Clause 42 and Clause 43 of the Tax Audit Report as prescribed under Form 3CD of the Income-tax Rules, 1962, are designed to ensure comprehensive reporting of transactions involving specified financial disclosures. These clauses primarily deal with the filing requirements under Rule 114B, Rule 114E, and the international reporting obligations under section 286 of the Income-tax Act, 1961. These clauses aim to ensure better tax compliance and transparency in financial reporting, particularly regarding high-value or foreign transactions. Auditors must verify the accuracy and completeness of the information reported in the prescribed forms and identify any discrepancies or omissions based on the assessee’s records.
Understanding Clause 42 of Form 3CD
Clause 42 focuses on determining whether the assessee is required to furnish any statement in Form No. 61, Form No. 61A, or Form No. 61B during the previous year. These forms are mandated by the Income-tax Department for reporting certain specified transactions or declarations. If the assessee is required to furnish these forms, the auditor must verify the details regarding the type of form filed, the due date of submission, the actual filing date, and the completeness of the information reported.
Auditor’s Responsibility under Clause 42
To report under Clause 42, the auditor is expected to verify the assessee’s books of account to identify transactions requiring reporting under Rules 114B, 114E, 114F, 114G, and 114H. The auditor must obtain and examine the filed Forms 61, 61A, and 61B and compare them with the information available on the Income-tax Department portal. A reconciliation must be done between the transactions reflected in the books of account and those disclosed in the respective forms. If any discrepancies are found or if certain transactions are not reported, the auditor must detail those in the audit report under Clause 42.
Applicability and Compliance of Form 61
Form 61 is applicable when the assessee undertakes specific transactions listed under Rule 114B without obtaining the Permanent Account Number (PAN) from the transacting party. In such cases, a declaration in Form 60 must be collected, and the assessee is required to submit Form 61, which contains details of all such declarations received. These transactions generally include high-value cash transactions or activities where identity verification is mandated. Transactions covered include the sale or purchase of motor vehicles, opening bank or demat accounts, high-value cash deposits or withdrawals, investments in financial instruments, and the purchase or sale of immovable property. The rules prescribe specific monetary thresholds beyond which PAN must be obtained or Form 60 must be collected. Form 61 must then report all such declarations accurately and be submitted within the prescribed timelines.
Exemptions from Rule 114B
Certain persons or entities are exempt from furnishing PAN under Rule 114B. These include central or state governments, consular offices, and non-residents for specific transactions. For instance, non-residents are exempted from transactions such as applying for credit cards, making payments to hotels or restaurants if audited under section 44AB, foreign currency transactions, or the purchase of RBI-issued bonds. The auditor must verify the assessee’s records to ensure that exemptions claimed under Rule 114B are justified and that the relevant supporting documentation is available.
Relevance and Requirements of Form 61A
Form 6A also referred to as the Statement of Specified Financial Transactions (SFT), is required to be filed under Rule 114E of the Income-tax Rules. This form reports high-value transactions undertaken by the assessee during the financial year. The responsibility to file this form lies with specific reporting entities such as banks, financial institutions, mutual funds, and registrars. The nature of transactions reported under Form 61A includes high-value cash deposits or withdrawals, credit card payments, purchase of financial instruments, immovable property transactions, and high-value insurance premium payments. The thresholds for reporting these transactions vary, with most requiring reporting if they exceed Rs. 10 lakh in aggregate during the financial year. The auditor is required to verify whether the assessee, being a reporting entity under Rule 114E, has filed Form 61A wherever applicable. The filing status must be checked along with the completeness and accuracy of the information disclosed.
Key Transactions Reported in Form 61A
Form 61A captures a wide range of specified financial transactions that include cash payments for purchasing bank instruments exceeding Rs. 10 lakh in a year, cash deposits or withdrawals of Rs. 50 lakh or more from current accounts, and deposits of over Rs. 10 lakh in savings or time deposit accounts. It also includes large credit card payments, receipt of high-value share application money, purchase of bonds or mutual funds, sale of foreign currency or use of forex instruments, and purchase or sale of immovable property of Rs. 30 lakh or more. Any person receiving cash exceeding Rs. 2 lakh for the sale of goods or services must also report the same. The auditor must assess whether the assessee has complied with the obligations under Rule 114E and confirm that the Form 61A has been submitted correctly and timely.
Form 61B and International Reporting Compliance
Form 61B is required to be filed by reporting financial institutions to report information under FATCA (Foreign Account Tax Compliance Act) and CRS (Common Reporting Standard) rules. This form must be submitted annually and includes reportable accounts held by specified entities or individuals as per global information exchange agreements. The auditor must be familiar with Rules 114F, 114G, and 114H that govern the filing of Form 61B. The auditor should verify whether the assessee qualifies as a reporting financial institution and whether the obligations under FATCA and CRS have been met. Where applicable, the auditor must ensure that Form 61B has been submitted in time, and the details reported match the records maintained by the entity.
Role of the Auditor in Form 61B Reporting
While verifying compliance with FATCA and CRS, the auditor should obtain a clear understanding of the reporting structure and identify whether the assessee holds or manages any reportable accounts. The auditor must confirm that the reporting format and information shared with the Income-tax Department through Form 61B align with prescribed international exchange protocols. Any mismatch or failure to comply may have significant regulatory consequences. The auditor is not expected to verify the correctness of every reportable account’s classification but should ensure that the due process has been followed and that the information provided by the assessee is based on proper internal controls and record maintenance.
Applicability of Clause 43 to International Groups
Clause 43 becomes applicable if the assessee or its parent entity or alternate reporting entity is obligated to furnish the country-by-country (CbC) report as per section 286(2). This provision typically applies to multinational enterprise groups that operate in multiple tax jurisdictions and have consolidated group revenue exceeding a specified threshold. In India, the threshold prescribed is Rs. 6400 crore for the preceding accounting year. Therefore, if the total consolidated group revenue crosses this limit and the entity is part of such a group, section 286 and Clause 43 of Form 3CD apply. The auditor must evaluate the group’s structure and revenue details to determine the applicability of the reporting requirement.
Reporting Responsibilities under Clause 43
When Clause 43 is applicable, the auditor must furnish the following details in the audit report. First, whether the report has been filed by the assessee or its parent entity or the alternate reporting entity. Second, the name of the parent entity. Third, the name of the alternate reporting entity, if applicable. Fourth, the date on which the report was furnished. Lastly, any remarks or expected dates in case the report has not yet been filed. These details must be confirmed through documentary evidence such as filing acknowledgments, board resolutions, group communication, or certificates obtained from the group headquarters or other reporting entities.
Understanding Section 286(2) of the Income-tax Act
Section 286(2) of the Income-tax Act mandates the furnishing of a country-by-country report by the parent entity or alternate reporting entity, which is a resident in India. The report must be filed within twelve months from the end of the reporting accounting year. This provision was introduced in line with India’s commitment to implement Action Plan 13 of the OECD’s BEPS project. The country-by-country report requires detailed information on the global allocation of income, taxes paid, and other economic indicators among tax jurisdictions where the multinational group operates. This data helps tax authorities assess transfer pricing risks and ensure appropriate tax is paid in the jurisdiction where value is created.
Forms to be Filed under Section 286
To comply with section 286, various forms must be filed with the Income-tax Department. These include Form 3CEAC, Form 3CEAD, and Form 3CEAE. Form 3CEAC contains details of the international group and the role of the reporting entity. Form 3CEAD is the actual country-by-country report, while Form 3CEAE is a notification form providing information about the designated reporting entity within the group. These forms must be filed electronically within the prescribed time limits. The auditor must ensure that the assessee has filed all applicable forms and retained copies of the submissions and relevant correspondence for verification during the audit.
Role of the Parent Entity and Alternate Reporting Entity
The parent entity is usually responsible for filing the country-by-country report unless an alternate reporting entity is appointed. An alternate reporting entity is a constituent entity designated by the multinational group to file the report on behalf of the group. The alternate reporting entity must be a resident of a jurisdiction with which India has an information exchange agreement. The appointment of the alternate reporting entity must be formally documented, and the Indian entity must inform the tax authorities through appropriate notification forms. The auditor should verify the official communication appointing the alternate reporting entity and ensure that its jurisdiction is compliant with the prescribed international agreements.
Verification of Filing by Auditor
The auditor is not required to comment on the accuracy or completeness of the report filed under section 286(2), but must verify whether the report has been filed and ensure that required disclosures are made under Clause 43. This includes obtaining copies of forms filed, reviewing acknowledgments of electronic submissions, and examining certificates or declarations from the group confirming compliance. If the filing is yet to be done, the auditor should mention the expected date of filing and provide any necessary remarks regarding delays or ongoing internal reviews within the group. The auditor must also verify the legal structure of the group to confirm whether the Indian entity is a parent, subsidiary, or part of an international group subject to section 286.
Documentation to Be Maintained
The assessee must maintain proper documentation to support the disclosures made under Clause 43. This includes group financial statements, organizational charts, documentation supporting the revenue threshold computation, appointment documents of alternate reporting entities, and copies of forms submitted to the tax department. Where the Indian entity is not the reporting entity, a declaration or certificate should be obtained from the parent entity or alternate reporting entity confirming that the report has been filed. These documents are crucial for the auditor to verify the facts disclosed under Clause 43. Additionally, these documents help in defending the group’s position in case of queries from tax authorities during assessments or international information exchange procedures.
Common Challenges Faced in Clause 43 Reporting
Reporting under Clause 43 often involves coordination with multiple group entities spread across jurisdictions, which can cause delays and inconsistencies in data collection. Communication gaps with parent entities located in other countries may lead to uncertainty regarding the filing status. Differences in tax reporting standards across countries can also create complications in preparing and submitting the required forms. Moreover, determining the threshold applicability in cases of mergers, acquisitions, or partial-year operations may pose additional complexity. Auditors must be vigilant and maintain clear documentation from the assessee and the group management to overcome these challenges. They must also be aware of recent notifications and circulars issued by the Central Board of Direct Taxes (CBDT) to interpret Clause 43 reporting correctly.
Relevance of Clause 43 in the Global Tax Framework
Clause 43 is a critical component of India’s commitment to global tax transparency. The OECD’s BEPS framework aims to curb tax avoidance by multinational enterprises that shift profits to low-tax jurisdictions. The country-by-country reporting mechanism allows tax administrations to assess risks related to transfer pricing, aggressive tax planning, and base erosion. India, being a participant in the multilateral convention for information exchange, expects full compliance from Indian arms of multinational groups. Through Clause 43, Indian tax authorities can access global group-level data and identify potential mismatches between profits and activities across jurisdictions. This supports fair taxation and strengthens India’s tax enforcement capabilities in cross-border matters.
Form 3CEAC: Intimation of the Reporting Entity
Form 3CEAC is the initial form that needs to be filed by the constituent entity of an international group that is resident in India. Through this form, the entity notifies the Income-tax Department about the details of the parent entity or the alternate reporting entity responsible for filing the country-by-country report. The form captures the name, address, country of residence, and legal identification of the reporting entity. The purpose of Form 3CEAC is to establish whether the Indian entity is the reporting entity or if such responsibility lies with another group entity abroad. The deadline to submit Form 3CEAC is generally by the end of the reporting accounting year, or such date as may be prescribed. The auditor must confirm that this form has been filed by obtaining the submission acknowledgment and reviewing the details contained within.
Form 3CEAD: Country-by-Country Report
Form 3CEAD is the core reporting form required under section 286(2). It contains the actual country-by-country report which includes financial and operational information of the international group segregated by each tax jurisdiction. The form captures key metrics such as revenues from related and unrelated parties, profit before tax, income tax paid and accrued, capital and accumulated earnings, tangible assets, number of employees, and a brief description of the activities conducted in each jurisdiction. The report must also specify the list of constituent entities in each country, along with their main business activities. The information provided in Form 3CEAD helps tax authorities perform high-level risk assessments of transfer pricing and base erosion strategies. The auditor should verify whether the Indian entity is the reporting entity and, if so, ensure that Form 3CEAD has been filed within twelve months of the end of the reporting accounting year. Copies of the form, submission receipts, and supporting documentation such as financial statements and group structure charts must be reviewed during the audit.
Form 3CEAE: Intimation of the Designated Entity
Form 3CEAE is required to be filed by an Indian constituent entity of an international group to intimate the Income-tax Department about the appointment of the reporting entity, whether it is the parent entity or an alternate reporting entity. This form essentially confirms that the country-by-country report will be filed by the designated group entity in compliance with section 286(2). It assures the Indian tax authorities that reporting obligations have been discharged on behalf of the group. This form should be filed within the time limit prescribed, which is typically before the due date of the CbC report filing. The auditor should check that Form 3CEAE has been submitted where the Indian entity is not the reporting entity. Verification should include reviewing declarations from the parent or alternate reporting entity, confirmation emails or board resolutions, and submission acknowledgments.
Verification Process for Country-by-Country Reporting
While auditing Clause 43, the auditor is expected to ensure procedural compliance with the applicable provisions. This includes confirming whether the group qualifies as an international group, checking the revenue threshold of Rs. 6400 crore, and verifying the identification and role of the reporting entity. The auditor must then check whether the applicable forms (3CEAC, 3CEAD, 3CEAE) have been duly filed by the assessee or another group entity. The actual contents of Form 3CEAD are not subject to audit scrutiny under Clause 43, and the auditor is not required to opine on their accuracy. However, completeness of the filing process and sufficiency of documentation must be verified. Supporting documents should be examined to validate the group’s organizational structure, the classification of entities, and jurisdiction-wise allocation of financial data.
Audit Procedures and Documentation
The audit procedures for Clause 43 include obtaining a written representation from management confirming whether section 286 is applicable, and if so, the details of the reporting structure. The auditor should also request documentation such as the group’s consolidated financial statements, list of constituent entities, revenue reports, and the final country-by-country report. These documents should be reviewed to verify the group’s total revenue and to identify the reporting jurisdiction. Where the Indian entity is not the reporting entity, a declaration or certificate must be obtained from the reporting entity confirming the filing of Form 3CEAD. In addition, the auditor should retain electronic acknowledgments of forms filed with the Income-tax Department as audit evidence. The working papers should document the basis on which the auditor has determined whether Clause 43 is applicable and whether the required disclosures have been made.
Common Scenarios in Clause 43 Audits
In practice, auditors may encounter various scenarios while reporting under Clause 43. One scenario may involve an Indian subsidiary of a foreign multinational group where the parent entity is the reporting entity. In such cases, the Indian subsidiary must file Forms 3CEAC and 3CEAE, while the country-by-country report is filed by the foreign parent. Another scenario may involve a group with no single parent entity resident in a jurisdiction with which India has an information exchange agreement. In such a case, an alternate reporting entity may be designated within the group to file the report. A third scenario may involve the Indian entity itself being the ultimate parent entity of the group, in which case it must prepare and file all three forms including the CbC report in Form 3CEAD. Each of these situations requires the auditor to apply different verification procedures and ensure that the correct documentation is filed and retained.
Issues in Determining Reporting Responsibility
Sometimes, determining which entity is responsible for reporting may not be straightforward. Complex group structures, mergers and acquisitions, or joint ventures may make it difficult to establish the ultimate parent or identify the designated reporting entity. The auditor should seek clarifications from management, review legal and financial documents, and consult with tax advisors where necessary to resolve such issues. Additionally, the auditor should stay updated on recent circulars and guidance issued by the Income-tax authorities regarding the interpretation of reporting responsibilities. In cases of ambiguity, the auditor should document the reasoning for the conclusion reached and disclose the relevant facts in the audit report if required.
Consequences of Non-Compliance
Failure to file any of the prescribed forms under section 286 can attract significant penalties. Non-filing or incorrect filing of the country-by-country report may lead to penal consequences under section 271GB of the Income-tax Act. The penalties range from Rs. 5000 to Rs. 50000 per day depending on the nature and duration of the default. Further, inaccurate reporting may expose the group to transfer pricing audits and risk assessments by tax authorities in multiple jurisdictions. From an audit standpoint, non-compliance must be reported in Clause 43 along with a clear explanation of the default and its implications. The auditor should maintain evidence of follow-up communication with the assessee regarding delays or errors in filing and should recommend corrective action if required.
Limitations of Auditor’s Responsibility under Clause 43
It is important to note that the auditor’s role under Clause 43 is limited to verifying whether the applicable forms have been filed and whether the required information has been disclosed. The auditor is not responsible for reviewing the correctness of the country-by-country report or assessing the appropriateness of the transfer pricing policies of the group. These matters fall under the domain of the tax authorities and the group’s internal compliance framework. The auditor should only focus on procedural aspects and ensure that adequate records are maintained to support the reporting obligations. Where appropriate, disclaimers should be included in the audit report to clarify the scope of the auditor’s verification.
Practical Considerations in Reporting Clause 42
While reporting under Clause 42, the tax auditor needs to ensure the completeness and accuracy of details furnished. The auditor must verify the amount of disallowance under section 43B, along with the relevant year in which the liability was discharged. The working papers should contain adequate documentation, including ledgers, payment proofs, challans, and bank statements. The classification between those liabilities that are covered under section 43B and those that are not should be diligently reviewed.
Additionally, the auditor should ensure that there is no double reporting, particularly in cases where the same disallowance is already reported under Clause 21(b). A cross-verification should be conducted to ensure consistency across different clauses of Form 3CD. If an assessee opts to pay any liability late and it is still claimed under section 43B in a subsequent year, then such amounts must be mentioned with proper notes in the tax audit report.
Common Pitfalls in Clause 42 Compliance
One of the common errors observed in reporting Clause 42 is the omission of certain liabilities due to a lack of understanding of the scope of section 43B. Many assessees wrongly assume that only statutory liabilities like PF and ESI are covered, whereas the section also includes various other dues such as excise, customs, and service tax, even if they relate to earlier laws.
Another mistake is not correlating the disallowed amount in books with the actual payments made in the following years. This results in a mismatch during tax assessments and unnecessary scrutiny. Some taxpayers also fail to identify payments made through adjustments or book entries, which are not allowed under section 43B, and erroneously consider them as compliant.
Recommendations for Effective Clause 42 Auditing
For proper compliance, auditors are advised to create a checklist of all payments covered under section 43B and perform a year-end review of whether they were paid on or before the due date of filing the return. It is also recommended to obtain a management representation letter confirming the treatment of such liabilities and their payments.
The auditor should also consider using automated tools to reconcile statutory dues recorded in the trial balance with actual payments reflected in bank ledgers or challans. A periodic internal audit or ERP-based validation of statutory dues and their payments can significantly reduce errors in reporting under Clause 42.
Overview of Clause 43: Transfer Pricing Adjustments
Clause 43 of Form 3CD deals with the applicability of transfer pricing provisions under section 92CE of the Income-tax Act, which refers to Secondary Adjustments. These adjustments are required when there has been a primary adjustment under section 92CA (Transfer Pricing Officer’s order), section 92C (arm’s length price determined by the assessee), or section 92CB (Safe Harbour Rules).
The objective of Clause 43 is to ensure that if a primary adjustment has been made and accepted, then the excess money, i.e., the difference between the arm’s length price and the price at which the transaction took place, must be repatriated into India within the prescribed time frame. If not, then such excess amount is treated as an advance made to the associated enterprise, and interest is imputed on it.
Key Components of Clause 43
Clause 43 requires disclosure of the following:
- Whether a primary adjustment to transfer price has been made.
- The amount of such primary adjustment.
- The year of adjustment and the section under which it was made.
- The details of repatriation of excess money.
- The amount treated as advance due to non-repatriation.
- The interest income computed on such deemed advance.
This clause ensures compliance with the transfer pricing regulations and also links to the corresponding income offered by the assessee on account of secondary adjustment. Any deviation from the prescribed time limit or incorrect computation of interest would attract penalties and further scrutiny.
Applicability Criteria under Section 92CE
Section 92CE was introduced to align India’s transfer pricing framework with international best practices as recommended by the OECD under BEPS Action Plan 13. It applies only when:
- A primary adjustment of INR 1 crore or more is made in any previous year starting from AY 2017-18 onwards.
- Such primary adjustment has been accepted by the assessee voluntarily or as per an order.
- The excess money arising from such adjustment is not repatriated to India within the prescribed time (90 days from the date of order or due date of return, depending on the situation).
In such cases, the excess money is deemed to be an advance and interest income has to be calculated as per Rule 10CB.
Rule 10CB: Determination of Interest Income
Rule 10CB provides the methodology to compute interest on the deemed advance. For international transactions denominated in INR, the interest rate shall be the one-year SBI MCLR as on 1 April of the relevant year plus 325 basis points. For foreign currency-denominated transactions, the rate shall be six-month LIBOR as on 30 September of the relevant year plus 300 basis points.
The interest should be calculated from the expiry of the prescribed time for repatriation until the date of actual repatriation, or till the end of the relevant assessment year, whichever is earlier. The computed interest income must be reported and offered to tax in the return.
Verification and Documentation for Clause 43
The auditor should verify whether the assessee has disclosed any primary adjustment in their transfer pricing documentation, return of income, or assessment order. If yes, the auditor should check the timing and amount of repatriation of excess money. The books of account, Form 3CEB, assessment orders, correspondence with the Assessing Officer, and bank records should be examined to validate compliance.
If there is no primary adjustment or the transaction falls outside the scope of section 92CE, a nil reporting should be made under Clause 43 with a suitable note. In case of repatriation delays, the auditor should check whether interest has been computed and accounted correctly.
Challenges in Clause 43 Reporting
The major challenge in Clause 43 reporting is the complexity of international transactions and the requirement of timely repatriation. In many cases, the associated enterprise may not remit the excess money due to operational, regulatory, or contractual limitations. This results in an unavoidable default and leads to interest imputation.
Another issue arises when there are multiple transfer pricing adjustments over different years, and the taxpayer fails to track each adjustment individually for repatriation and interest purposes. This creates a reconciliation challenge for both the assessee and the auditor.
Additionally, lack of clarity regarding the applicability of section 92CE in case of Safe Harbour Rules or Advance Pricing Agreements can lead to misreporting. There is also confusion about whether adjustments made suo motu by the assessee during the assessment or while filing the return attract secondary adjustment provisions.
Guidance Note Clarifications on Clause 43
The ICAI Guidance Note clarifies that Clause 43 should not be filled if there is no primary adjustment within the meaning of section 92CE. The auditor is not expected to initiate or suggest primary adjustments but only to report the facts based on existing records. The Note also emphasizes that the auditor should take reasonable care to verify whether the prescribed repatriation has taken place and interest, if any, is appropriately computed.
Where the assessee claims that the repatriation has occurred, the auditor must review the bank records, foreign remittance documents, and agreements. If repatriation is made beyond the prescribed time, the auditor must ensure that the appropriate interest is offered to tax. In the absence of adequate information, the auditor should qualify the report with a suitable note explaining the limitations.
Practical Scenarios and Reporting Examples
Let’s consider a scenario where an assessee accepted a transfer pricing adjustment of INR 2 crore made by the Assessing Officer under section 92CA for AY 2021-22. The excess amount was not repatriated till the due date. In this case, Clause 43 should report the year of adjustment, amount, section, and confirm that no repatriation was made within the prescribed time. The deemed advance of INR 2 crore should be disclosed and interest income should be calculated and reported.
In another case, an assessee made a primary adjustment voluntarily while filing the return and repatriated the excess amount within 60 days. In such a case, the auditor must report the adjustment, date, and amount repatriated, and confirm that no interest income arises since repatriation was within the time frame.
Importance of Coordination with Transfer Pricing Teams
Tax auditors must coordinate with the client’s internal or external transfer pricing consultants to ensure consistent reporting. Clause 43 is closely linked with the Transfer Pricing Report (Form 3CEB), and misalignment between the two can lead to audit flags or scrutiny. Information related to adjustments, acceptance, repatriation, and interest must be accurately sourced from the TP team.
Joint planning between statutory auditors, tax auditors, and TP professionals can streamline the process, particularly for MNEs having complex structures and large volume of cross-border transactions.
Conclusion
Clauses 42 and 43 of Form 3CD serve critical roles in ensuring transparency, consistency, and accountability in tax audit reporting. Clause 42 addresses the disclosure of disallowance under Section 43B if not paid on or before the due date of furnishing the return, while Clause 43 requires disclosure of any liability incurred in foreign exchange on account of the acquisition of a capital asset. Both clauses demand a high level of diligence, as they involve cross-verification with books of accounts, statutory payment records, and foreign currency transaction data.
The ICAI’s Guidance Note offers detailed interpretations and illustrative disclosures that assist tax auditors in complying with these clauses effectively. It emphasizes the importance of proper documentation, timely payment, and consistent accounting treatment, especially when dealing with complex or voluminous transactions.