Section 92CD is a crucial provision under the Income Tax Act that pertains to the computation of income from an international transaction or specified domestic transaction between associated enterprises. It deals with the concept of ‘secondary adjustments,’ which is an essential aspect of transfer pricing.
The objective of this article is to provide an overview of Section 92CD and its significance in transfer pricing. We will delve into the provisions of this section, their applicability, and the implications of non-compliance with the provisions.
Overview of Section 92CD
Section 92CD was introduced in the Income Tax Act, 1961, in 2017, through the Finance Act. It provides for secondary adjustments that need to be made in case of primary adjustments are made to transfer prices. Primary adjustments are made when the actual price charged or paid in a transaction between associated enterprises differs from the arm’s length price (ALP), i.e., the price that would have been charged or paid in a transaction between unrelated parties.
Secondary adjustments, as per Section 92CD, are required to be made when the primary adjustment exceeds INR 1 crore. The provisions of this section apply to both international transactions between associated enterprises and specified domestic transactions between related parties.
The section prescribes that the primary adjustment should be made within the due date of filing of the tax return. However, if the primary adjustment exceeds INR 1 crore, and the same is not made within the stipulated time, the taxpayer must make a secondary adjustment. This adjustment is made to reflect the arm’s length price, which would have been charged or paid if the transaction was between unrelated parties.
The secondary adjustment may be made in any of the following forms:
a) Increase in the taxpayer’s income for the relevant year, to the extent of the primary adjustment.
b) Decrease in the book value of the international transaction or specified domestic transaction between the associated enterprises.
c) Any other manner that the taxpayer may choose, subject to approval from the Assessing Officer.
Applicability of Section 92CD
Section 92CD applies to all taxpayers who are engaged in international transactions or specified domestic transactions with associated enterprises. The section applies irrespective of whether the transaction has resulted in an income or loss to the taxpayer.
It is essential to note that the provisions of Section 92CD come into play only when the primary adjustment exceeds INR 1 crore. Hence, taxpayers need to ensure that their transfer pricing policies are in line with the arm’s length principle to avoid the applicability of this section.
Implications of Non-Compliance with Section 92CD
Non-compliance with the provisions of Section 92CD can attract severe consequences. The Assessing Officer may initiate penalty proceedings under Section 271AA, which prescribes a penalty of 2% per month of the amount of primary adjustment not made within the stipulated time.
In addition to penalties, non-compliance with Section 92CD can also lead to transfer pricing disputes and litigation. This can be a time-consuming and costly affair for taxpayers and result in reputational damage.
Therefore, taxpayers need to ensure compliance with the provisions of Section 92CD to avoid adverse consequences.
Conclusion
In conclusion, Section 92CD of the Income Tax Act is an essential provision that needs to be understood by taxpayers engaged in international transactions or specified domestic transactions with associated enterprises. Compliance with the provisions of this section can help taxpayers avoid penalties, litigation, and reputational damage. Therefore, taxpayers need to ensure that their transfer pricing policies are in line with the arm’s length principle and well-documented to avoid adverse consequences.
Other Related Blogs: Section 144B Income Tax Act
Frequently Asked Questions:
Q:1 What is Section 92CD of the Income Tax Act?
A: Section 92CD of the Income Tax Act is a provision that deals with the computation of Arm’s Length Price (ALP) for international transactions or specified domestic transactions between associated enterprises.
Q:2 What is an Arm’s Length Price (ALP)?
A: Arm’s Length Price (ALP) is the price at which unrelated parties would transact in a similar transaction under similar circumstances. The ALP is determined to ensure that the transactions between associated enterprises are carried out at fair market value.
Q:3 Who does Section 92CD apply to?
A: Section 92CD applies to all international transactions or specified domestic transactions that are undertaken between associated enterprises. It is applicable to both the taxpayer and the tax authority.
Q:4 What is the purpose of Section 92CD?
A: The purpose of Section 92CD is to ensure that transactions between associated enterprises are carried out at arm’s length price and to prevent transfer pricing manipulation.
Q:5 What is transfer pricing?
A: Transfer pricing is the practice of setting the price of goods or services sold between related entities, such as a parent company and its subsidiaries, to reduce tax liabilities.
Q:6 What are associated enterprises?
A: Associated enterprises are two or more entities that are under common control or management, such as a parent company and its subsidiary.
Q:7 What is the penalty for non-compliance with Section 92CD? A: Non-compliance with Section 92CD can result in penalties and interest charges. The penalty can range from 2% to 200% of the tax amount sought to be evaded.
Q:8 What is the role of the tax authorities in implementing Section 92CD?
A: The tax authorities are responsible for determining the arm’s length price of the transaction and verifying that the transactions between associated enterprises are carried out at fair market value. They can also conduct audits and assessments to ensure compliance with the provision.
Q:9 How can a taxpayer ensure compliance with Section 92CD?
A: To ensure compliance with Section 92CD, a taxpayer must maintain proper documentation and provide all relevant information and documentation to the tax authorities when requested. The taxpayer can also obtain an advance pricing agreement (APA) from the tax authorities to ensure that their transfer pricing practices are in compliance with the law.
Q:10 Can a taxpayer appeal against the tax authorities’ determination of the Arm’s Length Price?
A: Yes, a taxpayer can appeal against the tax authorities’ determination of the arm’s length price if they believe it is not in accordance with the law. The appeal can be made to the Income Tax Appellate Tribunal (ITAT) or the High Court.
