Removal of TP compliance for SDT related to section 40A(2)
The provisions related to Domestic Transfer Pricing was introduced from AY 13-14, wherein transactions covered in section 40A(2)(b) was covered under the annual TP compliance requirement. This section covered payments made to certain category of related persons, including Directors. The Finance Bill has recognised the hardship caused to taxpayers due to this procedural requirement and therefore, the TP compliance requirement for 40A(2) transaction will be removed effective AY 17-18. It is important to note that the basic premise of section 40A(2) in relation to the Assessing Officer`s (AO) power to challenge excessive or unreasonable expenditure remains and therefore, even if the annual compliance requirement is removed, the AO can always make independent enquiry on such transactions during regular assessment.
Introduction of "thin capitalisation" regulations
In continuance of India`s initiatives under the OECD BEPS action plans, the globally prevalent "thin capitalisation" norms have been introduced by the Finance Bill. The norms basically restrict the amount of interest which can be paid on any debt issued to a non-resident associated enterprise (AE) or even the third party debts which are supported by an explicit or implicit guaranteed by the AE. The interest expense on such debt will be allowed only up to 30% of the EBITDA of that year and the excess can be carried forward to the following 8 years for deduction, but subject to the 30% of EBITDA limit for each year. This provision is applicable from AY 2018-19. This provision will not apply to interest payments lesser than Rs 1 cr.
This new norm will have a significant impact on all intra-group debt or group guaranteed external debt for all MNCs operating in India. Even though this is a common TP concept across the world and many countries already have "thin cap" regulations, going forward any intra-group loan/debt instrument issued by Indian borrowers needs to be carefully analysed from a "thin cap" regulation perspective.
Introduction of secondary adjustments
In another move reflecting India`s alignment with global best practices in TP regulations, the concept of secondary adjustment has been introduced. This procedure, which is also included in the OECD TP Guidelines, relates to the practice of making additional tax adjustments which are consequential to the primary TP adjustment made in hands of the taxpayer.
In India, the secondary adjustment will be made on the following basis:
- there should be a primary TP adjustment arising from (a) suo moto adjustment in tax return, (b) adjustment made by AO/TPO which is not disputed, (c) arising from APA conclusion, (d) determined by applying Safe Harbour norms, or (e) arising from a MAP proceeding;
- such primary TP adjustment results in some excess cash/funds with the AE which has not been repatriated back within the prescribed timeline;
- the excess cash will be deemed to be an advance on which interest will be imputed at the prescribed rates, and taxed as additional income.
For example, if an Indian company pays management fee of Rs 100 to its AE which is entirely disallowed by the TPO, and pursuant to a MAP proceeding, the arm`s length payment is finally determined to be only Rs 50, then the excess Rs 50 which is already paid to the AE (excess money lying with AE) should be either repatriated back to the Indian company or else it will be deemed to an advance to the AE and the interest imputed thereon will be subject to tax.
This provision if effective from AY 18-19 but there is some ambiguity in the provision as to which years` primary TP adjustment can fall in its ambit. This provision will not apply to primary adjustments lesser than Rs 1 cr.