INTRODUCTION

In 2001, India introduced Transfer Pricing (TP) Regulations, marking a significant step towards safeguarding its tax base from tax erosion. These regulations were put in place to ensure that international and specified domestic transactions are priced at Arm’s Length. Over the years, these regulations have undergone several modifications to stay in line with global standards, with India playing a proactive role in OECD-led initiatives on transfer pricing.

TRANSFER PRICING DOCUMENTATION

For taxpayers with international dealings that exceed a specific threshold, adhering to a comprehensive documentation protocol is mandatory. This documentation is threefold, comprising a Local File, a Master File, and a Country-by-Country (CbC) Report, all of which must conform to the Income-tax Rules. The primary objective of this rigorous documentation process is to furnish ample evidence to justify adherence to Transfer Pricing methods and arm’s-length pricing of the transactions in question.

THREE-TIER TP DOCUMENTATION

India adopted the three-tier transfer pricing documentation structure as prescribed by the OECD

OVERVIEW OF THE THREE-TIER TRANSFER PRICING DOCUMENTATION

TRANSFER PRICING DOCUMENTATION: LEGAL REQUIREMENTS

In India, transfer pricing documentation is prescribed under Section 92D of the Income Tax Act, 1961. The following points outline the legal requirements for transfer pricing documentation in India:

1. Documentation for Taxpayers engaged in International Transaction:

Taxpayers engaging in international transactions or specified domestic transactions must maintain certain information and documents, as per the Rule 10D of Income Tax Rules, 1962

The Assessing Officer or the Commissioner (Appeals) may require to furnish any information or document referred to in the rules within 10 days from the date of receipt of a notice issued in this regard.

2. Documentation for international groups:

Constituent Entities that are part of an international group must also maintain specific information and documents about that group, following the guidelines specified under Rule 10DA of Income Tax Rules, 1962

The person referred to in clause (ii) of sub-section (1) of Section 92D must furnish the information and document referred to therein to the authority prescribed under sub-section (1) of section 286, in such manner, on or before such date, as may be prescribed.

3. Maintenance period:

The Board may prescribe the period for which the information and document shall be kept and maintained.

BREAKING DOWN TRANSFER PRICING DOCUMENTATION: LOCAL FILE, MASTER FILE, AND CBC REPORT MASTER FILE

OVERVIEW AND PURPOSE OF LOCAL FILE

Local File is an essential part of Transfer Pricing Documentation of MNCs and it is prepared at the company or country level. The purpose of the local file in transfer pricing documentation is to provide a detailed overview of the related party transactions carried out by a specific entity in a specific jurisdiction.

MAIN CONTENTS OF THE LOCAL FILE:

MASTER FILE

The Master File is a pivotal document for multinational enterprises MNE Groups, encapsulating the important details of their global business operations and Transfer Pricing policies

Master File is primarily designed to be available to tax authorities in every jurisdiction where the group’s constituent entities of the group are resident, aiding in effective tax compliance and assessment.

Key features & contents of the Master File:

• It provides a thorough insight into the MNE group’s organizational structure, highlighting its global operational footprint and key value drivers.
• Adheres to OECD guidelines, ensuring a consistent and clear presentation of information.
• Includes in-depth details about the group’s products, services, and supply chain, elaborating on the business activities of each entity within the group.
• Highlights the management and transaction of intangible assets within the group.
• Describes the internal and external financing methods used by the group, including information on external funding.

Components of Master File and their Applicability

COUNTRY-BY-COUNTRY (CBC) REPORT

The Country-by-Country (CbC) report forms a crucial part of transfer pricing documentation, established as a part of the Base Erosion and Profit Shifting (BEPS) Action 13 initiative. This report mandates that large multinational enterprises (MNEs) disclose summarized data about how they distribute income, profits, taxes paid, and their economic activities across the various tax jurisdictions they operate in. Aimed at increasing transparency, the CbC report serves as an essential tool for tax authorities to conduct high-level assessments of transfer pricing and risks associated with BEPS.

Governing Provision and Applicability:

1. The elements relating to CbC reporting requirement shall apply in respect of an international group having consolidated revenue, based on consolidated financial statements, exceeds the threshold which is INR 6,400 Crores

2. As per Rule 10DA of the Income Tax Rules, 1962 the requirements to submit a CbC Report with the Income Tax Department are applicable only when the consolidated revenue of the International Group for the preceding accounting year exceeds INR 5,500 crores.

Contents of CbC Report:

The Country-by-Country (CbC) report mandates that multinational enterprises (MNEs) annually provide a breakdown for each tax jurisdiction where they conduct business, detailing specific information.

CONSEQUENCES OF NOT MAINTAINING ADEQUATE TRANSFER PRICING DOCUMENTATION

Not adhering to the adequate maintenance of Transfer Pricing Documentation can have several repercussions:

1. Risk of Non-Compliance Penalties:

Under Section 92D of the Income Tax Act, 1961, there are specific mandates for maintaining transfer pricing documentation in India. Failure to comply with these can result in significant penalties during tax assessments and audits.

2. Difficulty in Proving Compliance:

Without proper documentation, taxpayers may find it challenging to prove that their transactions adhere to the arm’s length principle, a core requirement under transfer pricing regulations. This can lead to increased scrutiny from tax authorities.

3. Increased Likelihood of Audits and Assessments:

Inadequate documentation can trigger transfer pricing assessments and audits, as it raises questions about the nature of transactions conducted by the taxpayer.

4. Extended Legal and Financial Implications:

Non-compliance can lead to prolonged legal battles and financial strains, as defending transfer pricing positions without adequate documentation is both challenging and costly.

Master Brains offers a range of expert guidance and services in the field of transfer pricing, tailored to the specific needs of their clients. These services include:

• Determination of Arm’s length price
• Transfer pricing methodology
• Advance pricing agreements
• Vetting of cross border transactions
• Preparation of Transfer Pricing Documentation
• Representation before Transfer Pricing Authorities
• Transaction Structuring and Advisory
• Health check-up of Transfer Pricing Compliances

Reach out to us via call/WhatsApp on +91-8595867402, or fill out our query form to send your inquiries. Our team will get back to your promptly.