Introduction:

The Finance Act  ushered in the concept of Advance Pricing Agreements (APAs) through the enactment of Sections 92CC and 92CD. APAs serve as formal agreements between taxpayers and tax authorities, delineating the arm’s length price and its method of calculation for international transactions. In 2012, nations such as the US, Canada, Australia, China, and India embraced APAs as a means to incentivize foreign investments.

Section 92CD of the Income Tax Act prescribes the period for filing amended documents after the execution of such an agreement. Continue reading to delve into the specifics of this section.

Section 92CD:

Section 92CD, incorporated into the Income Tax Act of 1961 by the Finance Act of 2017, governs secondary adjustments necessitated by primary adjustments to transfer prices. Primary adjustments occur when the actual price exchanged between associated enterprises deviates from the arm’s length price (ALP)—the hypothetical price in a transaction between unrelated parties.

Section 92CD requires a secondary adjustment when the primary one exceeds Rs. 1 crore, applying to both international and domestic transactions. If the primary adjustment surpasses this threshold and isn’t resolved by the filing deadline, a secondary adjustment reflecting arm’s length pricing becomes mandatory.

Applicability of the Section 92CD:

• Section 92CD applies to all taxpayers involved in specific international or domestic transactions with related entities, regardless of whether the transaction results in income or loss for the taxpayer.
• It’s crucial to highlight that Section 92 CD is activated solely when the primary adjustment exceeds INR 1 crore. Thus, taxpayers must align their transfer pricing policies with the arm’s length principle to mitigate the need for this section’s application.

Advance Pricing Agreements:

• An advance pricing agreement is established between a taxpayer and the CBDT (Central Board of Direct Taxes) to ascertain its arm’s length price (ALP), aimed at offering tax certainty for multinational enterprises (MNEs), resolving transaction disputes, and bolstering tax revenue within the country.
• The APA specifies the arm’s length value (ALP) or method of determination for international transactions for taxpayers. An ALP determination may be made using one of the methods described in section 92C(1) of the Information Technology Act, with modifications as necessary. These contracts generally run for five years for specific projects, with a four-year retroactive option.
• Sections 92 to 92F set out statutory frameworks aimed at fair and equitable assessment of profits and taxes in India, aimed at preventing squandering of profits by multinational corporations (MNCs) from the country Under Section 92CC under the CBDT has the power to enter into APAs with any person or entity. In addition, Section 92CD of the Income Tax Act defines the procedure for filing amended returns after the APA comes into force.

Sub-sections of the Section 92CD:

• The various subsections included in section 92 CD are given below:
• Section 92CD(1) mandates that persons opting for APA must file an amended income tax return (ITR) within three months.
• Section 92CD(2): All other provisions of section 92CD apply in the same manner to a return under section 129, with certain exceptions.
• Section 92CD(3): This subsection deals with cases where an examination or re-examination is completed before the deadline for returning an amended return. If such return satisfies the provisions of sub-section (1), the Assessing Officer (AO) shall reassess or recalculate your gross income for the relevant assessment year.
• Section 92CD(4): This applies to cases where an assessment or re-assessment in the previous assessment year is still outstanding before a pre-valuation agreement is entered into. On filing the amended return, the Assessing Officer (AO) will finalize the assessment or reassessment process by considering both the contract and the amended Income Tax Return (ITR).
• Section 92CD(5): Mandates that the assessment processes or reassessment proceedings under sub-section (3) must be completed by the Assessing Officer (AO) within one year from the financial year in which he files a revised Income Tax Return (ITR). the departure of the. This subsection applies independently of the provisions set forth in section 144c, section 153, or section 153b.
• Section 92CD(6): This means that the expression ‘contract’ mentioned in Section 92CD of the Income-tax Act means section 92CC. Furthermore, it defines the end of an assessment or reassessment for the assessment year as occurring when the assessment or reassessment order is issued, or when the limitation period referred to in section 143(2) expires.

Conclusion:

Section 92CD of the Income Tax Act stands as a crucial provision requiring comprehension by taxpayers involved in international or specified domestic transactions with associated enterprises. Adhering to the stipulations of this section can assist taxpayers in sidestepping penalties, legal disputes, and reputational harm. Hence, it is imperative for taxpayers to ensure alignment of their transfer pricing policies with the arm’s length principle and maintain comprehensive documentation to avert unfavorable outcomes.