Introduction:

Companies engaged in specific international or domestic transactions must comply with the rules set out in Section 92E of the Income Tax Act. These regulations are compulsory for associated enterprises, and various criteria determine whether their transactions fall within the aforementioned categories.

Therefore, multinationals operating in India should be familiar with the rules and regulations of Section 92E to ensure accurate filing of returns. Read this article to delve into Section 92E.

Section 92E:

As per Section 92E of the Income Tax Act, all individuals engaged in specified domestic transactions and international transactions in the preceding financial year are required to procure an audit report from a chartered accountant. This audit report must be submitted to  authorities by the specified due date.

Under transfer pricing regulations, individuals involved in international transactions or specific domestic transactions in the preceding year must obtain a report from an accountant. The accountant must be a Chartered Accountant (CA) possessing a valid certificate of practice and meeting specified qualifications under the Chartered Accountants Act, 1949.

Applicability of the Section 92E:

• The rules laid down in Section 92E of the Income Tax apply to specific international and domestic transactions involving more than two affiliated enterprises (AEs) Furthermore, among these enterprises, one or more parties must be a non-resident of India.
• some transactions that fall under the 92E:
• An agreement between two or more affiliated entities (AEs) for the allocation of costs or expenses associated with any benefit, service, or facility.
• lending or borrowing activities.
• Transactions between non-Associated Enterprises with a pre-existing agreement.
• Any transactions resulting in income, profits, losses, or gains/losses of assets.
• Purchase, sale or lease of tangible or intangible property.
• As per Section 92(3), the provisions of Section 92E do not apply to transactions which increase loss or give rise to a reduction in income tax. The Finance Act of 2009 sets out the specific guidelines on which the Tax Office accepts taxpayer valuations of new items. This guidance also extends to specific domestic transactions.

Provisions of the Section 92E:

• In addition to document maintenance, Section 92E mandates taxpayers to submit reports to the tax authorities. This report, known as the transfer pricing report, must be filed with the tax return by the specified due date. 
• The report include: a. Description of the taxpayer’s job b. Identification of specific international or domestic projects c. Description of the relevant work d. Terms and Conditions e. Arm value of the transaction f. Any other information or documents ordered by the tax authorities.
• Failure to obey this section may attract penalties. Failure to submit a document carries a penalty of 2% of the transaction value, while failure to submit a transfer pricing report carries a penalty of Rs. 1 lakh. Penalties for willful non-compliance can be up to 200% of the relevant tax rate.
• Section 92E requires taxpayers to check documents relating to specific international or domestic transactions. This register should be retained for eight years at the end of the relevant assessment year.
• The report must include: a. Description of the international or specified domestic transaction b. associated enterprise  Description c. Transaction Terms and conditions  d. Economic analysis conducted to ascertain the arm’s length price e. Any other information or document prescribed by tax authorities.

Audit Requirements under Section 92E:

• It is applicable to particular international and domestic transactions.
• Below are the eligibility criteria for projects classified as AE:
• One company must directly or indirectly control at least 26% of the voting power of another company.
• Loans extended by an entity to another enterprise must represent at least 51% of the latter’s total book value of assets.
• Anyone can appoint one or more executive directors of each of these companies or control more than 50% of the board.
• The organization’s business relies entirely on the proprietary formula, copyright, patent, and know-how of another business.
• Where individuals engage in management, control, or capital, directly, indirectly, or through an intermediary in another company.
• When one enterprise possesses at least a 10% ownership stake in another business, as seen in cases of BOIs, AOPs, and partnership firms.
• Articles or items produced by one business are sold to another enterprise, with the prices and terms and conditions being determined .

Importance of Section 92E:

• Section 92E plays a critical role in ensuring that prices of goods, services, or intellectual property transferred between related parties adhere to the arm’s length principle.
• . This ensures that the prices align with those that would be charged between unrelated parties in a similar transaction.
•  Failure to comply with transfer pricing regulations can result in double taxation, conflicts with tax authorities, and harm to the company’s reputation.
• Transfer pricing rules are necessary to avoid price increases or decreases between related entities in order to divert taxes paid by multinational companies. These rules also protect each state’s tax base from erosion by preventing profit shifting to low-tax states.

Conclusion:

Section 92E of the Income Tax Act mandates that persons entering into international transactions must procure and file an audit report from the CA. This provision applies to projects involving two or more AEs, at least one of which is not a resident. In addition, the section includes specific domestic transactions, as set out in section 92BA