Understanding Specified Domestic Transaction Provisions 1.0 INTRODUCTION: Transfer pricing regulations introduced in India in 2001, but till very recently covered only cross border related party transactions. Honoring the Supreme Court ruling in case of CIT vs. M/s Glaxo Smithkline Asia (P) Limited, CBDT expanded the ambit of transfer pricing to Specified Domestic Transactions w.e.f. 1st April, 2013. Thus, The Finance Act, 2012 extended its scope to cover certain domestic transactions with related parties within India, defined as ‘Specified Domestic Transactions’ (SDT). This will principally have impact in two ways. To begin with, the pricing of the domestic transactions will need to comply with the arm’s length principle by application of one of the prescribed methods. In addition, there will be compliance and documentation obligations for such specified domestic transactions. The provisions apply from the financial year 2012–13 onwards if the aggregate value of the transactions exceeds Rs. 5 crores in the relevant financial year. SDT includes payments to related parties, inter-unit transfer of goods or services of profit linked tax holiday-eligible units, transactions of profit-linked tax holiday-eligible units with other parties and any other transaction that may be notified by the Central Board of Direct Taxes. 2.0 PURPOSE OF INTRODUCING DOMESTIC TRANSFER PRICING It was realized by the government that: Presently, there is no method prescribed to determine reasonableness of expenditure to re-compute the income in related party transactions There is need to provide objectivity in determination of income and determination of reasonableness of expenditure in domestic related party transactions There is need to create legally enforceable obligation on assessee to maintain proper documentation 3.0 RELEVANT SECTIONS OF INCOME TAX ACT, 1961 PERTAINING TO DOMESTIC TRANSFER PRICING REGULATIONS: 3.1 Section 92(2): Where in an international transaction [or specified domestic transaction], two or more associated enterprises enter into a mutual agreement or arrangement for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises, the cost or expense allocated or apportioned to, or, as the case may be, contributed by, any such enterprise shall be determined having regard to the arm’s length price of such benefit, service or facility, as the case may be. 3.2 Section 92(2A): Any allowance for an expenditure or interest or allocation of any cost or expense or any income in relation to the specified domestic transaction shall be computed having regard to the arm’s length price. 3.3 SECTION 92BA: MEANING OF SPECIFIED DOMESTIC TRANSACTION. For the purposes of this section and sections 92, 92C, 92D and 92E, “specified domestic transaction” in case of an assessee means any of the following transactions, not being an international transaction, namely:— (i) 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; (ii) any transaction referred to in section 80A; (iii) any transfer of goods or services referred to in sub-section (8) of section 80-IA; (iv) any business transacted between the assessee and other person as referred to in sub-section (10) of section 80-IA; (v) 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 (vi) 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 five crore rupees. 3.4 PENALTIES APPLICABLE ON NON-COMPLIANCE: Section 271(1)(c): If adjustment is treated as concealment of income: Penalty will be 100% to 300% of the tax on adjustment Section 271AA: Failure to maintain required set of documents: 2% of value of transactions Section 271BA: Failure to furnish report by due date: Rs. 1,00,000 Section 271G: Failure to furnish documentation: 2% of value of transactions 4.0 DEFINITION 4.1 TAX HOLIDAY BENEFICIARIES IMPACTED BY DOMESTIC TRANSFER PRICING Section Nature of Undertakings covered 80IA Undertakings engaged in Developing, operating and maintaining, developing and operating and maintaining infrastructure facilities Generation/ transmission or distribution of power Reconstruction/ revival of power generating plants 80IAB Undertakings engaged in development of SEZ’s 80IB Undertakings located/ engaged in Industrially backward districts as notified; Scientific research & development Refining of mineral oil/ commercial production of natural gas Operating cold chain facility for agricultural produce Processing, preservation and packing of meat/ meat products or poultry/ marine/ dairy products Operating and maintaining a hospital of specified capacity 80IC Industrial Undertakings or enterprises established in special categories state 80ID Industrial Undertakings engaged in development of hotels and convention centres in specified areas 80IE Undertakings in North-eastern States 80JJA Undertakings engaged in collection and processing of bio-degradable wastes 80JJAA Undertakings engaged in employment of new workmen 80LA Offshore Banking Units and International Financial Service Centres 80P Co-operative Societies 4.2 MEANING OF RELATED PARTIES UNDER DOMESTIC TRANSFER PRICING REGULATIONS Tax Payer Section Related Party Individual 40A(2)(b)(i) Any Relative Company 40A(2)(b)(ii) Any Director or his / her Relative Firm 40A(2)(b)(ii) Any Partner or his / her Relative AOP 40A(2)(b)(ii) Any Member or his / her Relative HUF 40A(2)(b)(ii) Any Member or his / her Relative Any Tax Payer* 40A(2)(b)(iii) Any individual having substantial interest in the taxpayer’s business or his / her relative Any Tax Payer* 40A(2)(b)(iv) A Company, firm, AOP, HUF having substantial interest in the taxpayer or any director, partner, member of such company, firm, AOP, HUF or Relative of such director, partner or member Any Tax Payer* 40A(2)(b)(v) A Company, firm, AOP, HUF of which director, partner, member having substantial interest in the taxpayer or any director, partner, member of such company, firm, AOP, HUF or Relative of such director, partner or member Any Tax Payer* 40A(2)(b)(vi) A person in which taxpayer / any director, partner, member of taxpayer / relative of such individual, director, partner or member has substantial interest * Substantial Interest means beneficial ownership of shares with at least 20% voting right or beneficial entitlement of at least 20% of the profits COMPLIANCE REQUIREMENTS FOR DOMESTIC TRANSFER PRICING Current Compliance Requirements } Section 10AA: For claiming tax deduction, CA Certificate in Form 56F needs to be filed transactions are at ALP by selecting the most appropriate method } Section 40A: Transactions to be reported in Tax Audit Report in Form 3CD } Section 40A(2) read with Section 92(2); Section 92(2A) and Section 92BA: Expenditure paid or to be paid to related parties will require to be at arm’s length } Section 80IA: Declaration of Additional Compliance Requirements & Declaration of profit to be made in CA Certificate in Form 10CCB } Section 92D: read with Rule 10D: Maintaining Contemporaneous Documentation prove that transactions are at ALP } Section 92E: Filing audit report in Form 3CEB / any other Form may be prescribed 5.0 DUE DATE FOR FILING RETURNS Section 92F (iv) states that specified date for filing form 3CEB shall have the same meaning as assigned to Explanation 2 below section 139(1): Explanation 2 (aa) below Section 139, states that due date for filing return of income of the assessee who is required to furnish accountant report under section 92E is 30th November of the assessment year. 6.0 OUR ANALYSIS: With introduction of “Specified domestic transaction provisions”, the finance ministry is now moving towards: } Shift of focus from generic ‘Fair Market Value’ concept to ‘Arm’s Length Price’ } Fair Market Value can established using basic market evidence Thus, transfer pricing regulations will now applicable to all taxpayers including Individuals, Hindu Undivided Families (HUFs). Assesses will need to evaluate intra-group transactions with greater detail and will in turn also increase the administrative and compliance burden for the taxpayer in respect of such transactions. Further, if excessive or unreasonable expenses are disallowed in the hands of tax payer at time of the assessment then corresponding adjustment to the income of the recipient will not be allowed in the hands of recipient of income. Hence, it may lead to double taxation in India. Following points also needs to be kept in mind: } Arm’s Length Price can be determined by use of six prescribed methods } Advance Pricing Agreements NOT applicable to specified domestic transactions } Assessing officer’s powers shifted to Transfer Pricing Officer (‘TPO’) Since the due date for filing of the income tax return is extended to 30th November of the assessment year, the professionals can file the income tax return as well as tax audit return by 30th November. NOTIFICATION NO.41/2013 [F.NO.142/42/2012-TPL]/SO 1491(E), DATED 10-6-2013 has made it mandatory for e-filing of Form 3CEB for all the assessee to whom the provisions of Transfer Pricing is applicable. The common utility file is available for download from the following website: https://incometaxindiaefiling.gov.in/e-Filing/ SDT: COMMON TRANSACTIONS BETWEEN THE RELATED PARTIES } Purchase/lease of movable and immovable property } Centralized Corporate Services – Strategy, Marketing, Design & Engineering, HR, accounting, finance } Common management personnel expenses like common MD, CEO } Use of common facilities and Infrastructure – space, equipment, etc. } Use of brand name or trademarks (if payments are involved) } Reimbursement of expenses } Granting of Corporate Guarantees / Performance Guarantees by Parent Company to its subsidiaries (if payment of guarantee commission / fees are involved); } Intra-group purchase / sell / service transactions; } Payment made to key personnel of the group companies; } Payment of interest on loans within the group companies } Payment made to relatives of key personnel of the group companies } Partition of HUF properties if value exceeds Rs. 5 crores; } Payment of Salary, Remuneration, Interest on Partners Capital if value exceeds Rs. 5 crores; DISCLAIMER The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation
Posted on: Thu, 29 Aug 2013 07:48:54 +0000