Section 94A to the Income Tax Act, 1961 empowers the Indian Government to blacklist certain jurisdictions which do not effectively exchange information with India. Those jurisdictions are classified as “notified jurisdictional areas.”
The Finance Act, 2011, introduced anti-avoidance measures with respect to transactions with these jurisdictions. There is increasing concern that such jurisdictions are being used for the purposes of artificial tax avoidance schemes or tax evasion.
Recently, India’s Central Board of Direct Taxes introduced Rule 21AC to the Income-tax Rules according to which taxpayers transacting with persons in such blacklisted jurisdictions are not only required to maintain information and documents as prescribed under transfer pricing rules but also will have to maintain documents as prescribed under new Rule 21AC. The taxpayers will need to make this documentation ready for presentation and review if requested by the tax authorities.
For transactions with parties in notified jurisdictional areas, including transactions identified as “international transactions” and subject to the transfer pricing rules, transactions with related parties and transactions with any financial institution located in such areas, the anti-avoidance measures will limit deductions (including deprecation) with respect to payments.
The taxpayer must maintain documentation—in addition to the transfer pricing documentation—relating to the transaction, and have this documentation ready for presentation and review if requested by the tax authorities.
