Domestic Transfer Pricing – Laws and Practices : An Intro
This article covers the implications and nuances of domestic transfer pricing provision(s) and practices followed:
Transfer pricing regulations was introduced with regard to International transactions (Cross Border Transactions) with associated enterprises in 2001.The Ministry of Finance honoring the judgment of Apex Court in CIT vs. M/S Glaxo Smithkline Asia (P) Ltd. (Special Leave to Appeal (Civil) No(s).18121/2007) expanded the ambit of Transfer pricing to Specified domestic transactions (SDT) by Finance Bill 2012.
The Honorable Supreme court held that,
“The larger issue is whether Transfer Pricing Regulations should be limited to cross-border transactions or whether the Transfer Pricing Regulations to be extended to domestic transactions. In domestic transactions, ordinarily under-invoicing of sales and over-invoicing of expenses will be revenue neutral in nature; except in two circumstances having tax arbitrage such as where one of the related entities is
(i) Loss making or
(ii) Liable to pay tax at a lower rate and the profits are shifted to such entity.
The CBDT should examine whether Transfer Pricing Regulations can be applied to domestic transactions between related parties u/s 40A (2) by making amendments to the Act. The Assessing Officer can be empowered to make adjustments to the income declared by the assessee having regard to the fair market value of the transactions between the related parties and can apply any of the generally accepted methods of determination of arm’s length price (ALP), including the methods provided under Transfer Pricing Regulations”.
Earlier to afore mentioned regulatory norms and requirements, the Income Tax Act, 1961 gave wide powers to Assessing officer to circumvent the expenses raised above the fair market value for transactions between the related parties.
However, the said system was providing colossal amount of disputes and litigations between the tax payers and revenue as no specific method to determine the fair market value was in existence.
This judgment laid foundation to channelize the method in determination of ALP and led to the introduction of Domestic transfer pricing. The said fact is acknowledged in the Memorandum to Finance Bill 2012.
Meaning of Specified Domestic transactions
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:-
- any expenditure in respect of which payment has been made or is to be made to a person referred to in section 40A(2)(b);
- any transaction referred to in section 80A;
- any transfer of goods or services referred to in sub-section (8) of section 80-IA;
- any business transacted between the assessee and other person as referred to in section 80-IA (10)
- any transaction, referred to in any other section under Chapter VIA or section 10AA, to which provisions of section 80-IA(8) or section 80-IA(10) are applicable; or any other transaction as may be prescribed,(No Other transactions are prescribed)