DOMESTIC TRANSFER PRICING
Introduction
With effect from 2012-13, the transfer pricing regulations are also applicable to domestic transactions entered into with related parties. The following is a simplified overview of recent developments in Domestic Transfer Pricing regulations.
Domestic Transactions Defined
Section 92BA of the Act defines what constitutes “Specified Domestic Transactions” and such transactions are required to be compliant with transfer pricing regulations, provided these exceed the threshold value.SDTs include:
- Payments made or to be made to a person covered under section 40A(2)(b).
- Transactions referred to in section 80A.
- Transfer of goods or services as mentioned in section 80IA(8).
- Business transactions between the assessee and other parties referred to in section 80IA(10).
- Transactions are covered by other sections under Chapter VIA, section 10AA, or sections 80IA(8) and 80IA(10).
- Any other transactions prescribed under the law.
These rules apply if the total value of such transactions during the previous year exceeds ₹200 million (₹20 crores).
Threshold Exemption
Initially, the threshold for applying transfer pricing rules to domestic related party transactions was ₹50 million, but it has now been increased to ₹200 million as of 1st April 2016. If your SDTs total less than ₹200 million, you’re exempt from maintaining transfer pricing documentation or filing an accountant’s report. However, even when exempt, the transactions entered between related parties have to be at market price and not influenced by their association.
Related Party Transactions
Section 40A(2) provides for payments to relatives or associates. In simple terms, the underlying “related party” concept is explained as under:
- If the assessee is an individual, his relatives are related parties.
- If the assessee is a company, firm, or other business concern, their directors, partners, members, or relatives are related parties.
- The related parties also include a person who holds a substantial interest in the business of the assessee.
In simple words, the word “substantial interest” includes holding at least 20% of shares or entitled to at least 20% of profits.
| Criteria | International Transactions | Specified Domestic Transactions |
| Eligible Assessee | Enterprises involved in international transactions | Enterprises with domestic transactions involving related parties |
| Eligible Transactions | Transactions with associated enterprises as defined under section 92B | Transactions listed under section 92BA like expenses or cost allocation |
| Compensatory Adjustment | Not available for the other party to the transaction | Available for the other party in case of arm’s length price adjustments |
| Tax Holiday Benefits | Not applicable to nonresidents, but applicable in certain cases | Transfer pricing rules apply to tax holiday related transactions |
| Transfer Pricing Officer Role | Can determine arm’s length price for international transactions | Also applies to specified domestic transactions |
| Safe Harbour Provisions | 5% margin under specific conditions, as per notifications | Exemption for transactions below ₹200 million |
| Advance Pricing Agreement | Covers international transactions | Not available for domestic transactions |
| Computation Provisions | Same for both international and domestic transactions | Common under section 92C |
| Document Maintenance | Section 92D applies to both | Common for both |
| Audit Report | Section 92E applies to both | Common for both |
Consequential Amendments
The legislation about related party transactions has been amended and is on par with transfer pricing regulations. The payments made to relatives, associates, or substantially interested entities need to be appropriately market priced; failure of which may attract penalties under the tax laws. Any excess payment over and above the “arm’s length” price may be disallowed by the Assessing Officer.
Conclusion
The Domestic Transfer Pricing rules basically ensure that a business is transacting with related parties at fair market value and not at some artificial value designed to create an unfair tax advantage. While various thresholds and limited exemptions apply, any business that might engage in such transfers will want to take the necessary measures regarding compliance to avoid penalties. Follow the arm’s length principle and maintain clear records of all transactions.