In today's world, as more and more multinational corporations are entering into India the number of transactions between entities within the same group are increasing. As the number of transactions are increasing the complexity between the international transactions are also increasing. Due to growing complexity of these international transactions, the multinational corporations are in need of expert advice in relation the transactions entered within the same group as these transactions have a bearing on the profitability of the company.
The international transactions within the same group offers an incentive to the multinational corporations to shift their profit in low tax jurisdictions by determining the price of the transactions entered between its group companies.
Indian government was continuously monitoring these practices because of which Transfer Pricing Regulations were introduced in 2001. In 2001, government came up with the detailed regulations by introducing sections related to Transfer Pricing under Income Tax Act, 1961 and Income Tax Rules, 1962.
Transfer Pricing applicability in Trade Relations with "CYPRUS"
It is a big blow to the companies who are involved into trade relations with “CYPRUS” country. Now “CYPRUS” has been notified as a jurisdictional area under section 94A of the Income Tax Act, 1961. All the companies have to now follow the provisions of Transfer Pricing if they are dealing with any party (whether or not “Associated Enterprises” under section 92A of Income Tax Act, 1961) in this country.
Section 94A was firstly introduced in Finance Act, 2011 so as to use this section as a toolbox of counter measures in respect of transactions with persons located in a notified jurisdictional area.
The implications of the above said notification follows that every person dealing with any person located in “CYPRUS” country will have to comply to sections 92 to 92F of Income Tax Act, 1961 irrespective of the fact that whether they fall into definition of “Associated Enterprises” under section 92A of Income Tax Act, 1961.
All the person dealing with “CYPRUS” will have to show their International Transactions at arm’s length and comply with the requirement of furnishing report under section 92E of Income Tax Act, 1961 i.e. Form 3CEB.
What is the purpose of introducing section 94A of Income Tax Act, 1961 under Finance Act, 2011?
The proposed section provides: