1. Section 92(1) provides that:

i. There must be "income arising";

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

iii. 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,:

a. 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.

b. 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

c. 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

d. 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 inter-related transactions, which cannot be separately evaluated

e. 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

f. 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.

The Finance (No 2.) Act, 2009 provides that 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 five per cent of the transfer price, then the transfer price 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;

OR

• provision of services of any kind;

OR

• carrying out any work in pursuance of a contract;

OR

• investment

OR

• providing loan

OR

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

Such activity or business may be carried on directly or through one or more of the units or divisions or subsidiaries, which may be located at the same place where the enterprise is located or at a different place(s).

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

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., October 31st 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 re-opened 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 the end of the financial year  in which the order under section 254 is received by the Chief Commissioner or 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.

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.

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:

1. Rule 10A defines terms used in the rules for determining arm’s length price; i.e., uncontrolled transaction, property, services and transaction.

2.1 Rule 10B(1) elaborates the manner of determining arm’s length price under each of the methods described in section 92C(1).

2.2 Rule 10B(2) lays down parameters to be considered in comparing an international transaction with an uncontrolled transaction; i.e.,

i. Contractual terms

ii. Specific characteristics of property transferred or services provided

iii. Functions performed, risk assumed and assets employed

iv. Market conditions, which may include location and size of market, government regulations in force, level of competition etc.

2.3 Rule 10B(3) provides for adjustment to eliminate differences when there are material factors affecting the prices between an international transaction and an uncontrolled transaction.

2.4 Rule 10B(4) provides that for the purpose of comparing international transaction and uncontrolled transaction the data for the relevant financial year or immediately preceding two years be used.

3. Rule 10C recognises that there cannot be a single method which may be appropriate under all circumstances. It lays down various factors to be considered for determining the most appropriate method in a particular international transaction.

4.1 Rule 10D(1) prescribes the information and documents required to be maintained by every person who has entered into international transaction.

4.2 Rule 10D(2) grants exemption from maintaining prescribed information and documents, if the aggregate value as recorded in the books of account of international transactions entered into by the tax-payer does not exceed rupees one crore.

4.3 Rule 10D(3) requires that the information specified in Rule 10D(1) shall be supported by authentic documents.

4.4 Rule 10D(4) requires that the information and documents be contemporaneous. Rule 10D(5) requires that such information and documents be kept for eight years from the end of relevant assessment year.

5. Rule 10E prescribes form 3CEB as the report u/s 92E which shall be furnished by every person who has entered into an international transaction.