The government has placed transfer pricing regulations in India to ensure transparency and avoid profit shifting. The idea behind this is simple – certain categories of taxpayers operating in multiple nations might engage in certain transactions whereby the profits generated and taxable in high-taxation countries are shifted to low-taxation countries. To avoid this, taxpayers engaging in international transactions are required to abide by the transfer pricing regulations. One of the most important aspects of these regulations is the maintenance of proper transfer pricing documentation and adequate disclosures. What is the transfer pricing documents taxpayers are required to maintain? Find out here!
As per section 92D of the Income Tax Act, 1961 transfer pricing documents include all the documents maintained to review the transfer pricing arrangements for the transactions that take place between the entities in the same group. The purpose of maintaining the transfer pricing documents is to determine whether the transactions took place at arm’s length price or not.
Before you understand which documents are required to be maintained, you need to check out who is responsible for maintaining transfer pricing documentation. Here are the persons responsible for maintaining transfer pricing documents required in India:
Following are the transfer pricing documents required to be maintained as per Rule 10(D)(1):
The importance of maintaining the transfer pricing documentation was highlighted in the case of Convergys Customer Management Group Plc. It is a non-resident company in the USA (herein referred to as the taxpayer) that had a subsidiary company in India, Convergys India Services Private Limited (herein referred to as associated enterprise). The taxpayer availed of IT-enabled services from the associated enterprise and earned the following two types of income from it i.e., interest on loan and receipt of fees for technical service.
As per the Indian tax authorities, the taxpayer had a permanent establishment in India and therefore, attributed a portion of the taxpayer’s profits to such establishment. Further, the first-level tax authority levied a penalty under section 271AA equivalent to 2% of the value of international transactions.
As per the contentions of the revenue department, Section 92D states that every person engaging in international transactions is required to maintain transfer pricing documentation. The taxpayer in the present case did not maintain the TP Study Report and placed its reliance on the Indian-associated enterprise’s study report.
The Income Tax Appellate Tribunal (ITAT) heard arguments from both sides and stated that Section 92 requires all taxpayers to maintain the transfer pricing documentation, including non-resident taxpayers. Further, it is mandatory for non-resident taxpayers to obtain an independent accountant’s report in Form No. 3CEB. Merely relying on the transfer pricing documentation of the Indian-associated enterprises cannot be regarded as sufficient compliance with Indian transfer pricing regulations in India and transfer pricing documents need to be separately maintained by the non-resident taxpayers. Accordingly, the penalty imposed by the income tax authorities was upheld.
Above are the complete details relating to the maintenance of the transfer pricing documentation by the entities engaging in international transactions. In case you need any assistance and support in relation to transfer pricing regulations and compliances in India, feel free to contact the ASC Group.
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