1. Section 92(1) provides that:

1. There must be "income arising";

2. Such income must arise "from" an "international transaction";

3. Such income "shall" be computed having regard to the "arm's length price".

Allowance for any expenses or interest arising from an international transaction is also to be determined having regard to arm’s length price. Further, the application of arm’s length price results in reducing the chargeable income or increasing the loss from an Indian Income-tax perspective, then the income, expense, interest or other allocation or apportionment of expenses need not be calculated at such arm’s length price.

2. Section 92(2) provides that cost sharing arrangements between "associated enterprises" ("AEs") will also be subject to the arm’s length rule.

3. The term "international transaction" is defined in section 92B. The salient features of this definition are as under :

3.1 Use of word "means" shows that it is an exhaustive definition;

3.2 The term "transaction" is defined in an inclusive manner in section 92F(v);

3.3 The transaction has to be between two or more "associated enterprises" ("AEs"). "Associated enterprise" is defined in section 92A;

3.4 All or any one of the AEs must be a "non-resident". The section states "either or both of whom are non-resident". Section 2(30) defines the term non-resident and for the purposes of section 92 includes a resident but not ordinarily resident.

3.5 The transaction may be in the nature of commercial transaction such as:

• Purchase, sale or lease of tangible or intangible property; or

• Provision of services; or

• Lending or borrowing money; or

• Any other transaction having a bearing on profits, income, losses or assets of an AE.

• Cost sharing arrangement, that is, a mutual agreement or arrangement between AEs for the allocation or apportionment of, or contribution to any cost or expense incurred in connection with a "benefit, service or facility" provided to the AE.

4. Section 92B(2) deems a transaction between two unrelated enterprises to be an international transaction between two associated enterprises under certain circumstances

5. The term "arm’s length price" is defined in section 92F(ii) to mean—

• The price which is applied, or

• Is proposed to be applied

• In a transaction between persons other than AEs

• In uncontrolled conditions.

6. Section 92C provides the mechanism of determining the "arm’s length" price by any of the following five methods, being the most appropriate method taking into consideration the nature or class of the transaction functions performed or such other factors as laid down in rule 10B,:

1. comparable uncontrolled price method;

• Comparison of price charged or paid for property transferred or services provided in a comparable uncontrolled transaction.

• Used mainly in respect of transfer of goods, provision of services, intangibles, loans, provision of finance.

2. resale-price method;

• Considers the price at which property purchased or services obtained by the enterprise from an AE is resold or are provided to an unrelated enterprise.

• Used mainly in case of distribution of finished goods or other goods involving no or little value addition

3. cost-price method;

• Considers direct and indirect costs of production incurred by an enterprise in respect of property transferred or services provided and an appropriate mark-up.

• Used mainly in respect of provision of services, joint facility arrangements, transfer of semi finished goods, long-term buying and selling arrangements

4. profit-split method;

• Considers combined net profit of the AEs arising from the international transaction and its split amongst them.

• Used mainly in report of transactions involving integrated services provided by more than one enterprise, transfer of unique intangibles, multiple interrelated transactions, which cannot be separately evaluated

5. transactional net margin method.

• Considers net profit margin realised by the enterprise from an international transaction entered into with an AE.

• Used in respect of transactions for provision of services, distribution of finished products where resale price method cannot be adequately applied, transfer of semi-finished goods

6. Any other method as prescribed by the CBDT. The CBDT has not yet prescribed any other method.
   
   The most appropriate method from the above method shall be applied for determination of the arm’s length price in the manner laid down in Rule 10C.
   
   Where the variation between the arm’s length price determined and the price at which the international transaction has been undertaken (transfer price) does not exceed such percentage as may be notified by the Central Government of the transfer price, then the transfer price is deemed to be the arm’s length price.

7. The term "enterprise" is defined in section 92F(iii) to mean a "person" including a "permanent establishment" of a person who is, or has been or is proposed to be "engaged in" certain specified activities. These activities are in relation to :

• production storage, supply, distribution, acquisition or control of:

• articles or goods; or

• know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature; or

• any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process:

• of which the other enterprise is the owner; or

• in respect of which the other enterprise has exclusive rights;

• provision of services of any kind;

• carrying out any work in pursuance of a contract;

• investment;

• providing loan;

• business of acquiring, holding, underwriting or dealing with shares, debentures or other securities of any other body corporate.

8. The term "Permanent Establishment" is defined to include a fixed place of business through which the business of the enterprise is wholly or partly carried on.

9. An "enterprise" is an AE :-

• Which participates directly or indirectly in the management or control or capital of the other enterprise. This can be explained as under:

  

10. In the following circumstances, two enterprises shall be deemed to be AEs if at any time during the year:

    •	A holds at least 26% of the voting power of B; or,	(A & B are AEs)
    •	A holds at least 26% of the voting power of B & C; or	(B & C are AEs)
    •	A advances a loan to B, constituting at least 51% of the book value of total assets of B; or	(A & B are AEs)
    •	A guarantees at least 10% of the total borrowings of B; or	(A & B are AEs)
    •	A appoints, more than half the directors of B; or, one or more executive directors of B; or	(A & B are AEs)
    •	A appoints, more than half the directors of B & C; or, one or more executive directors of B & C; or	(B & C are AEs)
    •	The manufacture or processing of goods or articles or business carried on by A is wholly dependent on the use IPRs (knowhows etc.) belonging to B or in respect of which B has exclusive rights; or	(A & B are AEs)
    •	At least 90% of the raw materials and consumables required for the manufacturing or processing of goods or articles carried out by A, are supplied by B or by persons specified by B, and the prices and other conditions relating to the supply are influenced by B; or	(A & B are AEs)
    •	The goods manufactured or processed by A are sold to B or persons specified by B, and the prices and other conditions relating thereto are influenced by ‘B’; or	(A & B are AEs)
    •	Where A is controlled by B (an individual) a transaction between A and C, if C is controlled by B or his relative or jointly by B and his relative; or	(A & C are AEs)
    •	Where A is controlled by B HUF, a transaction between A and C, if C is controlled by a member of B HUF or by a relative of a member of B HUF or jointly by such member and his relative; or	(A & C are AEs)
    •	Where A is a firm, AOP or BOI and B holds at least 10% interest in A; or	(A & B are AEs)
    •	There exists any relationship of mutual interest between A and B as may be prescribed.	(A & B are AEs)

Sub-section 2 of section 92(A) clarifies that mere participation by A in the management, control or capital of B or the commonality of control, management or capital of A and B per se may not be sufficient to make A and B associated enterprises unless one or more of
the conditions specified in paragraph 10 above are satisfied.

11. Section 92C(3) provides that an Assessing Officer ("AO"), after having provided an opportunity to the assessee of being heard, may determine the arm’s length price, on the basis of material or information in his possession, if he is of the opinion that,

• the price charged or paid in an international transaction has not been determined in accordance with the transfer pricing provisions, or

• if any information and document relating to an international transaction has not been maintained in accordance with the provisions, or

• if the information and data used in computation of arm’s length price is not reliable or correct, or

• if the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice under section 92D(3).

Under such circumstances, the AO may compute the total income of the assessee having regard to the price so determined.

In cases where the total income is enhanced as a result of such computation of income, no deduction under section 10A, 10AA or section 10B or under Chapter VI-A is allowed in respect of the amount of income by which the total income of the assessee is enhanced.

Further, in cases where the total income of an AE is computed by the AO on determination of arm’s length price paid to another AE from which tax has been deducted or was deductible under Chapter XVIIB, the income of the other associated enterprise shall not be recomputed by reason of such determination.

12. The AO also has powers to refer the computation of arm’s length price to a Transfer Pricing Officer (TPO) with previous approval of the CIT. The TPO would then pass an order determining the arm’s length price after hearing the assessee. Thereafter, the A.O. will compute the total income having regard to the arm’s length price determined by the TPO. (S. 92CA). The MOF has issued instructions (No. 3/2003) dated 20th May, 2003 giving guidelines on references to TPO, the role of TPO and related issues. The text thereof is reproduced on the CD. The Assessing Officer while completing their assessment in respect of assessments involving transfer pricing are now bound to compute the total income of the assessee in conformity with the arm’s length price determined by the TPO.

13. Section 92CB provides for the determination of arm’s length price subject to safe harbour rules. Safe harbour is defined to mean circumstances in which the income-tax authorities shall accept the transfer price declared by the assessee. The Central Board of Direct Taxes to formulate rules for safe harbour.

14. The jurisdiction of the transfer pricing officer (TPO) is extend to determine the arm’s length price in respect of international transactions not referred to him by the Assessing Officer and which comes to his notice during the transfer pricing assessment proceedings

15. TPO permitted to exercise powers of survey under section 133A of the Act.

16. The Finance Act, 2011 has inserted section 94A which inter alia provides that if an assessee enters into a transaction where one of the parties to the transaction is a person located in a "notified jurisdictional area" then all the parties to the transaction to be deemed to be associated enterprises and any transaction entered into with them to be regarded as an international transaction and transfer pricing provisions to apply accordingly.

1. Every person who has entered into an "international transaction" shall keep and maintain the prescribed information and documents [Sec. 92D(1)] which shall be maintained for the prescribed period [Sec. 92D(2)].

2. The A.O. / CIT may require an assessee, in the course of any proceedings under the Act, to furnish the prescribed information or documents within 30 days from date of receipt of the notice. The AO may on application, extend the period by which such information and documents should be furnished by a further period of 30 days. [Sec. 92D(3)].

3. Every person who has entered into an international transaction is required to obtain an accountant’s report in prescribed format before the specified dates; i.e.,
   November 30th for corporate assessees and July 31st for others.

4. The time limit for passing orders by the Assessing Officer where a reference is made to the TPO for determining the arm’s length price in an international transaction has been increased to 12 months as under:

   In respect of normal assessment	From 21 months to 33 months from the end of the assessment year in which the income was first assessable
   In case of reopened assessments	From 9 months to 21 months from the end of the financial year in which the notice under section 148 was served
   In case of order under section 254 or under section 263 or section 264	From 9 months to 21 months from end of the financial year in which the order under section 254 is received by the Chief Commissioner or order under section 264 is passed by the Chief Commissioner or Commissioner of Income Tax
   In case of a search cases	From 21 months to 33 months from the end of the financial year in which the last authorization for search under section 132 or requisition under section 132A was executed

As per Explanation 7 to section 271(1)(c)

• where in case of an assessee who has entered into an international transaction

• any amount is added or disallowed in computing the total income under section 92C(4)

• then the amount so added or disallowed shall be deemed to represent the income in respect of which particulars have been concealed or inaccurate particulars have been furnished

• unless the assessee proves to the satisfaction of the Assessing Officer or the Commissioner (Appeals) or the Commissioner that the price charged or paid in such transaction was computed in accordance with the provisions contained in section 92C and in the manner prescribed under that section, in good faith and with due diligence.

The amount of penalty provided for is

• not less than the amount of tax sought to be evaded; and,

• not more than three times the amount of tax sought to be evaded, by reason of the concealment as aforesaid.

2. Section 271AA

If the assessee fails to keep and maintain the prescribed information and documents, penalty equal to 2% of the value of each international transaction may be leviable.

3. Section 271BA

Failure to furnish the accountant’s report may attract penalty of Rs. 1,00,000/-.

Failure to furnish the required information and documents may attract penalty of 2% of the value of the international transaction for each failure.

The penalties u/ss. 271AA, 271BA and 271G may not be levied if the assessee establishes reasonable cause for the said failures.

The Central Government has notified rules for giving effect to the provisions of sections 92C, 92D and 92E of the Act. The relevant rules 10A to 10E together with the forms prescribed under the said rules are given on the CD.

The gist of the said rules is as under: