1. GENERAL BACKGROUND
- The report is to be given by an Accountant in Form 3CEB as prescribed under Rule 10E. With effect from 1.04.2013, the rule requires electronic filing of the report.
- Section 2(31) defines a “person” in an inclusive manner. The definition is wide enough to include non-residents including foreign companies. Accordingly, if a foreign company has taxable international transactions with its Associated Enterprise (AE) in India, it is required to comply with the transfer pricing regulations and furnish an Accountant’s Report.
- Section 92E requires that every person who has entered into an “international transaction” or “specified domestic transaction” during a previous year shall obtain a report from an accountant and furnish such report in the prescribed form and in the prescribed manner on or before the specified date.
- Transfer pricing law applies to both domestic and international transactions. For domestic transactions the law will apply only if the specified domestic transactions fall above a threshold in terms of the transaction value.
- Transfer Pricing law in India was introduced through insertion of Section(s) 92A to 92F to Income-tax Act, 1961 and Rule(s) 10A to 10E of the Income Tax Rules The purpose is to ensure that the transaction between ‘related’ parties is at a price that would be comparable if the transaction was occurring between unrelated parties.
- Section 92F(i) imports the definition of an “Accountant” from Explanation to Section 288(2) which means a Chartered Accountant who holds a valid certificate of practice, subject to certain exclusions prescribed under the Section 92E therefore does not require that only statutory auditor appointed under the applicable law can perform the examination.
- Rule 10E provides that the requisite report under Section 92E shall be in Form No. 3CEB. The particulars required to be furnished under Section 92E are prescribed in Annexure to Form No. 3CEB.
- With effect from A.Y. 2020-21, section 92F defines “specified date” as the date which is one month prior to the due date for furnishing the return of income under Section 139(1) for the relevant assessment year. The due date for filing of return of income under for f.y. 2021-22 (AY 2022- 23) under Section 139 for the assesses whose accounts are required to be audited under any law is 31st October, 2022. Therefore, they will be required to furnish report under Section 92E are prescribed in Annexure to Form No. 3CEB by an Accountant before 30th September, 2022.
References to sections and rules in this article, unless otherwise specified, are reference to sections under the Income-tax Act, 1961 and rules under Income-tax Rules, 1962.
2. SCOPE OF EXAMINATION OF AN ACCOUNTANT’S REPORT UNDER SECTION 92E
- The accountant is not responsible to ensure that the Method used by the taxpayer to determine the Arm’s Length Price ‘ALP’ is the Most Appropriate Method, but he is required to ensure that the method stated to have been used to determine the ALP has actually been selected and applied by the assesse for such determination as provided under section 92C.
- In many a cases, non-residents are taxable in India in respect of income earned from sources within India, even though they may not have any physical presence (business connection or permanent establishment) in India and therefore statutorily they are not required to maintain regular books of accounts in India. Unless exempted under the provisions of section 115A(5) from filing a return of income in India, they are required to obtain an accountant’s report in Form 3CEB (Also known as ‘Mirror Form No. 3CEB’). In such cases, accountant can place reliance on invoices, agreements, Form 26AS and other documents available with the non-resident taxpayer and accounts, Form No. 3CEB and other information provided by the resident assessee with whom non-resident has entered into international transaction(s) in examination of Mirror Form No. 3CEB.
- If any document is not maintained, the accountant should suitably qualify or make appropriate disclosure in his report, depending upon the importance and the materiality aspect of the document. Qualification in the report should be comprehensive and self-explanatory and in accordance with “SA 700 – Forming an Opinion and Reporting on Financial Statements” issued by the Institute of Chartered Accountants of India ‘ICAI’.
- Examination under Section 92E is not an audit. Therefore, it does not require expression of an opinion on the “true and fair view” of the financial statements but it is a restricted examination of accounts and records of the tax payer relating to the International Transaction or the Specified Domestic Transaction entered into by the tax payer.
- The accountant should obtain from the tax payer a complete list of accounts and records (financial and non-financial) along with the supporting documents, if any, maintained by the taxpayer pertaining to international transactions and /or specified domestic transactions and obtain suitable representation confirming the completeness of the accounts and records pertaining to the relevant transactions.
- The accountant should take an appropriate Management Representation Letter (MRL) from the assessee in respect of all oral representations given to him. However, it may be noted that mere reliance on MRL in respect of the matters that may be directly verified by the accountant will not be in compliance with the Generally Accepted Auditing Standards.
- While it is the responsibility of the taxpayer to prepare and provide complete details, the accountant should use his professional skills and expertise to examine the same based on the documents, information and evidences provided to him by the assesse and apply reasonable tests to ensure that no item is omitted in the information furnished by the taxpayer and that the information furnished by the assesse is complete and correct.
- Where the certifying accountant is not the statutory auditor of the assessee, he should disclose his reliance on the work performed by the statutory auditor and ensure that reasonable checks/tests are applied to the transactions to satisfy himself about the authenticity and the correctness of the ultimate information.
- In order that the accountant is in a position to explain any question which may arise later on, it is necessary that he should keep detailed notes on the documents and other evidences on which he has relied upon while conducting his examination along with the detailed working papers. Such working papers, amongst others, should include his notes on the followings:-
- list of registers, documents and other records examined;
- the extent of checking and the basis ofsuch examination and by whom;
- information and explanations provided during the course of examination and by whom;
- decision on various points taken and the basis;
- the judicial pronouncements relied upon while issuing the If there is a conflict in judicial opinion, the view which he has followed and the reasons;
- certificates issued by the client;
- The assets owned and risks undertaken by each entity of the group in relation to the functions performed
- representation letter issued by the management;
- reconciliation between the figures to be reported under section 92E and the figures reported in the general purpose financial statements;
- Annexure to Form No.3CEB duly filled in and authenticated by the client and provided along with management representation letter.
- SA 230 –“Audit Documentation” provides that the documentation should serve as a sufficient and appropriate record of the basis for the accountant’s report. The documentation should be prepared on a contemporaneous real time basis and the accountant should document all the matters important in providing evidence that the examination was planned and performed in accordance with the applicable legal and regulatory requirements.
- Understanding taxpayer’s business operations is an essential part of transfer pricing examination, especially when assessee seeks guidance and professional assistance for preparation/ maintenance of the contemporaneous documentation. This will include an understanding of the followings:-
- The taxpayer’s operations;
- Industry in which the taxpayer operates;
- Key value drivers in the business;
- The operations of the taxpayer’s affiliates (domestic and foreign);
- The relationships between the taxpayer and its affiliates (domestic and foreign);
- The role each entity plays in carrying out the activities and performing the business functions of the controlled group;
- The scope, volume and nature of the controlled functions; and
- How much control and direction that taxpayer receives from headquarter of the group.
- The accountant should consider the law that is applicable for the relevant year even though the format of Form 3CEB may not have been amended to bring it in conformity with the amended law.
3. FORMAT OF THE ACCOUNTANT’S REPORT
3.1 The report from an accountant under Rule 10E is to be furnished in Form No 3CEB. The Form No. 3CEB is divided into three parts as follows:-
- Examination of the accounts and records: The first paragraph is a declaration by an accountant about his examination of the accounts and records of the taxpayer to review the international transaction(s) and/ or the specified domestic transaction(s) entered into by the assesse during the relevant previous year.
- Expression of an Opinion about maintenance of proper information and documentation: The second paragraph requires the accountant to express an opinion as to whether the tax payer has maintained proper information and the documents prescribed under the law in respect of the international transactions and/ or the specified domestic transactions entered into by him.
- Certification of ‘true and correct’ nature of the particulars furnished in the Annexure: Third paragraph is an expression of opinion by the accountant as to whether the particulars required to be furnished under Section 92E are furnished in the Annexures to Form 3CEB and whether the particulars furnished are true and correct.
Annexures to Form No.3CEB referred to in paragraph 3 of the report contains twenty five clauses. The accountant has to report whether the particulars furnished are true and correct.
The scope of an accountants report envisaged under section 92E does not require an accountant to express his opinion on the “true and fair view” of the financial statements of the assesse enterprise.
The section 92E requires an accountant to express an opinion whether “proper information and documents as are prescribed” have been kept by the assessee in respect of the international transactions and/or the specified domestic transaction entered into by him and whether the particulars required to be furnished under Section 92E are furnished in the Annexures to Form No. 3CEB and whether the particulars furnished are true and correct.
The contents of the report prescribed under section 92E and the Annexure are of no less importance. The accountant will have to use his professional skill and expertise and apply such tests as the circumstances of the case may require, considering the contents of the report. In order that the accountant may be in a position to explain any question which may arise later on, it is necessary that he should keep detailed notes about the evidence on which he has relied upon while conducting the examination and also maintain all his working papers.
The accountant should obtain from the assessee a letter of appointment for conducting the examination as mentioned in section 92E. It is advisable that such an appointment letter should be signed by the person competent to sign/verify the return of income in terms of the provisions of section 140 or by any person who has been authorized by the company to make such an appointment. The accountant should get the statement of particulars, as required in the annexure to the report, authenticated by the assessee before he proceeds to verify the same. The accountant is required to submit his report to the person appointing him viz. the assessee.
ICAI has issued “GUIDANCE NOTE ON REPORT ON INTERNATIONAL TRANSACTIONS UNDER SECTION 92E OF THE INCOME-TAX ACT, 1961” (“GN”).
It is advisable to refer the guidance note for the through and detailed guidance.