Following the release of OECD's Base Erosion and Profit Shifting (BEPS) report on Action Plan 13 (Transfer pricing documentation and country-by-country (CbC) reporting), the Indian TP legislation has been amended to include specific requirements in respect of CbC reporting and master file documentation with effect from financial year 2016-17. CbC provisions introduced in the Finance Bill, 2016 are broadly in line with the recommendations of OECD BEPS Action 13 report.
Some of the key provisions in relation to CbC are as follows:
Currently, under Section 271(1)(c) of the Act, where any TP adjustment is made by the tax officer then such adjustment amount was deemed to represent the income in respect of which particulars have been concealed or inaccurate particulars have been furnished. Consequently, the tax officers invariably in all cases proceeded to levy penalty (at a rate of 100-300 per cent of tax sought to be evaded) where TP adjustment were made by the TP officers. With effect from 01st April 2016, Section 271 will be replaced by Section 270A which provides for penalty in cases for "under-reporting" and "misreporting of income".
Where the taxpayer had maintained the prescribed TP documentation declared the international transaction under Chapter X and disclosed all the material facts relating to the transaction, it shall be presumed that the taxpayer has not "under-reported" income. Therefore, no penalty should be levied where the TP adjustment only emanated from difference of opinion on the arm's length price of transactions determined by the tax officer vis a vis arm's length price as determined by the taxpayer.
However, where taxpayer fails to report any international transaction or deemed international transaction under Chapter X, the taxpayer shall be liable for penalty at the rate of two hundred per cent of the tax payable on such misreported income. It is important to note that failure to report an international transaction or specified domestic transaction also leads to a penalty of 2 per cent of value of such transaction under Section 271AA of the Act.
Thus, it seems that Government has laid a lot of emphasis on true and correct disclosure of international transactions by taxpayers, failure of which may lead to stringent penal consequences both under Section 270A and 271AA.
Post June 2016, the time limit of the completion of the assessment proceedings (where reference has been made to TPOs) will be reduced from 36 months to 33 months. This implies that the TP assessment proceedings will now become time barred in the month of October of a tax year.
With the due date of compliance of TP study/ CbC/ master file being November 30 of a tax year, the revised time line of completion of TP assessment proceedings will leave taxpayers with limited time to focus on all compliances and assessment proceedings.
Lastly, in line with the intention of the Government to minimise litigation, orders passed by Dispute Resolution Panel (DRP) will not be appealable by tax authorities.
Vishal Rai, Partner- Transfer Pricing, International Tax Services, EY LLP