- The document discusses specified domestic transactions (SDT) under Indian tax law, which were introduced to align domestic transfer pricing with international standards. - SDT provisions allow tax authorities to make adjustments if payments between related parties or tax holiday-eligible transactions are not at arm's length prices. - Taxpayers must maintain documentation and obtain audit certificates to demonstrate compliance with SDT rules. Non-compliance can result in penalties. - The definition and computation of arm's length price is analyzed, along with applicable documentation requirements and assessment procedures for SDTs. Key cases and issues are also discussed.

1. Specified Domestic Transactions
Demystified

3. Discussion Topics
• Pre Finance Act 2012 & Glaxo smith Kline Case
• Scope of SDT provisions
• Concept of ALP
• Difference between FMV and ALP
• Documentation requirements & Penalties
• Clause wise analysis & Cases
• Assessments procedure

4. Pre Finance Act 2012 & Glaxo smith
Kline Case
 Tax officer empowered to disallow payments to “related parties”
which are “excessive” or “unreasonable”
 Tax officer empowered to re-compute tax holiday eligible profit, if
an 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, the tax
officer/taxpayer allowed to determine tax holiday profits based on
the Fair Market Value (‘FMV’) of goods/services.
 No specific methodology prescribed for disallowance/tax holiday
profit adjustment.

5. Glaxo smith Kline Case
• Supreme Court Suggestions
▫ Amendment to Sections 40A(2) and 80IA(10) to empower AO to
make adjustments based on ALPs.
▫ Law should be amended to make it compulsory for the taxpayer
to maintain books of accounts and other documents as required
under the Indian TP laws, in respect of domestic transactions
which are not revenue neutral; and
▫ The taxpayer may be required to obtain an audit report from a
Chartered Accountant certifying that transactions between
related entities are at arm's length

6. Scope of Specified domestic
transactions (SDT)
• Sub sec. (2A) was introduced to Sec 92 which read –
(2A) Any allowance for an expenditure or interest or allocation
of any cost or expense or any income in relation to the specified
domestic transaction shall be computed having regard to the arm's length
price.
• Specified domestic transactions as per Sec 92BA –
► Payments to related parties as defined under section 40A (2) (b)
► Tax holiday-related transactions (eligible business) :
▫ Any transaction referred to in section 80A of the Act
▫ Any transfer of goods/services referred to in section 80IA (8) of the Act
▫ Any business transaction referred to in section 80IA (10) of the Act
▫ Any transaction under Chapter VI-A or u/s 10AA of the Act to which
provisions of section 80IA (8) or section 80IA (10) apply
► Any other transaction, as may be prescribed

7. Aggregate value of transaction to exceed INR 20 Cr

8. Concept of ALP
• Defined to mean a price that is applied or proposed for a transaction entered
into by persons other than associated enterprises (‘AEs’) , in uncontrolled
conditions
• Concept of ALP, applicable for determining taxable income arising from
international transaction introduced in 2001, now extended to SDTs
• Comparability and FAR analysis (ie analysis of functions performed, assets
employed and risks undertaken) fundamental to the concept of ALP:
• Comparison of conditions in controlled transactions with conditions in
transactions among uncontrolled enterprises
• Compensation to reflect functions performed (taking into account assets used
and risks assumed)
• Typically relevant for transactions among “separate enterprises”; may need to be
applied by analogy to SDT involving the inter-unit transfer of goods/services

9. ALP V/s FMV
Arm’s length price Fair market value
• Subjective, entity specific value
• Based on actual transaction
undertaken & market
conditions
• Calculated following the
prescribed methods only.
• Narrow concept.
• Objective, market-based value
• Based on hypothetical
transactions & market
conditions
• No methods have been
prescribed.
• Broader concept
• FMV a better method when ALP is incapable of achieving a comparison.
• ITAT Ruling of Ascendas India upheld usage of DCF over the prescribed methods of calculating
ALP

10. Methods for computing ALP
• Computed using any of the following methods that seems to be the most
appropriate method:
▫ Comparable uncontrolled price method
▫ Resale price method
▫ Cost plus method
▫ Profit split method
▫ Transactional net margin method
▫ Other method as may be prescribed by the Central Board of Direct Taxes —
method prescribed in May 2012 by inserting Rule 10AB of the Income Tax Rules
(‘Rules’)
• Rules to provide guidance on the application of the listed methods and factorsto
be considered while selecting the most appropriate method (Rule 10B)

11. Documentation Requirements

12. Filing of Form 3CEB
• All taxpayers to whom the provisions apply required to file
• Form 3CEB, certified by a chartered accountant
• For FY 2012–13, due date of filing Form 3CEB: 30 November 2013 (to be filed
online)
• TP documentation as basis for the certification of Form 3CEB
• Certificate to contain details such as:
▫ Compliance by taxpayer with TP documentation requirements
▫ Nature/Quantum of transactions and method used to determine ALP
• Aimed at assisting tax officers in assessment proceedings

13. Penal Provisions

14. Sec 40A(2)(b) Analysis
Clause (i)
Clause (ii)

15. Sec 40A(2)(b) Analysis
Clause (iii)
Clause (iv)

16. Sec 40A(2)(b) Analysis
Clause (v)

17. Sec 40A(2)(b) Analysis
Clause (vi)(A)
Clause (vi)(B)

18. Sec 40A(2)(b) Challenges
• Applicability to Capital expenditure
• Direct / Indirect Relationship (for the purpose of determining
beneficial ownership to derive substantial interest)
• Benchmarking Director Remuneration
• Data sourced to understand entities / persons covered

19. Sec 40A(2)(b) Case

20. Tax Holiday undertakings
80A(6), 80IA(8), 80IA(10), 10AA
SDT provisions on business transactions/transfers referred to in section
80A, 80IA (8) , 80IA (10) , 10AA, Chapter VI-A provisions of the Act
Section 80A (6) and Section 80IA (8) to require adjustment to tax holiday
profits where:
► Goods and services of eligible business transferred to any other business
carried on by the same taxpayer and vice versa
► Consideration for such transfer as recorded in the accounts of
eligible business not
in correspondence to the market value of such goods/services
► In such cases, tax authorities/taxpayer required to re-compute tax
holiday claim by
reference to ALP of such goods/services
► Overlap between Section 80A (6) and Section 80IA (8) not of much
consequence
► Applies to all tax holiday claims under Chapter VI-A/ Section 10AA

21. Tax Holiday undertakings
80A(6), 80IA(8), 80IA(10), 10AA
General scope of Section 80A (6) / 80IA (8) :
• Covers transfer of goods/services held by “eligible business” to another
business or vice versa
• Existence of two or more separate businesses of the same taxpayer
• Transfer of goods/services among the businesses
• Does not contemplate an artificial or hypothetical segregation of profits
between tax holiday unit and the rest of the enterprise
• Once threshold satisfied, inter-unit transfer price may need to be
determined by hypothesizing the businesses as separate and distinct
enterprises for determining ALP
• Provides for a “two-way” adjustment (both favorable and adverse) and is
a mandatory provision

22. Eligible business covered

23. Eligible business covered

24. Eligible business covered

25. Tax Holiday undertakings
80A(6), 80IA(8), 80IA(10), 10AA

26. Tax Holiday undertakings
80A(6), 80IA(8), 80IA(10), 10AA
Close Connection ??

27. Examples

28. Applicability of Domestic TP – Inter Unit Transfer

29. Inter unit transfers – Interplay of eligible and non-eligible
unit

30. Coverage of s. 80-IA(10)

31. Tax Burden, if transaction not at ALP – Interplay between
40A(2) & 80IA(10)

32. Voluntary TP adjustment in ROI

33. Questions???

34. Thank You
For any details contact CA Yagnesh Katira on yagneshkatira@gmail.com