CA Jinesh R. Bhagdev
Transfer Pricing – Specified Domestic Transaction – Whether an area of concern for Domestic Companies
Transfer pricing until now was applicable to companies having cross border transactions with their ASSOCIATED ENTERPRISE. However, Finance Bill 2012, honoring the supreme court ruling in case of CIT vs. M/S Glaxo Smithkline Asia (P) Ltd. (Special Leave to Appeal (Civil) No(s).18121/2007), expanded the ambit of transfer pricing to specified domestic transactions w.e.f 01 April 2013.
Transactions covered under the ambit of domestic transfer pricing:
Provided that the aggregate value of the transaction entered into by the assessee with its domestic associated enterprise exceeds Rs. 5 crore.
Implication of such amendment by Finance Act, 2012:
All the transactions entered into by the taxpayers operating in Special Economic Zones (‘SEZs’); taxpayers entering into transactions with certain related parties specified under section 40A(2) and all the taxpayers claiming profit based deductions for undertaking specified business activities (under section 80A, 80-IA, etc.) will be covered.
The most likely affected industries are industries operating in SEZs, infrastructure developers and / or infrastructure operators, telecom services industries, industrial park developers, power generations or transmission, etc. Apart from these industries, the business conglomerates having significant intra-group transactions would be impacted.
Most likely transactions under the scanner of the transfer pricing authorities would be:
Area’s of Concern for Certain Domestic Companies:
There is no clarification with regards to Indian companies having both international transactions as well as domestic transactions. Since the company has to comply with transfer pricing regulations owing to their international transaction, the question remains whether the specified domestic transactions are required to be reported in following scenario.
The company who has the aggregate value of domestic transaction more than Rs. 5 crore anyways have to comply with the transfer pricing regulations.
In view of the above, the author is of the view, that once the company has to comply with the transfer pricing regulation by virtue of the international transaction, specified domestic transaction should also be reported by way of abundant caution in order to avoid future litigation.
Further, in order to avoid litigation at the future date, companies who have domestic transaction with its related parties equal to or more than Rs. 5 crore or companies whose present domestic transaction less than Rs. 5 crore but is likely to increase beyond Rs. 5 crore in the financial year 2013-14 are advised to validate their present business model and pricing methodology from a transfer pricing perspective which will enable them to take corrective actions, if necessary.
Author CA Jinesh R. Bhagdev, is a director of Esupport Outsourcing Services Private Limited and a specialist in the area of “Transfer Pricing” and is also a contributor to the book “Practical Guide to Indian Transfer Pricing” published by “Chambers of Tax Consultant” in September 2010. The author can be reached at firstname.lastname@example.org