The Transfer Pricing provisions has been introduced in india in the year 2001. Since then it has come a long way. Now, the Finance Act’ 2012 has extended the scope of Transfer Pricing provisions to certain specified domestic transactions and introduced section-92BA in order to bring in certain specified domestic transactions undertaken by the enterprises under the provisions of the transfer pricing. The amendment in the transfer pricing area relating to the specified domestic transactions apply from the financial year 2012-13 onwards and will , accordingly apply in relation to the Assessment Year 2013-14 and subsequent assessment years.
PROVISIONS INTRODUCED BY FINANCE ACT, 2012 defines the “Specified domestic transaction” as follows –
Specified domestic transaction means the following transactions, provided the aggregate amount of such transactions undertaken by the assessee in the previous year exceeds the sum of INR 5 crore or INR 50 million:-
1. Any expenditure in respect of which payment has been made or is to be made to a person referred to in clause (b) of section 40A(2).
Explanation – where the assesse incurs any expenditure in respect of which payment has been or is to be made to certain specified persons (related parties), the Assessing Officer may disallow so much of the expenditure as he considers to be excessive or unreasonable having regard to the fair market value of goods, services or facilities for which payment is made.
- Specified persons – means
(1) Where the assessee is an individual à any relative of the assessee
(2) Where the assessee is a company, firm, association of persons or HUF à any director of the company, partner of the firm or member of the association or family or any relative of such director, partner or member.
(3) Any individual who has a substantial interest in the business or profession of the assessee or any relative of such individual.
(4) A company, firm, association of persons or Hindu undivided family having a substancial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member.
(5) A company, firm, association of persons or Hindu undivided family of which a director, partner or member, as the case may be, has a substantial interest in the business or profession of the assessee; or any director, partner or member of such company, firm, association or family or any relative of such director, partner or member.
(6) any person who carries on a business or profession,—
(A) where the assessee being an individual, or any relative of such assessee, has a substantial interest in the business or profession of that person; or
(B) where the assessee being a company, firm, association of persons or Hindu undivided family, or any director of such company, partner of such firm or member of the association or family, or any relative of such director, partner or member, has a substantial interest in the business or profession of that person.
2. Any transaction referred to in section 80A;
3. Any transfer of goods or services referred to in sub-section (8) of section 80-IA;
4. Any business transacted between the assessee and other person as referred to in sub-section (10) of section 80-IA;
5. 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
6. Any other transaction as may be prescribed.
Explanation to point 2 to 6:-
(a) Where any goods or services held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or where any goods or services held for the purposes of any other business carried on by the assessee are transferred to the eligible business and in either case, the consideration for such transfer recorded in the accounts of the eligible business does not correspond to the market value of such goods or services on the date of transfer then, for the purpose of deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer had been made at the market value of such goods or services as on that date.
Eligible Business means business referred to in section 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID, 80-IE & 10AA.
(b) Where it appears to the Assessing Officer that owing to close connection between the assessee carrying on the Eligible Business and any other person, or for any other reason, the course of business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such business, the Assessing Officer shall in computing the profits and gains of such business for the purpose of computing deductions under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom.
Eligible Business means business referred to in section 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID, 80-IE & 10AA.
CONCLUSIONS drawn from the amendment made by FINANCE ACT, 2012 –
a) The Assessing Officer shall determine the Arm’s Length Price (ALP) of transactions mentioned above i.e. the FAIR MARKET VALUE of such transactions as if such transactions took place between unrelated person.
b) The Assessing Officer can refer the case to Transfer Pricing Officer (TPO) with the prior permission of Commissioner of Income-tax to determine the Arm’s Length Price of such transactions.
c) The Entire Provisions of Transfer Pricing will apply to such transactions and therefore:
- Arm’s Length Price shall be determined as per the SIX METHODS prescibed in the provisions relating of Transfer Pricing
- Allowance of expense shall be as per the Arm’s Length Price.
- Income shall be computed on basis of Arm’s Length Price.
- Assessing Officer can determine Arm’s Length Price himself or refer the case to Transfer Pricing Officer.
- Assessee will be required to maintain prescribed documents and records.
- Assessee will have to furnish a report from CA wherein the CA will certify that transaction has taken place on Arm’s Length Price.
- Deemed Concealment of Income, if any, disallowance made on the basis of Arm’s Length Price and Penalty for Concealment of income ranging from 100% to 300% of the amount of tax sought to be evaded.
- Variation of 3% with Arm’s Length Price is permissible.
- Provisions of Transfer Pricing not to apply if income get reduced or losses get increased because of application of chapter of Transfer Pricing.
Penalties Applicable on Non-Compliance of the above provisions:-
- Adjustment is treated as concealment of income: Penalty will be 100 % to 300 % of the tax on adjustment.
- Failure to maintain required set of documents: 2 % of value of transactions.
- Failure to report transaction in report from Chartered Accountants: 2 % of value of transactions.
- Failure to furnish documentation: 2 % of value of transactions.
- Failure to furnish report by due date: INR 1,00,000
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The above Article is compiled by Javed Ansari, the Accounting Technician having the Accounting Technician certificate issued by the Institute of Chartered Accountants of India under the Integrated Professional Competence Course. For Any Query feel free to contact:- EMAIL ID: javedd.ansari@gmail.com, Cell: +91 9650709321
I understand these provisions of DTP are applicable only when the transactions of any expenditure or in some cases transactions of income & expenditure both are entered into with specified persons . I feel that when transactions between two related persons exceed , in aggregate , Rs.5 Crores , then only provisions of DTP are applicable. I mean to say that total transactions of an entity with all persons [ related / non related ] exceeding the bench mark limit of Rs.5 crores need not be considered for applicability of provisions of DTP
The firm and partners are , inter se , related persons , in my view . Thus transactions with the firm and its partners involving income or expenditure may only be hit. Any transactions on capital account like introduction and withdrawal of capital or overdrawing from firm will not e hit by provisions of DTP – whether there is provision of interest on partners’ capital in the deed or the deed says specifically that no adjustment for interest would be made by the firm for transactions with partners including contribution / overdrawing of capital
Your guidance in the matter shall be highly appreciated