Section 92 of the Income Tax Act
Section 92 of the Income Tax Act, 1961 deals with the computation of income from international transactions. It applies to any person who carries on any business, profession or vocation, or has any other source of income, outside India. Essentially, the provisions lay down specific rules for how to treat cross-border transactions for tax purposes. This is important, as cross-border transactions can be complex and tricky to compute.
The section lays out a framework for how to deal with various types of income and expenses associated with international transactions. This helps to ensure that everyone is treated fairly and that businesses do not get an unfair advantage over others.
Key Features and Provisions Under S. 92
There are three key provisions under Section 92(1,2,3) of the Income Tax Act:1.
- Capital Gain
- Business Income
- Income from Other Sources
Each of these is fairly straightforward to understand. Read on to know more:
Capital Gain: This is the gain or profit you make from the sale of a capital asset, such as property or shares. The amount of tax you pay on this depends on how long you have owned the asset. If you have owned it for less than the time-period stipulated in the Income Tax Act for the given asset class (1 year in many cases), you will be taxed at your normal income tax rate. However, if you have owned it for more than a year, you will be taxed at a lower rate called long-term capital gains tax.
Business Income: This is income you earn from carrying on a business, such as through self-employment or partnership. The tax rates for business income vary, depending on how much profit your business makes. You can either pay tax on your business income as it comes in, or you can choose to have it taxed at a lower rate called presumptive taxation.
Income from Other Sources: This is any income that does not fit into the first two categories, such as rent, interest or dividend income. The tax rates for other sources of income also vary, depending on how much money you earn from them.
The government has implemented Transfer Pricing Regulations through the Finance Bill (2001). This has been done to address issues of tax avoidance occurring within intra-group transactions.
After this, S. 92 of the Income Tax Act was amended to include Sections 92A to 92F, which introduced transfer pricing regulations to India.
One of the important topics under Section 92 is Section 92A, which gives the Income Tax Department the authority to determine income from international transactions. It applies to all transactions between associated entities located anywhere in the world. It also provides for certain anti-avoidance measures, such as transfer pricing regulations, etc.
Under this section, if an associated enterprise
- enters into an international transaction and
- it is established that any part of its profits resulted from manipulation or abuse of the transfer pricing provisions, then
- the Assessing Officer may determine to adjust those profits.
Additionally, Section 92A also provides certain criteria for assessing officers. This is to ensure that the correct computation of income is made as per this section. It outlines that
- Both parties involved should have ‘associated enterprises’ as defined under
- Furthermore, associates must have entered into an international transaction
- This should have resulted in a variation in value between what has been spent by one associate and what has been received by the other associate beyond a certain threshold limit.
- Last but not least, it is necessary to prove any manipulation or abuse of the
transfer pricing provisions by either party involved to claim benefits under this tax provision.
If you have any international transactions, Section 92B of the Income Tax Act is a must-know. This section consists of certain eligibility criteria and requirements that must be fulfilled before you can claim any tax benefits under this provision.
For example, under Section 92B, the recipient of the income
- Should not be a resident or non-resident liable to tax in India on any income from a source outside India.
And if you are an Indian resident,
- you must provide proof that the said income is considered to be chargeable to tax in the country where it was earned.
More importantly, for the application of Section 92B to be valid, it is essential to provide enough evidence and documentation about the international transaction in question. You must also apply for and obtain an Advance Pricing Agreement with the Indian tax authority and will need to comply with all statutory filing requirements.
Thus, understanding and following Section 92B is pivotal if one wants to claim any tax benefits related to international transactions.
Section 92C of the Income Tax Act defines certain rules and regulations for the computation of income from international transactions. This section sets out the eligibility criteria for claiming tax benefits and outlines how one can comply with the provision.
Specifically, Section 92C requires that
- A taxpayer provides a detailed description and assessment of any transaction which is defined as an international transaction.
- This includes information regarding the nature of the transaction, its source, supply, location and cost. It is important to keep detailed records when filing your taxes to ensure accuracy in reporting and compliance with S. 92C.
- In addition, this section also requires taxpayers to obtain relevant documents from their foreign counterparts in validating a transaction or vice-versa. This is necessary to prove that the above-mentioned criteria have been met prior to filing their income taxes.
- Finally, taxpayers must also present an accurate report of their taxable income generated out of all international transactions along with relevant proof to get tax relief under Section 92C.
S. 92D is a provision that applies to the computation of income from international transactions. According to this section, the income from an international transaction has to be determined at arm’s length. This means that it should not differ from what a third party would have paid for the same transaction.
When it comes to eligibility criteria requirements as per this section, the taxpayer needs to be a resident of India and must have entered into an international transaction with a non-resident.
One of the key features of this tax provision is that it prescribes two methods for computing the income arising out of an international transaction
- The Transactional Net Margin Method (TNMM) and
- The Comparable Uncontrolled Price Method (CUP).
The method used by the taxpayer should be one that best reflects the arm’s-length price in respect of such a transaction.
Claiming tax benefits under this section is a hassle-free process. This applies if you comply with rules related to documentation, and file returns accurately and on time. Also, ensure you keep all your documents related to international transactions handy to avoid disputes with the Income Tax Department. This will be helpful, in case the tax authorities decide to audit your books of accounts or seek additional information from you during any compliance exercise.
The next tax provision to consider is Section 92E. As per this section, the income from international transactions needs to be computed with certain methods such as Comparable Uncontrolled Price Method, Resale Price Method, Cost Plus Method and Profit Split Method.
Moreover, the Indian company entering into an international transaction should meet certain eligibility criteria to be able to avail of benefits under this section. It includes meeting certain conditions in terms of satisfying the threshold turnover requirement of minimum ₹50 crores during the previous year and maintaining arm’s length price (ALP). ALP reflects a price which is determined based on market forces between two independent and unrelated parties entering into a transaction with each other.
Therefore, it is important to comply with all aspects of Section 92E while making transactions at an international level. If a company is not compliant with these rules, then it may result in tax-related complications and penalties on part of the taxpayer such as interest charges or levying taxes at a higher rate.
This section outlines that,
- Any adjustment arising due to fluctuation in the rate of exchange
- Should be made only to the extent deemed fit by the assessing authority.
It requires that all claims under this section must be satisfied with a valid and approved agreement between two associated enterprises.
The key benefits of this section are that it helps in
- Avoiding double taxation
- Helps in claiming tax credits from foreign countries
- Also allows for relief from certain taxes or duties even if the agreement does not cover such taxes or dues.
To comply with this provision, taxpayers must ensure that
- All agreements between parties related to an international transaction and any other supporting documents must be kept handy.
This is necessary for reference by the assessing authority and is to be submitted to them as per applicable laws.
Eligibility Criteria as per S.92
S. 92 (1,2,3) of the Income Tax Act outlines three criteria that must be met:
- The company has to be resident in India
- It must be incorporated under Indian law and
- It has to have an agreement with the Government of India.
If all three criteria are met, then a company is eligible to claim deductions under Section 92 (1,2,3). However, there are certain exceptions. For example, companies that rely on income from trading activities or those engaged in banking or insurance businesses cannot claim deductions.
Documents required as per S.92
As per S. 92 of the Income Tax Act, you will need to provide certain documents as proof. This includes
- Documents such as receipts, invoices, contracts, and bank statements.
- Additionally, if you are claiming a business expenditure, you may be required to provide evidence such as proof of payment for the goods and services purchased.
- It is also important to remember that these documents must have been issued at the time the expense was incurred. This is to ensure that any expenses claimed have been incurred and prove your eligibility for claiming any tax deductions.
Therefore, it is a good idea to keep all relevant documents in a secure place so they can be accessed and reviewed when necessary during an audit or when preparing your annual income tax return.
Conditions to comply under S.92
It is important to know which category your income falls into so that you can file the correct return. The three categories are: business income, employment income or other income.
- Business income: This is any income that is earned from a business or commercial activity.
- Employment income: This is any income that you earn from employment
- Other income: This is any income that does not fit into the first two categories, such as rental income, interest, dividends and capital gains.
Knowing which category your income falls into is important because it affects how much tax you have to pay. When claiming tax benefits under this section, there are some specific rules and conditions you should be aware of.
- One such rule is that the taxpayer must be an Indian resident.
- Other conditions include that the taxpayer must meet certain criteria such as they must not have borrowed funds from non-resident lenders and cannot have any foreign assets.
- Furthermore, if you are taking advantage of this tax benefit, then you will also need to pay taxes on any income that is generated as a result of investments made. This means that profit earned from dividends or capital gains would be subject to taxation.
- You should also keep in mind that the amount of tax benefit under Section 92 (1,2,3) is dependent on your total income and the number of investments you make.
- Finally, if you leave India for more than 180 days in any financial year, then you may not be able to claim tax benefits under this section.
Common mistakes to avoid while complying with S.92
It is essential to adhere to S.92 of the Income Tax Act to avoid any legal repercussions. To ensure the same, here are a few mistakes to avoid:
- Not filing returns or making late payments: As per S.92, it is mandatory to file your returns on time and make timely payments. Any failure to do so can land you in trouble with the authorities.
- Not paying tax on time: Delaying tax payments can have an impact both in terms of incurring charges and fines as well as the risk of legal action by the income tax department.
- Ignoring notices sent by the department: In case of any discrepancies in your returns, the department may send a notice. It is important not to ignore these notices and take the necessary steps to resolve any issue immediately.
- Not keeping records: Neglecting to keep accurate documentation can put you at risk of violating S. 92 of the Income Tax Act. All income must be declared for you to pay the correct amount of tax according to the law.
Do I need to file a return when claiming losses under Section 92?
Yes, you would still need to file a return even if you are claiming losses. You need to adjust your income based on the amount you are claiming.
Does Section 92 apply in all situations?
This section deals with the taxation of income arising from an international transaction using the arm’s length price. To understand, if this would specifically apply to your income computation, It is always recommended to check with a professional.
Are there any other restrictions or requirements related to this section?
Yes. Claiming losses under Section 92 can be complicated and you must comply with certain conditions for the losses incurred to be considered legitimate. You should consult with an accountant or tax specialist for more detailed information on this subject.
What kind of income does Section 92 cover?
Section 92 covers all sorts of income, such as salaries and wages, business profits, rental income, capital gains, and more.
Does Section 92 apply to both businesses and individuals?
Yes, it does. It applies to both businesses and individuals, though there are certain exemptions for small businesses.