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An overview

The Gujarat International Finance Tec-City (‘IFSC-GIFT City’), designated the International Financial Services Centre (‘IFSC’), was conceived as a global hub for financial and IT services, boasting cutting-edge infrastructure and facilities. Considering factors such as India’s strategic location, robust economy, expanding international trade, a wealth of talent, and the impetus for rapid economic growth, the Government of India inaugurated the country’s first IFSC, i.e., IFSC-GIFT City in Gandhinagar, Gujarat. Sanctioned under the Special Economic Zones Act of 2005, this initiative positions IFSC-GIFT City as a pioneering model for smart cities in India, striving to set a global benchmark in the finance and technology sectors.

The key vision of IFSC-GIFT City is to emerge as a hub for international financial services activities.  One of the primary objectives of setting up IFSC units in IFSC-GIFT City is to bring back those financial services transactions that are currently carried on outside India by overseas financial institutions and overseas branches/subsidiaries of Indian financial institutions in New York, London, Singapore, Hong Kong, Dubai, Tokyo, and others to the Indian shores.  IFSC-GIFT City will promote innovation and act as an enabler and catalyst for growth and can open doors to global financing for sustainable and climate-related projects.

Further, IFSC-GIFT City provides very competitive operating costs, a highly competitive tax regime, single-window clearance, relaxed company law provisions, an international arbitration centre, and overall facilitation of doing business.

With the above advantages, many international corporations choose to set up their units in IFSC-GIFT City and carry out permitted activities that may result in intercompany transactions that need to comply with India Transfer Pricing Regulations (‘India TPR’).

Key sectors operating in IFSC-GIFT City and typical cross-border transactions

Some key industrial sectors that have set up their units in IFSC-GIFT City are the Banking, Insurance, Capital Markets, Financial Services industries, etc. Some of the typical intercompany transactions between related enterprises relevant from the Indian TPR perspective are as follows:

1. Portfolio Investment Management Services between group companies within Fund Management industries
2. Intercompany Loan/Guarantee transactions for financial services industries
3. Intra-group services like Accounting, Human Resources, Legal services, Centralised treasury functions, brokerage, etc.
4. Intra-group Management Fees
5. Sharing of premiums, ceding commission, sharing reinsurance brokerage, etc, for Insurance industries

Residency test – Income-tax Act vis-a-vis FEMA

Before we discuss the transfer pricing implications for units set up in IFSC-GIFT City, it is pertinent to understand its residency status as per the provisions of the India Income-tax Act, 1961.  The Units established in IFSC-GIFT City are considered as non-residents for Foreign Exchange Management Act, 1999 (‘FEMA’) purposes.  However, these units are considered residents from the perspective of the India Income-tax Act, 1961 (‘the Act’). A moot question that then arises for determination is whether Indian TPR applies for intercompany transactions undertaken by newly set up units with their (a) foreign-related parties, (b) Indian-related parties, or both (a) and (b).

Transfer Pricing: Relevant provisions of the Act

As per section 92A(1) of the Act, the term Associated Enterprise (‘AE’) means any enterprise that participates directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise. This is, however, subject to the satisfaction of the deeming fiction mentioned in section 92A(2) of the Act. As per section 92B of the Act, the term ‘international transaction’ means a transaction between two or more AEs, either or both of whom are non-residents.

Therefore, on a plain reading of sections 92A and 92B of the Act, it can be inferred that a transaction between two AEs in which at least one enterprise is a non-resident can be considered an international transaction subject to Transfer Pricing provisions under Chapter X of the Act.

Applicability of India TPR to units set up in IFSC-GIFT City

The applicability of the India TPR could be analysed in the following two scenarios:

1. The unit set up in IFSC-GIFT City has a transaction with the foreign related party, and
2. The unit set up in IFSC-GIFT City having a transaction with a group entity present in Mainland India/ Domestic Tariff Area (‘collectively referred to henceforth as DTA’) other than IFSC-GIFT City in India, i.e., a domestic-related party.

As discussed earlier, a unit set up in IFSC-GIFT City is considered as a non-resident only for FEMA purposes. However, for the purpose of the Act, it is still considered as a resident.  Hence, any transaction of a unit newly set up in IFSC-GIFT City will be required to comply with India TPR, like any other entity based in DTA.

Relevance of TP for transactions with entities in DTA

In many instances whereby a unit set up in IFSC-GIFT City is having transactions with its group entity present in DTA, a question may arise if they are reportable as Specified Domestic Transaction (‘SDT’) as per provisions of section 92BA of the Act.  Section 92BA provides for reporting requirements for domestic transactions between units/entities claiming benefits under Section 80A, 80IA(8), 80- IA(10) or other sections under Chapter VI-A or Section 10AA or the provisions of sub-section (8) or subsection (10) of section 80-IA of the Act.  It is critical to note here that Section 80LA has not been explicitly mentioned in Section 92BA of the Act. Hence, a view may be adopted that 80LA transactions remain outside the purview of SDT, therefore, Indian TPR ought not to apply to a unit set up in IFSC-GIFT City having transactions with its group entity present in DTA.

However, a clear reading of Section 80A(6) of the Act elaborates that inter-unit transfer of services/goods covering eligible units claiming deductions under certain heads, including Heading C of Chapter VI-A (Income-based deductions), are to be carried out at market value.  By applying this principle, one may adopt a view that Section 80LA falls within the gamut of a broad category of Heading C of Chapter VI‑A, hence, it is prudent for units set up in IFSC-GIFT City to carry out intercompany transactions with entities in DTA at prices by leveraging on the arm’s length principle laid out in the Act and Rules 10A to 10E of the Income-tax Rules, 1962 in the situations where there are practical challenges regarding the availability of open market data to arrive at/justify prices.

Availability of Tax holiday benefit on Transfer Pricing adjustments

The tax authorities may make additions to the total income of the unit set up in IFSC-GIFT City having intercompany transactions with its foreign related parties on account of intercompany transactions not being at arm’s length price. In such a case, deduction/ tax holiday to the extent of additions made will not be allowed, which is in line with the provisions of section 92C (4) of the Act.

Way forward for tax leaders

Tax leaders will need to keep pace with the applicability of India TPR for units set up in IFSC-GIFT City and examine, considering, the intercompany transactions with foreign and domestic related parties.  It is certain that units in IFSC-GIFT City are resident for the purposes of the Act and need to comply with the Indian TPR, which includes filing an Accountant’s Report in Form No. 3CEB and maintaining a detailed local file, which is due in October each year if they have transaction/(s) with foreign related parties.

Yet, the transactions carried out by units set up in IFSC-GIFT City with domestic related parties in DTA are required to be carried out at Market Value where one may take shelter of the arm’s length principle enshrined in Indian TPR to justify the price, which may also provide adequate comfort to the management, shareholders, government Authorities and all other stakeholders.  Certain listed companies follow a similar approach as a good corporate governance practice to comply with the Companies Act, 2013 provisions and the Securities and Exchange Board of India Listing Obligations and Disclosure Requirements, 2015.