Section 92E of the Income Tax Act, 1961, deals with transfer pricing regulations in India. Transfer pricing is the practice of determining the prices at which goods, services, or intellectual property are transferred between related parties such as parent companies and subsidiaries. This section has significant implications for multinational corporations operating in India. In this blog post, we will discuss the applicability of Section 92E of the Income Tax Act and its key provisions.
What is Section 92E of the Income Tax Act?
Section 92E of the Income Tax Act was introduced in 2001 to address the issue of transfer pricing. It requires every person who has entered into an international transaction or specified domestic transaction with an associated enterprise to obtain and maintain certain documentation. This documentation is required to be submitted to the tax authorities at the time of filing the tax return.
Applicability of Section 92E
Section 92E is applicable to all taxpayers who enter into international transactions or specified domestic transactions with associated enterprises. An associated enterprise refers to a person who participates directly or indirectly in the management, control, or capital of the taxpayer. The provision applies to all types of taxpayers, including individuals, HUFs, companies, and firms.
Provisions of Section 92E
- Maintenance of documentation
Section 92E requires taxpayers to maintain and keep documentation pertaining to the international transaction or specified domestic transaction. The documentation must be maintained for a period of eight years from the end of the relevant assessment year. The documentation must include the following:
a. A description of the international transaction or specified domestic transaction b. A description of the associated enterprise c. The terms and conditions of the transaction d. The economic analysis carried out to determine the arm’s length price e. Any other information or document as may be prescribed by the tax authorities
- Filing of a report
In addition to maintaining documentation, Section 92E also requires taxpayers to file a report with the tax authorities. The report, known as the Transfer Pricing Report, must be filed on or before the due date of filing the tax return. The report must contain the following information:
a. A description of the taxpayer’s business b. A description of the international transaction or specified domestic transaction c. A description of the associated enterprise d. The terms and conditions of the transaction e. The arm’s length price of the transaction f. Any other information or document as may be prescribed by the tax authorities
- Penalties for non-compliance
Failure to comply with the provisions of Section 92E can result in penalties. The penalty for non-maintenance of documentation is 2% of the value of the transaction. The penalty for non-filing of the Transfer Pricing Report is Rs. 1 lakh. In case of deliberate non-compliance, the penalty can go up to 200% of the tax amount involved.
Importance of Section 92E
Section 92E is crucial for ensuring that the prices at which goods, services, or intellectual property are transferred between related parties are at arm’s length. This means that the prices should be the same as those that would be charged between unrelated parties in a similar transaction.
Transfer pricing regulations are essential for preventing multinational corporations from artificially inflating or deflating prices between related entities to reduce their tax liability. These regulations also ensure that the tax base of each country is not eroded by the shifting of profits to low-tax jurisdictions.
Compliance with Section 92E is necessary for multinational corporations operating in India to avoid penalties and legal consequences. Non-compliance with transfer pricing regulations can lead to double taxation, disputes with tax authorities, and damage to the reputation of the company.
Steps to Ensure Compliance with Section 92E
To comply with Section 92E, taxpayers should take the following steps:
- Identification of related parties: Taxpayers should identify all the related parties with whom they enter into international transactions or specified domestic transactions.
- Determination of the arm’s length price: Taxpayers should carry out a detailed analysis to determine the arm’s length price of the transaction. The analysis should take into account factors such as the nature of the transaction, market conditions, and the functions performed, risks assumed, and assets employed by each of the parties.
- Maintenance of documentation: Taxpayers should maintain and keep all the necessary documentation pertaining to the international transaction or specified domestic transaction. The documentation should be detailed, accurate, and consistent with the arm’s length price determination.
- Filing of the Transfer Pricing Report: Taxpayers should file the Transfer Pricing Report on or before the due date of filing the tax return. The report should contain all the necessary information and documents as prescribed by the tax authorities.
Conclusion
Section 92E of the Income Tax Act is an essential provision that aims to ensure that taxpayers comply with transfer pricing regulations. The provision requires taxpayers to maintain and file documentation pertaining to the international transaction or specified domestic transaction. Failure to comply with the provisions can result in penalties. It is crucial for taxpayers to understand the applicability and provisions of Section 92E to avoid any legal consequences.
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- section 234e of income tax act
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Frequently Asked Questions (FAQ’s)
What is Section 92E of the Income Tax Act?
Section 92E of the Income Tax Act is a provision that requires taxpayers who enter into international transactions or specified domestic transactions with associated enterprises to maintain and submit certain documentation to the tax authorities.
Who is required to comply with Section 92E?
All taxpayers who enter into international transactions or specified domestic transactions with associated enterprises are required to comply with Section 92E.
What is transfer pricing?
Transfer pricing is the practice of determining the prices at which goods, services, or intellectual property are transferred between related parties such as parent companies and subsidiaries.
What is an associated enterprise?
An associated enterprise refers to a person who participates directly or indirectly in the management, control, or capital of the taxpayer.
What documentation is required under Section 92E?
Taxpayers are required to maintain and keep documentation pertaining to the international transaction or specified domestic transaction. The documentation must include a description of the transaction, the associated enterprise, the terms and conditions of the transaction, the economic analysis carried out to determine the arm’s length price, and any other information or document as prescribed by the tax authorities.
What is the Transfer Pricing Report?
The Transfer Pricing Report is a report that taxpayers are required to file with the tax authorities. The report must contain a description of the taxpayer’s business, the international transaction or specified domestic transaction, the associated enterprise, the terms and conditions of the transaction, the arm’s length price of the transaction, and any other information or document as prescribed by the tax authorities.
What is the penalty for non-compliance with Section 92E?
The penalty for non-maintenance of documentation is 2% of the value of the transaction, while the penalty for non-filing of the Transfer Pricing Report is Rs. 1 lakh. In case of deliberate non-compliance, the penalty can go up to 200% of the tax amount involved.
What is the purpose of transfer pricing regulations?
Transfer pricing regulations aim to ensure that multinational corporations do not artificially inflate or deflate prices between related entities to reduce their tax liability. These regulations also ensure that the tax base of each country is not eroded by the shifting of profits to low-tax jurisdictions.
What is the arm’s length price?
The arm’s length price is the price that would be charged between unrelated parties in a similar transaction. This price is used to determine whether the prices charged between related parties are at arm’s length or not.
How long should the documentation be maintained?
Taxpayers are required to maintain and keep the documentation for a period of eight years from the end of the relevant assessment year.
