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Pandora Box Opens with Domestic Transactionnow covered under Transfer Pricing

Jinesh Bhagdev, Practicing Chartered Accountant and Jatin Popat, Practicing Company Secretary

A Company Secretary holds a key position in any Company

as the Compliance Officer of the Company. A Company

Secretary is responsible for all regulatory compliances of

Company. A Company Secretary supervises the finalization

of Annual Accounts of a Company and is also a party

to sign the Balance Sheet when a Company Secretary is

employed by the Company. A

Company Secretary has to ensure

that all disclosures with respect

to financial statements, company

law compliances, taxation, audit,

related party disclosure, etc. has

been disclosed and that the financial

statement gives a true and fair

view of the financial performance

of the Company. Merely because a

Company has a hired specialist key

personnel taking care of taxation

related matters (including transfer

pricing matters) including Financial

Director or a Chief Financial

Officer or a Chartered Accountant who takes care of tax

related compliance matters does not absolve a Company

Secretary from his duties to ensure that tax related matters

are regularly complied by the Company in a timely manner.Even then, a Company Secretary has to overlook the work

done by the key personnel or a Chartered Accountant and

ensure appropriate compliance by the Company.

As per the Income Tax Act, any income (expenses) arising

from an international transaction (or specified domestic

transaction) with an Associated Enterprise shall be

computed having regard to arms length price. Accordingly,

it is imperative for the Company Secretary to understand

certain terminologies governing the Indian Transfer Pricing

Regulations.

1. Associated Enterprise:

Two companies can be said to be AEs when there is

direct or indirect participation in management, control

or capital by one enterprise in other enterprise or by

the same person in two enterprises. The participation

in management, control or capital can be through direct

or indirect equity holding, control over the board of

directors, or appointment of one or more executive

directors by one enterprise in other enterprise or by the

same person in two enterprises.

Situations like granting of loan more than 51% of the

book value of assets, giving guarantee of more than 10%

of the total borrowings of the other Company, complete

dependence on know-how, patent, etc. of the other

Company, or purchase of raw materials from the other

Company greater than 90% of the total raw material

purchased by the Company during

the year, or one entity has more

than 10% of the beneficial interest

in a partnership firm, association

of persons or body of individuals

triggers the deemed fiction and the

two entities will be deemed to be

AE irrespective of the fact that there

is no direct or indirect participation

in management, control or capital

within the enterprises.

Role of Company Secretary:

The prima-facie role of a

Company Secretary is to identify

all the AEs with whom the Company has transacted

during the year. There are likely chances that some of

the entities which are falling under the deeming fiction

might go unnoticed to the auditors. The consequenceof non-reporting of a transaction is as high as 2 % of

the total value of transaction that went unreported.

Further, penalty proceedings can also be initiated for

concealment of true facts and disclosure under section

the Income Tax Act.

2. International Transaction:

An international transaction means a transaction

between two or more AEs, in the nature of 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 the profits,

income, losses or assets of such enterprises, and shallinclude a mutual agreement or arrangement between

two or more AEs for the allocation or apportionment of,

or any contribution to, any cost or expense incurred or

to be incurred in connection with a benefit, service or

facility provided or to be provided to any one or more

of such enterprises.

Finance Act 2012 has now clarified that an international

transaction shall also include the following:

FINANCE AND TAX

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operators, telecom services industries, industrial park

developers, power generations or transmission, etc.

Apart from these industries, the business conglomerates

having significant intra-group transactions would be

impacted.

Most likely transactions under the scanner of the TP

Authorities would be:

Interest Free Loans to group companies;

Granting of Corporate Guarantees / Performance

Guarantees by Parent Company to its subsidiaries;

Intra-group purchase / sell / service transactions;

Payment made to key personnel of the group

companies;

Payment made to relatives of key personnel of the

group companies.

Role of a CompanySecretary:

Companies which did

not have international

transactions till date,

however had domestic

transactions with related

parties, were not governed

by the Indian TPR.

However, now since the

domestic transfer pricing

regulations are in place,

Company Secretary of

the companies who have

domestic transaction with

its related parties equal to

or more than ` 5 crore or

companies whose present

domestic transaction less

than `5 crore but is likely to increase beyond `5 crore

in the financial year 2013-14 are advised to validate

their present business model and pricing methodology

from a transfer pricing perspective which will enable

them to take corrective actions, if necessary.

4. Arms Length Price:

An arms length price, is a price at which a transaction

is entered into by a Company with a third party under

normal market / economic conditions, i.e. without

the influence of the relation between the parties. The

principle of arms length pricing requires a Company

to enter into a transaction with its AE similar to a

transaction it has entered into or would have entered

into with a third party under uncontrolled conditions.

Role of a Company Secretary:

The role of the Company Secretary is to ensure that all

the transactions which are entered into by a Company

with its AE should be entered into having regards to

arms length price (and not at arms length price). If

the transactions are found not to be at arms length, the

Company might face huge transfer pricing additions

during the transfer pricing assessments.

Check List for a CompanySecretary to ensure appropriate

compliance of Transfer Pricing

Regulation:

1. During the financial

year, liaise with the Financial

Director or the Chief Financial

Officer to identify the list of

AEs and determine the value

of International Transactions

or specified domestic

transactions.

2. Revisit the existingbusiness model and transfer

pricing methodology atleast

once in a year to ensure that the

transactions of the Company

with its AEs are at arms length

to justify contemporaneous nature of transfer pricing

business model.

3. Ensure that the Transfer Pricing Accountant Report is

filed with the Assessing Officer before the due date of

filing of the return of income i.e. 30 November.

FINANCE AND TAXPandora Box Opens with Domestic Transaction now covered under Transfer Pricing