Applicability of Transfer Pricing (“TP”) provisions was earlier limited to International Transactions only. With effect from April 1, 2013, the scope of Transfer Pricing provisions extended to “Specified Domestic Transactions (“SDT”).
With the applicability of transfer pricing provisions on Specified Domestic Transactions, it is the obligation on the taxpayer to report / document and substantiates the arm’s length nature of such transaction.
Transfer pricing regulations were extended to include transactions entered into with domestic parties or by an undertaking with other undertakings of the same entity for the purpose of section 40A, Chapter VI-A and section 10AA. All the compliance requirements relating to transfer pricing documentation, including accountant’s report, etc. equally apply to specified domestic transactions as they do for international transactions amongst associated enterprises. However, with a view to reduce the compliance burden, the scope of applicability of domestic transfer pricing has been relaxed by excluding the reporting of expenditure in section 40A under the ambit of SDT provisions.This amendment will take effect from April 1, 2017 and accordingly apply in relation to AY 2017-18 and onwards.
Objective of domestic transfer pricing
Prior to the introduction of domestic transfer pricing, tax officers were empowered to re-compute tax holiday eligible profit if undertaking makes more than ordinary profits as a result of arrangements with closely connected persons or otherwise. In case of inter-unit transfer of goods or services, tax officer/ taxpayer allowed to determine tax holiday profits based on FMV of goods/ services. Thus, no specific methodology was prescribed for disallowance/ tax holiday profit adjustment and it was important to consider making TP provisions applicable to aforesaid transactions.
There are two counts where tax arbitrage happen in India viz. tax holidays and accumulated losses. The objective of introducing the domestic transfer pricing provisions in India is to deal with the tax arbitrage possibilities in India arising out of differential taxes and accumulated losses of loss making concerns.
Statutory rules and regulations
A separate code on transfer pricing under Sections 92 to 92F of the Indian Income TaxAct, 1961 (“the Act”) covers intra-group specified domestic transactions.
The Indian Transfer Pricing Code prescribes that income arising from specified domestic transactions should be computed having regard to the arm’s length price. It has been clarified that any allowance for an expenditure or interest or allocation of any cost or expense arising from a specified domestic transaction also shall be determined having regard to the arm’s-length price. The Act defines the term specified domestic transactions, related parties and arm’s length price.
Type of transactions covered
Finance Act 2012 extended the application of Indian transfer pricing regulations tospecified domestic transactions, being the following transactions with certain related domestic parties, if the aggregate value of such transactions exceeds 20crores:
- Any transaction referred to in section 80A;
- Any transaction related to businesses eligible for profit-linked tax incentives, for example, infrastructure facilities (Section 80-IA) and SEZ units (Section 10AA) and
- Any other transactions as may be specified.
Thus, SDT provisions are applicable only if one of the domestic Indian entities involved in the inter-company transaction is enjoying benefits of any tax holiday / profit linked deduction and the aggregate of such transactions exceed INR 20crores.
Eligible business covered
|Section||Tax payers covered||Deduction|
|10AA||Persons with income from SEZ units||100% for the first 5 years50% for the next 5 years50% of the profits or amount credited to SEZ re-investment reserve, whichever is less for next 5 years|
|80-IA||Infrastructure developers||100% for a period of 10/15 years out of 15/20 years, as the case maybe from the date of commencement of operation|
|80-IA||Telecommunication service providers||100% for a period of 5 years30% for the next 5 yearsout of 15 years from the date of commencement of operations|
|80-IA||Developers of Industrial park||100% for a period of 10 years out of 15 years from the date of commencement of operations|
|80-IA||Producers or distributors of power||100% for a period of 10 years out of 15 years from the date of commencement of operations|
|80-IAB||Developers of SEZ||100% for a period of 10 years out of 15 years from the date of commencement of operations|
|80-IB||Small scale industry engaged in operating cold storage plant||30% of profits for the first 10 years|
|80-IB||Industrial undertaking in Industriallybackward state as mentioned in VIIISchedule
(ex: Jammu and Kashmir)
|100% of profits for 5 years and 30% for the next 5 years|
|80-IB||Multiplex theaters and convention centre||50% for the first 5 years|
|80-IB||Company carrying on scientific researchand development||100% of profits for first 10 years|
|80-IB||Eligible housing projects||100% of profits from such business|
|80-IB||Eligible hospitals||100% of profits for first 5 years|
|80-IC/ 80-IE||Persons with units in North-eastern states claiming deduction||100% for a period of first 10 years|
|80-ID||Hotels located in districts having World Heritage site||100% of profits for first 5 years of commencement of business|
As per section 92D, every person who has entered into SDT shall keep and maintain such information and documents in respect thereof, as prescribed in Rule 10D of the Income Tax Rules. As per Section 92E, the assessee has to take an accountant’s report, in Form 3CEB, duly signed and verified as per the provisions of the Act. The Transfer Pricing Audit Report is required to file electronically on or before the due date of filing of Income Tax Return i.e. on or before November 30 of the respective assessment year.
If any person fails to keep and maintain any such information and document as required by section 92D, the Assessing Officer or Commissioner (Appeals) may direct that such person shall pay, by way of penalty, a sum equal to 2% of the value of each SDT entered into by such person.
Further, failure to furnish a report from an accountant (Form 3CEB) as required by section 92Eby the due date shall attract a penalty of INR 100,000. However, in case of a transfer pricing adjustment, in absence of good faith and due diligence by the taxpayer in applying the provisions and maintaining adequate documentation, tax authorities in India can levy a penalty of 100% – 300% of tax on the adjusted amount.
For a more detailed discussion of specific transfer pricing rules, or to obtain further assistance in domestic transfer pricing compliance, transfer pricing study, planning activities,addressing and resolving intercompany transfer pricing issues, please contact AJSH & Co LLP. If you have any query regarding this Click Here.