Special domestic transaction

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

21 September 2013 suppose if Altd (r) holds 60 % shares in kk ltd and kk ltd hold 20% shares in sahin ltd (nr) not an indian campany

1) is the transaction is specifced domestic is 40 a (2)

2 ) suppose if A ltd buys good 50 cr from sahin ltd will it be related parties n is it specificed domestic transaction

pls help me

Querist : Anonymous

Querist : Anonymous (Querist)

21 September 2013 guys help me

Aashok Kumar Sharma online

Aashok Kumar Sharma online

(Expert)
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25 July 2025 Let's break down your question regarding **Specified Domestic Transactions (SDT)** under **Section 40A(2)** of the Income Tax Act and related-party transactions.

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### Given:

* **A Ltd (Resident)** holds 60% shares in **KK Ltd (Resident)**
* **KK Ltd holds 20% shares in Sahin Ltd (Non-Resident)**
* A Ltd buys goods worth ₹50 crore from Sahin Ltd (Non-Resident)

---

### Question 1:

**Is the transaction between A Ltd and KK Ltd a Specified Domestic Transaction (SDT) under Section 40A(2)?**

* Section 40A(2) applies to transactions between **related parties**, where the payment is excessive or unreasonable.

* Related parties include:

* Companies where one holds **at least 26%** of voting power in the other.
* Transactions between **residents** only (domestic transactions).

* Here, **A Ltd holds 60% in KK Ltd** — so **A Ltd and KK Ltd are related parties**.

* Both are **residents** in India.

**Therefore, any transaction between A Ltd and KK Ltd is a Specified Domestic Transaction (SDT).**

---

### Question 2:

**If A Ltd buys goods worth ₹50 crore from Sahin Ltd (Non-Resident), is this a related party transaction and is it a Specified Domestic Transaction?**

* Related party status:

* A Ltd and Sahin Ltd: Sahin Ltd is a **Non-Resident**.
* A Ltd holds 60% in KK Ltd, KK Ltd holds 20% in Sahin Ltd.
* Indirect shareholding less than 26% by A Ltd in Sahin Ltd (because A Ltd's direct holding in Sahin Ltd is nil).
* Normally, a **company is related to another if it holds ≥26%** voting rights.
* So, A Ltd and Sahin Ltd are **not related parties** directly.

* But **A Ltd and Sahin Ltd are not both residents**, so **Section 40A(2) on Specified Domestic Transactions will NOT apply here**.

* However, this transaction will be covered under **Transfer Pricing provisions (Section 92 to 92F)** as an **International Transaction** because it's between an Indian company and a Non-Resident associated enterprise (if Sahin Ltd is associated).

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### Summary:

| Transaction | Related Party? | SDT under Section 40A(2)? | Other Applicability |
| ------------------- | ---------------------- | ------------------------- | ---------------------------------------------------------- |
| A Ltd and KK Ltd | Yes (60% shareholding) | Yes | Yes, domestic related party |
| A Ltd and Sahin Ltd | No | No | Covered under Transfer Pricing (International transaction) |

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### Additional notes:

* **Specified Domestic Transactions (SDT)** apply only to **domestic related party transactions**.
* **International Transactions** are governed separately by transfer pricing rules.
* Shareholding threshold for related party is **26% or more**.
* Indirect holding is considered only when **effective control or significant influence** exists.

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If you want, I can help with detailed transfer pricing implications or drafting an explanation letter for the tax authorities. Would you like that?

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