This presentation was during Transfer pricing workshop arranged by Chamber of Tax Consultants on March 23rd, Saturday. The presentation cover the overview of Domestic Transfer pricing provisions introduced by Finance Act 2012, history of introduction (including Supreme Court ruling in Glaxo) and some issues.

1. Ameya Kunte
March 23, 2013
ameya.kunte@taxsutra.com
Domestic Transfer Pricing
Provisions

2. Contents
 Background
 Law on Domestic Transfer pricing
 Arm’s length and other laws
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3. Background
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4. Domestic Transfer pricing – new
?
 Disallowance of excessive / unreasonable
expenditure u/s 40A(2)(b)
 Fair value
 Legitimate needs of the business
 Benefits test
 Sec. 40A(2) not applicable when the recipient is subject to
higher tax/ where tax evasion motive doesn’t exist - Indo Saudi
Services (Travel) P. Ltd. [310 ITR 306 (Bom.)], V.S. Dempo &
Co. P. Ltd. [336 ITR 209(Bom)]
 Conditions u/s 80IA (8)/(10) in case of tax holiday
units
 Ordinary profits
4

5. Domestic Transfer pricing – new
?
 Immovable property transfers u/s 50C and Sec 56
 Use of stamp duty valuation
 Cost of acquisition of depreciable assets where higher
cost is used with the objective of reduction of tax
liability – explanation to Sec 43(1)
 Value of any benefit or perquisite derived from
exercise of business or profession – Sec 28(iv)
5

6. Amendments by Finance Act,
2012
 Finance Act, 2012 introduced TP provisions to ‘specified
domestic transactions’ (SDT)
 Memorandum to Finance Bill: Proposals in line with SC
decision in Glaxo Smithkline [TS-47-SC-2010-TP]
 Objectives as per Memorandum
 Bring in objectivity in determination of income/reasonableness of
expenditure arising from domestic related party transaction
 Legally enforceable obligation on assessee to maintain
documentation
 Monetary threshold of aggregate transactions of Rs. 5 Cr for
avoiding unnecessary compliance & administrative burden
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7. SC Observations in Glaxo ruling
 Domestic transactions between related entities will
not be revenue neutral if
 Profit shifted from profitable entity to loss-making entity
 Tax arbitrage on transactions between related units due
difference in tax rates –
 E.g – shifting of profits from non-SEZ unit to SEZ unit
 Recommends amendments to provisions like Sec 40A
(2) and Sec 80IA(10) to empower AO to make
adjustments to the income having regard to the fair
market value of the transactions between the related
parties
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8. SC observations in Glaxo ruling
 The AO may thereafter apply any of the generally
accepted methods of determination of arm's length
price, including the methods provided under Transfer
Pricing Regulations
 One of the suggestions which needs consideration is
whether the law should be amended to make it
compulsory for the taxpayer to maintain Books of
Accounts and other documents in line with Rule 10D
and whether the assessee should be required to
obtain an audit report from CA
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9. Domestic TP – the Law
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10. Charging Section
 Sec 92 : (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.
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11. Specified domestic transaction? Implications
Aggregate
transaction
value
exceeds
Rs. 5 Cr in
a financial
year
These transactions have to be
undertaken at arm’s length price by
selecting most appropriate method
Penalty of 2% on transactions
value each for failure to report /
maintain or furnishing
documentation
Maintain contemporaneous
documentation
Report transaction in the
Accountant’s Report
Expenditure for which
payment made to related
parties defined u/s 40A(2)
Any other transaction that
may be specified
Undertakings to which
incentive deductions are
provided (eg 10AA, 80-IA, 80-
IB), covering:
inter-unit transfer of goods
and services; and
transactions between entities
having close connection
Domestic TP - Framework
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12. SDT – Definition – Sec.92BA
 Transactions covered:
 Expenditure in respect of which payment is made to persons
covered u/s 40A(2)(b);
 Any transaction referred to in Sec. 80A – inter-unit transfers;
 Any transfer of goods or services referred in Sec 80IA(8) –
inter-unit transfer;
 Any business transacted between the assessee and other
person referred in 80-IA(10) – Transactions between
connected persons;
 Any transaction, referred in Chapter VIA or Sec 10AA, to
which provisions of Sec. 80-IA(8) & (10) apply; and
 Any other transaction as may be prescribed
 Provisions applicable only if aggregate of all SDT
during relevant previous year exceeds Rs 5 Cr
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13. Related party payments u/s
40A(2)
Persons covered u/s 40A(2)(b)
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Company Hindu
Undivided
Family
Association
of Persons
Partnership
firm
Individual
Director /
his
Relatives
Member / his
Relative
Member / his
Relative
Partners / his
Relatives
Relative
Any individual (or his relative) who has substantial interest in the assessee’s
business / profession.
Any company (or director), firm (or partner), AoP / HUF (or member) or their
relatives who has substantial interest in the assessee’s business / profession
including company in which such company is holding substantial interest
•Any company, firm, AOP or HUF if director/partner/ member of which has
substantial interest
•Other director/partner/ members of such entities
•Any person in whose business / profession, assessee or his relative has
substantial interest.

14. Related Party Payments u/s
40A(2)
 Relative – husband, wife, brother, sister or any lineal
ascendant or descendant of the individual
 Fellow subsidiary clause introduced
 Substantial Interest –
 In case of companies – 20% control on voting power
 In case of other entities – 20% share in profits
 Definition of related party u/s 40A(2)(b) substantially
narrower than associated enterprises definition as
applicable for international transaction
 Eg Covers only immediate level in the corporate structure
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Substantial interest for
international transaction - AE
threshold 26%

15. Related party payments u/s
40A(2)
 Illustration on transactions covered
 Purchase of goods, services from related concern
 Payment of expenses like rent, commission, interest
 Directors remuneration
 Cost recharge for common facilities/services
 Applicability to -
 Capital expenditure – Depreciation ?
 Write off of bad debts ?
 Payment to partners ?
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16. Units eligible for tax holiday
 Deduction under Chapter VI-A, Sec. 10AA to be
computed based on ALP
 ALP concept made applicable
 Section 80-IA(8) /80A (6) – Inter-unit transfers
 Goods/services held for the purposes of the undertaking / unit /
enterprise / eligible business transferred to any other business
carried on by assessee or vice versa, and
 Consideration for such transfer does not correspond to market
value of such goods or services.
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Unlike international
transactions, SDT can apply
even to transactions between
different units/ undertakings
of same assessee

17.  Sec. 80-IA(10) – Inter company dealings
Owing to the close connection between the assessee
and any other person, the course of business between
them is so arranged that the business transacted
between them produces more than ordinary profits.
 If aggregate SDT < Rs. 5 Cr, existing ‘market price/ Fair
Market Value ’/ ‘ordinary profits’ concept would apply
17
Units eligible for tax holiday

18. Ordinary profits vs ALP
 Weston Knowledge Systems & Solutions (India) Pvt.
Ltd [ TS-269-ITAT-2012(HYD)]
 Profit margin of unit entitled to tax holiday was more than
arm’s length margin determined in TP analysis
 TPO invoked Sec 80-IA(10) & disallowed tax holiday benefit
for excess profits
 ITAT deleted disallowance
 Phrase “more than ordinary profits” different from ALP
 AO required to show the actual ordinary profits which could
have been earned
 Tweezerman (India) P. Ltd. [TS-82-ITAT-2010)(Chny)] and
Digital Equipment India Ltd. [103 TTJ 329(Bang)] relied upon
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19. Relevant Provisions
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Sec 92C and
Rule 10B &
10AB
Six methods for computing ALP
• Safe harbour provisions applicable
Sec. 92CA(2) Reference to TPO
• Extended assessment timelines apply
Sec 92D and
Rule 10D
Maintenance of Contemporaneous
Documentation
Sec 92E and
Rule 10E
Accountant’s Report
•Revised Form 3CEB yet to be notified

20. Reference to TPO
 For international transactions, AO must mandatorily
refer all transactions to TPO if value exceeds Rs. 5
crores
 CBDT may issue similar instruction for specified domestic
transactions.
 TPO’s powers to determine ALP of
 Transaction not referred by AO – restricted to international
transaction – SDT not covered
 Transaction not disclosed in Form 3CEB – SDT not covered
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21. Key differences
 Income transactions in non-tax holiday unit not
subject to domestic TP
 Documentation applies to SDT (with value exceeding
Rs 5 Cr)
 For international transactions, documentation not required if
aggregate value less than Rs. 1 Crore
 “Deemed Transactions” concept not applicable
 APA framework not available
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22. Profile of
Industry
Profile of group
Profile of
related parties
Transaction
terms
FAR related
Economic
Analysis
(method
selection,
comparable
benchmarking)
Forecasts,
budgets,
estimates
Agreements
Invoices
Pricing related
correspondenc
e (letters, e-
mails, fax, etc.)
Entity Related Price Related Transaction Related
TP documentation
2
2

23. Penalty
23
Sec 271AA Sec 271BA Sec 271G
2% of transaction value for:
• failure to maintain
prescribed documents or
information.
• failure to report any
specified domestic
transaction which is
required to be reported.
• maintaining/ furnishing
incorrect information/
documents.
Penalty of Rs. 1
lakh for failure to
furnish
accountant’s
report u/s 92E
2% of
transaction value
for failure to
furnish
information/
documents as
required u/s
92D(3).
Concealment penalty u/s 271(1)(c) - @ 100%- 300% of tax sought
to be evaded also applicable to SDT

24. Arm’s length concept – other
laws
24

25. Arm’s length - Company Law
25
 Companies Bill, 2012 as passed by Lok Sabha has
introduced arm’s length concept for related party
transactions (RPT)
 Various approvals required from Board of Directors/
shareholders not applicable if the RPT entered on
arm’s length basis & in ordinary course of business
 Bill does not prohibit the company from entering into
RPT which is not on arm’s length basis, but Board of
Directors required to give justification for every
transaction

26. Arm’s length – Cost audit
report
26
 Related party transactions disclosure in cost audit
report under the Companies (Cost Audit Report)
Rules 2011
 Report requires disclosure of ‘transfer price’, ‘normal price’
and ‘basis adopted to determine ‘normal price’
 Non disclosure of normal price and basis amounts to
incomplete information

27. Domestic TP – applicability ?
 Trusts
 Other heads of income – house property, other
sources, capital gains ?
 Transaction without consideration ?
 Regulated transactions - benchmarking?
27

28. 28
Thank you

29. Sec 92BA
 92BA. For the purposes of this section and sections
92, 92C, 92D and 92E, "specified domestic transaction" in case of an
assessee means any of the following transactions, not being an
international transaction, namely:—
 (i) any expenditure in respect of which payment has been made or is to
be made to a person referred to in clause (b) of sub-section
(2) of section 40A;
 (ii) any transaction referred to in section 80A;
 (iii) any transfer of goods or services referred to in sub-section
(8) of section 80-IA;
 (iv) any business transacted between the assessee and other person as
referred to in sub-section (10) of section 80-IA;
 (v) any transaction, referred to in any other section under Chapter VI-A
or section 10AA, to which provisions of sub-section (8) or sub-section
(10) ofsection 80-IA are applicable; or
 (vi) any other transaction as may be prescribed,
 and where the aggregate of such transactions entered into by the
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