Transfer pricing for Specified Domestic Transactions :
(i) Under section 40A(2), the Assessing Officer is empowered to disallow expenditure incurred between related parties to the extent the same is not reasonable. Further, under Chapter VI-A, the Assessing Officer can re-compute the income (on the basis of fair market value) of the undertaking to which profit -linked deduction is provided if there are transactions with the related parties or other undertakings of the same entity at a value that does not correspond to the market value of the goods or services. However, these sections do not provide for any particular method to determine reasonableness of expenditure or fair market value to re-compute the income of the undertaking in such related transactions.
(ii) In CIT vs. Glaxo SmithKline Asia (P) Ltd (2010) 195 Taxman 35, the Supreme Court had opined that in order to reduce litigation, the Ministry of Finance should consider the applicability of the transfer pricing regulations to such related party domestic transactions. This suggestion was made after examining the complications arising in cases where fair market value is to be assigned to transactions between domestic related parties. Accordingly, the transfer pricing provisions have been made applicable to specified domestic transactions with effect from A.Y.2013-14.
(iii) Income from domestic related party transactions to be subject to transfer pricing [Section 92(2A)]: Section 92 provides that any income arising from an international transaction shall be computed having regard to the arm’s length price. In order to provide objectivity in determination of income from domestic related party transactions and determination of reasonableness of expenditure between related domestic parties, the provisions of section 92 have been extended to include within its ambit the specified domestic transactions. Sub-section (2A) has been inserted in section 92 to provide that, any allowance for an expenditure or interest or allocation of any cost or expense or any income in relation to the specified domestic transaction shall be computed having regard to the arm’s length price. However, as per section 92(3), the provisions o f this section would not apply if such allowance for expense or interest under section 92(2A) has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be.
(iv) Meaning of “specified domestic transaction” [Section 92BA] : Section 92BA provides the meaning of “specified domestic transaction”. As per section 92BA, for the purpose of sections 92, 92C (Computation of arm‟s length price), 92D (Maintenance and keeping of information and documents) and 92E (Furnishing of repor t from an accountant), in case of an assessee the specified domestic transaction shall mean any of the following transactions, not being an international transaction, namely, –
(1) any expenditure in respect of which payment has been made or is to be made to a related person referred to in section 40A(2)(b);
(2) any transaction referred to in section 80A i.e., inter-unit transfer of goods and services by an undertaking or unit or enterprise or eligible business to other
business carried on by the assessee or vice versa, for consideration not corresponding to the market value on the date of transfer;
(3) any transfer of goods or services referred to in section 80-IA(8) i.e., inter-unit transfer of goods or services between eligible business and other business, where the consideration for transfer does not correspond with the market value of goods and services;
(4) any business transacted between the assessee carrying on eligible business and other person as referred to section 80-IA(10);
(5) any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which provisions of section 80-IA(8) or section 80-IA(10) are applicable; or
(6) any other transaction as may be prescribed,
(v) However, the above mentioned transactions shall not be treated as specified domestic transaction in case the aggregate of such transactions entered into by the assessee in the previous year does not exceed a sum of ` 20 crore.
(vi) Arm’s length price and income of a specified domestic transaction to be computed in the same manner as applicable to an international transaction [Sections 92 & 92C]: In order to determine the arm‟s length price in respect of the specified domestic transaction, the provisions of section 92 and 92C shall apply to the specified domestic transaction as they apply to the international transaction. Accordingly, the methods of computation of arm’s length price for an international transaction would be applicable to a specified domestic transaction also.
(vii) Persons entering into a specified domestic transaction to maintain information and documents and furnish report of an accountant [Section 92D & 92E] : With a view to create a legally enforceable obligation on assessees entering into a specified domestic transaction to maintain proper documentation and obtain and furnish report of a Chartered Accountant on or before the specified date, the provisions of section 92D and 92E have been made applicable to a specified domestic transaction as they apply to an international transaction.
(viii) Reference to Transfer Pricing Officer for computation of arm’s length price of specified domestic transaction [Section 92CA]: According to section 92CA, where any person has entered into an international or a specified domestic transaction in any previous year, the Assessing Officer can with the previous approval of the Commissioner, if he considers necessary or expedient to do so, refer the computation of the arm‟s length price of such transaction to the Transfer Pricing Officer (TPO).
When such reference is made, TPO can call upon the assessee to produce evidence in support of the computation of arm‟s length price made by him in respect of such transaction.
The TPO has to pass an order determining the arm‟s length price in respect of the specified domestic transaction after considering the evidence, documents, etc. produced by the assessee and after considering the material gathered by him. He has to send a copy of his order to the Assessing Officer as well as the assessee.
However, the powers available to the TPO to determine the ALP of other international transactions identified subsequently in the course of proceedings before him, is not available in respect of other specified domestic transaction i.e., the TPO can determine the ALP in respect of other international transaction that came to his notice subsequently during the course of proceedings but such power is not available in respect of specified domestic transaction subsequently identified.
(ix) Penalty provisions to apply to specified domestic transactions as they apply to an international transaction [Sections 271, 271AA, 271BA & 271G]: The penalty provisions under section 271, 271AA, 271BA and 271G shall apply to the specified domestic transaction as they apply to an international transaction defined under section 92B.
Accordingly, the amount added or disallowed in computing total income under section 92C(4) in the case of an assessee who has entered into a specified domestic transaction shall be deemed to represent concealed income and penalty under section 271(1)(c) ranging between 100% to 300% of the amount of tax sought to be evaded would be attracted.
Failure to furnish the report under section 92E from an accountant would attract penalty of Rs 1,00,000 under section 271BA.
In addition,
(i) in case of failure to keep and maintain information, document as required under section 92D(1) or 92D(2); or
(ii) failure to report such specified domestic transaction which is required to be reported; or
(iii) maintain or furnishes incorrect information or document
penalty under section 271AA at 2% of the value of each transaction would be attracted.
Penalty@2% of value of specified domestic transaction would be attracted under section 271G for failure to furnish the prescribed information or document as required under section 92D(3) within the period of 30 days from the date of receipt of notice or the extended period not exceeding another 30 days, as the case may be.
(x) No adjustment to expenditure under section 40A(2) if the transaction is carried out at arm’s length price: The proviso to section 40A(2)(a) provides that no disallowance on account of any expenditure in respect of payment which has been made or is to be made to a related person, being excessive or unreasonable having regard to the fair market value, shall be made in respect of a specified domestic transaction referred to in section 92BA, if such transaction is at arm‟s length price i.e., no adjustment shall be made under section 40A(2) in relation to the specified domestic transaction in case the same is carried out at arm‟s length price even though the arm’s length price so determined may be at variance with the fair market value.
The related person as mentioned in section 40A(2) includes, inter alia, a company, firm, association of persons or Hindu undivided family having a substantial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member. The said meaning is amended to include that the related person in relation to a company shall include any other company carrying on business or profession in which the first mentioned company has substantial interest.
(xi) Market value to be the arm’s length price of goods or services in a specified domestic transaction [Section 80A & 80-IA(8)]: As per the provisions of section 80A(6), in a case where the goods or services held for the purpose of the undertaking or unit or enterprise or eligible business are transferred to any other business carried on by the assessee or where any goods or services held for the purposes of any other business carried on by the assessee are transferred to the undertaking or unit or enterprise or eligible business, the transfer price of such goods and services shall be determined at the market value of such goods or services as on the date of transfer.
Clause (iii) of Explanation to section 80A(6) clarifies that “market value” in relation to any goods or services sold, supplied or acquired, means the arm‟s length price as defined under section 92F of such goods or services, if it is a specified domestic transaction referred to in section 92BA i.e., the aggregate value of all such transaction specified in section 92BA exceeds Rs 20 crore.
Therefore, in case the transfer of goods and services between undertaking or unit or enterprise or eligible business and any other business of the assessee takes place at the arm’s length price, such arm‟s length price shall be the market value for the purpose of section 80A(6), and no further adjustment would be required in respect of the same, if the transaction is a specified domestic transaction.
(xii) Similarly, for the purpose of section 80-IA(8), the market value, in relation to any goods or services transferred between the eligible business and any other business carried on by the assessee, shall mean –
(1) the price that such goods or services would ordinarily fetch in the open market; or
(2) the arm’s length price as defined under section 92F, where the transfer of such goods or services is a specified domestic transaction referred to in section 92BA.
(xiii) Profit from transactions between an assessee carrying on “eligible business” and other assessees to be determined as per arm’s length price [Section 80 -IA(10)]: Under section 80-IA(10), the Assessing Officer is empowered to make an adjustment while computing the profit and gains of the eligible business on the basis of the reasonable profit that can be derived from the transaction, in case the transaction between the assessee carrying on the eligible business under section 80-IA and any other person is so arranged that the transaction produces excessive profits to the eligible business.
It has now been provided that if the aforesaid arrangement between the assessee carrying on the eligible business and any other person is a specified domestic transaction referred to in section 92BA, then, the amount of profit of such transaction shall be determined having regard to arm‟s length price as defined under section 92F and not as per the reasonable profit from such transaction.
(xiv) Transfer Pricing Rules made applicable to Specified Domestic Transactions as well [Notification No. 41/2013 dated 10.06.2013]
With effect from A.Y 2013-14, the transfer pricing provisions have been extended to Specified Domestic Transactions. Accordingly, the transfer pricing rules prescribed for international transactions have been suitably amended to make the same applicable for specified domestic transactions, as well.
| Rule No. | Particulars | Amendment |
| 10A | Meaning of expressions used in computation of Arm’s length price | Definition of “associated enterprise” and “enterprise” included
“Associated Enterprise” shall – (i) have the same meaning as assigned to it in section 92A; and (ii) in relation to a specified domestic transaction entered into by an assessee, include — (A) the persons referred to in section 40A(2)(b) in respect of a transaction referred to in section 40A(2)(a); (B) other units or undertakings or businesses of such assessee in respect of a transaction referred to in section 80A or section 80-IA(8); (C) any other person referred to in section 80-IA(10) in respect of a transaction referred to therein; (D) other units, undertakings, enterprises or business of such assessee, or other person referred to in section 80-IA(10) or in respect of a transaction referred to in section 10AA or the transactions referred to in Chapter VI-A to which the provisions of section 80-IA(8) or section 80- IA(10) are applicable; “Enterprise” shall have the same meaning as assigned to it in clause (iii) of section 92F and shall, for the purposes of a specified domestic transaction, include a unit, or an enterprise, or an undertaking or a business of a person who undertakes such transaction. |
| 10AB | Other methods of determination of ALP | This Rule provides that for the purpose of section 92C(1)(f), the other method for determination of the arm‟s length price in relation to an international transaction shall be any method which takes into account the price which has been charged or paid or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts.
This Rule has now been made applicable to specified domestic transactions as well. |
| 10B | Determination of ALP under section 92C | The methods for determination of arm’s length price specified in this Rule for the purpose of section 92C(2) in relation to an international transaction shall also be made applicable in respect of specified domestic transactions. |
| 10C | Most appropriate method | Sub-rule (1) provides that, for the purposes of section 92C(1), the most appropriate method shall be the method which is best suited to the facts and circumstances of each particular international transaction, and which provides the most reliable measure of an arm’s length price in relation to an international transaction.
Sub-rule (2) specifies the factors to be taken into account in selecting the most appropriate method. This Rule is now made applicable in respect of a specified domestic transaction as well. |
| 10D | Information and documents to be kept and maintained under section 92D | Sub-rule (1) requires every person who has entered into an international transaction to maintain the requisite information and documents as detailed thereunder. As per sub-rule (2), maintenance of information and documents shall not apply where the aggregate value of international transactions does not exceed 1 crore rupees. However , sub-rule (1) shall be applicable for every specified domestic transaction irrespective of its value. |
| 10E | Report from an accountant to be furnished under section 92E | This rule provides for submission of audit report from a chartered accountant by every person who has entered into an international transaction. This provision would now apply to a person entered into a specified domestic transaction as well. |
(xv) Safe Harbour Rules notified for Specified Domestic Transactions in respect of a Government company engaged in business of generation, transmission or distribution of electricity [Notification No. 11/2015, dated 4-2-2015]
Section 92CB(1) provides that the determination of arm’s length price under section 92C or section 92CA shall be subject to safe harbour rules. Section 92CB(2) empowers the CBDT to prescribe safe harbour rules.
Safe harbour means circumstances in which the income tax authorities shall accept the transfer price declared by the assessee.
Accordingly, in exercise of the powers conferred by section 92CB read with section 295 of the Income‐tax Act, 1961, the CBDT had, vide Notification No. 73/2013, dated 18.09.2013, prescribed safe harbour rules in respect of international transactions.
The CBDT has, vide Notification No.11/2015 dated 4.2.2015, in exercise of the powers conferred by section 92CB and 92D, read with section 295, inserted Rules 10TH, 10THA, 10THB, 10THC & 10THD providing the safe harbour rules for specified domestic transactions.
| Rule | Rule heading | Particulars | ||||||
| 10TH | Definitions:
Appropriate Commission |
Meaning assigned to it in section 2(4) of the Electricity Act, 2003.
Appropriate Commission means the Central Regulatory Commission referred to in sub-section (1) of section 76 or the State Regulatory Commission referred to in section 82 or the Joint Commission referred to in section 83, as the case may be. |
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| Government Company | Meaning assigned to it in section 2(45) of the Companies Act, 2013.
Government company means any company in which not less than 51% of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government company. |
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| 10THA | Eligible assessee |
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| 10THB | Eligible Specified Domestic Transaction | A specified domestic transaction undertaken by an eligible asseessee and which comprises of:
(i) supply of electricity by a generating company; or (ii) transmission of electricity; or (iii) wheeling of electricity. |
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| 10THC | Safe harbour | (1) Where an eligible assessee has entered into an eligible specified domestic transaction in any previous year relevant to an assessment year and the option exercised by the said assessee is treated to be validly exercised under Rule 10THD, the transfer price declared by the assessee in respect of such transaction for that assessment year shall be accepted by the income-tax authorities, if it is in accordance with the circumstances specified in Rule 10THC(2).
(2) The following are the circumstances in respect of the eligible specified domestic transaction.
(3) No comparability adjustment and allowance under the second proviso to section 92C(2) shall be made to the transfer price declared by the eligible assessee and accepted by the income-tax authority. (4) The provisions of sections 92D relating to maintenance and keeping of information and document and section 92E for submission of report from an accountant in respect of a specified domestic transaction shall apply irrespective of the fact that the assessee exercises his option for safe harbour in respect of such transaction. |
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| 10THD | Procedure | Furnishing of Form 3CEFB
The assessee shall furnish a Form 3CEFB, complete in all respects, to the Assessing Officer on or before the due date for furnishing the return of income for the relevant assessment year specified in Explanation 2 to section 139(1), for exercising the option of safe harbour. The return of income should be furnished on or before the date of submitting the Form 3CEFB. Order by Assessing Officer The Assessing Officer shall pass the order declaring the option exercised by the assessee as invalid within a period of 3 months from the end of the month in which Form 3CEFB is received by him. No order can be passed declaring the option exercised by the assessee invalid unless an opportunity of being heard is given to him. Filling of objections against the order of Assessing Officer by the assessee If the assessee objects to the order of the Assessing Officer declaring the option to be invalid, he may file his objections with the Principal Commissioner or the Commissioner or the Principal Director or the Director, as the case may be, to whom the Assessing Officer is subordinate, within 15 days of receipt of the order of the Assessing Officer. The Principal Commissioner or Commissioner or Principal Director or Director, as the case may be, shall, after providing an opportunity of being heard to the assessee, pass appropriate order, within a period of 2 months from the end of the month in which the objection filed by the assessee is received by him, in respect of the validity or otherwise of the option exercised by the assesee. If the Assessing Officer or the Principal Commissioner or the Commissioner or the Principal Director or the Director, as the case may be, does not pass an order within the specified time, then the option for safe harbour exercised by the assessee shall be treated as valid. |
Information and documents to be maintained under section 92D in respect of eligible specified domestic transaction [Rule 10D(2A)]
Section 92D provides that every person who has entered into an international transaction or specified domestic transaction shall keep and maintain prescribed information and document.
Rule 10D(1) provides for information and documents to be maintained under section 92D. Sub-rule (2A) has been inserted in Rule 10D to provide that nothing contained in Rule 10D(1) in so far as it relates to specified domestic transaction referred to in Rule 10THB, shall apply in the case of an eligible assessee referred to in Rule 10THA.
The information and documents to be maintained by an eligible assessee referred to in Rule 10THA relating to an eligible specified domestic transaction referred to in Rule 10THB are given in Rule 10D(2A) as follows:
(i) a description of the ownership structure of the assessee enterprise with details of shares or other ownership interest held therein by other enterprises;
(ii) a broad description of the business of the assessee and the industry in which the assessee operates, and of the business of the associated enterprises with whom the assessee has transacted;
(iii) the nature and terms (including prices) of specified domestic transactions entered into with each associated enterprise and the quantum and the value of each such transaction or class of such transaction;
(iv) a record of proceedings if any before the regulatory commission and orders of such commission relating to the specified domestic transaction;
(v) a record of the actual working carried out for determining the transfer price of the specified domestic transaction;
(vi) the assumptions, policies and price negotiations, if any, which have critically affected the determination of the transfer price;
(vii) any other information, data or document, including information or data relating to the associated enterprise, which may be relevant for determination of the transfer price.