Worldwide transfer pricing reference guide 2014

India
Taxing authority and tax law
Taxing authorities:
• Central Board of Direct Taxes (CBDT)
• Income Tax Department
Tax laws:
• Sections 92–92F, 144C, 271, 271AA, 271BA and 271G of the Income Tax Act, 1961
• Rules 10A to 10TG and Rule 44GA of the Income Tax Rules, 1962
Relevant regulations and rulings
The pricing of international transactions between associated enterprises should be determined with regard to the arm’s length principle,
using methods prescribed under Indian transfer pricing regulations. Associated enterprises are enterprises for which 26% voting power in
one is held by the other or a common parent holds at least 26% of voting power in both such enterprises. Transfer pricing provisions are
applicable to the following types of transactions between associated enterprises:
• Purchase, sale or lease of tangible or intangible property
• Provision of services
• Lending or borrowing money or capital financing, including any type of long-term or short-term borrowing, lending or guarantee,
purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising
during the course of business
• A mutual agreement or arrangement for cost allocation/apportionment
• A transaction of business restructuring or reorganization
• Any other transaction having a bearing on the profits, income, losses or assets of such enterprises
Transactions with a third party will be deemed transactions between associated enterprises if the third party has a prior agreement
with the associated enterprise, or if the terms of the relevant transaction are determined in substance between the third party and the
associated enterprise.
Safe Harbor Provisions
On 18 September 2013, the CBDT introduced safe harbor provisions. The provisions provide minimum operating profit margins in
relation to operating expenses a taxpayer is expected to earn for certain categories of international transactions, such as provision of
software development services, information technology enabled services, knowledge process outsourcing services, contract research
and development services, manufacture and export of automotive components etc., that will be acceptable to the tax authority. Further,
the provisions also cover transactions pertaining to lending of money and providing guarantee by an Indian entity to its wholly owned
subsidiary.
The transfer price contained in the safe harbor rules shall be applicable for five years beginning from financial year 2012–13. The safe
harbor rules, optional for a taxpayer, contain the conditions and circumstances under which the norms/margins would be accepted by
the tax authority and the related compliance obligations. The taxpayer has flexibility in electing the years to be governed by the safe
harbor rules within the five year period. Where a taxpayer’s transfer price is accepted by the tax authority under the safe harbor rules,
the taxpayer shall not be entitled to invoke the mutual agreement procedure under an applicable tax treaty.
Specified domestic transactions
With effect from the financial year 2012–13, the transfer pricing provisions are applicable to ”specified domestic transactions” if the
aggregate value of such transactions exceeds US$0.8 million (approximately).
“Specified domestic transactions” include payments to related parties, inter-unit transfer of goods or services of profit-linked tax-eligible
units, transactions of profit-linked tax holiday-eligible units with other parties and any other transaction that may be notified by
the CBDT.
Worldwide transfer pricing reference guide
141