It was about a decade ago that transfer pricing was introduced in India to regulate cross border transactions. But it was not until 2013 that transfer pricing regulations penetrated into the domestic transactions. It all began with CIT vs GlaxoSmithKline case where the Indian Supreme Court felt a compelling need to broaden transfer pricing regulations so as to cover domestic transactions.
Specified Domestic Transactions in case of an assessee means any of the following transactions, not being an international transaction, namely:
- Any expenditure in respect of which payment has been made or is to be made to a person referred to in clause (b) of sub-section (2) of section 40A;
- Any transaction referred to in section 80A;
- Any transfer of goods or services referred to in sub-section (8) of section 80-IA;
- Any business transacted between the assessee and other person as referred to in sub-section (10) of section 80-IA;
- Any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which provisions of sub-section (8) or sub-section (10) of section 80-IA are applicable; or
- Any other transaction as may be prescribed,
- And where the aggregate of such transactions entered into by the assessee in the previous year exceeds a sum of INR 50 million.
As per the regulations of ‘Specified Domestic Transactions’, taxpayers are now liable to furnish and maintain prescribed documentation for relevant domestic transactions, to file Form 3CEB along with their tax return and most importantly to be compliant with the arm’s length pricing.
Who are Covered Under Specified Domestic Transactions?
The following persons would be covered under DTP provisions:
|i||Individual||Any relative [defined in sec. 2(41) to mean husband, wife, brother, sister, lineal ascendant or descendant] Definition of Relative u/s. 56(2) not relevant|
|ii||Company||Any director or relative of such director|
|Firm (includes LLP)||Any partner or relative of such partner|
|AOP||Any member or relative of such member|
|HUF||Any member or relative of such member|
|iii||Any assessee||Any individual having substantial interest in the assessee’s business or relative of such individual|
|Iv||Any assessee||A Company, Firm, AOP, HUF having substantial interest in the assessees businessorAny director, partner, member
Relative of such director, partner or member
or (newly inserted)
Any other company carrying on business or profession in which the first mentioned company has substantial interest.
X Ltd. (subsidiary co.)
A Ltd. (holding co.)
Y Ltd. (subsidiary co.)
Applicability on Tax Holiday Undertakings
Domestic Transfer Pricing regulations are applicable on the following transactions of tax holiday undertakings:
Location based tax holiday
· Undertakings having a unit in a Special Economic Zone
· Undertakings located in industrial backward districts
· Undertakings located in Himachal Pradesh, Uttaranchal, or notified areas in North Eastern States
· Undertakings engaged in hotel business
Industry based tax holiday
· Generation/distribution of power
· Company/companies engaged in refining oil
· Undertakings engaged in developing/building infrastructure facilities
Methods for Determining Arm’s Length Price
There are five common methods used for determining Arm’s Length price.
1. Resale Price Method
2. Comparable Uncontrolled Price Method
3. Profit Split Method
4. Cost Plus Method
5. Transactional Net Margin Method
6. Any other method prescribed by Central Board of Direct Taxes
Domestic Transfer Pricing needs the company to furnish and maintain documentation related to pricing and transactions.
· Industry profile
· Group profile
· Profile of the company and associated entities
· Business analysis
· Functions, Assets and Risks (FAR) analysis
· Comparability analysis
· Pricing policies
· Selection of the best method for determination of Arm’s Length Price
In case of non-compliance of these regulations, the penalty regime is as follows:
|Type of Non-Compliance||Penalty|
|Failure to maintain documents||2% of the value of the transaction|
|Failure to furnish documents||2% of the value of the transaction|
|Failure to report a transaction||2% of the value of the transaction|
|Maintaining or furnishing incorrect information or documents||2% of the value of the transaction|
|Failure to apply right provisions in transfer pricing adjustment||100% to 300% of the additional tax payable|
|Failure to furnish Form 3CEB||1,00,000 INR|
DTP provisions were introduced for strengthening the monitoring and accountability of domestic transactions that were otherwise vulnerable to manipulation. The advent of transfer pricing regulations in the domestic sector will make arm’s length principle as a standard practice, leading to the overall betterment of the national economy.