07 May 2012
How is Transfer Pricing as proposed in the recent Budget going to affect the domestic companies? To whom it is going to be applicable and on which type of transactions?
07 May 2012
TRANSFER PRICING REGULATIONS TO APPLY TO CERTAIN DOMESTIC TRANSACTIONS
Specified domestic transactions broadly comprise transactions entered in to by domestic related parties or by an undertaking with other undertakings of the same entity for the purposes of Section 40A,Chapter VI-A, Section 10AA and which exceed a monetary threshold of Rs. 50 Million during a FY.
The proposed new section 92BA provides for meaning of "specified domestic transaction" with reference to which the income is computed under section 92 having regard to arm’s length price.
Clause 35 of the Finance Bill 2012 seeks to insert a new section 92BA in the Income-tax Act relating to meaning of specified domestic transaction. 92BA. Meaning of specified domestic transaction.—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) 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 five crore rupees.’. APPLICABLE PROCEDURAL ASPECTS FOR SDT
The procedural aspects of TP are proposed to be made applicable to SDT by way of proposed amendments in sec. 92,92C,92D and 92E. These amendments would require that both the assessee as well as the tax department would need to adhere to the methods specified under sec. 92 C to determine the reasonableness of expenditure arising from related party transactions and/or income arising from SDT.
The second proviso to Sec. 92C allowing variation between the ALP and the actual transaction price would also be applicable to SDT. The proposed amendments would case compliance related obligations on taxpayers to maintain specified documentation ( Rule 10D) as well as file a report obtained from an accountant on or before the due date of filing tax return as prescribed under section 92E.
Furthermore, in terms of amendments proposed for Sec. 92, the provisions of sec. 92 will not apply to SDT if such computation of the ALP results in reducing the income chargeable to tax or increasing the loss, as the case may be.
APPLCIABLE TAX ASSESSMENT ASPECTS FOR SDT
Sec.92CA is also proposed to be amended. This would mean that the AO can refer the computation in respect of SDT to a TPO and consequently provisions related to Transfer pricing assessments as currently applicable to International transactions will also apply to SDT.
Penalty implications
The penal consequences currently applicable to international transactions are also proposed to become applicable to SDT. Thus sec. 271,271AA and 271G shall become applicable to SDT.
Expansion of scope of Sec. 40A(2)
There is also a proposal to increase the scope of sec. 40A(2) to include transactions between companies which have the same parent company.
Thus the implications to taxpayers are as under –
a) Any taxpayer who incurs expenditure that falls within the purview of sec.40A(2) . b) Taxpayers with income from SEZ units ( Sec.10AA) c) Infrastructure developers or operators etc. Sec.80-IA d) Other tax payers enjoying exemption under Chapter VI to which the provisions of Sec. 80-IA ,subsection 8 and 10 are applicable.
The typical domestic transactions that would get covered under SDT are
i) Intra-group transactions between related parties within India-rent payment, intra-group services, financial transactions, payment to directors, partners and their relatives.
ii) Not only corporate assesses, but even partnership firms, HUF and individuals may get covered under these provisions and would need to adhere to TP.
iii) Intra-group transactions with related parties outside India wherein expenditure is booked by India entity-these would be transactions which do not get covered under sec. 92 owing to higher threshold of ownership & control(26% share/voting power) but get covered under the substantial interest definition under sec. 40A(2) ( 20% or more beneficial owner of shares /voting power or share in profits)
iv) Intra-group transactions with sister concerns ( with common holding of 20% or more) under the proposed amendment to Sec. 40A(2)
v) Intra-group transactions between related domestic entities wherein any of them is eligible for tax holiday/tax exemption
vi) Intra-unit transfer of goods/services between tax holiday enjoying unit and other business unit of a taxpayer
vii) Transactions between an entity carrying on eligible business and any other person ,where the AO applies sec. 80-1A(10).
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