Applicability of Transfer Pricing provisions to Specified Domestic Transactions

CA Pardeep Kumar

SPECIFIED DOMESTIC TRANSACTIONS

INTRODUCTION

Applicability of transfer pricing provisions was earlier limited to International Transactions only. With effect from 01.04.2013, the scope of Transfer Pricing provisions is extended to “Specified Domestic Transactions” and will accordingly be applicable from A.Y. 2013-14.

With the applicability of TP provisions on Specified Domestic Transactions, now it is the obligation on the taxpayer to report/document & substantiate the Arm’s Length nature of such transaction.

Meaning of Specified Domestic Transaction.

Finance Act 2012, inserted section 92BA in the income tax act, which defines the Specified Domestic Transactions. Text of section 92BA is as under:-

92BA. 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 1 0AA, 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.

THRESHOLD LIMIT

All the transactions covered under the six limbs as mentioned above will be regarded as SDT only if the aggregate value of all transactions exceeds threshold of Rs. 5 crore. If the threshold limit is crossed, the taxpayer will be required to comply with the TP requirements with reference to all the transactions regardless of the fact that the value of transactions under one of the limbs may be very small or nominal. Thus, there is no internal threshold for each lime of the definition.

COMPLIANCE REQUIREMENTS

With the insertion of section 92BA all of the compliance requirements relating to transfer pricing documentation, accountant’s report, etc. shall equally apply to Specified Domestic Transactions as they do for international transactions with associated enterprises. Therefore, the following sections, which are applicable to international transactions, will also be made applicable to such specified domestic transactions:-

Section 92: Computation of income from specified domestic transaction having regard to arm’s length price

Clause (2A) has been inserted to section 92 to provide that 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.

Therefore, for each specified domestic transaction the arm’s length price would need to be determined in the manner prescribed in section 92C.

Section 92C: Computation of DWm^Ps lK1OHh JWicK

As per section 92C the Arm’s Length Price in relation to a specified domestic transaction shall be determined by any of the following methods:-

(a)    CUP – Comparable Uncontrolled Price Method

(b)    RPM – Resale Price Method

(c)    CPM – Cost Plus Method

(d)    PSM – Profit Split Method

(e)    TNMM – Transactional Net Margin Method

(f)     Such other method as may be prescribed

In selecting the most appropriate method, the following factors shall be taken into account, namely:—

(a)  the nature and class of the international transaction;

(b)  the class or classes of associated enterprises entering into the transaction and the functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprises;

(c) the availability, coverage and reliability of data necessary for application of the method;

(d)  the degree of comparability existing between the international transaction and the uncontrolled transaction and between the enterprises entering into such transactions;

(e)  the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction and the comparable uncontrolled transaction or between the enterprises entering into such transactions;

(f) the nature, extent and reliability of assumptions required to be made in application of a method.

Section 92CA: Reference to Transfer Pricing Officer

Where an assessee has entered into a specified domestic transaction in any previous year & the AO considers it necessary or expedient so to do, he may with the previous approval of commissioner refer the computation of arm’s length price in relation to said specified domestic transaction u/s 92C to the TPO.

Section 92D: Maintenance, keeping of information and documents by persons entering into specified domestic transaction

Every person who has entered into specified domestic transaction shall keep & maintain following information & documents:-

(a)a description of the ownership structure of the assessee enterprise with details of shares or other ownership interest held therein by other enterprises;

(b)          a profile of the multinational group of which the assessee enterprise is a part along with the name, address, legal status and country of tax residence of each of the enterprises comprised in the group with whom international transactions have been entered into by the assessee, and ownership linkages among them;

(c) a broad description of the business of the assessee and the industry in which the assessee operates, and of the business of the associated enterprises with whom the assessee has transacted;

(d)  the nature and terms (including prices) of specified domestic transactions entered into with each associated enterprise, details of property transferred or services provided and the quantum and the value of each such transaction or class of such transaction;

(e)  a description of the functions performed, risks assumed and assets employed (FAR) or to be employed by the assessee and by the associated enterprises involved in the specified domestic transaction;

(f)  a record of the economic and market analyses, forecasts, budgets or any other financial estimates prepared by the assessee for the business as a whole and for each division or product separately, which may have a bearing on the specified domestic transactions entered into by the assessee;

(g)a record of uncontrolled transactions taken into account for analysing their comparability with the specified domestic transactions entered into, including a record of the nature, terms and conditions relating to any uncontrolled transaction with third parties which may be of relevance to the pricing of the specified domestic transactions;

(h)  a record of the analysis performed to evaluate comparability of uncontrolled transactions with the relevant specified domestic transaction;

(i)a description of the methods considered for determining the arm’s length price in relation to each specified domestic transaction or class of transaction, the method selected as the most appropriate method along with explanations as to why such method was so selected, and how such method was applied in each case;

(j)  a record of the actual working carried out for determining the arm’s length price, including details of the comparable data and financial information used in applying the most appropriate method, and adjustments, if any, which were made to account for differences between the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions;

(k)the assumptions, policies and price negotiations, if any, which have critically affected the determination of the arm’s length price;

(l)details of the adjustments, if any, made to transfer prices to align them with arm’s length prices determined under these rules and consequent adjustment made to the total income for tax purposes;

(m)any other information, data or document, including information or data relating to the associated enterprise, which may be relevant for determination of the arm’s length price.

In view of the above discussion, a complete TP Study report would be required to be prepared & maintained by the company.

Section 92E: Report from a Chartered Accountant to be furnished by persons entering into international transactions.

Every person who has entered into specified domestic transaction during a previous year shall obtain a report from the Chartered Accountant.