Transfer Pricing (TP) Provisions were introduced in India by the Finance Act 2001. The TP Provisions were introduced with an intent to protect India’s right to collect a fair share of tax in respect of cross border transactions. In simpler terms, TP Provisions were introduced to ensure that an international transaction between two associated enterprises is made at an arm’s length price so that both the countries involved get a proper share of profits in their respective jurisdiction.
The term “international transaction” has been defined in section 92B of the Income-tax Act. Prior to the amendment proposed by the Budget 2012, the section provided that besides the specific transactions contained in the section, any other transactions which have a bearing on the profit, income, losses or assets shall also be treated as international transaction. Section 92 of the Income-tax Act (which is the charging section for transfer pricing) provides that any income arising from an international transaction shall be computed having regard to the arm’s length price (ALP).
Keeping in view the aforesaid provisions, the Indian courts have taken a view that until there is any income arising from an international transaction which is chargeable to tax in India, the provisions of transfer pricing will not apply. For example in the case of business restructuring it was held that TP provisions will not apply (see Dana Corporation, In re, 321 ITR 178 (AAR)).
Accordingly, while filing an audit report on transfer pricing (Form 3CEB) along with the Return of Income, in most of the cases, only those transactions would have been reported which were considered as having any bearing on the profit, income or losses. Form 3CEB upto assessment year 2011-12 would have already been filed by the assessees with the Income-tax Department.
Amendments have now been proposed in section 92B by the Budget 2012. An explanation has been inserted providing that transfer pricing provisions shall be applicable on all international transactions irrespective of the fact whether it has any bearing on the profit, income or losses or not. In addition to this, the capital/debt financing has also been included in the definition of international transaction. This amendment has been proposed with retrospective effect from assessment year 2002-03.
Since the said amendment has been proposed with retrospective effect from AY 2002-03, therefore, there is a high possibility that the Form 3CEB already filed with the Income-tax Department would not cover the transactions which will now be covered within the definition of international transaction as a result of the retrospective amendment.
Under the circumstances, the reports filed by the assessees would be rendered incomplete and wrong because of operation of retrospective amendment.
Earlier, the penalty was leviable in case the assessee has not filed the report in Form 3CEB with the Income-tax Department or the assessee fails to maintain the Transfer Pricing documents or fails to file the same with the Transfer Pricing Officer.
There was no penalty in case any transaction has escaped from being reported in Form 3CEB filed by assessee. Amendment has been proposed in section 271AA to provide that in case any transaction has not been reported in Form 3CEB, then the AO may levy penalty @2% of the value of international transaction. This amendment has been made applicable from 01.07.2012.
Under the circumstances, there is a good possibility that the assessees may be subjected to penalty as per the amended provisions of section 271AA in respect of cases which are pending for assessment as on 01.07.2012.
It will be grossly unfair and inequitable if assessees are made to pay penalty in such cases where they had fully complied with the then prevailing provisions of law.
Therefore, it is earnestly suggested that the Government should issue necessary clarification to provide that the amended provisions of section 271AA will apply only in respect of audit reports (Form 3CEB) filed after 01.07.2012, i.e. the date of coming into force of the amended provisions of section 271AA.
The author is a Sr. Partner in S.S. Kothari Mehta & Co.