Section 92B of the Income Tax Act is an important provision that deals with the computation of income in the case of international transactions or specified domestic transactions. This provision was introduced in the year 2001 as a part of the Finance Act and has been amended several times since then to provide more clarity and transparency in the taxation of such transactions.
What are International Transactions and Specified Domestic Transactions?
International transactions refer to any transaction between two or more associated enterprises, where at least one of the enterprises is located outside India. Associated enterprises are those enterprises that are related to each other in any way, such as through ownership, control, or management. Some examples of international transactions include the sale of goods or services, the provision of loans, or the transfer of intangible assets between associated enterprises located in different countries.
Specified domestic transactions, on the other hand, refer to any transaction between two or more related parties that meet certain monetary thresholds. These thresholds are set by the Income Tax Act and are revised from time to time. Some examples of specified domestic transactions include the payment of rent, interest, or royalty to a related party, or the purchase of goods or services from a related party.
Computation of Income under Section 92B
Section 92B of the Income Tax Act lays down the method for computing the income arising from international transactions or specified domestic transactions. The basic principle behind this provision is that the income arising from such transactions should be computed at arm’s length price. Arm’s length price refers to the price that would have been charged or paid for a transaction between unrelated parties under similar circumstances.
To determine the arm’s length price, the taxpayer is required to use one of the following methods:
- Comparable Uncontrolled Price Method (CUP) – Under this method, the price charged or paid in a comparable uncontrolled transaction is used as a benchmark to determine the arm’s length price.
- Resale Price Method (RPM) – This method involves determining the resale price of the goods or services and deducting an appropriate gross profit margin to arrive at the arm’s length price.
- Cost Plus Method (CPM) – This method involves adding an appropriate gross profit margin to the cost of production or acquisition of the goods or services to arrive at the arm’s length price.
- Transactional Net Margin Method (TNMM) – This method involves comparing the net profit margin earned in the transaction with the net profit margin earned in comparable uncontrolled transactions to arrive at the arm’s length price.
- Profit Split Method (PSM) – This method involves splitting the profit earned from the transaction between the related parties based on the functions performed, assets used, and risks assumed by each party.
The taxpayer is required to choose the most appropriate method for computing the arm’s length price based on the nature of the transaction and the availability of comparable data. In case the taxpayer is unable to find comparable uncontrolled transactions, he may use any other method that is reliable and can provide a reasonable estimate of the arm’s length price.
One of the main objectives of Section 92B is to prevent transfer pricing, which refers to the practice of setting the prices for goods or services between related parties in a way that can shift profits from high-tax jurisdictions to low-tax jurisdictions. Transfer pricing can be used as a means of tax avoidance, and can result in significant revenue losses for governments.
To prevent transfer pricing, Section 92B requires taxpayers to determine the arm’s length price for international transactions or specified domestic transactions. The arm’s length price is the price that would have been charged or paid for a transaction between unrelated parties, and is used to ensure that the taxpayer is not able to manipulate prices to shift profits to a low-tax jurisdiction.
In order to determine the arm’s length price, the taxpayer is required to use one of the five methods mentioned earlier in the blog, based on the nature of the transaction and the availability of comparable data. These methods are considered to be reliable and are widely accepted in the international tax community.
In addition to providing a method for computing income from international transactions or specified domestic transactions, Section 92B also requires taxpayers to maintain documentation to support their transfer pricing calculations. This documentation should include details of the transaction, the method used to determine the arm’s length price, and any comparable data used to support the calculation.
The documentation requirements under Section 92B are designed to promote transparency and provide tax authorities with the information they need to determine whether transfer pricing has been used to shift profits to low-tax jurisdictions. Failure to maintain proper documentation can result in penalties and interest charges.
It is important to note that Section 92B applies to all taxpayers, whether they are Indian residents or non-residents. It is also important to note that the provisions of Section 92B apply only to transactions between related parties. Transactions between unrelated parties are not subject to the transfer pricing rules under Section 92B.
In conclusion
Section 92B is a crucial provision of the Income Tax Act that helps to prevent transfer pricing and ensure that taxpayers pay their fair share of taxes. By requiring taxpayers to determine the arm’s length price for international transactions or specified domestic transactions, the provision promotes fairness and equity in taxation and helps to prevent tax evasion. The documentation requirements under Section 92B also help to promote transparency and provide tax authorities with the information they need to ensure compliance with the transfer pricing rules.
Other Related Blogs: Section 144B Income Tax Act
Frequently Asked Questions (FAQs)
Q:1 What is Section 92B of the Income Tax Act?
A: Section 92B of the Income Tax Act is a provision that deals with transfer pricing. It requires taxpayers to determine the arm’s length price for international transactions or specified domestic transactions.
Q:2 What is the arm’s length price?
A: The arm’s length price is the price that would have been charged or paid for a transaction between unrelated parties.
Q:3 Why is Section 92B important?
A: Section 92B is important because it helps to prevent transfer pricing, which can be used as a means of tax avoidance. By requiring taxpayers to determine the arm’s length price, the provision promotes fairness and equity in taxation and helps to prevent tax evasion.
Q:4 What are the methods used to determine the arm’s length price?
A: There are five methods used to determine the arm’s length price: the comparable uncontrolled price method, the resale price method, the cost plus method, the transactional net margin method, and the profit split method.
Q:5 Who is subject to Section 92B?
A: Section 92B applies to all taxpayers, whether they are Indian residents or non-residents.
Q:6 What transactions are subject to Section 92B?
A: Section 92B applies to international transactions or specified domestic transactions between related parties.
Q:7 What is meant by related parties?
A: Related parties are entities that are related to each other in one of several ways, such as by ownership or control.
Q:8 What documentation is required under Section 92B?
A: Taxpayers are required to maintain documentation to support their transfer pricing calculations. This documentation should include details of the transaction, the method used to determine the arm’s length price, and any comparable data used to support the calculation.
Q:9 What are the consequences of non-compliance with Section 92B?
A: Failure to comply with the provisions of Section 92B can result in penalties and interest charges.
Q:10 How can taxpayers ensure compliance with Section 92B?
A: Taxpayers can ensure compliance with Section 92B by engaging in proper transfer pricing planning and documentation. They can also seek the advice of tax professionals with expertise in transfer pricing.
