Applicability of Transfer pricing regulation on Specified Domestic Related Party Transactions
How to Define Domestic Related Party?
Specified Domestic Transactions defined
- Expenditure for which payment is made or to be made to specified domestic related parties.
- Transfer of goods or services to/from eligible business (tax holiday undertaking) from/to other business (non-tax holiday undertaking).
- Business transactions between eligible business (tax holiday unit) and other person(s) producing more than ordinary profits owing to close connection.
Specified Domestic Transactions in a simplified language:
- Any expenditure in respect of which payment is made or is to be made to a person referred to in Section 40A(2)(b) of the IT Act;
- Any transaction that is referred to in Section 80A;
- Any transfer of goods or services referred to in Section 80-IA(8) i.e. applicable to companies operating as industrial undertaking or enterprises engaged in infrastructure development;
- Any business transacted between the assessee and other person as referred to in section 80-IA(10);
- 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;
- Any other transaction, as may be prescribed by the board.
Provided that the aggregate value of the transaction entered into by the assessee with its domestic associated enterprise exceeds Rs. 5 crores.
- Documentation: maintain mandatory documentation as required U/s 92 D read with rule 10 D
- Compliance: file Form 3CEB along with their tax return. (Sec 92 E)
- Methods: follow the five transfer pricing methods for determining arm’s length price. (Sec 92 C)
- Scrutiny: Be subject to scrutiny by the TPO (Sec 92 CA)
- Penal Provision: be subject to penal provisions as provided U/s 271AA, 271G, 271BA and 271(1)(c).
Purpose of Amendment
Differential tax rate
When one of the entities to the transaction enjoys a tax stimulus (i.e. in case of entities in SEZ, Infrastructure sector, backward area etc.) parties are tempted to shift profit to the entity enjoying favored status.
Presence of accumulated loss
When one the party to the transaction have accumulated loss in their book, they might be tempted shift profit from profit making entity to the organization with accumulated loss in a bid to profiteer from reduced combined tax obligation
Methods for determining Arm’s Length Price
- Comparable Uncontrolled Price Method (CUP)
- Resale Price Method (RPM)
- Cost Plus Method (C+)
- Profit Split Method (PSM)
- Transactional Net Margin Method (TNMM)
- Or any other method as prescribed by the Central Board of Direct Taxes
- 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 in Accountant’s report – 2% of the value of the transaction
- Maintaining or furnishing incorrect information or documents – 2% of the value of the transaction
- Adjustment for incorrect pricing – 100% to 300% of the additional tax payable
Due date for filing the Accountant’s report and documentation
- The Accountant’s report needs to be submitted with the tax authorities by the due date of filing annual return of income.
At present, the due date is 30 November.
- Documentation is not required to be submitted along with the Accountant’s report, but is to be in place by the due date. It it does need to be submitted during the course of the audit/assessment.
- Increased compliance burden on all effected assessee: in terms of maintaining TP documentation, selecting the most appropriate method and being subject to scrutiny by the TPO.
- Increased administrative burden on revenue department: Indian revenue department, which is still grappling with developing adequate expertise to address international transaction, will now have to double up for domestic transaction as well. However with the avenue of increase in revenue in the eyesight, they would be least bothered about logistics.
- Impact on litigation: Although SC had suggested introduction of TP to the domestic turf in a bid to bring legislative clarity and reduce litigation. However, given the litigative record of Revenue department with respect to TP sphere one would have reasonable reason to doubt it
- Formulation of product pricing methods: Methods of arm length pricing along with TP concepts and considerations like risk -reward planning, benchmark driven pricing, supply chain re-engineering, location planning study, etc. would help in formulation of product pricing methods and also enable legitimate tax cost management (TCM) avenues.
- Robust TP Documentation: Assessee will also be subject to stringent penal provisions as provided U/s 271AA, 271G, 271BA and 271(1)(c). As a corollary, maintenance of robust TP documentation would be accorded paramount significance.