This article is written by Adv.Vijay Shekhar Jha.
Table of Contents
Introduction
Indian Transfer Pricing (hereinafter “TP”) regulations as introduced in the year 2001 until the F.Y. 2011-2012 were only covering ‘International Transaction’ undertaken between two or more ‘Associated Enterprise’ within its fold. However, triggered by the suggestions made by the Hon’ble Supreme Court in CIT vs Glaxo Smithkline Asia (P) Ltd., Government of India vide the Finance Act, 2012 extended the purview of these regulations covering specified class of domestic transactions entered into between Associated Enterprises with effect from A.Y. 2013-2014.
Position which prevailed before incorporation of Specified Domestic Transaction in the Domestic TP regulations
Before incorporation of ‘Specified Domestic Transaction’ (hereinafter “SDT”) in our domestic TP regulations, following provisions of the Income Tax Act, 1961 (hereinafter “Act/ITA”) were generally resorted by the Assessing Officer (hereinafter “AO”) to plug the revenue leakages/tax arbitrage emanating out of domestic transactions:
- Section 40A(2)– which covers transaction entered between taxpayer and specified persons wherein as per AO expenditure incurred by the AO is excessive or unreasonable having regard to the ‘Fair Market Value’ (“FMV”).
- Section 80A(6), 80IA(8) &(10).
These provisions though empowered AO to examine and determine the FMV of certain transactions mentioned therein, however, the Act prescribed no method to compute FMV of these transactions because of which taxpayers were severely prejudiced owing to the procedural ambiguity. Therefore, in a bid to resolve the cloud of confusion caused owing to such procedural ambiguity, the transfer pricing regulations were extended to cover specified domestic transactions whereby FMV of such transactions were determined in accordance with the generally accepted methods of determination of arm’s length price (hereinafter “ALP”) provided in the TP regulation Section .
Meaning of Specified Domestic Transactions under the Act
Under ITA, ‘Specified Domestic Transaction’ has been defined under Section 92BA, which provides:
“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 iro 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; (has been omitted Fin Act, 2017)
(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) of section 80-IA are applicable; or
(vi) any other transaction as may be prescribed,
and where the aggregate of such transactions entered into by the assessee in the previous year exceeds a sum of Rs. 20 crore.”
Therefore, perusal of the above definition of the ‘SDT’ will reveal that following are its constituents:
i) There must be a transaction- ‘Transaction’ is defined under Section 92F(v) of the Act.Here, it is important to note that Section 92F(v) though defines this term with the expression “In sections 92, 92A, 92B, 92C, 92D and 92E, unless context otherwise requires ….” which prima facie does not include Section 92BA in the list of provisions mentioned therein, however, since it covers Section 92, 92C, 92D and 92E which pertains both to International Transaction and SDT, it would be safe to state that the meaning of ‘Transaction’ would be relevant for SDT as well.
ii) Not an International Transaction (refer to Section 92B for the meaning of ‘International Transaction’).
iii) Transaction should be covered under one of the six transactions mentioned in the sub-section.
iv) Aggregate value of transactions should not exceed Rs. 20 Crore.
Differences between ‘SDT’ and ‘International Transaction’
|
Particulars |
SDT |
International Transaction |
|
Scope |
Its scope is limited to Transaction in the nature of expenditure with persons specified under Section 40A(2)(b) Transactions concerning taxpayers carrying eligible businesses which are eligible for profit based deductions or transactions between an eligible business unit and any other unit of the taxpayer |
The scope includes transaction in the nature of:
Between two or more associate enterprises, at least one of which is a non-resident |
|
Threshold |
Applicable when aggregate value of transactions specified under Section 92BA exceeds Rs. 20 Crore |
No threshold prescribed.Thus, TP regulations are attracted, once there is Int. Tran. irrespective of the quantum of the transaction |
|
Criteria for specified person/Associated Enterprise based on participation in capital |
Threshold of 20% or more of voting power to establish substantial interest |
Threshold of 26% or more of voting power to establish participation in management |
|
Residential Status of the Party |
Can be both residents or non-residents (NR) |
At least one party to the transaction must be a NR, except in cases where it is a deemed international transaction |
|
Applicability of Advance Pricing Agreement(APA) |
Not applicable |
Applicable |
|
Power of Transfer Pricing Officer (TPO) |
TPO can’t assume jurisdiction on SDT which are not referred to it by AO |
TPO is empowered to adjudicate on even those International Transactions which are not referred to him by the AO, but come to his notice during course of proceedings |
|
Income Escapement |
Failure to report specified SDT in form 3CEB does not lead to escapement of income and hence reopening under Section 147 is not possible |
Failure to report an International Transaction may lead to income escapement and hence reopening is possible under Section 147 |
Section 92BA(i)- Expenditure incurred iro which payment has been made/is to be made to specified persons
Though this sub-section has been omitted by virtue of Fin Act, 2017 (wef 01.04.2017), yet, the effect of this sub-section will continue for quite some time as the concerned taxpayer owing to the requirement of Rule 10D(5) of the Income Tax Rules, 1961 (hereinafter “Rules”) would be maintaining information and document relating to all transactions entered by them (prior to 1st April, 2017) which is covered by Section 40A(2) for a period of eight years.Thus, it becomes essential to understand this provision.
Under section 40A (2), while computing income from business or profession of the taxpayer, AO may disallow any expenditure or the payment which is made or to be made to specified person (refer to clause (b) to Section 40A(2)), which in his opinion is either excessive or unreasonable having regard to:
- FMV of goods or services or facility involved in such transaction; or
- The legitimate business needs of the business of the taxpayer; or
- The benefits derived by or accruing to the taxpayer as a result of expenditure.
However, Finance Act, 2012 has inserted a proviso to Section 40A(2)(a) as per which no disallowance of expenditure undertaken in a transaction covered by Section 40A(2) would be made by the AO, if such a transaction is at arm’s length price as defined in Section 92F (ii) of the Act.
Thus, after 2017 amendment, there may arise a situation where there might be clash between Section 40A and TP regulations and AO may try to disallow the expenditure incurred by the taxpayer on the pretext of excessiveness or reasonableness, in those situations, if taxpayer could show that the expenditure satisfies the requirement of ALP then, AO would be left with no option but to allow such expenditure. At this juncture, it will be pertinent to bear in the mind the decision of ITAT Bangalore Aztec Software & Technology Services Ltd vs ACIT wherein Hon’ble Tribunal ruled that in case a transaction in the nature of expenditure is classified as ‘specified domestic transaction’ under section 92BA, the transfer pricing provisions as contained in Chapter X of the Act (being specific provisions) shall override the general provisions of section 40A (2).
Section 92BA (ii)- Transaction covered under section 80A
The perusal of Section 80A of the Act will reveal that though Section 80A deals with various deduction allowable in computing the total taxable income, it is only Section 80A (6) of the Act which is relevant for the purpose of Section 92BA (ii) of the Act, for the reason that while other sub-sections regulate the quantum of deduction, sub-section(6) deals with the TP of goods/services between undertaking/unit/enterprise/eligible business and other business of the taxpayer. Therefore, as far as reference of Section 80A in Section 92BA is concerned it should be read as if Section 80A(6) has been mentioned in the place of Section 80A. This view gets reinforced by the fact that by Finance Act, 2012 an amendment was made only to sub-section (6) of Section 80A in the form of explanation which provides that the market value of goods or services transferred between undertaking /unit/enterprise/eligible business and other business of the taxpayer shall be determined having regard to ALP, if such transfers are SDT.
Section 80A(6) covers the transfer of goods or services from an undertaking/ unit/ enterprise/ eligible business to any other business of the taxpayer and vice versa. Therefore, the value of goods or services acquired by such undertaking/ unit/ enterprise/ eligible business from the other business of the taxpayer and the value of goods or services transferred to such other business shall be aggregated for the purpose of Section 92BA(ii).
A list of eligible businesses covered by Section 80A(6) of the Act are: Section 10A, 10AA, 80IA, 80IAB, 80IAC, 80IB, 80IBA, 80IC, 80ID, 80IE.
Section 92BA(iii), (iv), (v)- Transaction covered under section 80IA(8), 80IA(10)
|
Description |
Section 80IA(8) |
Section 80IA(10) |
|
Nature and Scope of Transaction |
It covers transactions in the nature of transfer of goods or services between an eligible business unit and any other business unit of the taxpayer. Thus, this sub-section is limited to the transfer of the goods and services |
It covers transactions entered into between a taxpayer carrying on eligible business and any other person. Thus, scope of this sub-section is apparently wider than Section 80IA(8). |
|
Condition for Application |
Value at which transfer of goods or services has taken place between the eligible business unit and any other business unit does not correspond to the market value/ ALP |
More than ordinary profits have accrued to the taxpayer carrying eligible business as a result of the business transaction entered into between persons who are closely connected. |
|
Power of AO |
Where the value of goods or services transferred doesn’t correspond to their market value/ALP, the AO can recomputed the value of such transfers having regard to its market value/ALP |
Where it appears to the AO that the business transacted has produced more than ordinary profits to the taxpayer carrying on eligible business, then the AO may determine reasonable profits that would have been derived by such eligible business with regard to the arm’s length price of such transaction. |
|
Parties to the Transaction |
Such Transaction transpired between undertakings/ units (one of which is eligible for profit based deduction) of the same taxpayer |
Such Transaction transpired between the taxpayer carrying on an eligible business and any other person closely connected to it. |
Compliances to be done by the taxpayer iro SDT
|
(i.) Determination of ALP |
As per Section 92(2A) of the Act, any allowance for expense, interest or allocation of any cost or expense or allocation of any income in relation to a SDT shall be computed having regard to its ALP. Therefore, any SDT entered into by a taxpayer is required to conform with ALP. The ALP has to be determined by using any one of the methods prescribed as the most appropriate method under Section 92C of the Act read with Rule 10B. Further, as per Rule 10C, a method which is best suited to the facts and circumstances of each particular transaction and which provides most reliable measure of an ALP should be chosen as the ‘Most Appropriate Method’ for determining the ALP of the transaction. |
|
(ii.) Maintenance and keeping of certain information and documents |
Section 92D enjoins the taxpayer who during the P.Y. has entered into a SDT to maintain and keep certain information and documents as prescribed in Rule 10D. Besides, as per Section 92D read with Section 92BA, the taxpayer is not required to maintain the documentation, if, the aggregate value of the SDT does not exceed Rs. 20 Crore. Moreover, as per Rule 10B(4) the information and documents required to be maintained is to be supported by contemporaneous data. Further, as per Rule 10D(5) the information and documents specified shall be kept and maintained for a period of eight years from the end of the relevant assessment year. |
|
(iii) Furnishing of Report from the Accountant |
As per Section 92E every taxpayer who has entered into SDT has to obtain a report in Form 3CEB from an accountant and should be filed on or before 30th November of relevant A.Y. |
Penalties in case of non-compliance of TP under Chapter X of the Act
|
Section |
Nature of Default |
Quantum of Penalty |
|
270A |
Adjustment made by the AO to SDT as a consequence of:
|
|
|
271AA |
Failure to maintain and keep prescribed documentation under Section 92D |
2% of value of each SDT |
|
271AA |
Maintaining and keeping incorrect information or document |
2% of value of each SDT |
|
271AA |
Failure to report a transaction in Accountant’s report |
2% of value of each SDT |
|
271BA |
Failure to furnish Accountant’s report in Form 3CEB |
Rs. 100000 |
|
271G |
Failure to furnish information or documents under Section 92D |
2% of value of each SDT |
References
- Section 92B of the ITA for the meaning of ‘International Transaction’
- Section 92A of the ITA for the meaning of ‘Associated Enterprise’
- Refer Section 92B of the Act
- Pallavi Dinodia & Pradeep Dinodia, Bharat’s Transfer Pricing Demystified, Bharat (2019), 3rd Edition, pg 151
- Section 92F(ii) –arm’s length price means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions;
- (2007) 107 ITD 141 (Bang-SB)-Affirmed by the Karnataka High Court – ITA 826/2007.
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