Transfer Pricing – Specified Domestic Transactions

Specified Domestic Transactions (SDD)

The Supreme Court in the case of Glaxo Smithkline (CIT vs. Glaxo Smithkline Asia (P) Ltd [2010] opined on the need to extend the existing Transfer Pricing provisions to domestic transactions, with a view to counter tax evasion between domestic related parties. The Supreme Court observed that in cases where fair market value is to be assigned to domestic related parties, the MOF should consider appropriate provisions in Law to make transfer pricing regulations applicable to such related party transactions.

Consequent to the above, section 92 BA of the Income Tax Act, 1961 has been introduced w.e.f. AY 2013-14 by Finance Act, 2012.

The scope of transfer pricing regulations have been extended to domestic transactions to bring neutrality in pricing transactions that involve payments for expenses to related parties and to do away with the tax arbitrage that occurs due to differential tax rates when one of the entities enjoys tax exemption under the law.

To illustrate:

i. A loss making company could charge an excessive amount to a group company for reducing the tax liability

ii. A Tax Holiday Undertaking could charge an excessive amount for sales to related parties for claiming higher tax holiday.

Accordingly, the intention of the tax payer to evade tax and absence of a defined mechanism in the domestic tax laws to determine fair market value and maintain detailed documentation led the Supreme Court to recommend applicability of transfer pricing regulations to specified domestic transactions.

However, post introduction of SDD, there could be transactions, as under, where there could be no intention to evade tax but which would be covered under domestic transfer pricing:

• Payment of managerial remuneration by a company to its key managerial persons
• Payment by one company to another related concern where both companies are making profits and taxed at the same rate and there is no possibility of a tax arbitrage
• Granting of loan by a company to its loss making Group company at a slightly higher rate as compared to banks/financial institution since no bank/FI is willing to grant loan to it
• Payment for use of intellectual property rights by a contract manufacturer wherein the contract manufacturer has no option but to pay the mutually agreed royalty consideration.

The Act does not provide provisions for correlative relief whereby the income of the recipient is reduced in case expenses are disallowed in the hands of the taxpayer, where adjustment to the income of an assessee is proposed under domestic transfer pricing provisions.

1. How are Specified Domestic Transactions defined?

The following transactions with the aggregate value exceeding INR 50 million are covered.
• Expenditure for which payment is made or to be made to specified domestic related parties.
• Transfer of goods or services to/from eligible business (tax holiday undertaking) from/to other business (non-tax holiday undertaking).
• Business transactions between eligible business (tax holiday unit) and other person(s) producing more than ordinary profits owing to close connection.

2. Which tax payers covered under Specified Domestic Transactions?

Any taxpayer incurring any expenditure with specified domestic related parties are required to comply with the regulations.

3. How do you define a specified domestic related party?

The domestic related party will inter alia include a director, a relative of the director, a person having substantial interest in the taxpayer (carrying not less than 20% of the voting power) and fellow related parties where a single person has substantial interest in two taxpayers.

4. Are there prescribed methods to determine Arm’s Length Price?

The Arm’s Length Price has to be determined applying any of the prescribed methods
• Comparable Uncontrolled Price Method (CUP)
• Resale Price Method (RPM)
• Cost Plus Method (C+)
• Profit Split Method (PSM)
• Transactional Net Margin Method (TNMM)
• Or any other method as prescribed by the Central Board of Direct Taxes


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