Specified Domestic Transactions

Form No. 3CEB as prescribed under Rule 10E which is required to be furnished by an accountant under section 92E for International Transactions. However, no such form has been specified separately with regard to Specified Domestic Transactions. The contents of this Guidance Note (in sofar as they relate to Specified Domestic Transactions) relate to the present provisions of the Income Tax Act, 1961 and Income Tax Rules, 1962. If andwhen a new revised format of Form No. 3CEB is notified, contents of this Guidance Note may need to be reviewed, and an addendum issued, orseparate or amended Guidance Note issued. In the meantime, contents ofthis chapter (Specified Domestic Transactions) should be treated forinformation purposes only

Transfer pricing regulations have been extended vide Finance Act2012 to include transactions entered into with domestic related parties or byan undertaking with other undertakings of the same entity for the purposes of section 40A, Chapter VI-A and section 10AA. Domestic transfer pricing provisions are applicable from Assessment Year 2013-14 onwards.

All of the compliance requirements relating to transfer pricing documentation, accountant’s report, etc shall equally apply to specified domestic transactions as they do for international transactions amongst associated enterprises.

Definition

Section 92BA defines Specified Domestic Transaction (SDT) which is covered by TP regulations. Section 92BA as under:

“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 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;
  • any transaction referred to in section 80A;
  • any transfer of goods or services referred to in sub-section (8) of section 80-IA;
  • any business transacted between the assessee and other person as referred to in sub-section (10) of section 80-IA;
  • 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
  • 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 ` 5 crore.’

Threshold Limit

The above referred transactions will be regarded as SDT only if the aggregate value of all the above specified transactions exceeds the threshold limit of ` 5 crore. All the transactions covered under the six limbs as mentioned above will be regarded as SDT only if the aggregate value of all transactions exceeds threshold of ` 5 crore. If the threshold limit is crossed, the taxpayer will be required to comply with TP requirements with reference to all the transactions regardless of the fact that that the value of transactions under one of the limbs may be very small or nominal. Thus, there is no internal threshold for each limb of the definition.

Expenditure in respect of payments made to persons referred to in section 40A(2)(b)

Section 92BA(i) refers to ‘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;’

Section 40A(2)(a) lays down

‘Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this subsection, and the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction.’

The following proviso has been inserted in sub-section (2)(a) of section 40A by the Finance Act, 2012, w.e.f. 1-4-2013 :

‘Provided that no disallowance, on account of any expenditure 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 as defined in clause (ii) of section 92F.’

The transactions included in the ambit of this section would include expenditure transactions like (illustrative only):

  • Expenditure on buying goods
  • Expenditure on procurement of services
  • Expenditure on interest payments
  • Expenditure on salary, training services, marketing expenses
  • Expenditure on purchase of tangible and intangible property
  • Director’s remuneration, commission, sitting fees
  • Group charges
  • Reimbursement expenditure
  • Guarantee fee expenditure

This provision operates only on the expenditure side and would not have any impact in the hands of the recipients of such payments. Thus only the persons/entities incurring such expenditure would be subject to SDT under this provision and would be required to comply with the relevant transfer pricing compliances.

The persons/entities receiving such income will not be subject to SDT under this provision and would not be required to comply with the relevant transfer pricing compliances.

Sections 40A(2)(b) lays down the list of persons who would be covered under this section

Sections 40A(2)(b) reads as under:

The persons referred to in clause (a) are the following, namely:—

  • where the assessee is an individual - any relative of the assessee;
  • where the assessee is a company, firm, association of persons or Hindu un-divided family - any director of the company, partner of the firm, or member of the association or family, or any relative of such director, partner or member;
  • any individual who has a substantial interest in the business or profession of the assessee, or any relative of such individual;
  • 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 [or any other company carrying on business or profession in which the first mentioned company has substantial interest];
  • a company, firm, association of persons or Hindu undivided family of which a director, partner or member, as the case may be, has 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;
  • any person who carries on a business or profession,

A. where the assessee being an individual, or any relative of such assessee, has a substantial interest in the business or

B. where the assessee being a company, firm, association of persons or Hindu undivided family, or any director of such company, partner of such firm or member of the association or family, or any relative of such director, partner or member, has a substantial interest in the business or profession of that person.

Explanation.— For the purposes of this sub-section, a person shall be deemed to have a substantial interest in a business or profession, if,—

  • in a case where the business or profession is carried on by a company, such person is, at any time during the previous year, the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) carrying not less than twenty per cent of the voting power; and
  • in any other case, such person is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the profits of such business or profession.

Further, the list of specified persons as per section 40A(2)(b) has also been amended by Finance Act 2012 to cover transactions amongst persons/companies wherein another person/company has substantial interest in both such transacting persons/companies.

The threshold for substantial interest to qualify as ‘specified persons’ (relevant for domestic transfer pricing) is 20% or more, as compared to the threshold of 26% of more applicable for ‘associated enterprises’ (relevant for international transfer pricing). For example, where an Indian company purchases goods from a US company in which it has a 23% equity stake (substantial interest), such an expenditure transaction will not qualify as an international transaction amongst associated enterprises, but will qualify as a specified domestic transaction and thus subjected to arms length price requirements, transfer pricing documentation, accountant’s report, etc.

below is an illustrative (only) chart of specified persons as per section 40A(2)(b) in case of a corporate taxpayer:

sdt illustrative

As in the case of section 92A(2)(a) and (b) (which defines the term ‘associated enterprise’ for the purposes of international transactions) the phrase “directly or indirectly” is not used in Section 40A(2)(b). However, in this regard, reference should be made to the Central Board of Direct Taxes’ Circular number 6-P dated 6 July 1968 explaining the then newly inserted provisions in section 40A(2). This circular sets out the categories of the persons, payments to whom fall within the purview of section 40A(2). It mentions that such persons would include inter alia -

“(c) persons in whose business or profession the taxpayer has a substantial interest directly or indirectly”.

The coverage of section 40A(2)(b) is very wide and covers persons related to the assessee under several relationships. Thus the assessee and the accountant should ensure that all relevant expenditure transactions with all specified persons as mentioned in section 40A(2)(b) should be carefully identified and included in transfer pricing documentation and accountant’s report. With regard to ensuring completeness of such information, the accountant should obtain a written representation from the assessee detailing the list of persons specified in section 40A(2)(b) and expenditure transactions with them.

Transactions covered under section 80A, 80-IA and 10AA Section 92BA further extends transfer pricing provisions to:

  • any transaction referred to in section 80A;
  • any transfer of goods or services referred to in sub-section (8) of section 80-IA;
  • any business transacted between the assessee and other person as referred to in sub-section (10) of section 80-IA;
  • 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

Transactions covered under section 80A

The second limb of section 92BA refers to any transaction referred to in

Section 80A applies to deductions to be made in computing total income under Chapter VI-A. Though the reference in section 92BA is to section 80A in general, on a closer examination, it becomes clear that the reference is merely to sub-section (6) of section 80A and not to any other sub-section since other sub-section of section 80A merely regulates the quantum of deduction and does not involve fair pricing of any transaction. This is also supported by corresponding amendment made to section 80A(6) by Finance Act 2012 to amend the meaning of expression ‘market value’ referred to in that sub-section and to provide that in case of specified domestic transactions, the market value shall be computed at arm’s length price.

Section 80A (6) of the Act provides that

“Notwithstanding anything to the contrary contained in section 10A or section 10AA or section 10B or section 10BA or in any provisions of this Chapter under the heading “C— Deductions in respect of certain incomes”, where any goods or services held for the purposes 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 and, the consideration, if any, for such transfer as recorded in the accounts of the undertaking or unit or enterprise or eligible business does not correspond to the market value of such goods or services as on the date of the transfer, then, for the purposes of any deduction under this Chapter, the profits and gains of such undertaking or unit or enterprise or eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods or services as on that date.

Explanation — For the purposes of this sub-section, the expression “market value”,—

  • in relation to any goods or services sold or supplied, means the price that such goods or services would fetch if these were sold by the undertaking or unit or enterprise or eligible business in the open market, subject to statutory or regulatory restrictions, if any;
  • in relation to any goods or services acquired, means the price that such goods or services would cost if these were acquired by the undertaking or unit or enterprise or eligible business from the open market, subject to statutory or regulatory restrictions, if any;
  • in relation to any goods or services sold, supplied or acquired means the arm’s length price as defined in clause (ii) of section 92F of such goods or services, if it is a specified domestic transaction referred to in section 92BA “

This provision requires that the inter unit transfer of goods or services between eligible and other units of the same taxpayer should be recognized at market value of such goods or services on the date of transfer for the purpose of computing deduction admissible to the taxpayer under specified sections of Chapter VI-A. The provision covers income as well as expenditure of the eligible unit. Further, if threshold of ` 5 crore is not crossed, the same will continue to be governed by un amended provisions of section 80A(6) of the Act and FMV will be computed on general principles.

The provisions currently in force which grant profit linked tax holiday deductions and which are regulated by section 80A(6) and, consequently,subject to Domestic transfer pricing are as follows:-

  • 80-IA – Infrastructure development, etc
  • 80-IAB – SEZ development
  • 80-IB – Industrial undertakings
  • 80-IC – Industrial undertakings or enterprises in special category states
  • 80-ID – Hotels and convention centres in specified area
  • 80-IE – Undertakings in North-Eastern states
  • 80JJA – Collection and processing of bio-degradable waste
  • 80JJAA – Employment of new workmen
  • 80LA – Offshore Banking units and International Financial Services Centre
  • 80P – Co-operative societies

Transfers referred to in section 80-IA(8)

The third limb of section 92BA refers to any transfer of goods or services referred to in sub-section (8) of section 80-IA. Section 80-IA (8) covers inter-unit transfer of goods and services.

Section 80-IA(8) reads as under:

“Where any goods or services held for the purposes of the 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 eligible business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods or services as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods or services as on that date”

Provided that where, in the opinion of the Assessing Officer, the computation of the profits and gains of the eligible business in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit.

Explanation.—For the purposes of this sub-section, "market value", in relation to any goods or services, means—

  • the price that such goods or services would ordinarily fetch in the open market; or
  • the arm's length price as defined in clause (ii) of section 92F, where the transfer of such goods or services is a specified domestic transaction referred to in section 92BA.

The above provision entitles the assessing officer to compute profits and gains of eligible business based on market value of goods and services transferred between an eligible and a non-eligible business only if the consideration for such transfer (if any) as recorded in the books of accounts of the eligible business does not correspond to the market value of the goods or services. By virtue of the amendment made to the above explanation vide Finance Act 2012, on lines of extension of Explanation to section 80A(6) defining market value, the Explanation under this provision has also been expanded to provide that the market value shall be computed at arm’s length price if the inter unit transfer constitutes specified domestic transaction.

Transfers referred to in section 80-IA(10)

The fourth limb of section 92BA refers to business transacted between the assessee and any other person as referred to in sub-section (10) of section 80-IA.

Section 80-IA(10) reads as under:

“Where it appears to the Assessing Officer that, owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the Assessing Officer shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom.”

“Provided that in case the aforesaid arrangement involves a specified domestic transaction referred to in section 92BA, the amount of profits from such transaction shall be determined having regard to arm’s length price as defined in clause (ii) of section 92F.”

Section 80-IA (10) applies to transactions between the assessee and any other person which results in excessive profits in the hands of the assessee:

  • either owing to close connection with other person; or
  • for any other reason.

The dealings between taxpayer and other person get covered by section 80-IA(10) provided the course of business between them is so arranged that the transaction produces more than ordinary profits in the eligible business.

Transactions in other provisions to which section 80-IA(8)/(10) apply.

Specified domestic transactions as defined in section 92BA also refer to any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which provisions of section 80-IA(8) and section 80-IA(10) are applicable.

The following profit linked incentive provisions under Chapter VI-A are also governed by provisions of section 80-IA(8) and section 80-IA(10) and hence will be subject to Domestic TP:-

  • 80-IAB- Deductions in respect of profits and gains by an undertaking or enterprise engaged in development of Special Economic Zone.
  • 80-IB- Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings
  • 80-IC- Special provisions in respect of certain undertakings or enterprises in certain special category States
  • 80-ID- Deduction in respect of profits and gains from business of hotels and convention centres in specified area
  • 80-IE- Special provisions in respect of certain undertakings in North-
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