Archives 2023

Overview:

Section 92 of the Income Tax Act, 1961, deals with regulations of transfer pricing in India. It is a practice of determining the price of the transactions between associate enterprises and computation of Income from International transaction at Arm’s Length Price. This section has significant implications for Multi National Enterprises (MNE) operating in India and also on Specified Domestic Transaction (SDT).

Section 92E (Audit under Transfer Pricing):

Every person who has entered into an international transaction (IT) or specified domestic transaction (SDT) during a previous year shall obtain a report from an accountant (Chartered Accountant) and furnish such report on or before the “specified date” in the prescribed form (3CBE) duly signed and verified in the prescribed manner by such accountant and setting forth such particulars as may be prescribed.

Prescribed form for report from accountant is Form No. 3CEB. Under proviso to rule 12(2) audit report shall be furnished electronically.

“Specified date” means the date one month prior to the due date for furnishing the return of income under sub-section (1) of section 139 for the relevant assessment year.[Section 92F(iv)] As due date for ITR in transfer pricing cases is 30th November of the relevant assessment year, specified date is 31St October. Report from accountant (CA) will have to be furnished on or before 31st October of relevant assessment year in Form 3CEB.

PENALTY ON ASSESSEE FOR FAILURE TO FURNISH REPORT UNDER SECTION 192E [SECTION 271BA]

If any person fails to furnish a report from an accountant as required by section 92E, the Assessing Officer may direct that such person shall pay, by way of penalty, a sum of one hundred thousand rupees ie.Rs.1,00,000.

PENALTY ON AUDITOR FOR FURNISHING INCORRECT INFORMATION IN REPORTS OR CERTIFICATES

Section 271J of the Act provides for Penalty for furnishing incorrect information in reports or certificates. Section 271J provides that where the Assessing Officer or the Commissioner (Appeals), in the course of any proceedings under the Income Tax Act, 1961, finds that an accountant has furnished incorrect information in any report or certificate furnished under any provision of Income Tax Act or the rules made thereunder, the Assessing Officer or the Commissioner (Appeals) [or Joint Commissioner (Appeals) may direct that such accountant (CA), shall pay, by way of penalty, a sum of Rs. 10,000 for each such report or certificate.

HOW TO FILE FORM 3CEB:

Form 3CEB can be filed online by following these easy steps

Step 1: You need to avail the services of a Chartered Accountant (CA) who will audit the business transactions. For this log in to your e-Filling portal account, navigate to the ‘My Chartered Accountants’ page and add a CA authorised by you. 

Step 2: Once you select a CA from the list, you must assign Form 3CEB to him/her. You can assign the form by selecting the CA’s name, selecting the filing type and entering the assessment year.

Step 3: Once the form has been successfully assigned, the CA can find it in his/her work list in the ‘For Your Action’ section. He/she can either accept or reject the assignment. If the assigned CA rejects it, you must reassign the form.

Step 4: If the CA accepts the task, he will fill in all the necessary details in the form after proper assessment and auditing. 

Step 5: Once done, you can find the form uploaded by the CA in the Taxpayer’s work list. You can click the ‘For Your Action’ button and find the form marked ‘Pending for Acceptance’. You can either accept or reject it after reviewing the form. Once you approve it, Form 3CEB will be filed.

Form 3CEB comprises three parts – Part A, Part B and Part C. 

Part A contains basic details that need to be filled up. 

Part B have a lot of information related to international transactions must be provided. It includes information about associate enterprises, nature and particulars of transactions.

Part C of the form is solely dedicated to specified domestic transactions. While Part B focuses on international transactions, Part C is on engagements with domestic enterprises. 

Conclusion:

As per Section 92E of the Income Tax Act, which relates to international transactions and specified domestic transactions, filing Form 3CEB is mandatory for companies who are engaged in foreign or domestic business with associated enterprises. Taxpayers must strictly follow the requirements listed in Form 3CEB; otherwise, there are penalty rules which might be enforced.

Clause 44 It was added w.e.f 20th August 2018 but Reporting under this clause was deferred till 31st March 2019 vide Circular No. 6/2018 dated 17th August 2018, So reporting in clause 44 is started from AY 2019-20.

The Objective for insertion of this Clause 44:

The main objective is to co-relate GST Data with Income Tax Data.

FAQ’s on CLAUSE 44

Q.1. Is reporting in this clause applicable only for Assessee who are GST registered?

Ans: No, Reporting is to be made by all assesses who are registered under GST or not.

Q.2. Interpretation of wordings “Breakup of total expenditure”? What expenditures are not Included?

Q.3. Tabular format for disclosure:

Sl. No.	Total amount of Expenditure incurred during the year	Relating to Goods or services Exempt from GST	Relating to entities Falling under Composition Scheme	Relating to Other Registered Entities	Total Payment to Registered Entities	Expenditure relating to entities not registered under GST
(1)	(2)	(3)	(4)	(5)	(6)	(7)

Q.4. Colum 2 says “Total amount of Expenditure incurred during the year” so shall we report head-wise / nature wise expenditure?

Q.5. What are the Expenditure relating to other registered entities (column 5)?

Ans: The value of all inward supplies from registered dealers, other than supplies from composition dealers and exempt supply from registered dealers, are to be mentioned in this column.

Q.6.  What is the meaning of “Total payment to registered entities (column 6)”?

Ans: The language used in sub-heading of column 6 is total’ payment’ to registered entities. The word ‘payment’ should harmoniously be interpreted as ‘expenditure’ as the combined heading of columns (3), (4), (5) is ‘Expenditure in respect of entities registered under GST’. Hence, the total expenditure in respect of registered entities i.e., sum total of values reported in columns (3), (4) and (5) should be reported in Column 6.

Q.7. Checks and Control while reporting?

Foreign Currency Exposure:

The Foreign Currency Exposure is a risk associated with the businesses and investors engaged in the activities (trade and investments) of dealing in foreign currency transactions. The entities involved in the activities of transactions in different foreign currency denominations and does not take steps to protect themselves from currency fluctuations.

This exposure arises when a company or individual holds assets, liabilities, or cash flows in a foreign currency without implementing any hedging mechanisms to mitigate potential adverse currency fluctuation.

Entities needs to hedge ourselves from foreign currency exposure in the market to avoid any risk of volatility in the exchange rates and Derivative hedging is the one of the best ways to hedge.

Unhedged foreign currency exposure (UFCE):

The RBI issues guidelines for banks to manage their foreign currency exposure either fund base or non-fund base, in an attempt to reduce the risk of unhedged exposure on the banking system during extreme volatility in forex markets.

Banks would be required to assess the unhedged foreign currency exposures of all entities to whom they have an exposure in any currency.

Accordingly, the banks were given advisory through the issuance of various directions, guidelines and circulars to develop a framework for regular monitoring of entities that do not have a hedge. Henceforth, the present directions dated 11th October 2022

Applicability of the Directions:

The provision pertaining to the current directions shall apply to all commercial Banks excluding Payments Bank and Regional Rural Banks along with the Overseas Branches and Subsidiaries of Banks incorporated in India.

These Directions shall come into effect from January 1, 2023.

Computation of UFCE:

Banks shall ascertain the Foreign Currency Exposure (FCE) of all entities at least on an annual basis. Banks shall compute the FCE following the relevant accounting standard applicable for the entity. For ascertaining the Foreign Currency Exposer, the banks shall also include all the sources of an entity’s exposure, including Foreign Currency Borrowings & External Commercial Borrowings.

UFCE shall be obtained from entities on a quarterly basis based on statutory audit, internal audit or self-declaration by the concerned entity. Moreover UFCE information shall be audited and certified by the statutory auditors of the entity, at least on an annual basis.

Provisioning and Capital Requirements:

The bank is required to calculate the total potential loss to the entity from Unhedged Foreign Currency Exposure. It shall be determined by using the data published by FEDAI on the annual volatility rate in the USD-INR exchange rate for the last 10 years and multiplying it with the UFCE of an entity.

The bank is required to ascertain the susceptibility of an entity towards adverse exchange rate movements. It shall be determined by computing the ratio of potential loss to the entity from UFCE and the entity EBID (Earnings before interest and depreciation).

In case if the bank is unable to gather information on UFCE and EBID of an entity due to restrictions on disclosure of information, then, in that case, the bank can compute the susceptibility ratio by using data that is immediately preceding the last four quarters.

In case of Unlisted Company if the information on EBID and UFCE is not available due to the non-availability of the last audited results of the last quarter, then, in that case, the bank shall undertake the latest quarterly and annual result. However, the EBID figure shall be for the last financial year.

The direction has determined the figure for computing the incremental provisioning and capital requirements which are as follows:

Potential Loss or EBID ( in Percentage)	Incremental provisioning Requirements	Incremental Capital Requirements
Up to 15 %	0	0
15% to 30%	20 BPS	0
30% to 50%	40 BPS	0
50% to 75%	60 BPS	0
More than 75%	80 BPS	Risk weight + 25%

Further, the bank is required to calculate the incremental requirements on quarterly basis. 

For projects under implementation and the new entities, banks shall calculate the incremental provisioning and capital requirements based on projected average annual EBID for the three years from the date of commencement of commercial operations.

In the case of consortium arrangements, the consortium leader / bank having the largest exposure shall have the lead role in monitoring the unhedged foreign exchange exposure of entities.

Exemption / Relaxation (a) Banks shall have the option to exclude the following exposures from the calculation of UFCE:

(i) Exposures to entities classified as sovereign, banks and individuals.

(ii) Exposures classified as Non-Performing Assets.

(iii) Intra-group foreign currency exposures of Multinational Corporations (MNCs) incorporated outside India.

Provided that the bank is satisfied that such foreign currency exposures are appropriately hedged or managed robustly by the parent. (iv) Exposures arising from derivative transactions and / or factoring transactions with entities, provided such entities have no other exposures to banks in India.

Assessment of Unhedged Foreign Currency Exposure (UFCE):

The banks are further required to ascertain the UFCE by obtaining such information from the concerned entity on quarterly basis. Further, the information on UFCE supplied to the bank must be audited and certified by a statutory auditor of the entity.

Nostro and Vostro accounts are two types of bank accounts used in international banking transactions. These terms originate from Latin, with Nostro meaning “our” and Vostro meaning “your”. In this article, we will discuss the meaning and differences between these two types of bank accounts.

What is a Nostro account?

A Nostro account is a bank account that a bank holds in a foreign currency in another bank. These accounts are maintained by banks to facilitate their foreign currency transactions. Nostro accounts are used by banks to hold funds that belong to their customers in other countries. These accounts are denominated in the currency of the foreign country where the account is held. Banks use Nostro accounts to receive and make payments in foreign currencies.

For example, if Bank A in the United States has a customer who wants to make a payment to a supplier in Japan, Bank A would use its Nostro account in Japan to make the payment in Japanese yen. The funds would be transferred from the customer’s account in Bank A to Bank A’s Nostro account in Japan, and then Bank A would use these funds to make the payment to the supplier in Japan.

What is a Vostro account?

A Vostro account is a bank account that is held by a foreign bank in the local currency of the country where the account is held. Vostro accounts are maintained by banks to facilitate transactions with their international customers. These accounts are used by banks to hold funds that belong to their customers in the local currency of the country where the account is held. Banks use Vostro accounts to receive and make payments in local currencies.

For example, if Bank A in the United States has a customer who wants to receive a payment from a supplier in Japan, Bank A would give its Japanese partner bank permission to open a Vostro account with Bank A. The supplier in Japan would transfer the payment in Japanese yen to Bank A’s Vostro account in Japan. Bank A would then credit the payment to its customer’s account in the United States in US dollars.

Differences between Nostro and Vostro accounts

The main difference between Nostro and Vostro accounts is that Nostro accounts are held by a bank in a foreign country, denominated in the currency of the foreign country, and used to facilitate its transactions in that country. On the other hand, Vostro accounts are held by a foreign bank in the local currency of the country where the account is held, used to facilitate transactions with the bank’s international customers.

Another difference between Nostro and Vostro accounts is the ownership of the account. A Nostro account is owned by the bank that holds the account, while a Vostro account is owned by the foreign bank that opened the account.

A Nostro Account of one country can be a Vostro Account for another country, and vice versa

SEBI has been notified as the regulator of gold exchanges in the country. SEBI has come up with the ‘Framework for operationalizing the Gold Exchange in India’ vide Circular dated January 10, 2022 and has also declared the instrument for trading in Gold Exchange ,i.e., EGRs as ‘securities’ under Section 2(h)(iia) of the Securities Contracts (Regulation) Act 1956 dated December 24, 2021 vide Gazette notification. The SEBI Regulations, 2021’ provides that any person willing to carry on the business of providing vaulting services in relation to gold, i.e., storage and safekeeping of physical gold deposited by the depositor for the purpose of trading in EGRs may apply to SEBI and obtain registration to act as a Vault Manager. The Framework provides that stock exchanges willing to trade in EGRs may apply to SEBI and begin trading in EGRs in new segment. A structure of the transactions in respect of creation, trading and conversion of EGR into Physical Gold has also been defined.

PROPOSED AMENDMENTS

In line with these new developments, it is proposed to bring following amendments in the ITA to make the conversion of physical gold into EGR and vice versa tax neutral:

• New provision, S. 47(viid), is proposed where under the conversion of physical gold (held as capital asset) into EGRs issued by a Vault Manager and vice versa, shall not be considered as ‘transfer’ within the meaning of S. 47 of the ITA. Hence, there would be no capital gain arising at the time of mere conversion.
• Further, S. 2(42A) is proposed to be amended to include the period of holding of the converting asset in the period of holding of the converted asset. In other words, the period of holding of EGRs would include even the period for which the physical gold was held by the assessee prior to conversion into EGRs and vice versa. (Clause (hi) to Explanation 1 of S. 2(42A)).
• Lastly, it is proposed that the Cost of Acquisition of EGRs shall be deemed to be the cost of gold in the hands of the person in whose name EGRs is issued. Similarly, where gold is released against an EGRs, the COA of the gold shall be deemed to be the cost of the EGRs in the hands of such person. (S. 49(10)).

These amendments will become effective from April 1, 2024 and shall accordingly, apply in relation to the AY 2024-25 and subsequent AYs.

CLARIFICATION REQUIRED

There is an ambiguity in relation to the indexation benefit. A clarification is also needed with regard to the classification of Electronic Gold Receipts (ECRs) as Short term or Long term, whether EGRs must be considered as a Capital Asset (36months/ 3 years) or as a Security (12 months/1 year).