Revamped framework of the Transfer Pricing documentation & Penalties : Clause 171 of the Income Tax Bill, 2025 Vs. Section 92D of the Income-tax Act, 1961

Clause 171 Maintenance, keeping and furnishing of information and document by certain persons.

Income Tax Bill, 2025

Introduction

Clause 171 of the Income Tax Bill, 2025 introduces a framework for the maintenance, keeping, and furnishing of information and documents by persons engaged in international transactions, specified domestic transactions, and constituent entities of international groups. This clause seeks to update and consolidate the compliance and reporting obligations that currently exist under the Income-tax Act, 1961, particularly u/s 92D, Section 271G, and the associated Income-tax Rules, namely Rule 10D and Rule 10DA.

The legislative context of Clause 171 is rooted in the global evolution of transfer pricing regulations, the need for robust anti-avoidance measures, and the increasing emphasis on transparency in cross-border transactions. The clause is significant as it aligns Indian law with international best practices, notably the OECD's Base Erosion and Profit Shifting (BEPS) Action Plan, and addresses perceived lacunae or inefficiencies in the existing regime. This commentary will dissect Clause 171, analyze its objectives, compare it in detail with the existing statutory and regulatory framework, and discuss its practical and legal implications.

Objective and Purpose

The principal objective of Clause 171, as with its predecessors, is to ensure that entities engaged in cross-border and specified domestic transactions maintain adequate documentation to substantiate the arm's length nature of their dealings. This serves multiple policy goals:

• Enabling tax authorities to effectively scrutinize and assess the correctness of transfer pricing adopted by taxpayers.
• Deterring tax avoidance and profit shifting through stringent documentation and reporting requirements.
• Facilitating exchange of information and international cooperation by standardizing the information required from multinational enterprises (MNEs).
• Providing clarity and certainty to taxpayers regarding their compliance obligations.

The legislative intent is also to harmonize Indian transfer pricing documentation requirements with international standards, particularly the three-tiered documentation approach (local file, master file, and country-by-country report) advocated by the OECD.

Detailed Analysis of Clause 171 of the Income Tax Bill, 2025

1. Scope and Coverage

Clause 171(1) mandates every person who has entered into an international transaction or specified domestic transaction, and every constituent entity of an international group, to maintain prescribed information and documentation. This dual scope mirrors the existing Section 92D(1), but with a subtle shift in language and structure. The clause explicitly bifurcates the obligations of (a) persons entering into transactions, and (b) constituent entities of international groups, thereby aligning with the master file and local file distinction.

The inclusion of "specified domestic transaction" is significant, as it extends transfer pricing documentation requirements beyond cross-border dealings to certain domestic transactions that may have a bearing on profit allocation or tax base erosion within India.

2. Nature, Period, and Manner of Documentation

Clause 171(1) defers to the rules for the nature, period, and manner of documentation, akin to Section 92D(1) and (2). The rules (currently Rule 10D and Rule 10DA) prescribe extensive details, including ownership structures, business profiles, transaction details, functional analyses, comparability analyses, and transfer pricing methodologies.

The clause thus acts as an enabling provision, with the substantive requirements being set out in delegated legislation. This approach allows for flexibility and timely updates in response to evolving international standards and business practices.

3. Furnishing of Information to Tax Authorities

Clause 171(2) empowers the Assessing Officer or Commissioner (Appeals) to require any person referred to in sub-section (1)(a) (i.e., persons entering into transactions) to furnish prescribed information or documents within ten days of receiving a notice. This is identical to Section 92D(3) post-2023 amendment, which reduced the compliance window from thirty to ten days. The provision for extension by up to thirty days on application (Clause 171(3)) is also retained.

The requirement to furnish documentation within a short timeframe underscores the expectation that taxpayers maintain contemporaneous documentation, and signals a move towards more efficient and timely tax administration.

4. Reporting by Constituent Entities of International Groups

Clause 171(4) requires constituent entities to furnish the prescribed information and documents to the authority specified u/s 511(1) (presumably the authority for master file reporting), in the manner and by the date prescribed. This is analogous to Section 92D(4), which refers to Section 286 (the CbCR authority). The cross-reference to Section 511 indicates a possible restructuring of reporting authorities in the new Bill, but the underlying obligation remains unchanged.

5. Definitions

Clause 171(5) defines "constituent entity" and "international group" by reference to Section 511(10)(d) and (g), respectively. This is in line with the current practice of referencing definitions in the relevant master file/CbCR provisions (Section 286(9) in the 1961 Act). This ensures consistency across the transfer pricing documentation and reporting framework.

Practical Implications

1. Compliance Burden and Documentation Standards

Clause 171, read with the rules, imposes a significant compliance burden on taxpayers engaged in cross-border and specified domestic transactions. The documentation requirements are exhaustive and require sophisticated transfer pricing analyses, benchmarking studies, and contemporaneous record-keeping. For MNEs, the obligation to maintain and furnish master file information (as u/r 10DA) adds a further layer of complexity.

However, the provision also provides clarity and certainty, as the detailed rules leave little room for ambiguity regarding the nature and extent of documentation required.

2. Timelines and Penalties

The ten-day compliance window, though extendable, is stringent and necessitates that documentation be maintained on a real-time or contemporaneous basis. Failure to comply attracts severe penalties under the current Section 271G (2% of the value of each transaction), and it is expected that similar penalty provisions will be retained or strengthened under the new law.

Thus, the practical implication is that taxpayers must invest in robust documentation and compliance systems, and ensure that their transfer pricing policies and documentation are regularly updated and readily accessible.

3. Regulatory and Administrative Efficiency

For tax authorities, Clause 171 facilitates more effective scrutiny of transfer pricing practices, enables swift information gathering, and supports international cooperation in tax matters. The prescribed forms and procedures (e.g., Form 3CEAA u/r 10DA) also standardize the information received, making risk assessment and audit processes more efficient.

Comparative Analysis with Existing Provisions

1. Comparison with Section 92D of the Income-tax Act, 1961

Section 92D is the operative provision governing documentation for transfer pricing purposes. Its main features are:

• Documentation Mandate: Both Section 92D(1) and Clause 171(1) require persons entering into international or specified domestic transactions, and constituent entities of international groups, to maintain prescribed documentation.
• Prescribed Period and Manner: Section 92D(2) allows the Board to prescribe the period of retention, mirrored in Clause 171(1).
• Furnishing on Demand: Section 92D(3) allows the AO/Commissioner (Appeals) to demand documents within ten days (post-2023 amendment; previously thirty days), with a possible extension of thirty days-identical to Clause 171(2) and (3).
• Group Information: Section 92D(4) requires constituent entities to furnish group information to the authority u/s 286(1); Clause 171(4) refers to Section 511(1) (presumably the new equivalent).
• Definitions: Section 92D provides definitions by reference to Section 286(9); Clause 171 refers to Section 511(10).

Key Differences:

• Reference to New Sections: Clause 171 replaces references to Section 286 with Section 511, indicating an overhaul or reorganization of the relevant statutory architecture in the 2025 Bill.
• Streamlining: Clause 171 appears to consolidate the requirements more succinctly, possibly to be supplemented by detailed rules.
• Terminological Precision: The new clause is more explicit in its cross-referencing, which may reduce interpretative disputes.

2. Comparison with Section 271G of the Income-tax Act, 1961

Section 271G imposes a penalty for failure to furnish documentation as required u/s 92D(3), at the rate of two percent of the value of each international or specified domestic transaction. The provision is punitive and acts as a deterrent against non-compliance.

While Clause 171 does not itself stipulate penalties, its language and structure presuppose the existence of a similar penalty regime. It is reasonable to expect that the corresponding penalty provision in the 2025 Bill will mirror or update Section 271G, ensuring that the documentation requirements are backed by credible enforcement mechanisms.

3. Comparison with Rule 10D of the Income-tax Rules, 1962

Rule 10D operationalizes Section 92D by prescribing the specific information and documentation to be maintained. It is detailed and granular, covering ownership structures, business profiles, transaction details, functional analysis, comparables, pricing methods, and supporting documentation.

Clause 171, while not specifying the particulars, authorizes the prescription of such requirements. It is anticipated that the rules under the 2025 Bill will be similar in scope and content to Rule 10D, possibly updated to reflect recent OECD guidance and Indian administrative experience.

Key Points of Comparison:

• Thresholds and Exemptions: Rule 10D(2) provides exemptions for transactions below certain thresholds (e.g., one crore rupees), and for specified domestic transactions under certain conditions. Clause 171 is silent on thresholds, but this is likely to be addressed in subordinate legislation.
• Contemporaneous Documentation: Rule 10D(4) requires documentation to be contemporaneous; Clause 171's requirement for maintenance "in such manner as prescribed" is broad enough to encompass this.
• Retention Period: Rule 10D(5) mandates an eight-year retention period; Clause 171 leaves this to be prescribed.

4. Comparison with Rule 10DA of the Income-tax Rules, 1962

Rule 10DA sets out the master file requirements for constituent entities of international groups, including detailed information on group structure, business activities, intangibles, financing, and transfer pricing policies. It also prescribes filing procedures (Form 3CEAA, 3CEAB) and retention periods.

Clause 171(4) closely tracks this requirement, mandating that constituent entities furnish group information to the prescribed authority. The cross-reference to Section 511(1) suggests a reorganization of the master file/CbCR framework in the new legislation.

Key Points of Comparison:

• Scope: Both provisions cover constituent entities with reference to group-level documentation.
• Thresholds: Rule 10DA applies only if the group revenue and transaction value exceed specified thresholds; Clause 171 does not specify thresholds but delegates this to rules.
• Procedural Aspects: Rule 10DA is rule-heavy, specifying forms, deadlines, and filing authorities; Clause 171 is enabling, with details to follow in subordinate legislation.

Ambiguities and Potential Issues

While Clause 171 largely clarifies and consolidates the existing legal position, certain issues may arise:

• Interpretation of "Prescribed": As the clause defers to rules for most substantive requirements, the precise obligations will depend on the content and timing of the rules notified under the new Bill.
• Overlap with Other Reporting Regimes: The relationship between Clause 171 and other reporting regimes (such as CbCR, master file, and local file) must be clearly delineated to avoid duplicative or conflicting obligations.
• Thresholds and Exemptions: The thresholds for documentation and reporting (as in Rule 10D and 10DA) must be carefully calibrated to balance compliance burden and risk-based targeting.
• Penalty Provisions: As Clause 171 does not itself contain penalty provisions, the effectiveness of the regime will depend on the strength and clarity of corresponding penalty sections in the new Bill.
• Retrospective Application: Care must be taken to ensure that the new requirements do not apply retrospectively or create uncertainty for open assessment years.

Comparative Perspective with International Norms

The documentation and reporting framework under Clause 171, as with the current regime, is closely aligned with the OECD's BEPS Action 13-requiring a three-tiered approach comprising local file, master file, and country-by-country report. Many other jurisdictions (e.g., the UK, Australia, the EU) have adopted similar frameworks, with variations in thresholds, documentation content, and penalties.

India's approach, as reflected in Clause 171 and the associated rules, is robust and comprehensive, and in some respects more stringent (e.g., shorter compliance windows and higher penalties) than those in other major jurisdictions. This reflects India's policy emphasis on transfer pricing compliance as a key anti-avoidance tool.

Conclusion

Clause 171 of the Income Tax Bill, 2025 represents a thoughtful consolidation and modernization of India's transfer pricing documentation and reporting regime. It maintains continuity with the existing framework Section 92D, Section 271G, Rule 10D, and Rule 10DA, while providing scope for future refinement and alignment with international best practices. The clause strikes a balance between the need for comprehensive documentation to prevent tax avoidance and the practical realities of compliance for taxpayers. The effectiveness of the regime will ultimately depend on the clarity of the rules, the proportionality of penalties, and the administrative efficiency of tax authorities.

Going forward, areas for possible reform include further simplification of documentation for low-risk transactions, enhanced use of technology for compliance and reporting, and continued alignment with global standards to facilitate cross-border investment and cooperation.

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Full Text:

Clause 171 Maintenance, keeping and furnishing of information and document by certain persons.

 

Dated: 25-4-2025