Domestic Transfer Pricing

Starting from the financial year 2012-13, transfer pricing rules have been extended to cover domestic transactions between related parties. This summary provides an overview of the key aspects and recent developments in Domestic Transfer Pricing regulations.

Section 92BA outlines the transactions considered as Specified Domestic Transactions (SDTs), which are subject to transfer pricing rules. These include:

• Payments to Related Parties: Any expenditure involving payments made or to be made to persons specified in section 40A(2)(b).
• Intra-group Transactions: Transactions referred to in section 80A.
• Transfer of Goods or Services: Transfers mentioned in section 80IA(8).
• Business Transactions Between Related Entities: Business dealings between the assessee and another party as referred to in section 80-IA(10).
• Transactions under Specific Sections: Transactions under Chapter VI-A or section 10AA, or those covered under sub-sections (8) or (10) of section 80-IA.
• Other Prescribed Transactions: Any other transactions as may be specified.

These provisions apply when the total value of such transactions in a financial year exceeds INR 200 million.

Initially, the Finance Act, 2012, set the threshold for domestic related party transactions at INR 50 million. This was later increased to INR 200 million effective from April 1, 2016. If the total value of specified domestic transactions is below INR 200 million, compliance requirements like maintaining transfer pricing documentation or filing an accountant’s report are not necessary. However, it is crucial that pricing remains based on market value, unaffected by the relationship between the parties.

Section 40A(2) addresses payments made to relatives and associates. The modified definition of “related party” under Section 40A(2)(b) includes:

• For individuals, any relative of the assessee.
• For companies, firms, associations of persons, or Hindu Undivided Families (HUF), any director, partner, member, or relative of such individuals.
• Any individual with a substantial interest in the assessee’s business or profession, or any relative of such an individual.
• Any company, firm, association, or HUF with a substantial interest in the assessee’s business, or any related company where the first company has a substantial interest.
• Any entity where a director, partner, or member has a substantial interest in the assessee’s business or profession.

A person is considered to have a “substantial interest” if they own at least 20% of the voting power or are entitled to at least 20% of the profits in a business or profession.

If the assessee incurs any expenditure in connection with related parties, the Assessing Officer may disallow any portion of the expenditure that is considered excessive or unreasonable, considering the fair market value of the goods, services, or facilities for which the payment is made.

Transfer pricing rules share similarities with Section 40A(2), which disallows payments exceeding the arm’s length price. The Tribunal in Aztec Software and Technology Services Ltd v. ACIT [2007] 294 ITR (AT)32 (BANG) [SB] ruled that Chapter X is a complete code applicable to transactions with non-resident associates where payments exceed the arm’s length price. Section 40A(2) covers excessive or unreasonable payments made to related parties.

Section 40A(2) has been amended to state that no disallowance would be made under this section for specified domestic transactions if such transactions are at arm’s length as defined under Section 92F. The term “specified domestic transaction” under Section 92BA only refers to “expenditure” and does not include income. Additionally, the treatment of managerial payments requires further detailed analysis.