Finance Bill, 2012Applicability of Transfer pricing regulation on Domesticrelated party transactions
Applicability of Transfer pricing regulation on Domestic • Empowers tax department to re-compute the income of a taxrelated party transactions payer eligible for certain tax incentives based on fair market value, under section 10AA/80IA/80IB/80IC.The Union budget 2012 (“UB”) has extended the gamut oftransfer pricing regulation to domestic firms. Therefore, transfer However, the law does not provide any method to determinepricing regulation will be applicable to specified domestic reasonableness of expenditure or fair market value to re-computetransactions that these firms get into with their sister company the income of such transactions.from same group.The Supreme Court in the case of CIT Vs Glaxo SmithKline Asia (P) Objective of amendmentLtd, in its order has, after examining the complications which arisein cases where fair market value is to be assigned to transactions The application and extension of transfer pricing regulations tobetween domestic related parties, has suggested that Ministry of domestic transactions would provide objectivity in determination ofFinance should consider appropriate provision to make Transfer income from domestic related party transactions and determinationPricing regulations applicable to certain related party domestic reasonableness of expenditure between related domestic parties. Ittransactions. will create legally enforceable obligation on assesses to maintain proper documentation. However, extending the transfer pricingThe tax law, as it stands today, empowers the tax office to: requirements to all domestic transactions will lead to increase in compliance burden on all assessees which may not be desirable.• Disallow unreasonable expenditure incurred among domestic group companies (or expressed as related party transactions), Applicability of amendment under section 40A(2)(b); and
Accordingly the Finance Bill proposes to extend the applicability of certainty as the tax payer is not entitled for APA on domesticthe transfer pricing provisions to all the above referred domestic transactions.transactions i.e. This amendment will take effect from April 1, 2013 and will,• Taxpayers operating in Special Economic Zones (under Section accordingly, apply in relation to the assessment year 2013-14 and 10AA of ITA); subsequent assessment years.• Taxpayers having domestic transactions with certain related parties [under Section 40A(2) of ITA]; and Impact of Amendment• Taxpayers claiming deductions for undertaking specified These new domestic transfer pricing provisions would have business activities [under Section 80A, 80- IA etc of ITA]. ramifications across industries which benefit from the saidThe tax authorities can recompute the income (based on fair preferential tax policies such as SEZ units, infrastructuremarket value) under these sections, of the undertaking to which developers or operators, telecom services, industrial parkprofit linked deduction is provided if there are transactions with the developers, power generation or transmission etc. Apart from this,related parties or other undertakings of the same entity. The business conglomerates having significant intra-group dealingtransfer pricing provisions in respect of domestic transaction are would be largely impacted. The IT industry which gets taxapplicable to transactions that will exceed threshold of Rs 5 crore. incentives under Section 10AA will come under this ambit as they also transact with their units that are not a part of such schemesUnder the proposed amendments the transfer pricing officer will (such as STPI units). There is now a requirement to maintainalso examine payments made to directors and computation of documentation to prove arms length pricing, however, for thoseincome and allocation of expenses between related party who are able to demonstrate business being conducted on anundertakings claiming tax holiday. Whilst on one hand the arms-length basis, these provisions will not harm them.proposals increases the compliance burden of the tax payer and,on the other, tax authorities do not allow the tax payer to obtain
DOMESTIC WORRIES* Arm’s length pricing of domestic related party transactions;* Five transfer pricing methods for determining arm’s length price;* Entities claiming tax holiday with super-normal profits to comply withTP laws;* Taxpayers to maintain mandatory documentation for related partytransactions; Contact details:* Taxpayers will have to file Form 3CEB along with their tax return; * Domestic transactions to be assessed by transfer pricing officer S.P.Nagrath & Co., instead of assessing officer. A-380 , Defence colony , New Delhi -110024 Email - email@example.com/ firstname.lastname@example.orgConclusionThese amended transfer pricing regulations will not be limited to justthe large groups any more. Many mid-sized groups, partnership firms,Hindu Undivided Families (HUFs) and even individuals in smaller citieswill now have to adhere to the TP rules. This will lead to an increase inthe administrative and compliance burden for the taxpayer in respect ofsuch transactions and a focused examination by the tax authorities.