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  7. Section 92E of Income Tax Act: Report To Be Furnished Before Entering Into International Transaction

Section 92E : Report From An Accountant To Be Furnished By Persons Entering Into International Transaction

Updated on: 23 May, 2024 04:07 PM

Contents

What is section 92E?

An audit report from a Chartered Accountant is required to be obtained & furnished in Form 3CEB by every person who has entered into :

  • an international transaction or
  • a specified domestic transaction

What is the meaning of International transactions as per section 92B?

A transaction which fulfill the following conditions :

  • A transaction done between two or more associated enterprises AND
  • At least one must be Non Resident
Also, such transactions should be in nature of

i) Purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money

ii) A mutual agreement or arrangement between two or more associated enterprises and terms of transaction are pre determined like allocation of cost

allocation of cost

Now we need to understand the meaning of Associated enterprises

What is the meaning of Associated Enterprises as per section 92A ?

  • An enterprise taking part directly or indirectly in the
    1. management or
    2. control or
    3. capital
    of the other enterprise.
  • An enterprise in respect of which the person participating in management or control or capital, directly or indirectly, or through intermediaries are the same persons who participate in a similar manner in the other enterprise.
  • One enterprise holds, directly or indirectly, at least 26% of the voting power in the other enterprise.
  • Any person or enterprise holds, directly or indirectly, shares 26% of the voting power in each of such enterprises
  • A loan advanced by one enterprise to the other enterprise,at least 51% book value of the total assets of the other enterprise.
  • In case where one enterprise give guarantee for at least 10% of the total borrowings of the other enterprise.
  • Any person appoints more than half of the BOD or one or more Executive Director of each of such enterprise.
  • When the appointment of more than half of the directors or members of the governing board, or one or more of the executive directors or executive members of the governing board is made by the same person or persons
  • The business of such enterprise is wholly dependent on knowhow, copyright, patent, secret formula of other enterprise.
  • 90% or more of the raw materials and consumables required by one enterprise, are supplied by the other enterprise.
  • The goods or articles manufactured one enterprise, are sold to the other enterprise , and the prices and other conditions are influenced by such other enterprise.
  • Where one enterprise is controlled by an individual, the other enterprise is also controlled by such individual himself or through his relative or jointly by such individual and his relative.
  • Where one enterprise is controlled by a HUF and the other enterprise is controlled by either
    1. A member of such Hindu undivided family, or
    2. By a relative of such Hindu undivided family member, or
    3. Jointly by such member and his relative.
  • One enterprise has at least 10% interest in another enterprise being partnership Firm, AOP, BOI.
  • In case any relationship of mutual interest exists between the two enterprises.
  • When the assessee enters into a transaction in which one of the parties to the transaction is a person located in a notified jurisdictional area, then all the parties to the transaction are deemed to be the associated enterprises as per section 92A of the income tax act.

What is the meaning specified domestic transactions as per section 92BA ?

Previously, only cross border transactions were covered under transfer pricing rules. However, the Finance Act, 2012 extended it scope and covered some specified domestic transactions with related parties within the country Now, we will understand which transactions are referred as specified domestic transactions :

"specified domestic transaction" means
  • any transaction given under section 80A;
  • any transfer of goods or services referred u/s 80-IA(8);
  • any business transacted between the assessee and other person as referred u/s 80-IA(10);
  • any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which provisions of section 80-IA(8)/(10) are applicable; or
  • any business transacted between the persons referred to in section 115BAB(4);
  • any other transactions as may be prescribed,

and where the aggregate of such transactions entered into by the assessee in the previous year exceeds a prescribed sum of Rs 20cr rupees.

If the threshold limit is crossed, the transfer pricing requirements will be required to be complied by the taxpayers with reference to all transactions regardless of the fact that the value of some transactions may be very small or nominal.

What are the types of information and documents that are required to maintain in relation to international transactions ?

A person has to keep and maintain given below information & documents in relation to the international transactions which is given under Rule 10D of Income Tax Rules

Rule 10D of Income Tax Rules

 

Rule 10D
10D (1) (a) The description of the ownership structure of the (AE) assessee enterprise shall be furnished. Together with the details of shares or other ownership interest held therein by other enterprises.
10D (1) (b) A profile of the MNC group of which the (AE) assessee enterprise is a part, along with the
  • Name,
  • Address,
  • Legal status and
  • Country of tax residence
of each of the enterprises comprised in the group with whom international transactions have been undertaken and ownership linkages amongst them shall be stated.
10D (1) (c) A broad description of the business of the assessee and the industry in which it operates. Details of the business of the associated enterprises with whom the assessee has transacted.
10D (1) (d) The nature and terms (including prices) of
  • International transactions or 
  • Specified domestic transactions
Which are entered into with each associated enterprises. The details of property transferred or services provided along with the quantum and the value of such transactions.
10D (1) (e) A description of the
  • Functions performed,
  • Risks assumed and
  • Assets employed or
  • To be employed
by the assessee and by the associated enterprises involved in such international transaction or such specified domestic transaction.
10D (1) (f) A record of the
  • Economic and market analyses,
  • Forecasts,
  • Budgets or
  • Any other financial estimates
prepared by the assessee. The records might be prepared for the business as a whole or for each division or product separately, having a bearing on the international transactions or such specified domestic transactions entered.
10D (1) (g) A record of uncontrolled transactions taken into account for analysing their comparability with international transactions or other specified transactions entered into. It shall include
  • A record of the nature,
  • Terms and conditions relating to such transaction
Which may be of relevance to the pricing of the international transactions or other transactions.
10D (1) (h) Record of the analysis performed to evaluate comparability of uncontrolled transactions with the specified transactions.
10D (1) (i) Description of the methods considered for determining the arm's length price in relation to these transactions. An explanation to the method and why such method was so selected, and how such method was applied in each case, shall be reported.
10D (1) (j) Details pertaining to actual working of arm's length price determination, including details of
  • Comparable data and
  • Financial information used in applying the most appropriate adjustments and methods, if any,
which were made to account for differences between
  • The international transaction or other specified transactions and
  • The comparable uncontrolled transactions, or between
  • The enterprises entering into such transactions
10D (1) (k) Assumptions, policies and price negotiations, if any, which have critically affected the arm's length price determination.
10D (1) (l) Details of the adjustments (if any) made to transfer prices to make them in line with arm's length prices determined. And aslo, consequent adjustment made to the total income for the purpose of tax.
10D(1) (m) Any other information, data or document, which includes information or data relating to the associated enterprise, which may be relevant for the arm's length price determination.

What is the penalty for not furnishing report u/s 92E?

If you fail to furnish report u/s 92E then penalty amounting to Rs 1,00,000 may be levied by the assessing officer as per section 271BA.

Frequently Asked Questions

Q- What is the due date of return filing for assessee covered under section 92E ?

The due date of Income tax return filing is 30th November in case taxpayers covers under transactions referred u/s 92E.

Q- What is Form 3CEB ?

Form 3CEB is a report from a Chartered Accountant to be furnished in case of international transactions & specified domestic transactions covered under section 92E. It is furnished electronically and needs to be signed by DSC.The requirement of Form 3CEB is given under Rule 10E.

Q- What is the amount of penalty levied in case failure to furnish report of CA as per section 92E?

As per section 271BA, amount of penalty is Rs. 1,00,000/- in case of failure to furnish report of CA.

Q- Whether amount of taxes will be included in threshold limit calculated for specified domestic transactions?

The threshold limit can be calculated on the net basis if assessee is availing credit of taxes and if not, then on gross basis.

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CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.