Volume 5, Issue 21

6th September, 2012

Tax Alert
Expert Committee's Recommendations on GAAR

Since the introduction of transfer pricing provisions in 2002, India has witnessed a flurry of litigation in transfer pricing resulting in astronomical adjustments; the last round of assessments alone accounting for an unprecedented adjustment figure of USD 9 billion. The Government obviously sees transfer pricing as an emerging area with a potential for generating huge tax revenues in future. Thus, in order to further strengthen the transfer pricing provisions, Finance Act 2012 has introduced a plethora of amendments. One of the critical amendments was to widen the scope of “international transactions” as per Sec 92B of the Indian Income Tax Act (‘ITA’). This alert throws light on the new widened scope of international transactions and its implications on taxpayers.

While the erstwhile definition of international transactions was itself wide, there were still some ambiguities on whether transactions such as corporate guarantees, delay in receipt of receivables, restructuring and subscription to shares were regarded as transactions and were supposed to be reported in Form 3CEB or not.

In order to provide more clarity to taxpayers, the Finance Act 2012 has amended / expanded the definition of “international transaction” as per Sec 92B of the ITA retrospectively with effect from 1st April, 2002 to include following categories of transactions:

Tangible Property:

Purchase, sale, transfer, lease or use of tangible property including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing.

Intangible Property:

Purchase, sale, transfer, lease or use of intangible property whether related to technology, engineering, customers, human capital or any other similar items deriving their value from intellectual content. These include transfer of ownership or the provision of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know-how, industrial property right or commercial rights of similar nature.

Capital financing:

Capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business.

Provision of services:

Provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service.

Business Restructuring:

Transaction of business restructuring or reorganisation, entered into by an enterprise with an associated enterprise, irrespective of the fact that it has bearing on the profit, income, losses or assets of such enterprises at the time of the transaction or at any future date.

More importantly, the Finance Act 2012 also amended the penalty provisions to provide that failure to report a transaction in Form 3CEB would be subject to a penalty of 2% of the value of transaction.

SKP Comments:

With the above amendments, the definition of international transactions is very wide and would cover anything under the sun.  Few instances of transactions which were earlier not regarded as international transactions and were also not reported are:

Receipt of money towards share subscription / Issuance of shares:

Hitherto, transactions in respect of receipt of share subscription money were not reported by some of the taxpayers. However, with the extended definition, this would squarely be covered and would have to be reported. This is important especially for start up companies which may not have any other transaction other than receipt of share subscription money but now they would have to file Form 3CEB even for this single transaction.

Guarantees and deferred payments:

With the inclusion of guarantees and deferred payments in the definition of international transactions, taxpayers now will have the additional responsibility to benchmark financial transactions, a challenge by itself.


Transactions related to business restructuring irrespective of whether the income arising out of such restructuring is chargeable to tax in India or not are now covered under the definition of international transaction and hence would have to be reported. Similarly, on intangibles, creation / enhancement of marketing intangible through significant spent on advertisement & marketing has been regarded by tax authorities as a separate transaction. Taxpayers till now were partially successful in defending the said approach on the grounds that such expenses were incurred for selling their own products and was not an international transaction. The wide definition now also weakens the taxpayer’s defence.

Way Forward:

The international transaction now has a very wide connotation leaving taxpayers with hardly any opportunity to escape the clutches of transfer pricing. There is no doubt that the Revenue is bracing itself to follow an aggressive approach against taxpayers who have not been reporting international transactions due to ambiguity in the erstwhile definition. Taxpayers now need to be aware of the implications of the amendment and identify all possible international transactions including share transactions entered into with their associated enterprises. Further, such taxpayers would be required to satisfy the compliance requirements of filing Form 3CEB reporting all such transactions entered into with associated enterprises.