DIRECT TAXATION TRANSFER PRICING - PENAL PROVISION

1. Section 271(1)(c)
As per Explanation 7 to section 271(1)(c)

• Where in case of an assessee who has entered into an international transaction or specified domestic transaction
• Any amount is added or disallowed in computing the total income under section 92C(4)
• Then the amount so added or disallowed shall be deemed to represent the income in respect of which particulars have been concealed or inaccurate particulars have been furnished
• Unless the assessee proves to the satisfaction of the Assessing Officer or the Commissioner (Appeals) or the Commissioner that the price charged or paid in such transaction was computed in accordance with the provisions contained in section 92C and in the manner prescribed under that section, in good faith and with due diligence.

The amount of penalty provided for is

• Not less than the amount of tax sought to be evaded; and,
• Not more than three times the amount of tax sought to be evaded, by reason of the concealment as aforesaid.

2. Section 271AA
If the assessee –

• Fails to keep and maintain the prescribed information and documents or;
• Fails to report any international transaction which is required to be reported, or;
• Maintains or furnishes any incorrect information or documents.

penalty equal to 2% of the value of each international transaction and value each specified domestic transaction may be leviable.
3. Section 271BA
Failure to furnish the accountant’s report may attract penalty of ₹ 1,00,000/-.
4. Section 271G
Failure to furnish the required information and documents may attract penalty of 2% of the value of the international transaction and value each specified domestic transaction for each failure. The power to levy this penalty has also been conferred to the Transfer Pricing Officer.
5. Section 273B
The penalties u/ss. 271AA, 271BA and 271G may not be levied if the assessee establishes reasonable cause for the said failures.

E. TRANSFER PRICING RULES

The Central Government has notified rules for giving effect to the provisions of sections 92C, 92D and 92E of the Act. The relevant rules 10A to 10E together with the forms prescribed under the said rules are given in the CD.
The gist of the said rules is as under:
1. Rule 10A defines terms used in the rules for determining arm’s length price; i.e., uncontrolled transaction, property, services and transaction.

2.1 Rule 10B(1) elaborates the manner of determining arm’s length price under each of the methods described in section 92C(1).
2.2 Rule 10B(2) lays down parameters to be considered in comparing an international transaction with an uncontrolled transaction; i.e.,

1. Contractual terms
2. Specific characteristics of property transferred or services provided
3. Functions performed, risk assumed and assets employed
4. Market conditions, which may include location and size of market, government regulations in force, level of competition, etc.

2.3 Rule 10B(3) provides for adjustment to eliminate differences when there are material factors affecting the prices between an international transaction and an uncontrolled transaction.
2.4 Rule 10B(4) provides that for the purpose of comparing international transaction and uncontrolled transaction the data for the relevant financial year or immediately preceding two years be used. The Finance Minister in his Budget speech announced that multiple year data can be used instead of one year data for comparable analysis. However, detailed rules in this will be prescribed

3. Rule 10C recognises that there cannot be a single method which may be appropriate under all circumstances. It lays down various factors to be considered for determining the most appropriate method in a particular international transaction.

4.1 Rule 10D(1) prescribes the information and documents required to be maintained by every person who has entered into international transaction.
4.2 Rule 10D(2) grants exemption from maintaining prescribed information and documents, if the aggregate value as recorded in the books of account of international transactions entered into by the tax-payer does not exceed rupees one crore.
4.3 Rule 10D(3) requires that the information specified in Rule 10D(1) shall be supported by authentic documents.
4.4 Rule 10D(4) requires that the information and documents be contemporaneous. Rule 10D(5) requires that such information and documents be kept for eight years from the end of relevant assessment year.

5. Rule 10E prescribes Form 3CEB as the report u/s. 92E which shall be furnished by every person who has entered into an international transaction.