The expert group on transfer pricing has recommended insertion of a new clause in section 209(1) of the Companies Act to enable the government to frame rules or guidelines.
It also defined related entities as those which have at least 26 per cent voting rights in a company and recommended that companies prepare an annual audited implementation report on such transactions.
"Such a legislative measure would invest the guidelines with unambiguous statutory force," the group has said in its report submitted to the department of company affairs on September 25.
The group has said in the backdrop of corporate malpractices reported across the world, there was an urgent need to put the regulations under Companies Act, which very few countries have done so far.
The group headed by JR Verma of IIM Ahmedabad, has further said as the legislative process could be time consuming, the government could use powers vested under section 641 and 642 of the Companies Act.
Most of the groups recommendations pertaining to additional disclosures could also be implemented by incorporating them in Schedule VI of the Companies Act.
This could be done by the Central Government in exercise of its powers conferred on it under section 641(1) of the Companies Act, the report says.
It has also said that whenever a company undertakes a transaction with a related entity it shall prepare a statement on Transfer Price Policy and a report on Implementation of Transfer Price Policy as part of the annual report.
However, because it may have commercially sensitive information, it need not be made available to the shareholders.
The Implementation Report would document the compliance with the Policy Statement and would include the actual detailed computation of an arms length price for every material transaction with a related party or internal business segment.
It added that the report be audited by an independent chartered accountant or cost accountant and along with the policy statement be placed before the Audit Committee for approval.
The report has recommended that the Implementation Report document the compliance with the Policy Statement and would include the actual detailed computation of an arms length price for every material transaction with a related party or internal business segment.
The Implementation Report would be audited by an independent Chartered Accountant or Cost Accountant.
According to the draft guidelines prepared by the committee, transactions where the price is fixed by the government or another authority pursuant to a law will be outside the ambit of these norms.
In addition, if a loan advanced by an entity to a company constitutes upto 51 per cent of the book value of the total assets of the loanee company, it would constitute a related entity.
