Section 92E of Income Tax Act: Meaning, Applicability, Limit, Report, Penalty

For entities taking part in international or specified domestic transactions, abiding by the rules present under Section 92E of Income Tax Act is mandatory. They apply to associated enterprises and there are several criteria for their transactions to fall into the above-mentioned categories. 

Thus, multinational businesses operating in India must know the rules and regulations of Section 92E, in order to accurately file returns. Read this article to know more about Section 92E.

What Is Section 92E of Income Tax Act?

According to Section 92E of Income Tax Act, all individuals involved in specified domestic transactions and international transactions in the previous financial year need to obtain a report from a chartered accountant. 

This audit report is a transfer pricing report which contains details on transactions between related entities that are conducted at arm’s length prices and are compliant with tax regulations in India.

This report of audit must be submitted to the authorities within the specified due date via Form 3CEB.

Applicability of Section 92E of Income Tax Act

The rules present under Section 92E of Income Tax Act apply to international and specified domestic transactions. They must take place between more than two Associated Enterprises (AE). Moreover, among them, one or more parties need to be a non-resident of India. 

Here are some of the transactions which come under Section 92E applicability:

• Buying, selling or leasing tangible or intangible property. 
• Mutual agreements between two or more AEs for allocations towards costs or expenses regarding any benefit, service or facility. 
• Any transactions leading to income, profits, losses or gain/loss of assets.      
• Lending or borrowing money. 
• Transactions between entities which are not Associated Enterprises with prior agreement. 

Now, as per Section 92(3), the rules and regulations of Section 92E shall not be applicable for transactions that cause an increase in losses or reduction of income tax. The Finance Act of 2009 mentions certain guidelines depending upon which the Income Tax department accepts taxpayer’s transfer price declarations. These rules are also applicable for specified domestic transactions.  

Who Is Liable for Audit Under Section 92E?

Section 92E of Income Tax Act is applicable for Associated Enterprises partaking in international and specified domestic transactions. Here are the eligibility criteria for businesses to classify themselves as AEs:

• Where individuals take part in administration, control or capital, directly, indirectly or via intermediaries in the other company.
• One entity must control a minimum of 26% of voting power in the other enterprise, directly or indirectly. 
• Any business or individual must own at least 26% voting power in each of these companies directly or indirectly. 
• Loans made by an entity to another enterprise representing a minimum 51% of the latter's entire book value of assets. 
• In case one business guarantees a minimum 10% of the other company's total borrowings.
• Any individual can appoint one or more executive directors or more than 50% of the board of directors for each of these companies. 
• When the same individual/s appoints one or more of the company’s members of the governing board, executive directors, or more than half of the company’s directors.     
• The organisation’s business is completely dependent on the secret formula, copyright, patent and know-how of another business. 
• The other company caters to at least 90% or more of the consumables and raw materials requirements of one entity. 
• Articles or items produced by one business are sold to another enterprise and the prices and terms and conditions are set by the latter. 
• In cases when a business is under the control of an individual along with the other entity, directly or indirectly or jointly with a relative. 
• When one enterprise owns a minimum of 10% of another business like in cases of BOIs, AOPs and partnership firms. 
• Mutual interest link between the two enterprises.            

Steps to Ensure Compliance with Section 92E

The following actions should be taken by taxpayers in order to comply with Section 92E:

1. Related party identification: Taxpayers must list all of the related parties they deal with when making certain domestic or international transactions.

2. Determination of the arm’s length price: In order to ascertain the arm's length price of the transaction, taxpayers should conduct a thorough analysis. Factors like the nature of the transaction, the state of the market, and the roles, risks, and resources used by each party should all be considered in the analysis.

3. Document maintenance : Taxpayers are required to preserve and retain all relevant records related to the specific domestic or international transaction. The documentation should be accurate, detailed, and in line with the arm's length.

4. Transfer Pricing Report Filing: Taxpayers must submit the Transfer Pricing Report by the deadline for filing their tax returns. Every document and piece of information required by the tax authorities should be included in the report.

Section 92E of Income Tax Act Filing Deadlines

The last date for filing income tax returns for transactions that come under Section 92E of Income Tax Act is 30^th November.  

Section 92E of Income Tax Act Penalties

In case taxpayers fail to furnish the CA report as required under Section 92E within the due date, a penalty of Rs.1,00,000 will be chargeable.  

Guidance Note on Report Under Section 92E of the Income Tax Act 1961

Over the years, the Institute of Chartered Accountants of India (ICAI) via the Committee on International Taxation has been issuing guidance notes for the CA report under Section 92E of Income Tax Act. 

It contains opinions of the ICAI on the documentation, records and accounts related to international and specified domestic transactions. Moreover, members taking part in these transactions must have extensive knowledge of the transfer pricing and any recent developments in this regard. 

Apart from this, the Committee on International Taxation has released the 9^th edition of the Guidance Note on Report under Section 92E. It incorporates all the amendments as present in the Finance Act, 2022. 

Taxpayers can learn about the Guidance Note in detail by clicking here. 

Now, to accurately file returns under Section 92E of Income Tax Act, companies need to understand which types of dealings fall under international and specified domestic transactions. They must also stay informed of the necessary documents which they need to submit while filing returns.

Furthermore, to avoid last-minute rushes, they should consider submitting their report of audit well before the due date