction has been undertaken by
the applicant. Clarification is required as to whether rollback has to be requested
for all four years or applicant can choose the years out of the block of four years.
Answer:
The applicant does not have the option to choose the years for which it wants to
apply for rollback. The applicant has to either apply for all the four years or not
apply at all. However, if the covered international transaction(s) did not exist in a
rollback year or there is some disqualification in a rollback year, then the
applicant can apply for rollback for less than four years. Accordingly, if the
covered international transaction(s) were not in existence during any of the
rollback years, the applicant can apply for rollback for the remaining years.
Similarly, if in any of the rollback years for the covered international
transaction(s), the applicant fails the test of the rollback conditions contained in
various provisions, then it would be denied the benefit of rollback for that rollback
year. However, for other rollback years, it can still apply for rollback.
Q.4     Rule 10 MA(3) states that the rollback provision shall not be provided in
respect of an international transaction for a rollback year if the determination of
arm's length price of the said international transaction for the said year has been
the subject matter of an appeal before the Appellate Tribunal and the Appellate
Tribunal has passed an order disposing of such appeal at any time before
signing of the agreement. Further, Rule 10 RA(4) provides that if any appeal filed
by the applicant is pending before the Commissioner (Appeals), Appellate
Tribunal or the High Court for a rollback year, on the issue which is subject
matter of the rollback provision for that year, the said appeal to the extent of the
subject covered under the agreement shall be withdrawn by the applicant.
There is a need to clarify the phrase "Tribunal has passed an order disposing of
such appeal" and on the mismatch, if any, between Rule 10MA(3) and Rule
10RA(4).
Answer:
The reason for not allowing rollback for the international transaction for which
Appellate Tribunal has passed an order disposing of an appeal is that the ITAT is
the final fact finding authority and hence, on factual issues, the matter has
already reached finality in that year. However, if the ITAT has not decided the
matter and has only set aside the order for fresh consideration of the matter by
the lower authorities with full discretion at their disposal, the matter shall not be
treated as one having reached finality and hence, benefit of rollback can still be
given. There is no mismatch between Rule 10MA(3) and Rule 10RA(4).


                                        352
                                                                       Annexure IV

Q.5      Rule 10MA(3)(ii) provides that rollback provision shall not be provided in
respect of an international transaction for a rollback year if the application of
rollback provision has the effect of reducing the total income or increasing the
loss, as the case may be, of the applicant as declared in the return of income of
the said year. It may be clarified whether the rollback provisions in such
situations can be applied in a manner so as to ensure that the returned income
or loss is accepted as the final income or loss after applying the rollback
provisions.
Answer:
It is clarified that in case the terms of rollback provisions contain specific
agreement between the Board and the applicant that the agreed determination of
ALP or the agreed manner of determination of ALP is subject to the condition
that the ALP would get modified to the extent that it does not result in reducing
the total income or increasing the total loss, as the case may be, of the applicant
as declared in the return of income of the said year, the rollback provisions could
be applied. For example, if the declared income is ` 100, the income as adjusted
by the TPO is ` 120, and the application of the rollback provisions results in
reducing the income to ` 90, then the rollback for that year would be determined
in a manner that the declared income ` 100 would be treated as the final income
for that year.
Q.6     Rule 10RA(7) states that in case effect cannot be given to the rollback
provision of an agreement in accordance with this rule, for any rollback year to
which it applies, on account of failure on the part of applicant, the agreement
shall be cancelled. It is to be clarified as to whether the entire agreement is to be
cancelled or only that year for which roll back fails.
Answer:
The procedure for giving effect to a rollback provision is laid down in Rule 10RA.
Sub-rules (2), (3), (4) and (6) of the Rule specify the actions to be taken by the
applicant in order that effect may be given to the rollback provision. If the
applicant does not carry out such actions for any of the rollback years, the entire
agreement shall be cancelled. This is because the rollback provision has been
introduced for the benefit of the applicant and is applicable at its option.
Accordingly, if the rollback provision cannot be given effect to for any of the
rollback years on account of the applicant not taking the actions specified in sub-
rules (2), (3), (4) or (6), the entire agreement gets vitiated and will have to be
cancelled.



                                        353
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

Q.7     If there is a Mutual Agreement Procedure (MAP) application already
pending for a rollback year, what would be the stand of the APA authorities?
Further, what would be the view of the APA Authorities if MAP has already been
concluded for a rollback year?
Answer:
If MAP has been already concluded for any of the international transactions in
any of the rollback year under APA, rollback provisions would not be allowed for
those international transactions for that year but could be allowed for other years
or for other international transactions for that year, subject to fulfilment of
specified conditions in Rules 10MA and 10RA. However, if MAP request is
pending for any of the rollback year under APA, upon the option exercised by the
applicant, either MAP or application for roll back shall be proceeded with for such
year.
Q.8      Rule 10MA(1) provides that the agreement may provide for determining
ALP or manner of determination of ALP. However, Rule 10MA(4) only specifies
that the manner of determination of ALP should be the same as in the APA term.
Does that mean the ALP could be different?
Answer:
Yes, the ALP could be different for different years. However, the manner of
determination of ALP (including choice of Method, comparability analysis and
Tested Party) would be same.
Q.9     Will there be compliance audit for roll back? Would critical assumptions
have to be validated during compliance audit?
Answer:
Since rollback provisions are for past years, ALP for the rollback years would be
agreed after full examination of all the facts, including validation of critical
assumptions. Hence, compliance audit for the rollback years would primarily be
to check if the agreed price or methodology has been applied in the modified
return.
Q.10 Whether applicant has an option to withdraw its rollback application? Can
the applicant accept the rollback results without accepting the APA for the future
years?
Answer:
The applicant has an option to withdraw its roll back application even while
maintaining the APA application for the future years. However, it is not possible


                                       354
                                                                        Annexure IV

to accept the rollback results without accepting the APA for the future years. It
may also be noted that the fee specified in Rule 10MA(5) shall not be refunded
even where a rollback application is withdrawn.
Q.11 For already concluded APAs, will new APAs be signed for rollback or
earlier APAs could be revised?
Answer:
The second proviso to Rule 10MA(5) provides for revision of APAs already
concluded to include rollback provisions.
Q.12 For already concluded APAs, where the modified return has already
been filed for the first year of the APA term, how will the time-limit for filing
modified return for rollback years be determined?
Answer:
The time to file modified return for rollback years will start from the date of
signing the revised APA incorporating the rollback provisions.
Q.13 In case of merger of companies, where one or more of those companies
are APA applicants, how would the rollback provisions be allowed and to which
company or companies would it be allowed?
Answer:
The agreement is between the Board and a person. The principle to be followed
in case of merger is that the person (company) who makes the APA application
would only be entitled to enter into the agreement and be entitled for the rollback
provisions in respect of international transactions undertaken by it in rollback
years. Other persons (companies) who have merged with this person (company)
would not be eligible for the rollback provisions. To illustrate, if A, B and C merge
to form C and C is the APA applicant, then the agreement can only be entered
into with C and only C would be eligible for the rollback provisions. A and B
would not be eligible for the rollback provisions. To illustrate further, if A and B
merge to form a new company C and C is the APA applicant, then nobody would
be eligible for rollback provisions.
Q.14 In case of a demerger of an APA applicant or signatory into two or more
companies (persons), who would be eligible for the rollback provisions?
Answer:
The same principle as mentioned in the previous answer, i.e., the person
(company) who makes an APA application or enters into an APA would only be
entitled for the rollback provisions, would continue to apply. To illustrate, if A has

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

applied for or entered into an APA and, subsequently, demerges into A and B,
then only A will be eligible for rollback for international transactions covered
under the APA. As B was not in existence in rollback years, availing or grant of
rollback to B does not arise.




                                      356
                                                            Annexure V
     Mandatory Communication - Relevant
         Extracts from the Code of Ethics
                                    (Eleventh edition ­ January 2009)
A Chartered Accountant in practice shall be deemed to be guilty of professional
misconduct, if he:-
Clause (8):    "accepts a position as auditor previously held by
another chartered accountant or a certified auditor who has been
issued certificate under the Restricted Certificate Rules, 1932 without
first communicating with him in writing".
It must be pointed out that professional courtesy alone is not the major
reason for requiring a member to communicate with the existing accountant
who is a member of the Institute or a certified auditor. The underlying
objective is that the member may have an opportunity to know the reasons
for the change in order to be able to safeguard his own interest, the
legitimate interest of the public and the independence of the existing
accountant. It is not intended, in any way, to prevent or obstruct the change.
When making the inquiry from the retiring auditor, the one proposed to be
appointed or already appointed should primarily find out whether there is any
professional or other reasons why he should not accept the appointment.
It is important to remember that every client has an inherent right to choose
his accountant; also that he may, subject to compliance with the- statutory
requirements in the case of limited companies, make a change whenever he
chooses, whether or not the reasons which had impelled him to do so are
good and valid. The change normally occurs where there has been a change
of venue of business and a local accountant is preferred or where the partner
who has been dealing with the client's affairs retires or dies or where
temperaments clash or the client has some good reasons to feel dissatisfied.
In such cases, the retiring auditor should always accept the situation with
good grace.
The existence of a dispute as regards the fees may be the root cause of an
auditor being changed. This would not constitute valid professional reasons
on account of which an audit should not be accepted by the member to
whom it is offered. However, in the case of an undisputed audit fees for
carrying out the statutory audit under the Companies Act, 1956 or various
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

other statutes having not been paid, the incoming auditor should not accept
the appointment unless such fees are paid. In respect of other dues, the
incoming auditor should in appropriate circumstances use his influence in
favour of his predecessor to have the disputes as regards the fees settled.
The professional reasons for not accepting an audit could be:
(i)     Non-compliance of the provisions of Sections 224 and 225 of the
        Companies Act as mentioned in clause (9);
(ii)    Non-payment of undisputed audit fees by auditees other than in case
        of sick units for carrying out the statutory audit under the Companies
        Act, 1956 or various other statutes; and
(iii)   Issuance of a qualified report.
In the first two cases, an auditor who accepts the audit would be guilty of
professional misconduct. The Council has taken the view that the provision
for audit fee made in accounts signed by both - the auditee and auditor shall
be considered as `undisputed' audit fees.
In this connection, attention of members is invited to the Council Guidelines
No. 1-CA/(7)/02/2008 dated 08.08.08 appearing in Chapter-3 of the book and
also published at page 686 of October, 2008 issue of the Journal. In the said
guidelines, Council has explained that the provision for audit fee in accounts
signed by both the auditee or the auditor shall be considered as "undisputed"
audit fee and " sick unit " shall mean where the net worth is negative. .
In the last case, however, he may accept the audit if he is satisfied that the
attitude of the retiring auditor was not proper and justified. If, on the other
hand, he feels that the retiring auditor has qualified the report for good and
valid reasons, he should refuse to accept the audit.. There is no rule, written
or unwritten, which would prevent an auditor from accepting the appointment
offered to him in these circumstances. However, before accepting the audit,
he should ascertain the full facts of the case. For nothing will bring the
profession to disrepute so much as the knowledge amongst the public that if
an auditor is found to be "inconvenient" by the client, he could readily be
replaced by another who would not displease the client and this point cannot
be too over-emphasized.
What should be the correct procedure to adopt when a prospective client tells
you that he wants to change his auditor and wants you to take up his work?
There being two persons involved, the company and the old auditor, the
former should be asked whether the retiring auditor has been informed of the
intention to change. If the answer is in the affirmative, then a communication

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                                                                    Annexure V

should be addressed to the retiring auditor. If, however, it is learnt that the
old auditor has not been informed, and the client is not willing to make the
first move, it would be necessary to ask him the reason for the proposed
change. If there is no valid reason for a change, it would be healthy practice
not to accept the audit. If he decides to accept the audit he should address a
communication to the retiring auditor.
As stated earlier, the object of the incoming auditor, in communicating with
the retiring auditor is to ascertain from him whether, there are any
circumstances which warrant him not to accept the appointment. For
example, whether the previous auditor has been changed on account of
having qualified his report or he had expressed a wish not to continue on
account of something inherently wrong with the administration of the
business. The retiring auditor may even give out information regarding the
condition of the accounts of the client or the reason that impelled him to
qualify his report. In all these cases it would be essential for the incoming
auditor to carefully consider the facts before deciding whether or not he
should accept the audit, and should he do so, he must also take into account
the information while discharging his duties and responsibilities
Sometimes, the retiring auditor fails without justifiable cause except a feeling
of hurt because of the change, to respond to the communication of the
incoming auditor. So that it may not create a deadlock, the auditor appointed
can act, after waiting for a reasonable time for a reply.
The Council has taken the view that a mere posting of a letter "under
certificate of posting" is not sufficient to establish communication with the
retiring auditor unless there is some evidence to show that the letter has in
fact reached the person communicated with. A Chartered Accountant who
relies solely upon a letter posted "under certificate of posting" therefore does
so at his own risk.
The view taken by the Council has been confirmed in a decision by the
Rajasthan High Court in J.S. Bhati v.s. The Council of the Institute of
Chartered Accountants of India and another. (Pages 72-79 of Vol. V of
Disciplinary Cases published by the Institute ­ Judgement delivered on 29th
August, 1975). The following observations of the Court are relevant in this
context :
"Mere obtaining a certificate of posting in my opinion does not fulfil the
requirements of Clause (8) of Schedule I as the presumption under Section
114 of the Evidence Act that the letter in due course reached the addressee
cannot replace that positive degree of proof of the delivery of the letter to the

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

addressee which the letters of the law in that case required. The expression
`in ` communication with' when read in the light of the instructions contained
in the booklet `Code of Conduct' (now Code of Ethics) cannot be interpreted
in any other manner but to mean that there should be positive evidence of
the fact that the communication addressed to the outgoing auditor by the
incoming auditor reached his hands. Certificate of posting of a letter cannot,
in the circumstances, be taken as positive evidence of its delivery to the
addressee.""
Members should therefore communicate with a retiring auditor in such a
manner as to retain in their hands positive evidence of the delivery of the
communication to the addressee. In the opinion of the Council,
communication by a letter sent "Registered Acknowledgment due" or by hand
against a written acknowledgment would in the normal course provide such
evidence.
The Council is of the opinion that it would be a healthy practice if the practice
to communicate with the member who had done the work previously is
followed in every case where a Chartered Accountant is required to give a
certificate or in respect of a verification of the books of account for special
purpose as well as in cases where he is appointed as a Liquidator, Trustee
or Receiver and his predecessor was a Chartered Accountant.
As a matter of professional courtesy and professional obligation it is
necessary for the new auditor appointed to act jointly with the earlier auditor
and to communicate with such earlier auditor.
It would also be a healthy practice if a tax auditor appointed for conducting
special audit under the Income-tax Act, communicates with the member who
has conducted the statutory audit.
It is desirable that a member, on receiving communication from the auditor
who has been appointed in his place, should send a reply to him as soon as
possible setting out in detail the reason, which according to him had given
rise to the change and other attendant circumstances but without disclosing
any information as regards the affairs of the client which he is not competent
to do.
The Council has taken the view that it is not obligatory for the auditor
appointed to conduct a Special Audit under Section 233A of Companies Act,
1956 to communicate with the previous auditor who had conducted the
regular audit for the period covered by the Special Audit.


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                                                                   Annexure V

The Council has also laid down the detailed guidelines on the subject as
under:
1.    The requirement for communicating with the previous auditor being a
      chartered accountant in practice would apply to all types of audit viz.,
      statutory audit, tax audit, internal audit, concurrent audit or any other
      kind of audit.
2.    Various doubts have been raised by the members about the terms
      "audit ", "previous auditor ", "Certificate " and "report", normally while
      interpreting the aforesaid Clause (8). These terms need to be
      clarified.
3.    As per para 2 of the Institute's publication viz., Standard on Auditing
      (SA) 200, "Basic Principles Governing an Audit" , an "audit" is the
      independent examination of financial information of any entity,
      whether profit oriented or not, and irrespective of its size or legal
      form, when such an examination is conducted with a view to
      expressing an opinion thereon.
4.    The term "previous auditor " means the immediately preceding auditor
      who held same or similar assignment comprising same/similar scope
      of work. For example, a chartered accountant in practice appointed
      for an assignment of physical verification of inventory of raw
      materials, spares, stores and finished goods, before acceptance of
      appointment, must communicate with the previous auditor being a
      Chartered Accountant in practice who was holding the appointment of
      physical verification of inventory of raw materials, stores, finished
      goods and fixed assets. The mandatory communication with the
      previous auditor being a Chartered Accountant is required even in a
      case where the previous auditor happens to be an auditor for a year
      other than the immediately preceding year.
5.    As explained in para 2.2 of the Institute's publication viz., `Guidance
      Note on Audit Report and Certificates for Special Purposes', a
      "certificate " is a written confirmation of the accuracy of the facts
      stated therein and does not involve any estimate or opinion. A
      "report", on the other hand, is a formal statement usually made after
      an enquiry, examination or review of specified matters under report
      and includes the reporting auditor 's opinion thereon. Thus, when a
      reporting auditor issues a certificate, he is responsible for the factual
      accuracy of what is stated therein. On the other hand, when a


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

       reporting auditor gives a report, he is responsible for ensuring that
       the report is based on factual data, that his opinion is in due
       accordance with facts, and that it is arrived at by the application of
       due care and skill.
6.     A communication is mandatorily required for all types of audit/report
       where the previous auditor is a Chartered Accountant. For
       certification, it would be healthy practice to communicate. In case of
       assignments done by other professionals not being Chartered
       Accountants, it would also be a healthy practice to communicate.
7.      Although the mandatory requirement of communication with previous
       auditor being Chartered Accountant applies, in uniform manner, to
       audits of both government and non-government entities, yet in the
       case of audit of government Companies/banks or their branches, if
       the appointment is made well in time to enable the obligation cast
       under this clause to be fulfilled, such obligation must be complied
       with before accepting the audit. However, in case the time schedule
       given for the assignment is such that there is no time to wait for the
       reply from the outgoing auditor, the incoming auditor may give a
       conditional acceptance of the appointment and commence the work
       which needs to be attended to immediately after he has sent the
       communication to the previous auditor in accordance with this clause.
       In his acceptance letter, he should make clear to the client that his
       acceptance of appointment is subject to professional objections, if
       any, from the previous auditors and that he will decide about his final
       acceptance after taking into account the information received from
       the previous auditor.




                                    362
                                                          Annexure VI
       Revision of recommended scale of fee
              chargeable for the professional
             assignments done by Chartered
                                 Accountants
An announcement hosted by Committee for Capacity Building of CA Firms
and Small and Medium Practitioners-Last updated on 12TH October, 2015 :
               PARTICULARS                                Rates
                                            For Class A           For Class B
                                               Cities                Cities
                                              Revised            Revised
                                              Minimum            Minimum
                                           Recommended        Recommended
                                            scale of Fees      scale of Fees
 I)      ADVISING ON DRAFTING OF
         DEEDS/AGREEMENTS
         (a)    i) Partnership Deed        ` 10,500/- &      ` 7,000/- &
                                           Above             Above
                ii) Partnership Deed       ` 15,000/- &      ` 10,000/- &
                (With consultation & Tax   Above             Above
                Advisory)
         (b)    Filing of Forms with       ` 4,500/- &       ` 3,000/- &
                Registrar of Firms         Above             Above
                                           Per Form          Per Form
         (c)    Supplementary /            ` 9,000/- &       ` 6,000/- &
                Modification in            Above             Above
                Partnership Deed
 II)     INCOME TAX
         A.     Filing of Return of
                Income
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

              PARTICULARS                                     Rates
                                                For Class A           For Class B
                                                   Cities                Cities
                                                  Revised            Revised
                                                  Minimum            Minimum
                                               Recommended        Recommended
                                                scale of Fees      scale of Fees
        I)     For Individuals/ HUFs
               etc.
               (a) Filing of Return of         ` 6,000/- &       ` 4,000/- &
               Income with                     Above             Above
               Salary/Other
               Sources/Share of Profit
               (b) Filing of Return of
               Income with detailed
               Capital Gain working
               (i) Less than 10                ` 9,000/- &       ` 6,000/- &
               Transactions (For               Above             Above
               Shares & Securities)
               (ii) More than 10               ` 15,000/- &      ` 10,000/- &
               Transactions (For               Above             Above
               Shares & Securities)
               (c) Filing of Return of         ` 30,000/- &      ` 20,000/- &
               Income for Capital Gain         Above             Above
               on Immovable property
               (d) Filing of Return of         ` 10,500/- &      ` 7,000/- &
               Income with Preparation         Above             Above
               of Bank Summary,
               Capital A/c & Balance
               Sheet.


        II)    (a) Partnership                 ` 12,000/- &      ` 8,000/- &
               Firms/Sole Proprietor           Above             Above
               with Advisory Services
               (b) Minor's I.T.                ` 6,000/- &       ` 4,000/- &


                                         364
                                                              Annexure VI

     PARTICULARS                                    Rates
                                      For Class A           For Class B
                                         Cities                Cities
                                        Revised            Revised
                                        Minimum            Minimum
                                     Recommended        Recommended
                                      scale of Fees      scale of Fees
      Statement                      Above             Above
      (c) Private Ltd. Company
      :
      (i) Active                     ` 22,500/- &      ` 15,000/- &
                                     Above             Above
      (ii) Defunct                   ` 10,500/- &      ` 7,000/- &
                                     Above             Above
      (d) Public Ltd. Company
      (i) Active                     ` 60,000/- &      ` 40,000/- &
                                     Above             Above
      (ii) Defunct                   ` 22,500/- &      ` 15,000/- &
                                     Above             Above
B.    Filing of Forms Etc.           (Quarterly        (Quarterly
                                     Fees)             Fees)
      (a) Filing of TDS/TCS
      Return (per Form)
      (i) With 5 or less Entries     ` 3,000/- &       ` 2,000/- &
                                     Above             Above
      (ii) With more than 5          ` 7,500/- &       ` 5,000/- &
      Entries                        Above             Above
      (b) Filing of Form No.         ` 3,000/- &       ` 2,000/- &
      15-H/G ( per Set)              Above             Above
      (c) Form No. 49-A/49-B         ` 3,000/- &       ` 2,000/- &
                                     Above             Above
      (d) Any other Forms filed      ` 3,000/- &       ` 2,000/- &
      under the Income Tax           Above             Above
      Act

                               365
Guidance Note on Report under Section 92E of the Income-tax Act, 1961

             PARTICULARS                                    Rates
                                              For Class A           For Class B
                                                 Cities                Cities
                                                Revised            Revised
                                                Minimum            Minimum
                                             Recommended        Recommended
                                              scale of Fees      scale of Fees
        C.    Certificate
              Obtaining Certificate          ` 12,000/- &      ` 8,000/- &
              from Income Tax                Above             Above
              Department
        D.    Filing of Appeals Etc.
              (a) First Appeal               ` 30,000/- &      ` 20,000/- &
               Preparation of                Above             Above
              Statement of Facts,
              Grounds of Appeal, Etc.
              (b) Second Appeal              ` 60,000/- &      ` 40,000/- &
              (Tribunal)                     Above             Above
        E.    Assessments Etc.
              (a) Attending Scrutiny
              Assessment/Appeal
              (i) Corporate                  See Note 1        See Note 1
              (ii) Non Corporate             ` 30,000/- &      ` 20,000/- &
                                             Above             Above
              (b) Attending before           ` 9,000/- &       ` 6,000/- &
              Authorities                    Above             Above
                                             Per Visit         Per Visit
              (c) Attending for              ` 6,000/- &       ` 4,000/- &
              Rectifications/Refunds/A       Above             Above
              ppeal effects Etc.             Per Visit         Per Visit
              (d) Income Tax Survey          ` 75,000/- &      ` 50,000/- &
                                             Above             Above
              (e) T.D.S. Survey              ` 45,000/- &      ` 30,000/- &
                                             Above             Above


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             PARTICULARS                                    Rates
                                              For Class A           For Class B
                                                 Cities                Cities
                                                Revised            Revised
                                                Minimum            Minimum
                                             Recommended        Recommended
                                              scale of Fees      scale of Fees
              (f) Income Tax Search          See Note 1        See Note 1
              and Seizure
              (g) Any other                  See Note 1        See Note 1
              Consultancy


III)   CHARITABLE TRUST
       (a)    (i) Registration Under         ` 22,500/- &      ` 15,000/- &
              Local Act                      Above             Above
              (ii) Societies Registration    ` 30,000/- &      ` 20,000/- &
              Act                            Above             Above
       (b)    Registration Under             ` 22,500/- &      ` 15,000/- &
              Income Tax Act                 Above             Above
       (c)    Exemption Certificate          ` 18,000/- &      ` 12,000/- &
              U/s 80G of Income Tax          Above             Above
              Act
       (d)    Filing Objection               ` 9,000/- &       ` 6,000/- &
              Memo/other Replies             Above             Above
       (e)    Filing of Change Report        ` 9,000/- &       ` 6,000/- &
                                             Above             Above
       (f)    Filing of Annual Budget        ` 9,000/- &       ` 6,000/- &
                                             Above             Above
       (g)    Attending before Charity       ` 7,500/- &       ` 5,000/- &
              Commissioner including         Above             Above
              for Attending Objections       per visit         per visit
       (h)    (i) F.C.R.A. Registration      ` 30,000/- &      ` 20,000/- &
                                             Above             Above
              (ii) F.C.R.A. Certification    ` 7,500/- &       ` 5,000/- &

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

              PARTICULARS                                     Rates
                                                For Class A           For Class B
                                                   Cities                Cities
                                                  Revised            Revised
                                                  Minimum            Minimum
                                               Recommended        Recommended
                                                scale of Fees      scale of Fees
                                               Above             Above


 IV)    COMPANY LAW AND LLP
        WORK
        (a)    Filing Application for          ` 6,000/- &       ` 4,000/- &
               Name Approval                   Above             Above
        (b)    Incorporation of a              ` 30,000/- &      ` 20,000/- &
               Private Limited                 Above             Above
               Company/LLP
        (c)    Incorporation of a Public       ` 60,000/- &      ` 40,000/- &
               Limited Company                 Above             Above
        (d)    (i) Company's/LLP ROC           See Note 1        See Note 1
               Work, Preparation of
               Minutes, Statutory
               Register & Other
               Secretarial Work
               (ii) Certification (Per         ` 9,000/- &       ` 6,000/- &
               Certificate)                    Above             Above
        (e)    Filing Annual Return Etc.       ` 9,000/- &       ` 6,000/- &
                                               Above             Above
                                               per Form          per Form
        (f)    Filing Other Forms Like :       ` 3,000/- &       ` 2,000/- &
               F-32, 18, 2 etc.                Above per         Above per
                                               Form              Form
        (g)    Increase in Authorised
               Capital
               Filing of F-5, F-23,            ` 22,500/- &      ` 15,000/- &
               preparation of Revised          Above             Above

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                                                                    Annexure VI

           PARTICULARS                                    Rates
                                            For Class A           For Class B
                                               Cities                Cities
                                              Revised            Revised
                                              Minimum            Minimum
                                           Recommended        Recommended
                                            scale of Fees      scale of Fees
            Memorandum of
            Association/Article of
            Association/LLP
            Agreement
     (h)    DPIN/DIN per                   ` 3,000/- &       ` 2,000/- &
            Application                    Above             Above
     (i)    Company Law                    See Note 1        See Note 1
            Consultancy including
            Petition drafting
     (j)    Company Law                    See Note 1        See Note 1
            representation including
            LLP before RD and CLB
     (k)    ROC Representation             See Note 1        See Note 1


V)   V.A.T./ PROFESSIONAL TAX
     A.     Registration Work
            (a) Registration Under
            V.A.T. & C.S.T.                See Note 1        See Note 1
            Corporate Non                  ` 15,000/- &      ` 10,000/- &
            Corporate                      Above             Above
            (b) Professional Tax           ` 6,000/- &       ` 4,000/- &
            Registration (PTR)             Above             Above
            (c) Professional Tax           ` 3,000/- &       ` 2,000/- &
            Enrollment (per                Above             Above
            Application)


     B.     Filing of Return (V.A.T.)


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

             PARTICULARS                                      Rates
                                              For Class A             For Class B
                                                 Cities                  Cities
                                                Revised              Revised
                                                Minimum              Minimum
                                             Recommended          Recommended
                                              scale of Fees        scale of Fees
              (a) Monthly Challans           ` 3,000 + (Per      ` 2,000/- + (Per
              with Annual Return             Month)              Month)
              (b) Quarterly Challans         ` 4,500 + (Per      ` 3,000/- + (Per
              with Annual Return             Quarter)            Quarter)
              (c) Six Monthly Challans       ` 6,000 + (Per 6    ` 4,000/- + (Per
              with Annual Return             Months)             6 Months)
              (d) Yearly Composition         ` 9,000/- &         ` 6,000/- &
              Return                         Above               Above


        C.    Assessments/Appeals
              (a) Attending                  ` 15,000/- +        ` 10,000/- +
              V.A.T./Commercial Tax          7,500/- (Per        5,000/-(Per
              Assessments                    Visit)              Visit)
              (b) Attending                  ` 15,000/- +        ` 10,000/- +
              V.A.T./Commercial Tax          9,000/- (Per        6,000/-(Per
              Appeals                        Visit)              Visit)
        D.    Filing of Appeal/Appeals
              Drafting
              (a) First Appeal (AC/DC)       ` 15,000/- &        ` 10,000/- &
                                             Above               Above
              (b) Second Appeal              ` 22,500/- &        ` 15,000/- &
                                             Above               Above


        E.    Miscellaneous Work
              (a) Professional Tax           ` 7,500/- &         ` 5,000/- &
              Returns & Assessment           Above               Above
              (b) Obtaining C/F/H            ( Per               ( Per

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                                                                 Annexure VI

         PARTICULARS                                   Rates
                                         For Class A           For Class B
                                            Cities                Cities
                                           Revised            Revised
                                           Minimum            Minimum
                                        Recommended        Recommended
                                         scale of Fees      scale of Fees
          Forms under                   Application)      Application)
          V.A.T./Commercial Tax
           (i) First Time               ` 6,000/- &       ` 4,000/- &
                                        Above             Above
           (ii) Renewal                 ` 3,000/- &       ` 2,000/- &
                                        Above             Above


VI)   AUDIT AND OTHER
      ASSIGNMENTS
          Rate per day would
          depend on the
          complexity of the work
          and the number of days
          spent by each person
          (i) Principal                 ` 15,000/- &      ` 10,000/- &
                                        Above per day     Above
                                                          per day
          (ii) Qualified Assistants     ` 7,500/- &       ` 5,000/- &
                                        Above             Above
                                        per day           per day
          (iii) Semi Qualified          ` 3,000/- &       ` 2,000/- &
          Assistants                    Above             Above per day
                                        per day
          (iv) Other Assistants         ` 1,500/- &       ` 1,000/- &
                                        Above             Above
                                        per day           per day
          Subject to minimum
          indicative Fees as under:
          (i) Tax Audit                 ` 37,500/- &      ` 25,000/- &

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

           PARTICULARS                                      Rates
                                              For Class A           For Class B
                                                 Cities                Cities
                                                Revised            Revised
                                                Minimum            Minimum
                                             Recommended        Recommended
                                              scale of Fees      scale of Fees
                                             Above             Above
             (ii) Company Audit
             (a) Small Pvt. Ltd. Co.         ` 45,000/- &      ` 30,000/- &
             (Turnover up to ` 2             Above             Above
             Crore)
             (b) Medium Size Pvt.            ` 75,000/- &      ` 50,000/- &
             Ltd. Co./ Public Ltd. Co.       Above             Above
             (c) Large Size Pvt. Ltd.        See Note 1        See Note 1
             Co./Public Ltd. Co.
             (iii) V.A.T. Audit              ` 22,500/- &      ` 15,000/- &
                                             Above             Above
             (iv) Review of TDS              ` 22,500/- &      ` 15,000/- &
             Compliance                      Above             Above
             (v) Transfer Pricing Audit      See Note 1        See Note 1


 VII)   INVESTIGATION,
        MANAGEMENT SERVICES
        OR SPECIAL ASSIGNMENTS
             Rate per day would
             depend on the
             complexity of the work
             and the number of days
             spent by each person
             (a) Principal                   ` 30,000/- &      ` 20,000/- &
                                             Above + per       Above + per
                                             day charge        day charge
             (b) Qualified Assistant         ` 15,000/- &      ` 10,000/- &


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                                                                      Annexure VI

              PARTICULARS                                   Rates
                                             For Class A            For Class B
                                                Cities                 Cities
                                               Revised             Revised
                                               Minimum             Minimum
                                            Recommended         Recommended
                                             scale of Fees       scale of Fees
                                            Above + per        Above + per
                                            day charge         day charge
               (c) Semi Qualified           ` 7,500/- &        ` 5,000/- &
               Assistant                    Above + per        Above + per
                                            day charge         day charge


VIII)   CERIFICATION WORK
        (a)    Issuing Certificates         See Note 1         See Note 1
               under the Income Tax
               Act i.e. U/s 80IA/80IB/10
               A/10B & other
               Certificates
        (b)    Other Certificates
               For LIC/Passport/Credit      ` 7,500/- &        ` 5,000/- &
               Card/Etc.                    Above              Above
               Other Attestation (True      ` 1,500/- per      ` 1,000/- per
        (c)    Copy)                        form               Form
        (d)    Net worth Certificate for    ` 1,5000/- &       ` 10,000/- &
               person going abroad          Above              Above


IX)     WEALTH TAX
        (a)    Per statement                ` 15,000/- &       ` 10,000/- &
                                            Above              Above
        (b)    Statement & Filing           ` 20,000/- &       ` 15,000/- &
               Return                       Above              Above



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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

              PARTICULARS                                     Rates
                                                For Class A           For Class B
                                                   Cities                Cities
                                                  Revised            Revised
                                                  Minimum            Minimum
                                               Recommended        Recommended
                                                scale of Fees      scale of Fees
 X)     CONSULTATION &
        ARBITRATION
               Rate per hour would
               depend on the
               complexity of the work
               and the number of hours
               agent by each person.
               (a) Principal                   ` 30,000/- &      ` 20,000/- &
                                               Above(initial     Above(initial
                                               fees) +           fees) +
                                               additional fees   additional fees
                                               @ ` 7,500/- &     @ ` 5,000/- &
                                               Above per hour    Above per hour
               (b) Qualified Assistant         ` 5,300/- &       ` 3,500/- &
                                               Above per hour    Above per hour
               (c) Semi Qualified              ` 2,300/- &       ` 1,500/- &
               Assistant                       Above per hour    Above per hour


 XI)    NBFC/RBI MATTERS
        (a)    NBFC Registration with          See Note 1        See Note 1
               RBI
        (b)    Other Returns                   ` 15,000/- &      ` 10,000/- &
                                               Above             Above


 XII)   SERVICE TAX
        (a)    Registration                    ` 15,000/- &      ` 10,000/- &


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                                                                        Annexure VI

              PARTICULARS                                     Rates
                                                For Class A           For Class B
                                                   Cities                Cities
                                                  Revised            Revised
                                                  Minimum            Minimum
                                               Recommended        Recommended
                                                scale of Fees      scale of Fees
                                               Above             Above
        (b)    Registration with               See Note 1        See Note 1
               Consultation
        (c)    Tax Advisory &                  See Note 1        See Note 1
               Consultation i.e. about
               value, taxability,
               classification etc.
        (d)    Monthly Challan with            ` 15,000/- &      ` 10,000/- &
               Half Yearly Return              Above + ( `       Above + ( ` 2
                                               3,000/- Per       ,000/- Per
                                               Month)            Month)
        (e)    Quarterly Challan with          ` 15,000/- &      ` 10,000/- &
               Half Yearly Return              Above + ( `       Above + ( ` 3
                                               4,500/- Per       ,000/- Per
                                               Quarter)          Quarter)
        (f)    Adjudication                    ` 45,000/- &      ` 30,000/- &
                                               Above             Above
        (g)    Appeal & show cause             ` 30,000/- &      ` 20,000/- &
               notice drafting/ reply          Above             Above

XIII)   FEMA MATTERS
        1  Filing Declaration with             ` 30,000/- &      ` 20,000/- &
           RBI in relation to                  Above             Above
           transaction by
           NRIs/OCBs
        2  Obtaining Prior                     ` 45,000/- &      ` 30,000/- &
           Permissions from RBI for            Above             Above
           Transaction with
           NRIs/OCBs


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

                PARTICULARS                                    Rates
                                                 For Class A           For Class B
                                                    Cities                Cities
                                                   Revised            Revised
                                                   Minimum            Minimum
                                                Recommended        Recommended
                                                 scale of Fees      scale of Fees
          3      Technical Collaboration:
                 Advising, obtaining RBI        See Note 1        See Note 1
                 permission, drafting and
                 preparing technical
                 collaboration agreement
                 and incidental matters
          4      Foreign Collaboration:
                 Advising, obtaining RBI        See Note 1        See Note 1
                 permission, drafting and
                 preparing technical
                 collaboration agreement
                 and incidental matters
                 (incl. Shareholders
                 Agreement)
          5      Advising on non                See Note 1        See Note 1
                 Resident Taxation
                 Matters including Double
                 Tax Avoidance
                 Agreements including
                 FEMA


 XIV)     PROJECT FINANCING
          (a)    Preparation of CMA Data        See Note 1        See Note 1
          (b)    Services relating to           See Note 1        See Note 1
                 Financial sector
Notes:
1)       Fees to be charged depending on the complexity and the time spent
         on the particular assignment.


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                                                                    Annexure VI

2)     The above recommended minimum scale of fees is as recommended
       by the Committee for Capacity Building of CA Firms & Small and
       Medium Practitioners (CCBCAF&SMP) of ICAI and duly considered
       by the council.
3)     The aforesaid table states recommendatory minimum scale of fees
       works out by taking into account average time required to complete
       such assignments. However, members are free to charge varying
       rates depending upon the nature and complexity of assignment and
       time involved in completing the same.
4)     Office time spent in travelling & out-of-pocket expenses would be
       chargeable. The Committee issues for general information the above
       recommended scale of fees which it considers reasonable under
       present conditions. It will be appreciated that the actual fees charged
       in individual cases will be matter of agreement between the member
       and the client.
5)     Service Tax should be collected separately wherever applicable.
6)     The Committee also recommends that the bill for each service should
       be raised separately and immediately after the services are rendered.
7)     "Class A Cities here includes Delhi, Mumbai, Calcutta, Chennai,
       Pune, Hyderabad, Bangalore and Ahmedabad.
Class B Cities includes all other cities not included in ""Class A""."
8)     The amount charged will be based on the location of the service
       provider.
Please note the above mentioned rates are as per the data available on ICAI
website at below link:
http://www.icai.org/new_post.html?post_id=7252




                                       377
                                                                                         Annexure VII
Standard on Auditing (SA) 610 (Revised)
    Using the Work of Internal Auditors
                                                       Contents
                                                                                                       Paragraph(s)
Scope of this SA ................................................................................................... 1-5
Relationship between Revised SA 315 and SA 610 (Revised) ....................... 6-10
The External Auditor 's Responsibility for the Audit ............................................ 11
Effective Date ........................................................................................................ 12
Objectives ........................................................................................................... .13
Definitions .............................................................................................................. 14
Requirements
Determining Whether, in Which Areas, and to What Extent the
Work of the Internal Audit Function Can Be Used ........................................... 15-20
Using the Work of the Internal Audit Function ............................................... 21-25
Determining Whether, in Which Areas, and to What Extent Internal
Auditors Can Be Used to Provide Direct Assistance ...................................... 26-32
Using Internal Auditors to Provide Direct Assistance .................................... 33-35
Documentation .................................................................................................. 36-37
Application and Other Explanatory Material
Definition of Internal Audit Function ............................................................... A1-A4
Determining Whether, in Which Areas, and to What Extent the
Work of the Internal Audit Function Can Be Used ...................................... A5-A23
Using the Work of the Internal Audit Function ........................................... A24-A30
Determining Whether, in Which Areas, and to What Extent Internal
Auditors Can Be Used to Provide Direct Assistance .................................. A31-A39
Using Internal Auditors to Provide Direct Assistance ............................... A40-A41
Standard on Auditing (SA) 610 (Revised ), Using the Work of Internal Auditors,
should be read in conjunction with SA 200, Overall Objectives of the
Independent Auditor and the Conduct of an Audit in Accordance with Standards
on Auditing.
                                                                    Annexure VII

Introduction
Scope of this SA
1.     This Standard on Auditing (SA) deals with the external auditor 's
responsibilities if using the work of internal auditors. This includes (a) using
the work of the internal audit function in obtaining audit evidence and (b)
using internal auditors to provide direct assistance under the direction,
supervision and review of the external auditor.
2.      This SA does not apply if the entity does not have an internal audit
function. (Ref: Para. A2)
3.      If the entity has an internal audit function, the requirements in this SA
relating to using the work of that function do not apply if:
(a)     The responsibilities and activities of the function are not relevant to
        the audit; or
(b)     Based on the auditor 's preliminary understanding of the function
        obtained as a result of procedures performed under SA 315,1 the
        external auditor does not expect to use the work of the function in
        obtaining audit evidence.
Nothing in this SA requires the external auditor to use the work of the internal
audit function to modify the nature or timing, or reduce the extent, of audit
procedures to be performed directly by the external auditor; it remains a
decision of the external auditor in establishing the overall audit strategy.
4.     Furthermore, the requirements in this SA relating to direct assistance
do not apply if the external auditor does not plan to use internal auditors to
provide direct assistance.
5.      In some cases, the external auditor may be prohibited, or restricted to
some extent, by law or regulation from using the work of the internal audit
function or using internal auditors to provide direct assistance. The SAs do
not override laws or regulations that govern an audit of financial statements.2
Such prohibitions or restrictions will therefore not prevent the external auditor
from complying with the SAs. (Ref: Para. A31)

1
   Please see the conforming amendments to Revised SA 315, Identifying and
Assessing the Risks of Material Misstatement through Understanding the Entity and
Its Environment, arising pursuant to issuance of this SA 610 (Revised). These are
given at the end of the document.
2
  SA 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit
in Accordance with Standards on Auditing, paragraph A55.

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961




Relationship between SA 315 and SA 610
(Revised)
6.      Many entities establish internal audit functions as part of their internal
control and governance structures. The objectives and scope of an internal
audit function, the nature of its responsibilities and its organizational status,
including the function's authority and accountability, vary widely and depend
on the size and structure of the entity and the requirements of management
and, where applicable, those charged with governance.
7.      SA 315 addresses how the knowledge and experience of the internal
audit function can inform the external auditor 's understanding of the entity
and its environment and identification and assessment of risks of material
misstatement. SA 3153 also explains how effective communication between
the internal and external auditors also creates an environment in which the
external auditor can be informed of significant matters that may affect the
external auditor 's work.
8.       Depending on whether the internal audit function's organizational
status and relevant policies and procedures adequately support the
objectivity of the internal auditors, the level of competency of the internal
audit function, and whether the function applies a systematic and disciplined
approach, the external auditor may also be able to use the work of the
internal audit function in a constructive and complementary manner. This SA
addresses the external auditor 's responsibilities when, based on the external
auditor 's preliminary understanding of the internal audit function obtained as
a result of procedures performed under SA 315, the external auditor expects
to use the work of the internal audit function as part of the audit evidence
obtained.4 Such use of that work modifies the nature or timing, or reduces the
extent, of audit procedures to be performed directly by the external auditor.
9.    In addition, this SA also addresses the external auditor 's
responsibilities if considering using internal auditors to provide direct

3
   Please see the conforming amendments to Revised SA 315, Identifying and
Assessing the Risks of Material Misstatement through Understanding the Entity and
Its Environment, arising pursuant to issuance of this SA 610 (Revised). These are
given at the end of the document. (Para A116 of SA 315 in those conforming
amendments)
4
  See paragraphs 15­25.

                                      380
                                                                    Annexure VII

assistance under the direction, supervision and review of the external
auditor.
10.     There may be individuals in an entity that perform procedures
similar to those performed by an internal audit function. However, unless
performed by an objective and competent function that applies a systematic
and disciplined approach, including quality control, such procedures would be
considered internal controls and obtaining evidence regarding the
effectiveness of such controls would be part of the auditor 's responses to
assessed risks in accordance with SA 330.5

The External Auditor's Responsibility for the
Audit
11.     The external auditor has sole responsibility for the audit opinion
expressed, and that responsibility is not reduced by the external auditor 's use
of the work of the internal audit function or internal auditors to provide direct
assistance on the engagement. Although they may perform audit procedures
similar to those performed by the external auditor, neither the internal audit
function nor the internal auditors are independent of the entity as is required
of the external auditor in an audit of financial statements in accordance with
SA 200.6 This SA, therefore, defines the conditions that are necessary for the
external auditor to be able to use the work of internal auditors. It also defines
the necessary work effort to obtain sufficient appropriate evidence that the
work of the internal audit function, or internal auditors providing direct
assistance, is adequate for the purposes of the audit. The requirements are
designed to provide a framework for the external auditor 's judgments
regarding the use of the work of internal auditors to prevent over or undue
use of such work.

Effective Date
12.    This SA is effective for audits of financial statements for periods
beginning on or after 01st April, 2016.

Objectives
13.       The objectives of the external auditor, where the entity has an internal

5
    SA 330,The Auditor' s Responses to Assessed Risks.
6
    SA 200, paragraph 14.

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

audit function and the external auditor expects to use the work of the function
to modify the nature or timing, or reduce the extent, of audit procedures to be
performed directly by the external auditor, or to use internal auditors to
provide direct assistance, are:
(a)    To determine whether the work of the internal audit function or direct
       assistance from internal auditors can be used, and if so, in which
       areas and to what extent; and having made that determination:
(b)    If using the work of the internal audit function, to determine whether
       that work is adequate for purposes of the audit; and
(c)    If using internal auditors to provide direct assistance,              to
       appropriately direct, supervise and review their work.

Definitions
14.     For purposes of the SAs, the following terms have the meanings
attributed below:
(a)    Internal audit function ­ A function of an entity that performs
       assurance and consulting activities designed to evaluate and
       improve the effectiveness of the entity's governance, risk
       management and internal control processes. (Ref: Para. A1­A4)
(b)    Direct assistance ­ The use of internal auditors to perform audit
       procedures under the direction, supervision and review of the external
       auditor.

Requirements
Determining Whether, in Which Areas, and to What Extent the Work of
the Internal Audit Function Can Be Used
Evaluating the Internal Audit Function
15.     The external auditor shall determine whether the work of the internal
audit function can be used for purposes of the audit by evaluating the
following:
(a)    The extent to which the internal audit function's organizational status
       and relevant policies and procedures support the objectivity of the
       internal auditors; (Ref: Para. A5­A9)
(b)    The level of competence of the internal audit function; and (Ref: Para.
       A5­A9)


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                                                                  Annexure VII

(c)    Whether the internal audit function applies a systematic and
       disciplined approach, including quality control. (Ref: Para. A10­A11)
16.     The external auditor shall not use the work of the internal audit
function if the external auditor determines that:
(a)    The function's organizational status and relevant policies and
       procedures do not adequately support the objectivity of internal
       auditors;
(b)    The function lacks sufficient competence; or
(c)    The function does not apply a systematic and disciplined approach,
       including quality control. (Ref: Para. A12­A14)
Determining the Nature and Extent of Work of the Internal Audit
Function that Can Be Used
17.      As a basis for determining the areas and the extent to which the work
of the internal audit function can be used, the external auditor shall consider
the nature and scope of the work that has been performed, or is planned to
be performed, by the internal audit function and its relevance to the external
auditor 's overall audit strategy and audit plan. (Ref: Para. A15­A17)
18.     The external auditor shall make all significant judgments in the audit
engagement and, to prevent undue use of the work of the internal audit
function, shall plan to use less of the work of the function and perform more
of the work directly: (Ref: Para. A15­A17)
(a)    The more judgment is involved in:
       (i)    Planning and performing relevant audit procedures; and
       (ii)   Evaluating the audit evidence gathered; (Ref: Para. A18­A19)
(b)    The higher the assessed risk of material misstatement at the
       assertion level, with special consideration given to risks identified as
       significant; (Ref: Para. A20­A22)
(c)    The less the internal audit function's organizational status and
       relevant policies and procedures adequately support the objectivity of
       the internal auditors; and
(d)    The lower the level of competence of the internal audit function.
19.    The external auditor shall also evaluate whether, in aggregate, using
the work of the internal audit function to the extent planned would still result
in the external auditor being sufficiently involved in the audit, given the
external auditor 's sole responsibility for the audit opinion expressed. (Ref:

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

Para. A15­A22)
20.     The external auditor shall, in communicating with those charged with
governance an overview of the planned scope and timing of the audit in
accordance with SA 260,7 communicate how the external auditor has planned
to use the work of the internal audit function. (Ref: Para. A23)

Using the Work of the Internal Audit Function
21.     If the external auditor plans to use the work of the internal audit
function, the external auditor shall discuss the planned use of its work with
the function as a basis for coordinating their respective activities. (Ref: Para.
A24­A26)
22.     The external auditor shall read the reports of the internal audit
function relating to the work of the function that the external auditor plans to
use to obtain an understanding of the nature and extent of audit procedures it
performed and the related findings.
23.    The external auditor shall perform sufficient audit procedures on the
body of work of the internal audit function as a whole that the external auditor
plans to use to determine its adequacy for purposes of the audit, including
evaluating whether:
(a)     The work of the function had been properly planned, performed,
        supervised, reviewed and documented;
(b)     Sufficient appropriate evidence had been obtained to enable the
        function to draw reasonable conclusions; and
(c)     Conclusions reached are appropriate in the circumstances and the
        reports prepared by the function are consistent with the results of the
        work performed. (Ref: Para. A27­A30)
24.    The nature and extent of the external auditor 's audit procedures shall
be responsive to the external auditor 's evaluation of:
(a)     The amount of judgment involved;
(b)     The assessed risk of material misstatement;
(c)     The extent to which the internal audit function's organizational status
        and relevant policies and procedures support the objectivity of the
        internal auditors; and



7
      SA 260, Communication with Those Charged with Governance, paragraph 11.

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(d)     The level of competence of the function;8 (Ref: Para. A27­A29) and
        shall include reperformance of some of the work. (Ref: Para. A30)
25.     The external auditor shall also evaluate whether the external auditor 's
conclusions regarding the internal audit function in paragraph 15 of this SA
and the determination of the nature and extent of use of the work of the
function for purposes of the audit in paragraphs 18­19 of this SA remain
appropriate.
Determining Whether, in Which Areas, and to What Extent Internal
Auditors Can Be Used to Provide Direct Assistance
Determining Whether Internal Auditors Can Be Used to Provide Direct
Assistance for Purposes of the Audit
26.     The external auditor may be prohibited by law or regulation from
obtaining direct assistance from internal auditors. If so, paragraphs 27­35
and 37 do not apply. (Ref: Para. A31)
27.     If using internal auditors to provide direct assistance is not
prohibited by law or regulation, and the external auditor plans to use internal
auditors to provide direct assistance on the audit, the external auditor shall
evaluate the existence and significance of threats to objectivity and the level
of competence of the internal auditors who will be providing such assistance.
The external auditor 's evaluation of the existence and significance of threats
to the internal auditors' objectivity shall include inquiry of the internal auditors
regarding interests and relationships that may create a threat to their
objectivity. (Ref: Para. A32­A34)
28.    The external auditor shall not use an internal auditor to provide direct
assistance if:
(a)     There are significant threats to the objectivity of the internal auditor;
        or
(b)     The internal auditor lacks sufficient competence to perform the
        proposed work. (Ref: Para. A32­A34)
Determining the Nature and Extent of Work that Can Be Assigned to
Internal Auditors Providing Direct Assistance
29.     In determining the nature and extent of work that may be assigned to
internal auditors and the nature, timing and extent of direction, supervision
and review that is appropriate in the circumstances, the external auditor shall

8
      See paragraph 18.

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

consider:
(a)     The amount of judgment involved in:
        (i)    Planning and performing relevant audit procedures; and
        (ii)   Evaluating the audit evidence gathered;
(b)     The assessed risk of material misstatement; and
(c)     The external auditor 's evaluation of the existence and significance of
        threats to the objectivity and level of competence of the internal
        auditors who will be providing such assistance. (Ref: Para. A35­A39)
30.    The external auditor shall not use internal auditors to provide direct
assistance to perform procedures that:
(a)     Involve making significant judgments in the audit; (Ref: Para. A19)
(b)     Relate to higher assessed risks of material misstatement where
        the judgment required in performing the relevant audit procedures or
        evaluating the audit evidence gathered is more than limited; (Ref:
        Para. A38)
(c)     Relate to work with which the internal auditors have been involved
        and which has already been, or will be, reported to management or
        those charged with governance by the internal audit function; or
(d)     Relate to decisions the external auditor makes in accordance with this
        SA regarding the internal audit function and the use of its work or
        direct assistance. (Ref: Para. A35­A39)
31.     Having appropriately evaluated whether and, if so, to what extent
internal auditors can be used to provide direct assistance on the audit, the
external auditor shall, in communicating with those charged with governance
an overview of the planned scope and timing of the audit in accordance with
SA 260,9 communicate the nature and extent of the planned use of internal
auditors to provide direct assistance so as to reach a mutual understanding
that such use is not excessive in the circumstances of the engagement. (Ref:
Para. A39)
32.      The external auditor shall evaluate whether, in aggregate, using
internal auditors to provide direct assistance to the extent planned, together
with the planned use of the work of the internal audit function, would still
result in the external auditor being sufficiently involved in the audit, given the

9
      SA 260, paragraph 11.

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external auditor 's sole responsibility for the audit opinion expressed.

Using Internal                     Auditors            to      Provide      Direct
Assistance
33.   Prior to using internal auditors to provide direct assistance for
purposes of the audit, the external auditor shall:
(a)        Obtain written agreement from an authorized representative of the
           entity that the internal auditors will be allowed to follow the external
           auditor 's instructions, and that the entity will not intervene in the work
           the internal auditor performs for the external auditor; and
(b)        Obtain written agreement from the internal auditors that they will keep
           confidential specific matters as instructed by the external auditor and
           inform the external auditor of any threat to their objectivity.
34.     The external auditor shall direct, supervise and review the work
performed by internal auditors on the engagement in accordance with SA
220.10 In so doing:
(a)        The nature, timing and extent of direction, supervision, and review
           shall recognize that the internal auditors are not independent of the
           entity and be responsive to the outcome of the evaluation of the
           factors in paragraph 29 of this SA; and
(b)        The review procedures shall include the external auditor
           checking back to the underlying audit evidence for some of the work
           performed by the internal auditors.
The direction, supervision and review by the external auditor of the work
performed by the internal auditors shall be sufficient in order for the external
auditor to be satisfied that the internal auditors have obtained sufficient
appropriate audit evidence to support the conclusions based on that work.
(Ref: Para. A40­A41)
35.    In directing, supervising and reviewing the work performed by internal
auditors, the external auditor shall remain alert for indications that the
external auditor 's evaluations in paragraph 27 are no longer appropriate.

Documentation
36.        If the external auditor uses the work of the internal audit function, the
10
     SA 220, Quality Control for an Audit of Financial Statements.

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

external auditor shall include in the audit documentation:
(a)     The evaluation of:
        (i)     Whether the function's organizational status and relevant
                policies and procedures adequately support the objectivity of
                the internal auditors;
        (ii)    The level of competence of the function; and
        (iii)   Whether the function applies a systematic and disciplined
                approach, including quality control;
(b)     The nature and extent of the work used and the basis for that
        decision; and
(c)     The audit procedures performed by the external auditor to evaluate
        the adequacy of the work used.
37.    If the external auditor uses internal auditors to provide direct
assistance on the audit, the external auditor shall include in the audit
documentation:
(a)     The evaluation of the existence and significance of threats to the
        objectivity of the internal auditors, and the level of competence of the
        internal auditors used to provide direct assistance;
(b)     The basis for the decision regarding the nature and extent of the work
        performed by the internal auditors;
(c)     Who reviewed the work performed and the date and extent of
        that review in accordance with SA 230;11
(d)     The written agreements obtained from an authorized representative of
        the entity and the internal auditors under paragraph 33 of this SA;
        and
(e)     The working papers prepared by the internal auditors who provided
        direct assistance on the audit engagement.
                                       ***

Application and Other Explanatory Material
Definition of Internal Audit Function (Ref: Para. 2, 14(a))
A1.     The objectives and scope of internal audit functions typically include

11
      SA 230, Audit Documentation.

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                                                                Annexure VII

assurance and consulting activities designed to evaluate and improve the
effectiveness of the entity's governance processes, risk management and
internal control such as the following:
Activities Relating to Governance
    · The internal audit function may assess the governance
       process in its accomplishment of objectives on ethics and values,
       performance management and accountability, communicating risk
       and control information to appropriate areas of the organization and
       effectiveness of communication among those charged with
       governance, external and internal auditors, and management.
Activities Relating to Risk Management
    · The internal audit function may assist the entity by identifying
       and evaluating significant exposures to risk and contributing to the
       improvement of risk management and internal control (including
       effectiveness of the financial reporting process).
    · The internal audit function may perform procedures to assist the
       entity in the detection of fraud.
Activities Relating to Internal Control
    · Evaluation of internal control. The internal audit function may be
       assigned specific responsibility for reviewing controls, evaluating
       their operation and recommending improvements thereto. In doing
       so, the internal audit function provides assurance on the control. For
       example, the internal audit function might plan and perform tests or
       other procedures to provide assurance to management and those
       charged with governance regarding the design, implementation and
       operating effectiveness of internal control, including those controls
       that are relevant to the audit.
    · Examination of financial and operating information. The internal audit
       function may be assigned to review the means used to identify,
       recognize, measure, classify and report financial and operating
       information, and to make specific inquiry into individual items,
       including detailed testing of transactions, balances and procedures.
    · Review of operating activities. The internal audit function may be
       assigned to review the economy, efficiency and effectiveness of
       operating activities, including non- financial activities of an entity.
    · Review of compliance with laws and regulations. The internal audit
       function may be assigned to review compliance with laws,

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

            regulations  and      other      external requirements, and with
            management policies and directives and other internal requirements.
A2.      Activities similar to those performed by an internal audit function may
be conducted by functions with other titles within an entity. Some or all of the
activities of an internal audit function may also be outsourced to a third-party
service provider. Neither the title of the function, nor whether it is performed
by the entity or a third-party service provider, are sole determinants of
whether or not the external auditor can use the work of the function. Rather,
it is the nature of the activities; the extent to which the internal audit
function's organizational status and relevant policies and procedures support
the objectivity of the internal auditors; competence; and systematic and
disciplined approach of the function that are relevant. References in this SA
to the work of the internal audit function include relevant activities of other
functions or third-party providers that have these characteristics.
A3.     In addition, those in the entity with operational and managerial
duties and responsibilities outside of the internal audit function would
ordinarily face threats to their objectivity that would preclude them from being
treated as part of an internal audit function for the purpose of this SA ,
although they may perform control activities that can be tested in accordance
with SA 330.12 For this reason, monitoring controls performed by an owner-
manager would not be considered equivalent to an internal audit function.
A4.     While the objectives of an entity's internal audit function and the
external auditor differ, the function may perform audit procedures similar to
those performed by the external auditor in an audit of financial statements. If
so, the external auditor may make use of the function for purposes of the
audit in one or more of the following ways:
       · To obtain information that is relevant to the external auditor 's
          assessments of the risks of material misstatement due to error or
          fraud. In this regard, SA 31513 requires the external auditor to obtain
          an understanding of the nature of the internal audit function's
          responsibilities, its status within the organization, and the activities
          performed, or to be performed, and make inquiries of appropriate


12
     See paragraph 10.
13
  Please see the conforming amendments to Revised SA 315, Identifying and Assessing the
Risks of Material Misstatement through Understanding the Entity and Its Environment, arising
pursuant to issuance of this SA 610 (Revised). These are given at the end of the
document.(please see SA 315, paragraph 6(a) therein)


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            individuals within the internal audit function (if the entity has such a
            function); or
       · Unless prohibited, or restricted to some extent, by law or regulation,
          the external auditor, after appropriate evaluation, may decide to
          use work that has been performed by the internal audit function
          during the period in partial substitution for audit evidence to be
          obtained directly by the external auditor.14
In addition, unless prohibited, or restricted to some extent, by law or
regulation, the external auditor may use internal auditors to perform
audit procedures under the direction, supervision and review of the
external auditor (referred to as "direct assistance" in this SA).15
Misstatement through Understanding the Entity and Its Environment, arising
pursuant to issuance of this SA 610 (Revised). These are given at the end of
the document.(please see SA 315, paragraph 6(a) therein)

Determining Whether, in Which Areas, and to
What Extent the Work of the Internal Audit
Function Can Be Used
Evaluating the Internal Audit Function
Objectivity and Competence (Ref: Para. 15(a) ­(b))
A5.     The external auditor exercises professional judgment in determining
whether the work of the internal audit function can be used for purposes of
the audit, and the nature and extent to which the work of the internal audit
function can be used in the circumstances.
A6.     The extent to which the internal audit function's organizational status
and relevant policies and procedures support the objectivity of the internal
auditors and the level of competence of the function are particularly important
in determining whether to use and, if so, the nature and extent of the use of
the work of the function that is appropriate in the circumstances.
A7.      Objectivity refers to the ability to perform those tasks without allowing
bias, conflict of interest or undue influence of others to override professional
judgments. Factors that may affect the external auditor 's evaluation include
the following:

14
     See paragraphs 15­25.
15
     See paragraphs 26­35.


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

    · Whether the organizational status of the internal audit function,
       including the function's authority and accountability, supports the
       ability of the function to be free from bias, conflict of interest or
       undue influence of others to override professional judgments. For
       example, whether the internal audit function reports to those
       charged with governance or an officer with appropriate authority, or
       if the function reports to management, whether it has direct access
       to those charged with governance.
    · Whether the internal audit function is free of any conflicting
       responsibilities, for example, having managerial or operational
       duties or responsibilities that are outside of the internal audit
       function.
    · Whether those charged with governance oversee employment
       decisions related to the internal audit function, for example,
       determining the appropriate remuneration policy.
    · Whether there are any constraints or restrictions placed on the
       internal audit function by management or those charged with
       governance, for example, in communicating the internal audit
       function's findings to the external auditor.
    · Whether the internal auditors are members of relevant professional
       bodies and their memberships obligate their compliance with
       relevant professional standards relating to objectivity, or whether
       their internal policies achieve the same objectives.
A8.     Competence of the internal audit function refers to the attainment and
maintenance of knowledge and skills of the function as a whole at the level
required to enable assigned tasks to be performed diligently and in
accordance with applicable professional standards. Factors that may affect
the external auditor 's determination include the following:
    · Whether the internal audit function is adequately and appropriately
       resourced relative to the size of the entity and the nature of its
       operations.
    · Whether there are established policies for hiring, training and
       assigning internal auditors to internal audit engagements.
    · Whether the internal auditors have adequate technical training and
       proficiency in auditing. Relevant criteria that may be considered by
       the external auditor in making the assessment may include, for
       example, the internal auditors' possession of a relevant professional
       designation and experience.

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· Whether the internal auditors possess the required knowledge
   relating to the entity's financial reporting and the applicable financial
   reporting framework and whether the internal audit function
   possesses the necessary skills (for example, industry-specific
   knowledge) to perform work related to the entity's financial
   statements.
· Whether the internal auditors are members of relevant professional
   bodies that oblige them to comply with the relevant professional
   standards including continuing professional development
   requirements.
· A9.      Objectivity and competence may be viewed as a continuum.
   The more the internal audit function's organizational status and
   relevant policies and procedures adequately support the objectivity
   of the internal auditors and the higher the level of competence of the
   function, the more likely the external auditor may make use of the
   work of the function and in more areas. However, an organizational
   status and relevant policies and procedures that provide strong
   support for the objectivity of the internal auditors cannot compensate
   for the lack of sufficient competence of the internal audit function.
   Equally, a high level of competence of the internal audit function
   cannot compensate for an organizational status and policies and
   procedures that do not adequately support the objectivity of the
   internal auditors.
· Application of a Systematic and Disciplined Approach (Ref: Para.
   15(c))
· A10. The application of a systematic and disciplined approach to
   planning, performing, supervising, reviewing and documenting its
   activities distinguishes the activities of the internal audit function
   from other monitoring control activities that may be performed within
   the entity.
· A11. Factors that may affect the external auditor 's determination
   of whether the internal audit function applies a systematic and
   disciplined approach include the following:
· The existence, adequacy and use of documented internal audit
   procedures or guidance covering such areas as risk assessments,
   work programs, documentation and reporting, the nature and extent
   of which is commensurate with the size and circumstances of an
   entity.


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

     · Whether the internal audit function has appropriate quality
        control policies and procedures, for example, such as those
        policies and procedures in SQC 116 that would be applicable to an
        internal audit function (such as those relating to leadership, human
        resources and engagement performance) or quality control
        requirements in standards set by the relevant professional bodies for
        internal auditors. Such bodies may also establish other appropriate
        requirements such as conducting periodic external quality
        assessments.
     · Circumstances When Work of the Internal Audit Function Cannot Be
        Used (Ref: Para. 16)
     · A12. The external auditor 's evaluation of whether the internal audit
        function's organizational status and relevant policies and procedures
        adequately support the objectivity of the internal auditors, the level
        of competence of the internal audit function, and whether it applies a
        systematic and disciplined approach may indicate that the risks to
        the quality of the work of the function are too significant and
        therefore it is not appropriate to use any of the work of the function
        as audit evidence.
A13. Consideration of the factors in paragraphs A7, A8 and A11 of this SA
individually and in aggregate is important because an individual factor is
often not sufficient to conclude that the work of the internal audit function
cannot be used for purposes of the audit. For example, the internal audit
function's organizational status is particularly important in evaluating threats
to the objectivity of the internal auditors. If the internal audit function reports
to management, this would be considered a significant threat to the function's
objectivity unless other factors such as those described in paragraph A7 of
this SA collectively provide sufficient safeguards to reduce the threat to an
acceptable level.
A14. In addition, a self-review threat17 is created when the external auditor
accepts an engagement to provide internal audit services to an audit client,
and the results of those services will be used in conducting the audit. This is
because of the possibility that the engagement team will use the results of
16
  Standard on Quality Control (SQC) 1, Quality Control for Firms that Perform
Audits and Reviews of Historical Financial Information, and Other Assurance and
Related Services Engagements.
17
  Attention of the members is also invited to paragraph 2.1 of the Guidance Note on
Independence of Auditors, issued by the Institute of Chartered Accountants of India.

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the internal audit service without properly evaluating those results or without
exercising the same level of professional skepticism as would be exercised
when the internal audit work is performed by individuals who are not
members of the firm. Paragraph 290.173 of the Code of Ethics, issued by the
Institute of Chartered Accountants of India therefore in the context of
provision of internal audit service to financial statement audit clients,
specifically provides that "a statutory auditor of an entity cannot be its
internal auditor as it will not be possible for him to give an independent and
objective opinion". The said Code of Ethics discusses the threats and the
safeguards that can be applied to reduce the threats to an acceptable level in
other circumstances.
Determining the Nature and Extent of Work of the Internal Audit
Function that Can Be Used
Factors Affecting the Determination of the Nature and Extent of the Work of
the Internal
Audit Function that Can Be Used (Ref: Para. 17­19)
A15. Once the external auditor has determined that the work of the internal
audit function can be used for purposes of the audit, a first consideration is
whether the planned nature and scope of the work of the internal audit
function that has been performed, or is planned to be performed, is relevant
to the overall audit strategy and audit plan that the external auditor has
established in accordance with SA 300.18
A16. Examples of work of the internal audit function that can be used by
the external auditor include the following:
       · Testing of the operating effectiveness of controls.
       · Substantive procedures involving limited judgment.
       · Observations of inventory counts.
       · Tracing transactions through the information system relevant to
          financial reporting.
·         Testing of compliance with regulatory requirements.
·         In some circumstances, audits or reviews of the financial information
          of subsidiaries that are not significant components to the group
          (where this does not conflict with the requirements of SA 600).19

18
     SA 300, Planning an Audit of Financial Statements.
19
     SA 600, Using the Work of Another Auditor

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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

A17. The external auditor's determination of the planned nature and extent of
use of the work of the internal audit function will be influenced by the external
auditor's evaluation of the extent to which the internal audit function's
organizational status and relevant policies and procedures adequately support
the objectivity of the internal auditors and the level of competence of the internal
audit function in paragraph 18 of this SA. In addition, the amount of judgment
needed in planning, performing and evaluating such work and the assessed risk
of material misstatement at the assertion level are inputs to the external auditor's
determination. Further, there are circumstances in which the external auditor
cannot use the work of the internal audit function for purpose of the audit as
described in paragraph 16 of this SA.
Judgments in planning and performing audit procedures and evaluating results
(Ref: Para. 18(a), 30(a))
A18. The greater the judgment needed to be exercised in planning and
performing the audit procedures and evaluating the audit evidence, the external
auditor will need to perform more procedures directly in accordance with
paragraph 18 of this SA, because using the work of the internal audit function
alone will not provide the external auditor with sufficient appropriate audit
evidence.
A19. Since the external auditor has sole responsibility for the audit opinion
expressed, the external auditor needs to make the significant judgments in the
audit engagement in accordance with paragraph 18. Significant judgments
include the following:
·       Assessing the risks of material misstatement;
·       Evaluating the sufficiency of tests performed;
·       Evaluating the appropriateness of management's use of the
        going concern assumption;
·       Evaluating significant accounting estimates; and
·       Evaluating the adequacy of disclosures in the financial statements,
        and other matters affecting the auditor 's report.
Assessed risk of material misstatement (Ref: Para. 18(b))
A20. For a particular account balance, class of transaction or disclosure, the
higher an assessed risk of material misstatement at the assertion level, the more
judgment is often involved in planning and performing the audit procedures and
evaluating the results thereof. In such circumstances, the external auditor will
need to perform more procedures directly in accordance with paragraph 18 of
this SA, and accordingly, make less use of the work of the internal audit function

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in obtaining sufficient appropriate audit evidence. Furthermore, as explained
in SA 200,20 the higher the assessed risks of material misstatement, the more
persuasive the audit evidence required by the external auditor will need to
be, and, therefore, the external auditor will need to perform more of the work
directly.
A21. As explained in SA 315,21 significant risks require special audit
consideration and therefore the external auditor 's ability to use the work of
the internal audit function in relation to significant risks will be restricted to
procedures that involve limited judgment. In addition, where the risks of
material misstatement is other than low, the use of the work of the internal
audit function alone is unlikely to reduce audit risk to an acceptably low level
and eliminate the need for the external auditor to perform some tests directly.
A22. Carrying out procedures in accordance with this SA may cause the
external auditor to reevaluate the external auditor 's assessment of the risks
of material misstatement. Consequently, this may affect the external auditor 's
determination of whether to use the work of the internal audit function and
whether further application of this SA is necessary.
Communication with Those Charged with Governance (Ref: Para. 20)
A23. In accordance with SA 260,22 the external auditor is required to
communicate with those charged with governance an overview of the
planned scope and timing of the audit. The planned use of the work of the
internal audit function is an integral part of the external auditor 's overall audit
strategy and is therefore relevant to those charged with governance for their
understanding of the proposed audit approach.

Using the Work of the Internal Audit Function
Discussion and Coordination with the Internal Audit Function (Ref:
Para. 21)
A24. In discussing the planned use of their work with the internal audit
function as a basis for coordinating the respective activities, it may be useful
to address the following:


20   SA 200, paragraph A29.
21   SA 315, paragraph 4(e).
22   SA 260, paragraph 11.


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

·      The timing of such work.
·      The nature of the work performed.
·      The extent of audit coverage.
·      Materiality for the financial statements as a whole (and, if applicable,
       materiality level or levels for particular classes of transactions,
       account balances or disclosures), and performance materiality.
·      Proposed methods of item selection and sample sizes.
·      Documentation of the work performed.
·      Review and reporting procedures.
A25. Coordination between the external auditor and the internal audit
function is effective when, for example:
·      Discussions take place at appropriate intervals throughout the period.
·      The external auditor informs the internal audit function of significant
       matters that may affect the function.
·      The external auditor is advised of and has access to relevant reports
       of the internal audit function and is informed of any significant matters
       that come to the attention of the function when such matters may
       affect the work of the external auditor so that the external auditor is
       able to consider the implications of such matters for the audit
       engagement.
A26. SA 20023 discusses the importance of the auditor planning and
performing the audit with professional skepticism, including being alert to
information that brings into question the reliability of documents and
responses to inquiries to be used as audit evidence. Accordingly,
communication with the internal audit function throughout the engagement
may provide opportunities for internal auditors to bring matters that may
affect the work of the external auditor to the external auditor 's attention.24
The external auditor is then able to take such information into account in the
external auditor 's identification and assessment of risks of material
misstatement. In addition, if such information may be indicative of a

23
   SA 200, paragraphs 15 and A18
24
   Please see the conforming amendments to Revised SA 315, Identifying and
Assessing the Risks of Material Misstatement through Understanding the Entity and
Its Environment, arising pursuant to issuance of this SA 610 (Revised). These are
given at the end of the document.(please see SA 315, paragraph A116 therein).

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heightened risk of a material misstatement of the financial statements or may
be regarding any actual, suspected or alleged fraud, the external auditor can
take this into account in the external auditor 's identification of risk of material
misstatement due to fraud in accordance with SA 240.25
Procedures to Determine the Adequacy of Work of the Internal Audit
Function (Ref: Para. 23­24)
A27. The external auditor 's audit procedures on the body of work of the
internal audit function as a whole that the external auditor plans to use
provide a basis for evaluating the overall quality of the function's work and
the objectivity with which it has been performed.
A28. The procedures the external auditor may perform to evaluate the
quality of the work performed and the conclusions reached by the internal
audit function, in addition to reperformance in accordance with paragraph 24,
include the following:
·       Making inquiries of appropriate individuals within the internal audit
        function.
·       Observing procedures performed by the internal audit function.
·       Reviewing the internal audit function's work program and working
        papers.
A29. The more judgment involved, the higher the assessed risk of material
misstatement, the less the internal audit function's organizational status
and relevant policies and procedures adequately support the objectivity of
the internal auditors, or the lower the level of competence of the internal
audit function, the more audit procedures are needed to be performed by the
external auditor on the overall body of work of the function to support the
decision to use the work of the function in obtaining sufficient appropriate
audit evidence on which to base the audit opinion.
Reperformance (Ref: Para. 24)
A30. For purposes of this SA, reperformance involves the external
auditor 's independent execution of procedures to validate the conclusions
reached by the internal audit function. This objective may be accomplished
by examining items already examined by the internal audit function or, where

25
  SA 315, paragraph A11 (as given in the conforming amendments) in relation to
SA 240, The Auditor's Responsibilities Relating to Fraud in an Audit of Financial
Statements.

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it is not possible to do so, the same objective may also be accomplished by
examining sufficient other similar items not actually examined by the internal
audit function. Reperformance provides more persuasive evidence regarding
the adequacy of the work of the internal audit function compared to other
procedures the external auditor may perform in paragraph A28. While it is not
necessary for the external auditor to do reperformance in each area of work
of the internal audit function that is being used, some reperformance is
required on the body of work of the internal audit function as a whole that the
external auditor plans to use in accordance with paragraph 24. The external
auditor is more likely to focus reperformance in those areas where more
judgment was exercised by the internal audit function in planning,
performing and evaluating the results of the audit procedures and in
areas of higher risk of material misstatement.

Determining Whether, in Which Areas and to What
Extent Internal Auditors Can Be Used to Provide
Direct Assistance
Determining Whether Internal Auditors Can Be Used to Provide Direct
Assistance for Purposes of the Audit (Ref: Para. 5, 26­28)
A31. In case where the external auditor is prohibited by law or regulation
from using internal auditors to provide direct assistance, it is relevant for
the principal auditors to consider whether the prohibition also extends to
component auditors and, if so, to address this in the communication to the
component auditors.
A32. As stated in paragraph A7 of this SA, objectivity refers to the ability to
perform the proposed work without allowing bias, conflict of interest or undue
influence of others to override professional judgments. In evaluating the
existence and significance of threats to the objectivity of an internal auditor,
the following factors may be relevant:
·         The extent to which the internal audit function's organizational status
          and relevant policies and procedures support the objectivity of the
          internal auditors.26
·         Family and personal relationships with an individual working in, or
          responsible for, the aspect of the entity to which the work relates.


26
     See paragraph A7.

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·      Association with the division or department in the entity to which the
       work relates.
·      Significant financial interests in the entity other than remuneration
       on terms consistent with those applicable to other employees at a
       similar level of seniority.
Material issued by relevant professional bodies for internal auditors may
provide additional useful guidance.
A33. There may also be some circumstances in which the significance of
the threats to the objectivity of an internal auditor is such that there are no
safeguards that could reduce them to an acceptable level. For example,
because the adequacy of safeguards is influenced by the significance of the
work in the context of the audit, paragraph 30(a) and (b) prohibits the use of
internal auditors to provide direct assistance in relation to performing
procedures that involve making significant judgments in the audit or that
relate to higher assessed risks of material misstatement where the judgment
required in performing the relevant audit procedures or evaluating the audit
evidence gathered is more than limited. This would also be the case where
the work involved creates a self-review threat, which is why internal auditors
are prohibited from performing procedures in the circumstances described in
paragraph 30(c) and (d).
A34. In evaluating the level of competence of an internal auditor, many of
the factors in paragraph A8 of this SA may also be relevant, applied in the
context of individual internal auditors and the work to which they may be
assigned.
Determining the Nature and Extent of Work that Can Be Assigned to
Internal Auditors Providing Direct Assistance (Ref: Para. 29­31)
A35. Paragraphs A15­A22 of this SA provide relevant guidance in
determining the nature and extent of work that may be assigned to internal
auditors.
A36. In determining the nature of work that may be assigned to internal
auditors, the external auditor is careful to limit such work to those areas that
would be appropriate to be assigned. Examples of activities and tasks that
would not be appropriate to use internal auditors to provide direct assistance
include the following:
·      Discussion of fraud risks. However, the external auditors may make
       inquiries of internal auditors about fraud risks in the organization in


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Guidance Note on Report under Section 92E of the Income-tax Act, 1961

          accordance with SA 315.27
·         Determination of unannounced audit procedures as addressed in SA
          240.
A37. Similarly, since in accordance with SA 50528 the external auditor is
required to maintain control over external confirmation requests and evaluate
the results of external confirmation procedures, it would not be appropriate to
assign these responsibilities to internal auditors. However, internal auditors
may assist in assembling information necessary for the external auditor to
resolve exceptions in confirmation responses.
A38. The amount of judgment involved and the risk of material
misstatement are also relevant in determining the work that may be assigned
to internal auditors providing direct assistance. For example, in
circumstances where the valuation of accounts receivable is assessed as an
area of higher risk, the external auditor could assign the checking of the
accuracy of the aging to an internal auditor providing direct assistance.
However, because the evaluation of the adequacy of the provision based on
the aging would involve more than limited judgment, it would not be
appropriate to assign that latter procedure to an internal auditor providing
direct assistance.
A39. Notwithstanding the direction, supervision and review by the external
auditor, excessive use of internal auditors to provide direct assistance may
affect perceptions regarding the independence of the external audit
engagement.

Using Internal Auditors                           to        Provide   Direct
Assistance (Ref: Para. 34)
A40. As individuals in the internal audit function are not independent of the
entity as is required of the external auditor when expressing an opinion on
financial statements, the external auditor 's direction, supervision and
review of the work performed by internal auditors providing direct
assistance will generally be of a different nature and more extensive than if
members of the engagement team perform the work.
A41. In directing the internal auditors, the external auditor may, for
example, remind the internal auditors to bring accounting and auditing issues

27
     SA 315, paragraph 6(a).
28
     SA 505, External Confirmations, paragraphs 7 and 16.

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                                                                   Annexure VII

identified during the audit to the attention of the external auditor. In reviewing
the work performed by the internal auditors, the external auditor 's
considerations include whether the evidence obtained is sufficient and
appropriate in the circumstances, and that it supports the conclusions
reached.




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