Transfer Pricing Compliances for Non Residents (NR) in India
Home > Transfer Pricing Compliances for Non Residents (NR) in India
September 9, 2024
Transfer Pricing Compliances applicable to NRs in India:
The clock is ticking, and Indian Transfer Pricing (“TP”) Compliances for the financial year 2023-24 are just around the corner, with due dates in Oct/Nov ’24.
Ensuring compliance with Indian transfer pricing regulations isn’t just a box to tick; it’s a strategic imperative. Non-compliance can result in serious repercussions with tax authorities. While many multinationals are abreast and carefully track the TP compliances of resident entities, there has been confusion or oversight regarding TP compliances applicable to a non-resident entity especially the associated enterprises (“AEs”) of Indian entities.
In this update, we have highlighted the applicability of Indian TP compliances for Non-Residents (“NR”) in India.
Applicability of TP Provisions to NRs
Section 92(1) of the Income Tax Act, 1961 (“IT Act”) (the primary section for the applicability of TP) provides that income arising from international transactions has to be at arm’s length price (“ALP”). Accordingly, Indian TP provisions would apply to NRs only when they enter into international transactions that give rise to taxable income in India.
If an NR has taxable income in India as per the provisions of the ITA from its AEs in the nature of services income, royalty/license fees, interest, sale/transfer of shares (capital gains), guarantee commission, etc., the NR has to comply with TP regulations in India.
ALP analysis from the standpoint of Indian resident AEs alone is not sufficient, as the TP regulations require even the NR AEs to substantiate the ALP for taxable international transactions.
| TP Compliances for NR | Threshold for applicability | Due date | Penalty for non compliance |
|---|---|---|---|
|
Accountants
Report
(Form No.
3CEB) |
If International Transactions(irrespective of
threshold) are undertaken with foreign
Associated Enterprises (AEs).
[Sec 92E (Form No. 3CEB) is applicable for all
taxpayers including NR] |
31st
October |
INR 1,00,000
[Sec 271BA is
applicable to all
taxpayers
including NR] |
|
Transfer
Pricing Study
Report |
If aggregate value of International Transactions > INR 1 Crore.
[Sec 92D & Rule 10D (TP Study) is applicable
to NR having international transactions that
gives rise to taxable income in India] |
31st
October |
2% of value of
international
transactions
[Sec 271AA(1) is
applicable to all
taxpayers
including NR] |
|
Master File
(Form No.
3CEAA) |
Part A is applicable if International
Transactions are undertaken during the
financial year (Part A is applicable to all
MNEs irrespective of threshold) Part B is applicable if below twin conditions are satisfied: • Consolidated Group Revenue exceeds INR 500 Crores and • Aggregate value of all International Transactions exceeds INR 50 crores, or the Intangible Property related International Transactions exceeds INR 10 Crores [Sec 92D & Rule 10D (Form No. 3CEAA) is applicable for all taxpayers including NR] |
30th
November |
INR 5,00,000
[Sec 271AA(2) is
applicable to all
taxpayers
including NR] |
Filing of Form No. 3CEB, maintenance of TP Study Report and Corporate Tax Return by NR
| Income earned by NR | Form 3CEB & TP Report compliance requirement | Corporate Tax Return Requirement (“ROI”) |
|---|---|---|
|
Taxable as per Income Tax
Act & DTAA |
To be reported in Form 3CEB & TP
Study Report to be maintained (if
value > INR 1 Crore) |
Applicable unless TDS is
deducted at rates given in
Section 115A and there is no
other income chargeable apart
from incomes specified in
Section 115A. |
|
Taxable as per Income Tax
Act but exempt as per
DTAA |
To be reported in Form 3CEB & TP
Study Report to be maintained (if
value > INR 1 Crore) |
Applicable where DTAA benefit is
opted by NR. |
|
Not taxable as per Income
Tax Act |
Not to be reported
(Can be disclosed in Form No.
3CEB out of abundant caution if
there are any other taxable
international transactions) |
Not applicable |
|
Other transactions of NR
not impacting the taxable
income |
Not to be reported
(Can be disclosed in Form No.
3CEB out of abundant caution if
there are any other taxable
international transactions) |
Not applicable |
| TP compliances applicable even in case of ITR exemption | Filing of Master File (Form No. 3CEAA) by NR |
|---|---|
|
❑ Section 115A provides an exemption to NRs
from filing a Return of Income (ROI) when
their total income consists of interest,
dividends, FTS (Fees for Technical
Services), and royalties, if tax has been
deducted as per the rates provided therein. ❑ To claim such exemption, NR must not have any additional income that is assessable under the IT Act. ❑ However, there is no corresponding exemption in Sections 92E and 92D, and it would be advisable for NRs to comply with TP regulations to avoid penalties u/s 271BA and 271AA of the IT Act. |
❑ The Central Board of Direct Taxes (“CBDT”),
vide Notification No. 31/2021 dated April 5,
2021, amended Rule 10DA(4). ❑ As a result, if there are more than one resident as well as non-resident constituent entities, Form No. 3CEAA can be filed by any one designated constituent entity on behalf of all constituent entities. ❑ Accordingly, this redundant compliance burden on NRs is eased by the government. |
Mitigating the Risk of Potential Litigation
❑ Under the Indian TP litigation mechanism, the Assessing Officer (AO) must refer the scrutiny of international or specified domestic transactions to a designated Transfer Pricing Officer (TPO).
❑ The CBDT, via Instruction No. 03/2016, provides guidelines on risk parameters for referring cases to TPOs.
❑ Cases are selected for scrutiny based on “TP risk parameters” through the Computer Aided Scrutiny Selection (CASS) system or the Compulsory Manual Selection Process.
❑ Cases under corporate tax scrutiny may also be selected for TP scrutiny based on Non-TP risk parameters, such as:
- Non-filing of Form No. 3CEB or non-reporting of transactions in Form No. 3CEB.
- TP adjustments of INR 10 crore or more in prior years, upheld by judicial authorities or pending in an appeal.
- Findings related to TP matters in india from search, seizure, or survey operations.
❑ Non-Residents must ensure transfer pricing compliance to avoid scrutiny and penalties related to the non-filing of Form No. 3CEB in India.
Check Points for NR TP Compliance
| Check Points | Explanation |
|---|---|
|
Obtain PAN in India |
When TP compliances are applicable, obtaining a PAN in India is crucial for
electronic filings. For Non-Residents (NRs), obtaining a PAN through Form 49AA can be time-consuming, as it requires documents like the certificate of
incorporation to be apostilled or attested by the Indian consulate or
embassy abroad. It is advisable to initiate this process early to meet
impending due dates. |
|
Authorize Digital
Signature
Certificate (DSC)
Holders in India |
It is advisable to authorize a person holding a Digital Signature (DSC) in India
by initiating a Power of Attorney (PoA), as electronic TP filings require digital
signing. NR individuals acting as signatories for NR entities outside India may
also consider obtaining a DSC depending on convenience. |
|
Reliance on
Available
Documentation
for TP Compliance |
Since NR may not statutorily required to maintain books of accounts in India
under any law, reliance should be placed on Form No. 26AS, invoices,
agreements etc. Reliance can also be placed on documents, information
and accounts maintained by the Indian AE with whom the NR AE has entered
into international transaction. |
|
Ensure Arm’s
Length Price (ALP)
Compliance |
The Transfer Price should fall within the arm’s length range to meet the arm’s
length requirements from the perspectives of both the Indian AE and NR AE,
ensuring compliance from both sides. |
|
Reconcile Form
No. 3CEB with
Form No. 26AS
and Income Tax
Return |
Ensure that the value of international transactions reported in Form No.
3CEB matches with Form No. 26AS and the Income Tax Return to avoid
scrutiny notices due to mismatches. |
|
Report All
Relevant
International
Transactions |
Report all taxable international transactions and, where required, other
international transactions as a precautionary measure to avoid penalties for
failure to report qualifying international transactions. |
Judicial Rulings in the context of NR TP Compliances
| Case Law Reference | Important Observations |
|---|---|
|
Content |
|
|
Venenburg Group
B.V. [2007] 289 ITR
464 (AAR) |
Case Summary: The Authority for Advance Ruling (AAR) held that the applicant was not taxable in respect of capital gains on sale of shares held in its Indian subsidiary under the provisions of India Netherland Tax treaty. AAR held that since the provisions of the tax treaty were more beneficial to the assessee than provisions of the Act, the same were applicable to the assessee. Conclusion: The AAR further held that it was not necessary for the applicant to file tax return in India in the absence of tax liability in India and transfer pricing provisions under section 92 to 92F were not attracted in respect of the aforesaid transactions. |
|
Praxair Pacific Ltd.
[2010] 326 ITR 276
(AAR) |
Case Summary: The assessee, a tax resident of Mauritius, proposed to transfer its holding in Indian company to its wholly owned Indian subsidiary. The AAR held that the transaction could not be regarded as ‘transfer’ in view of provision of section 47(iv). Further, the AAR also held that the transaction was not subject to capital gain tax in view of provisions of India Mauritius tax treaty. The AAR further held that provisions of section 115JB (MAT provisions) were not applicable to foreign company. Conclusion: The AAR also held that transfer pricing provisions were not applicable as income was not taxable in India. |
|
Dow Agro
Sciences
Agricultural
Products Ltd.
[2016] 380 ITR 668
(AAR) |
Case Summary: The applicant, a company, incorporated and registered in Mauritius, contends that its investment in Dow Agrosciences India (DAS India) is a capital asset. The Revenue argues about the existence of a Permanent Establishment (PE) in India, but the applicant has provided documents supporting no PE. The applicant reiterates that profits from the sale of equity shares of DAS India won't be taxable in India due to the DTAA between India and Mauritius. Conclusion: Transfer pricing provisions (Sections 92 to 95) are not applicable if the transaction is not taxable in India. Since the proposed share transfer does not attract tax in India under the tax treaty's Article 13, these provisions do not apply. |
|
Goodyear Tire and
Rubber Co. [2011]
334 ITR 69 (AAR) |
Case Summary: In the facts of the given case, Goodyear Tire and Rubber Company USA, proposed to transfer its 74% shareholding in Goodyear India Limited (listed on BSE ) to its Singapore based subsidiary as ' Gift' and at NIL value . Goodyear USA argued that since the full value of consideration received or accruing as a result of the transfer of shares was NIL, the mechanism to charge the capital gains to tax fails. The AAR upheld Goodyear's contention and ruled that 'It is settled law that Section 45 must be read with Section 48 and if the computation provision cannot be given effect to for any reason, the charge under Section 45 fails. Conclusion: The AAR further held that transfer pricing provisions under section 92 to 92F were not applicable to the facts of the case as the transaction was not taxable under Indian tax laws. |
|
Vodafone India
Services Pvt. Ltd.
v. Union of India
[2014] 368 ITR 1
(Bombay) |
The Bombay High Court concluded that if 'income' is chargeable to tax
under the normal provisions Of the Act, then alone Chapter X/transfer
pricing provisions of the Act could be invoked. The Government of India
vide Instruction No. 2/ 2015 dated 29.1.2015 has accepted the decision of
the Bombay High Court in the case Of Vodafone Services Pvt. Ltd. According
to the said instruction, the premium arising on issue of shares is a capital
account transaction and does not give rise to income and hence not liable to
transfer pricing adjustment. |
|
Castleton
Investment
Limited. [2012]
348 ITR 537 |
Case Summary: The AAR held that transfer pricing provisions (Sections 92 to 92F) are applicable even if the income, such as capital gains, is exempt from taxation. In the case of Castleton Investment Limited, a Mauritius-based company, which held shares in an Indian listed company, the AAR determined that the provisions are considered machinery provisions. As such, capital gains cannot be determined without applying these sections. Whether the gain is ultimately taxable in India or not, the transfer pricing provisions would still apply if the transaction falls within their ambit. Conclusion: The applicability of Section 92 does not depend on chargeability under the Act. Thus, the AAR ruled that transfer pricing provisions would be applicable in this case of transferring investment to an associated enterprise in Singapore. |
|
Armstrong World
Industries
Mauritius
Multiconsult Ltd.
[2012] 349 ITR 303
(AAR) |
Case Summary: Armstrong World Industries Mauritius Multiconsult Ltd., a fully-owned subsidiary of Armstrong World Industries Ltd., UK (Armstrong UK) and a tax resident of Mauritius, intends to repurchase a portion of its shares from the applicant (holding 99.97% of shares) while the remaining shares (0.03%) are held by Armstrong UK. This proposed buyback is not liable to capital gains tax in India by virtue of the India-Mauritius. Conclusion: Thus, the AAR held that transfer pricing provisions would be applicable in the said case, taxpayer would be liable to comply with the Transfer Pricing provisions irrespective of whether the taxpayer earns any taxable income in India or not. |
|
BNT Global Pvt.
Ltd. v. ITO (ITA No.
4111/Mum/2016
dated 26 April
2017) |
Case Summary: The taxpayer has not filed the audit report in Form 3CEB for its international transaction involving the receipt of foreign remittance from its Non-Resident Indian (NRI) Director, who was also a beneficial shareholder, in exchange for share capital and share premium within the company. Conclusion: The ITAT upheld the penalty under Section 271BA for the failure as the share issuance transaction fell within the ambit of Section 92E, requiring the filing of Form No. 3CEB. The reliance on the Vodafone India Services Pvt. Ltd. case was rejected, as it dealt with different facts and penalties. |
|
Convergys
Customer
Management
Group Inc. [MA
NO. 261/Del/2020
I.T.A. No.
3529//DEL/2015
MA NO.
262/Del/2020 in
I.T.A. No.
3530//DEL/2015] |
Case Summary: Taxpayer only submitted Form 3CEB during the scrutiny and has not filed TP Study. Further, taxpayer did not disclose certain international transactions (of reimbursements, interest payments, FTS) on the premise that they are not subject to tax in India in accordance with the Treaty provisions. A categorical finding was given by the ITAT that every person has to maintain its own documents which taxpayer failed to and instead relied on its Indian subsidiary’s TP study. Conclusion: The ITAT upheld that Form 3CEB submission is not equivalent to TP documentation compliance u/s 92D while dismissing the Miscellaneous Application upholding levy of penalty u/s 271AA for non-maintenance of documents u/s 92D. |
|
Without Prejudice |
|
|
Commissioner of
Wealth-tax v. Apar
Ltd. [2002] 122
Taxman 631
(Bombay) |
The term "without prejudice" was used to indicate to the Assessing Officer
that filing a return and paying taxes should not impact the rights of the
taxpayer. The taxpayer reserves the option to claim settlement as if the
return was not filed under the Act. By filing the return "without prejudice,"
the taxpayer denies liability to be assessed under the Act and implies
the possibility of future rectification in accordance with the law. However, when any compliance is undertaken "without prejudice," it must be clearly disclosed, along with relevant facts and justifications, in the documentation maintained by the non-resident and in Form No. 3CEB issued by the accountant. |
|
On maintenance of separate transfer pricing documentation by non - residents |
|
|
DCIT v. Convergys
Customer
Management
Group Inc. [ITA No.
3529/DEL/2015
and ITA No.
3530/DEL/2015] |
Case Summary: The ITAT imposed a penalty on Convergys Customer Management Group Inc., a US-based non-resident company, for not maintaining TP documents under Section 271AA of the Income Tax Act. The case involved its Indian subsidiary, Convergys India Services Pvt. Ltd., providing call center/back office support services. The Assessing Officer found a fixed place PE and Service PE in India with attributable profits, resulting in disallowances and penalties for not maintaining TP documents. Conclusion: In conclusion, the ITAT upheld the penalty imposed under Section 271AA of the Income Tax Act, stating that the CIT(A) was wrong in deleting the penalty. |
|
On TP adjustments in hands of NR |
|
|
Instrumentation
Corporation Ltd.,
Finland v. ADIT
[I.T.A. Nos. 1548
and
1549/Kol/2009] |
Case Summary: Instrumentarium Corporation, a Finnish company (F Co.), provided an interest-free loan to its Indian subsidiary, Datex Ohmeda India Pvt. Ltd. (I Co.). The case revolved around whether the loan was at arm's length and whether it eroded India's tax base. Conclusion: The Assessing Officer argued that the transaction was not at arm's length, resulting in an adjustment to the interest income of F Co. The company contended that applying transfer pricing provisions in this situation would lead to a reduction in the Indian tax base and increased losses for I Co., which could be carried forward and set off in subsequent years. The Income Tax Appellate Tribunal (ITAT) held that Section 92(3) of the Income Tax Act required assessing the impact on profits or losses for the year under consideration and for the taxpayer in question, rather than considering the impact on taxes in subsequent years. Thus, if the transaction was accepted without an arm's length pricing adjustment, it would result in tax base erosion to the extent of the taxability of interest in the hands of F Co. The ITAT also rejected the argument that a corresponding deduction should be given to I Co. |
Emphasis on Two-sided Transfer Pricing Analysis
❑ To satisfy the ALP test for both parties in a transaction, a two-sided comprehensive transfer pricing analysis is required.
❑ This analysis ensures that both the Indian AE and the NR AE meet the ALP standards.
❑ The transfer price must be set within an acceptable arm’s length range for both jurisdictions. The process is complex and time-consuming but is crucial to prevent double taxation and avoid tax disputes.
❑ The Kolkata Tribunal, in the landmark case of Instrumentarium Corporation Limited [I.T.A. Nos. 1548 and 1549/Kol/2009], emphasized the need for a two-sided TP analysis to determine the arm’s length price in both jurisdictions and mitigate risks of double taxation and tax disputes.
Conclusion
To successfully navigate the complex TP landscape in India, here’s what both residents and NRs should do:
❑ Ensure Compliance: It’s crucial for multinationals to diligently ensure compliance in India with applicable transfer pricing regulations for both resident and non-resident entities in India (i.e., filing all the relevant forms in India related to three-tiered documentation). Non-compliance could be viewed negatively by tax authorities.
❑ 360-Degree Analysis: It’s pertinent to ensure that the information disclosed in Form No. 3CEB, the local file, master file, and country-by-country report provides a comprehensive view and supports the transfer pricing and other tax positions of the multinational group. Applicability and filing of corporate tax returns should also be perused diligently.
❑ Robust Documentation: Remember, it’s not limited to filings alone. TP and tax filings should be backed up by the maintenance of robust supporting documentation to substantiate the TP positions and analysis in case of future audits/scrutiny by tax authorities.
In a nutshell, robust transfer pricing documentation and adherence to guidelines should be your top priority if you’re a multinational operating in India.
Disclaimer: This material and the information contained herein prepared by Steadfast Business Consulting LLP is intended for clients to provide updates and is not an exhaustive treatment of such subject. We are not, by means of this material, rendering any professional advice or services. It should not be relied upon as the sole basis for any decision which may affect you or your business. This Alert provides certain general information as well as specific information with respect to Steadfast Business Consulting LLP. This alert should neither be regarded as comprehensive not sufficient for the purposes of any decision-making.
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