Applicability of Transfer pricing regulation on Domestic related party transactions

1. Finance Bill, 2012
Applicability of Transfer pricing regulation on Domestic
related party transactions

2. Applicability of Transfer pricing regulation on Domestic • Empowers tax department to re-compute the income of a tax
related 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 of
transfer pricing regulation to domestic firms. Therefore, transfer
However, the law does not provide any method to determine
pricing regulation will be applicable to specified domestic
reasonableness of expenditure or fair market value to re-compute
transactions 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 amendment
Ltd, in its order has, after examining the complications which arise
in cases where fair market value is to be assigned to transactions The application and extension of transfer pricing regulations to
between domestic related parties, has suggested that Ministry of domestic transactions would provide objectivity in determination of
Finance should consider appropriate provision to make Transfer income from domestic related party transactions and determination
Pricing regulations applicable to certain related party domestic reasonableness of expenditure between related domestic parties. It
transactions. will create legally enforceable obligation on assesses to maintain
proper documentation. However, extending the transfer pricing
The 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

3. Accordingly the Finance Bill proposes to extend the applicability of certainty as the tax payer is not entitled for APA on domestic
the 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 said
The tax authorities can recompute the income (based on fair preferential tax policies such as SEZ units, infrastructure
market value) under these sections, of the undertaking to which developers or operators, telecom services, industrial park
profit 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 dealing
transfer pricing provisions in respect of domestic transaction are would be largely impacted. The IT industry which gets tax
applicable 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 schemes
Under the proposed amendments the transfer pricing officer will (such as STPI units). There is now a requirement to maintain
also examine payments made to directors and computation of documentation to prove arms length pricing, however, for those
income and allocation of expenses between related party
who are able to demonstrate business being conducted on an
undertakings 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

4. 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 with
TP laws;
* Taxpayers to maintain mandatory documentation for related party
transactions; 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 - rashi@spnagrath.com/ nandita@spnagrath.com
Conclusion
These amended transfer pricing regulations will not be limited to just
the large groups any more. Many mid-sized groups, partnership firms,
Hindu Undivided Families (HUFs) and even individuals in smaller cities
will now have to adhere to the TP rules. This will lead to an increase in
the administrative and compliance burden for the taxpayer in respect of
such transactions and a focused examination by the tax authorities.